Ormet Primary Aluminum Corp. v. Ohio Power Co.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ORMET PRIMARY ALUMINUM
CORPORATION, a/k/a Ormet
Corporation,
Plaintiff-Appellant,
v.
OHIO POWER COMPANY; AMERICAN
ELECTRIC POWER COMPANY,
INCORPORATED; AMERICAN ELECTRIC
POWER SERVICE CORPORATION; JOHN
M. MCMANUS; JOHN E. HOLLBACK,
JR.,
Defendants-Appellees,
No. 99-1419
and
THE UNITED STATES ENVIRONMENTAL
PROTECTION AGENCY; CAROL M.
BROWNER, as Administrator of the
U.S. Environmental Protection
Agency,
Defendants.
ORMET PRIMARY ALUMINUM
CORPORATION, a/k/a Ormet
Corporation,
Plaintiff-Appellee,
v.
OHIO POWER COMPANY; AMERICAN
ELECTRIC POWER SERVICE
CORPORATION,
Defendants-Appellants,
No. 99-1454
and
AMERICAN ELECTRIC POWER
COMPANY, INCORPORATED; JOHN M.
MCMANUS; JOHN E. HOLLBACK, JR.;
THE UNITED STATES ENVIRONMENTAL
PROTECTION AGENCY; CAROL M.
BROWNER, as Administrator of the
U.S. Environmental Protection
Agency,
Defendants.
Appeals from the United States District Court
for the Northern District of West Virginia, at Wheeling.
Frederick P. Stamp, Jr., Chief District Judge.
(CA-94-11-5)
Argued: November 30, 1999
Decided: March 27, 2000
Before WILKINS and NIEMEYER, Circuit Judges, and
Margaret B. SEYMOUR, United States District Judge
for the District of South Carolina, sitting by designation.
_________________________________________________________________
2
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Wilkins and Judge Seymour joined.
_________________________________________________________________
COUNSEL
ARGUED: Charles Edward Bachman, O'SULLIVAN, GRAEV &
KARABELL, L.L.P., New York, New York, for Appellant. Janet J.
Henry, PORTER, WRIGHT, MORRIS & ARTHUR, L.L.P., Colum-
bus, Ohio, for Appellees. ON BRIEF: THORP, REED & ASSO-
CIATES, Wheeling, West Virginia; ROBINSON, SILVERMAN,
PEARCE, ARONSOHN & BERMAN, L.L.P., New York, New York,
for Appellant. Robert L. Brubaker, PORTER, WRIGHT, MORRIS &
ARTHUR, L.L.P., Columbus, Ohio; Michael B. Victorson, ROBIN-
SON & MCELWEE, L.L.P., Charleston, West Virginia; Daniel W.
Kemp, AMERICAN ELECTRIC POWER SERVICE CORPORA-
TION, Columbus, Ohio, for Appellees.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
This is an action brought under the Clean Air Act by an industrial
consumer of electric power to obtain rights to valuable pollution
emissions allowances allocated by the Environmental Protection
Agency for the Kammer Generating Station, near Moundsville, West
Virginia. Ormet Corporation, an aluminum manufacturer, sued Ohio
Power Company, an electric utility, as well as affiliated companies
and personnel and the Administrator of the Environmental Protection
Agency, claiming that because of their contractual arrangement with
respect to the Kammer plant, Ormet became a joint owner of the plant
under the Clean Air Act, and is therefore entitled to a proportionate
amount of the pollution emissions allowances.
On cross-motions for summary judgment the district court con-
cluded that, under the Clean Air Act, the contractual arrangement
between Ormet and Ohio Power did not make Ormet a joint owner
of the Kammer plant and that Ormet was therefore not entitled to a
3
proportionate share of the pollution emissions allowances allocated to
the plant. Accordingly, the court entered summary judgment against
Ormet. For the reasons that follow, we affirm.
I
Ormet Corporation manufactures primary aluminum at its plant
near Hannibal, Ohio. Electricity is its single greatest "raw material"
cost in its production of aluminum. Indeed, the Hannibal facility con-
sumes as much electricity each day as does the city of Pittsburgh.
