Public Service v. Patch

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 99-1754



         PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, ET AL.,



                           Plaintiffs,



             CONNECTICUT VALLEY ELECTRIC COMPANY and

           CENTRAL VERMONT PUBLIC SERVICE CORPORATION,



                     Intervenors, Appellees,



                                v.



     DOUGLAS L. PATCH, CHAIRMAN OF THE STATE OF NEW HAMPSHIRE

               PUBLIC UTILITIES COMMISSION, ET AL.,



                     Defendants, Appellants.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF NEW HAMPSHIRE



          [Hon. Ronald R. Lagueux, U.S. District Judge]


Before



                      Selya, Circuit Judge,



                  Bownes, Senior Circuit Judge,



                    and Boudin, Circuit Judge.


Michael E. Tucci, with whom Steven K. White, Morrison & Hecker

L.L.P. and Gary Epler, General Counsel, New Hampshire Public

Utilities Commission, were on brief for defendants, appellants

Douglas L. Patch, Susan S. Geiger and Nancy Brockway, Chairman and

Commissioners of the State of New Hampshire Public Utilities

Commission.              Lee A. Freeman, Jr. with whom John F. Kinney, James T.

Malysiak, Glynna W. Freeman, Freeman, Freeman & Salzman, P.C.,

Joseph M. Kraus, Senior Vice President and General Counsel, Central

Vermont Public Service Corporation, Dom S. D'Ambruoso, John T.

Alexander and Ransmeier & Spellman were on brief for intervenors,

appellees Connecticut Valley Electric Company and Central Vermont

Public Service Corporation.  


January 24, 2000


BOUDIN, Circuit Judge.  This appeal is a sequel to prior

litigation growing out of the same district court proceeding. 

Once again, the issues relate to interim matters; the merits have

not yet been decided in the district court.  To avoid repetition,

familiarity with our prior decisions is assumed; and we confine

ourselves to a bare-bones summary limited to events necessary for

this appeal.

  In 1997, acting under recently enacted state legislation,

the New Hampshire Public Utilities Commission ("the Commission")

issued a plan and implementing orders to restructure electric power

regulation in the state.  The new regime, aimed at promoting

competition through various means including market-based rates,

created a risk that existing utilities might not be able to recover

their full investment in previously built facilities.  The largest

utility in the state, Public Service Company of New Hampshire

("PSNH"), obtained a preliminary injunction in the district court

based, inter alia, on a colorable claim that the state's action

violated a specific agreement with that company and so also

violated bankruptcy court orders and the Contract Clause of the

U.S. Constitution.  See Patch IV, 167 F.3d at 21, 26, 28.

  In our principal decision issued in 1998--Patch IV--we

upheld this preliminary injunction and, with somewhat greater

reluctance, its extension by the district court to other New

Hampshire utilities that had intervened, including Connecticut

Valley Electric Company ("Connecticut Valley").  Id. at 27-29. 

However, in the same proceeding, the district court had also

ordered the Commission to allow a specific rate increase sought by

Connecticut Valley to recover increased power costs which the

Commission had previously disallowed in December 1997, see Patch V,

167 F.3d at 32-33; in our companion decision--Patch V--we vacated

the district court's injunction in this respect, holding that

Connecticut Valley had not shown a likelihood of prevailing in

federal court on this aspect of the case.  Id. at 36.

  Following our decisions, the Commission and PSNH engaged

in negotiations and have been moving toward a possible settlement

of their differences.  While proceedings in the district court as

to a permanent injunction for PSNH have been deferred pending

approval of the settlement, litigation between the Commission and

Connecticut Valley has moved forward; several months ago both sides

argued cross-motions for summary judgment on the merits of

permanent relief.  During this same period, two new and quite

distinct disputes have arisen--one relating to the preliminary

injunction upheld in Patch IV and the other to the further interim

relief that we disallowed in Patch V.