To secure electrical power for its Hannibal facility, in 1957 Ormet
entered into a series of agreements with Ohio Power. Under those
agreements, three power-generating units were constructed at the
Kammer Generating Station near Moundsville, West Virginia, with
Ormet becoming the owner of two of the units and Ohio Power
becoming the owner of the third. The parties agreed to an undivided
ownership of the plant's common areas in proportion to their owner-
ship of the units.
As Ormet's power needs grew, it looked to Ohio Power for assur-
ances that Ohio Power would supply power even beyond the capacity
of the Kammer Generating Station. Accordingly, in December 1966,
Ormet and Ohio Power revised their arrangement and executed a new
contract, entitled "Power Agreement." Under this 1966 Power Agree-
ment, Ohio Power acquired all of Ormet's ownership interest in the
Kammer Generating Station and, at the same time, agreed to supply
Ormet with its requirements for power at prices defined by contractu-
ally specified formulas. The 1966 Power Agreement had a 25-year
term with an option for a 5-year extension, which Ormet exercised in
1991.
Upon the enactment in 1990 of Title IV of the Clean Air Act, 42
U.S.C. §§ 7651-7651o, which created the Acid Rain Program, pollu-
tion emissions rights associated with specified fossil fuel-fired com-
bustion plants in the United States, including the Kammer Generating
Station, became a valuable commodity. In 1994, Ormet filed this
action under the Clean Air Act seeking a declaratory judgment that,
in view of its contractual relationship with Ohio Power, it owned a
proportionate share (89%) of those rights allocated to the Kammer
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plant. Ormet alleged that these rights had a value in excess of $40
million.
On defendants' motion challenging the district court's subject mat-
ter jurisdiction, the district court dismissed Ormet's complaint. The
court interpreted Ormet's claim as a challenge to the acid rain permit
issued to Ohio Power by the Environmental Protection Agency
("EPA"), and therefore as a "collateral attack on the EPA's decision
to allocate allowances to the private defendants." The court held that
Ormet's exclusive avenue to review the EPA's decision was through
§ 307 of the Clean Air Act, which lodges review of final EPA action
exclusively in the United States Courts of Appeals. The district court
thus concluded that it lacked subject matter jurisdiction to entertain
Ormet's suit. On appeal from that decision, we concluded that
Ormet's complaint raised sufficiently substantial federal questions
under the Clean Air Act to justify invoking the district court's federal-
question jurisdiction, conferred by 28 U.S.C. § 1331. Accordingly, we
vacated the district court's dismissal order and remanded this case for
disposition on the merits. See Ormet Corp. v. Ohio Power Co., 98
F.3d 799 (4th Cir. 1996).
On cross-motions for summary judgment, the district court inter-
preted the 1966 Power Agreement between Ormet and Ohio Power in
light of the Clean Air Act's requirements and held that Ormet did not
have an ownership interest in the Kammer plant. Accordingly, the
court concluded, Ormet was not entitled to a proportionate share of
the EPA's allowances for pollution emissions allocated to the plant.
More particularly, the district court concluded that the 1966 Power
Agreement did not make Ormet a part owner because Ormet did not
purchase power under a "life-of-the-unit, firm power contractual
arrangement" as defined by § 402(27) of the Clean Air Act, 42 U.S.C.
§ 7651a(27). The court held that
because the Power Agreement does not entitle Ormet to a
"specified amount or percentage of capacity in associated
energy generated by a specified generating unit (or units),"
the Power Agreement is not a "life-of-the-unit, firm power
contractual arrangement."
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Accordingly, it granted summary judgment in favor of the remaining
defendants, Ohio Power and an affiliated company, American Electric
Power Service Corporation. These appeals followed.
II
Because an understanding of the statutory scheme is necessary to
an understanding of our holding, we provide a general outline of the
relevant provisions of the Clean Air Act.
Title IV of the Clean Air Act, enacted as part of the Clean Air Act
Amendments of 1990, Pub. L. No. 101-549, 104 Stat. 2399, estab-
lished the Acid Rain Program. The Act prescribes limits for emissions
of sulphur dioxide and nitrogen oxides from specified electric utility
plants in the contiguous 48 states, including the Kammer Generating
Station. See 42 U.S.C. §§ 7651c, 7651d. It requires that owners or
operators of fossil fuel-fired combustion devices, referred to as
"units," obtain emissions permits from the EPA for each location or
"source" where units exist. See 42 U.S.C. § 7651g. Each permit allo-
cates to each unit a number of emissions "allowances" authorized for
the location, and each allowance authorizes the holder to emit one ton
of sulphur dioxide. See 42 U.S.C. §§ 7651g(a), 7651a(3). The Act
provides that these emissions allowances may be bought and sold as
any other commodity. See 42 U.S.C. § 7651b(b); 101 Cong. Rec.
S16980 (daily ed. Oct. 27, 1990) (statement of Sen. Moynihan)
("[A]llowances will be treated in part like economic commodities").
By establishing a system of marketable allowances, the Act intends
to harness the power of market forces to ensure that emissions reduc-
tions are achieved efficiently. A holder of allowances who addresses
pollution emissions and reduces them below the levels authorized at
its unit may sell the excess allowances to the owner of some other
unit who has need of greater emissions authority. The transferability
of allowances in a market setting is expected to create incentives for
aggressive and innovative efforts to control pollution.
To address the problem of joint plant ownership, the Act contains
a multiple-owners provision which provides that allowances allocated
to a jointly owned unit "will be deemed to be held or distributed in
proportion to" each owner's share of the unit. 42 U.S.C. § 7651g(i).
6
Joint ownership is defined to encompass several types of relation-
ships, including multiple holders of title to an affected unit, lessors
and lessees of an affected unit, and situations"where a utility or
industrial customer purchases power from an affected unit (or units)
under life-of-the-unit, firm power contractual arrangements." 42
U.S.C. § 7651g(i). A life-of-the-unit arrangement is specifically
defined in the Act. See 42 U.S.C. § 7651(a)(27).
In this case, Ormet contends that under the 1966 Power Agreement,
it was a joint owner of the Kammer units because it purchased power
from the Kammer units under a "life-of-the-unit" contractual arrange-
ment. It therefore claims that it is entitled to pollution allowances in
proportion to its ownership interest under 42 U.S.C.§ 7651g(i)
(defining multiple-ownership rights) and § 7651(a)(27) (defining a
life-of-the-unit contractual arrangement).
With this background, we now address Ormet's specific claim.
III
In order for Ormet to prevail on its claim that it is entitled to an
89% proportionate share of the Kammer units' allowances under 42
U.S.C. § 7651g(i) (providing for apportionment of allowances when
units are jointly owned), it must demonstrate that its 1966 Power
Agreement with Ohio Power amounts to a "life-of-the-unit, firm
power contractual arrangement" as specified in the Act. The Act
defines such an arrangement as follows:
The term "life-of-the-unit, firm power contractual arrange-
ment" means a unit participation power sales agreement
under which a utility or industrial customer reserves, or is
entitled to receive, a specified amount or percentage of
capacity and associated energy generated by a specified gen-
erating unit (or units) and pays its proportional amount of
such unit's total costs, pursuant to a contract either --
(A) for the life of the unit;
(B) for a cumulative term of no less than 30 years,
including contracts that permit an election for
early termination; or
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(C) for a period equal to or greater than 25 years
or 70 percent of the economic useful life of the
unit determined as of the time the unit was built,
with option rights to purchase or re-lease some
portion of the capacity and associated energy gen-
erated by the unit (or units) at the end of the
period.
42 U.S.C. § 7651a(27).
This definition can be distilled into four elements, all of which a
power sales agreement must satisfy in order for the customer to be
considered a joint owner under the Act: (1) the customer must have
reserved or been entitled to receive a specified amount or percentage
of capacity and associated energy; (2) the energy must be generated
by a specified generating unit or units; (3) the agreement must require
the customer to pay "its proportional amount" of the total costs of the
specified unit or units; and (4) the arrangement must be for a substan-
tial length of time relative to the life of the unit, as specified in the
Act. Thus, the Act recognizes joint ownership only where a power
sales agreement provides for both a firm reservation of electrical
power from a specific unit and a proportionate division of the operat-
ing costs of that unit. On the other hand, to the extent that such an
agreement guarantees a customer's power requirements from any
source, without imposing on that customer the risk of loss of that
power from a particular unit, joint ownership is contraindicated.
We now apply these four statutory requirements to the 1966 Power
Agreement to determine whether it provides for joint ownership.