  The first of these two disputes stems from a new motion

filed by the Commission after Patch IV asking the district court to

vacate its earlier injunction barring the New Hampshire

restructuring plan.  That injunction had rested primarily, as

preliminary injunctions normally do, see Ross-Simons of Warwick,

Inc. v. Baccarat, Inc., 102 F.3d 12, 15 (1st Cir. 1996), on a

showing of likelihood of success on the merits coupled with a

showing of threatened irreparable injury.  The irreparable injury

showing, initially made by PSNH, rested in part on an accounting

convention regarding the financial treatment of so-called

regulatory assets; according to PSNH's affidavits, the proposed New

Hampshire restructuring plan would have triggered changes in the

company's financial statements, placing it in immediate default on

huge bank loans.

  Our decision in Patch IV affirming the preliminary

injunction against the restructuring plan was rendered on December

3, 1998.  On January 18, 1999, the Commission moved to vacate the

injunction, primarily on the ground that changes in accounting

treatment by the Financial Account Standards Board had eliminated

the threat relied upon by PSNH in its original showing of

irreparable injury.  Connecticut Valley vigorously opposed the

motion.  The district court's decision on this motion is the first

issue on this appeal.

  The second dispute arises in the wake of our decision in

Patch V vacating a different aspect of the district court's

pendente lite relief.  As noted above and explained in detail in

Patch V, even before its restructuring plan was scheduled to be

implemented, the Commission had disallowed an attempt by

Connecticut Valley in December 1997 to implement a specific rate

increase designed to pass along to its customers a routine increase

in the cost of power it purchases from its parent and wholesale

supplier, Central Vermont Public Service Company ("Central

Vermont").  The Commission took the view that while the increase in

Connecticut Valley's costs was real, purchasing from Central

Vermont was no longer prudent because power could currently be

bought for less on the open market.  167 F.3d at 32.  Connecticut

Valley had a long-term requirements contract with Central Vermont,

but the Commission deemed it to be terminable on short notice.

  Without sharply distinguishing between this specific

disallowance by the Commission and its far-reaching restructuring

plan, the district court in April 1998 directed the Commission to

allow the increase.  It was this further preliminary relief that we

found not to be justified because (in our view) Connecticut Valley

had failed to show that it was likely to prevail on the merits in

its ultimate challenge to this disallowance in federal court.  Our

Patch V decision vacated this aspect of the district court's

preliminary injunction, thereby permitting the Commission to roll

back Connecticut Valley's retail rates to the pre-1998 level, see

167 F.3d at 36.

  The Commission not only rolled back the rate increase but

also ordered further temporary reductions by Connecticut Valley,

below the level prevailing in December 1997, in order to flow back

to customers the amount of the increases that had been collected

between the time of the district court's injunction with respect to

the disallowance and the later vacation of that injunction in Patch

V.  Connecticut Valley then asked the district court to enjoin the

Commission from requiring this further reduction until the district

court decided the merits of Connecticut Valley's request for a

permanent injunction requiring the Commission to allow the company

to charge rates sufficient to cover all of its costs.  The

Commission opposed the request.

  On April 7, 1999, after a hearing, the district court

entered an order refusing to dissolve the preliminary injunction

upheld in Patch IV and granting in substance the additional relief

sought by Connecticut Valley to defer any flow-back of the increase

that the company had collected before this court vacated the

district court's April 1998 injunction in that respect in Patch V. 

The district court did not discuss at length its reasons for the

first of these actions; but it wrote several paragraphs of findings

and explanations with respect to the second.  The Commission now

appeals, challenging both aspects of the district court's order.

  On this appeal, little need be said about the district

court's refusal to modify the preliminary injunction enjoining the 

the Commission's restructuring plan.  PSNH's original showing of

irreparable injury did depend in part on the issue of the then-

current accounting treatment of so-called regulatory assets; but

the threatened accounting treatment merely accelerated and made

more dramatic the adverse consequences of the plan for PSNH.  It

was credibly alleged, at least sufficiently for preliminary relief,

that the restructuring plan, as framed at the time, would prevent

PSNH from ever recovering very substantial prior investments

assertedly protected by a specific contract with the state and by

implementing orders of the bankruptcy court.