A
The first requirement is that, under the 1966 Power Agreement,
Ormet must have reserved or been entitled to receive a "specified
amount or percentage of capacity and associated energy."
Under the 1966 Power Agreement, Ohio Power was obliged to "de-
liver or cause to be delivered energy in amounts required by Ormet"
up to an amount designated as the "Ormet Firm Power Reservation."
8
The Ormet Firm Power Reservation could not be lower than 465,000
kilowatts in the first year of the Power Agreement or lower than
475,000 kilowatts for the remaining years. Ormet could increase the
Ormet Firm Power Reservation by specified increments up to a maxi-
mum of 575,000 kilowatts. During the period covered by the Power
Agreement, the Ormet Firm Power Reservation actually ranged from
465,000 kilowatts to 536,000 kilowatts.
Ormet contends that its right to receive the Ormet Firm Power Res-
ervation, even though specified as a range, serves to "specify an
amount or percentage of capacity" of the three Kammer units. Ormet
points out that the Ormet Firm Power Reservation did not fluctuate
during the period between 1990, when the Acid Rain Program was
created, and 1996, when the Power Agreement expired, but remained
static at 536,000 kilowatts. Ohio Power contends, on the other hand,
that the large magnitude of the range specified in the Power Agree-
ment and the limited notice needed to make adjustments in the reser-
vation amount suggest that the Ormet Firm Power Reservation was
not a reservation of capacity, but a requirements provision that
assured Ormet of a supply of energy, regardless of available capacity,
consistent with Ormet's varying production needs. Ohio Power also
points out that the Ormet Firm Power Reservation was not tied to the
capacity of the Kammer units themselves but that Ohio Power's obli-
gation to supply power was expressed in terms of the"amounts
required by Ormet," thus suggesting further that the Power Agree-
ment functioned as a requirements contract, not a contract allocating
the risks of ownership between the parties.
While we agree with Ohio Power that the structure of the reserva-
tion arrangement indicates that it was not intended merely to divide
the available capacity of the Kammer units between Ormet and Ohio
Power -- an aspect of the arrangement that we address in subpart B,
below -- we nevertheless conclude that the Power Agreement may
have substantially satisfied the first element, particularly when taking
the element in isolation. When we consider this first element in con-
nection with the requirement that the power must be generated by "a
specified unit," however, we reach a different result.
B
The second statutory requirement is that the energy must have been
generated by a specified unit or units, i.e., the three Kammer units. In
9
arguing that the energy that it was entitled to receive was to be gener-
ated by the Kammer units, Ormet relies heavily upon the fact that the
1966 Power Agreement is replete with references to the Kammer
units. However, this fact, by itself, does not persuade us that the
arrangement satisfies the second statutory requirement.
First, the 1966 Power Agreement was a contract that transferred
Ormet's ownership interest in the Kammer units to Ohio Power, and
it is therefore not surprising that references to these units would
appear in such a contract. Moreover, the references to Kammer appear
mainly in § 3 of the Power Agreement, related to pricing, not in the
section addressing Ohio Power's obligations to supply the reserved
amount of energy. In § 2 of the Agreement, which governs Ohio
Power's supply obligations, Ormet can point to only three terms that
are linked to the Kammer plant -- "Point of Delivery," "Ormet Meter-
ing Point Demand," and "Ormet Firm Power Reservation." But these
terms are linked to the Kammer plant only insofar as their definitions
make reference to the metering point, which is located on the grounds
of the Kammer facilities. This is of little consequence, because all of
the energy supplied to Ormet, whether from the Kammer units or
from another Ohio Power source, passed through and was measured
at the metering point.
Addressing more directly the requirement that power be generated
by a specific unit, the 1966 Power Agreement clearly contemplated
that the power delivered to Ormet could be generated anywhere in the
Ohio Power system. Ohio Power's obligation to supply the reserved
amount would not be diminished if the Kammer units were inopera-
ble. On the contrary, Ohio Power was permitted to reduce the amount
of energy it supplied only when an "emergency condition" occurred
with respect to the generating capability of the entire Ohio Power sys-
tem, and even then, Ohio Power was required to "expeditiously use
its best efforts" to obtain power from other electric power companies
in order to satisfy Ormet's needs.