  When in early 1998 Connecticut Valley joined PSNH in

seeking interim relief, it provided arguments and affidavits of its

own to demonstrate the harm that the restructuring plan would do to

it.  Once again, the projected accounting treatment of regulatory

assets was one of several strands in the showing of harm to

Connecticut Valley.  But, as is shown by even a brief review of the

company's motion papers, it was certainly not the only one--nor was

the greatest dollar impact on the company attributed to this

accounting requirement.

  As we pointed out in Patch IV, 167 F.3d at 23, 28, the

Commission made little effort to challenge the showing of

irreparable injury by either PSNH or Connecticut Valley.  Only the

most significant change in circumstances would require the district

court to revisit that issue.  Yet the change in accounting

treatment now trumpeted by the Commission was apparently made in

July 1997, over a year before our decision in Patch IV upholding

the same injunction.  If the Commission thought that this

adjustment changed everything, it certainly should have stressed

this in its original appeal in Patch IV, or asked for a remand to

consider the effect of the change.  In any event, the district

court did not abuse its discretion in refusing to modify the

preliminary injunction based on the accounting change.

  The district court's new prohibition of the Commission's

further reduction in Connecticut Valley's rates is an entirely

different matter.  In part, the company's defense of this new

relief rests on a narrow ground, namely, on case law that the

company argues allows a court to defer claims of restitution

stemming from a vacated preliminary injunction until the merits

have been decided.  However, Connecticut Valley's defense also

involves a view of our prior decisions in Patch IV and V that is

not consistent with those decisions and may have implications for

any further interim disputes and possibly for the merits of this

case.  For this reason, we revisit briefly the scope and rationale

of our earlier decisions.

  Ordinarily, a district judge has a great deal of freedom

to impose interim relief and, in particular, to preserve the status

quo in all matters properly before it.  But efforts by utilities to

enjoin state rate orders are not ordinary cases and relief--interim

or permanent--is severely restricted, especially by the so-called

Burford abstention doctrine, Burford v. Sun Oil Co., 319 U.S. 315

(1943), and by the Johnson Act, 28 U.S.C.  1342 (1994).  Broadly

speaking, the staples of utility-company appeals--attacks under

state law or based on due process--are severely limited when made

in federal courts.  See Patch IV, 167 F.3d at 24-25.  PSNH barely

threaded its way through this maze of limitations in obtaining a

preliminary injunction against the restructuring plan--relief

extended to the other utilities partly based on defaults by the

Commission.  Id. at 28.

  However, thus far in the district court neither PSNH nor

any other company has justified relief--consistent with Burford and

the Johnson Act--against any rate orders of the Commission except

its attempts to implement the restructuring plan.  The orders of

the Commission refusing to allow Connecticut Valley to recover the

cost increases imposed by Central Vermont are not orders

implementing that plan, which is why in Patch V we vacated the

further relief granted by the district court.  This is equally true

of the Commission's latest order lowering rates temporarily below

the December 1997 rate to refund the amounts collected under the

vacated Patch V injunction.

  In its brief and at oral argument, Connecticut Valley

made clear that it thinks that the district court has assured the

company pendente lite of its right to collect "its costs," a goal

frustrated in part by this court's supposed failure to understand

that cost recovery is the status quo that the district court has

sought to preserve.  However, what Patch IV and V sought to make

clear is that no such assurance is valid; the district court's

injunctive relief was sustained only against orders implementing

the restructuring plan.  If injunctive relief is to extend beyond

such orders, it must be independently justified.  True, the

restructuring plan and the disallowance and refund orders against

Connecticut Valley both may undermine cost recovery; but the former

has been validly enjoined pendente lite and the latter has not.

  This leaves open the possibility that the district

court's latest action deferring any refund can be justified on a

narrower set of grounds.  The decisions relied on by Connecticut

Valley, see note 2 above, reflect a common-sense policy that allows

a district court to wait until the end of a case to undo any

mischief wrought by interim relief it granted in error.  This often

makes sense because the final outcome may affect the amount of any

restitution or damage relief, or show that nothing at all should be

repaid, even though the preliminary relief was wrongly granted in

the first place.

  But here the district court is not deferring a

restitution order of its own; it is enjoining the Commission from

ordering restitution on the Commission's own authority.  Agencies

like the Commission often require refunds of rates "wrongly"

collected.  Unless the original Commission order disallowing the

Connecticut Valley increase is vulnerable to injunction by a

federal court, it is hard to see what authority a federal court has

to defer the Commission-ordered refund.  And, as we explained in

Patch V, 167 F.3d at 35-36, Connecticut Valley has not yet made

such a showing of likely vulnerability as to the disallowance

order.

  This is not because the Commission's disallowance order

is sound.  At best, the state agency may be exploiting a possible

drafting mistake--the short-notice termination clause in the

original contract between the two utilities--to shift to Central

Vermont (or to Vermont ratepayers) what may well have been

Connecticut Valley's prudently incurred costs of achieving long-

term rate protection for its New Hampshire customers.  See Patch V,

167 F.3d at 36.  If so, there may be a remedy available to

Connecticut Valley in state court and, in any event, if Central

Vermont prevails at the Federal Energy Regulatory Commission

("FERC") and is allowed to impose a termination charge on

Connecticut Valley, the Commission may be forced to retreat from

its effort to compel the contract termination, thereby undermining

its rationale for its disallowance order.  

  Nevertheless, given the limitations imposed by Burford

and the Johnson Act, it remains unclear why Connecticut Valley

thinks that it can overturn the disallowance order in federal

court.  Its own Contract Clause argument is quite different from

that of PSNH, which implicated a specific bankruptcy settlement

formally approved by the state; and, lacking a connection to

federal bankruptcy orders, Connecticut Valley's Contract Clause

claim may, even if otherwise sound, face some difficulty in federal

court given the broad language of the Johnson Act.  See Patch IV,

167 F.3d at 24-25.  Nor has the company yet been able to explain

plausibly, at least to us, how the disallowance order conflicts

with a federal statute or FERC order--claims admittedly likely to

avoid the Johnson Act's bar.  See Patch V, 167 F.3d at 33-34.

  On this record, we are no more able to sustain the

injunction against the Commission's new refund order than we were

to sustain the earlier injunction against the underlying

disallowance that we vacated in Patch V.  But the district court

may be on the verge of supplying the missing explanation in

deciding the merits of the now-submitted cross-motions for summary

judgment.  Based on its orders respecting the disallowance and the

refund, the district court seemingly believes that both measures

are vulnerable to a federal injunction, despite the Johnson Act,

and it may be on the verge of making clear why.

  It is thus possible that in the near future the district

court will grant permanent injunctive relief requiring the

Commission to allow cost pass-throughs of Central Vermont cost

increases; and if so it would be very odd to have refunds,

inconsistent with such an injunction, made effective in the next

several months.  For this reason, we have determined not to vacate

the district court's injunction against the refund order ourselves

but instead to remand this aspect of the case to the district court

for further proceedings consistent with this opinion.  Cf. SEC v.

Lehman Bros., Inc., 157 F.3d 2, 9 (1st Cir. 1998).

  On remand, the district court may defer vacation of this

injunction against the refund order for up to 90 days.  If within

that period it has decided the merits of the request for a

permanent injunction in a way inconsistent with refunds, or has

taken any other action that provides a showing that the company is

likely to prevail on the merits in federal court in barring the

refunds, it may enter a superceding injunction against the refund

order, which the Commission may then appeal to us.  Otherwise, no

later than the end of the 90-day period, the district court must

vacate its present injunction insofar as it enjoins the

Commission's refund order.

  The district court's refusal to modify the injunction

insofar as it prohibits implementation of the restructuring plan is

affirmed; insofar as the district court has enjoined the

Commission's refund order, the matter is remanded for further

proceedings consistent with this opinion.  

  It is so ordered.