Ormet argues that some provision for backup power is a necessary
element of any "firm power" agreement. But the requirement to sup-
ply power from other Ohio Power sources (and to use best efforts to
obtain power from other suppliers) extended also to the portion of the
10
reserved amount that was to be furnished on a non-firm basis after the
1966 Power Agreement was amended in 1969.
Because the 1966 Power Agreement did not tie Ohio Power's sup-
ply obligations to a "specified generating unit (or units)," Ohio Power
bore the entire risk of loss of capacity at the Kammer units. This risk
is an important burden of ownership, one that the 1966 Power Agree-
ment imposed exclusively on Ohio Power. As a consequence, Ormet
fails to establish this essential statutory requirement for demonstrating
shared ownership.
C
To fulfill the third statutory requirement for establishing a joint
ownership arrangement, Ormet must demonstrate that the 1966 Power
Agreement required it to pay a "proportional amount of the [Kammer
units'] total costs." Ormet contends that this requirement is satisfied
so long as its payments are stated as a proportion of the plant's total
costs. Under Ormet's interpretation, the proportion of costs need not
correspond to the percentage of capacity it reserved.
The applicable statutory provision for establishing shared owner-
ship requires in part that the power customer must"reserve[ ] . . . a
specified amount or percentage of capacity and associated energy
generated by a specified generating unit . . . and pay[ ] its proportional
amount of such unit's total costs." 42 U.S.C.§ 7651a(27). Because
these statutory criteria are intended to define a shared ownership, the
provisions make sense only if the percentage of plant capacity
reserved by the customer corresponds to the percentage of costs born
by that customer. If two parties divided the entitlement to a plant's
capacity 50-50, it would hardly be indicative of ownership if one
party bore only 5% of the plant's costs. The grammatical structure of
this enactment confirms our interpretation. It requires that the cus-
tomer reserve a specified amount or percentage of a plant's capacity
and pay "its proportional amount" of the plant's costs. The antecedent
for "proportional amount" is the reserved"amount or percentage of
capacity." If this were not so, then any proportional amount would
suffice, undermining the need to use the word "proportional" at all.
This construction of the statute can come as no surprise to Ormet,
for it advanced this very interpretation in ¶ 25(c) of its complaint,
11
where it alleged as follows: "Ormet agreed to pay a proportional
amount of the total costs associated with the three units at the Kam-
mer facility based upon the capacity of the Kammer facility that
Ormet reserved and the electric power generated by the Kammer
facility that Ormet was entitled to receive." (Emphasis added). Simi-
larly, on Ormet's first appeal, we characterized its complaint in this
case as seeking a declaratory judgment that it owned 89% of the
allowances issued for the Kammer plant because it was contractually
obligated to pay a similar proportion of its costs. See Ormet v. Ohio
Power Co., 98 F.3d 799, 801 (4th Cir. 1996).
A review of the 1966 Power Agreement reveals that Ormet did not
undertake to pay a proportionate share of the Kammer units' total
costs. Rather, it agreed on the payment of various costs in relation to
its reservation of power, based on Kammer's historical costs, whether
or not power was produced at the Kammer units. While the costs are
specified under extraordinarily elaborate pricing mechanisms, they
are never stated as a function of the Kammer unit's total costs.
For example, Ormet agreed to pay "Demand Charges," which were
fixed charges for capital expenses based on the depreciated value of
the Kammer units as of 1966. These fixed charges did not vary
directly with the amount of power Ormet reserved and were subject
to adjustment only to account for capital improvements associated
with the installation of pollution controls. Consequently, Ohio Power
asserts, Ormet was not required to pay, and did not pay, for any per-
centage of other capital improvements over the years, which Ohio
Power contends have totaled $60 million. Although Ohio Power's
contention remains undisputed in the record, Ormet asserts in its brief
that it will be prepared to contest Ohio Power's contention at trial.
Ormet was also responsible for paying "Energy Charges," which
were computed using a formula that took into account variations in
the amount of power reserved by Ormet. The Ormet Firm Power Res-
ervation in effect for any given month was used to calculate the
Ormet Total Contract Demand amount. This amount was then divided
by the contractually defined generating capacity of the Kammer units
to obtain the Ormet Power Ratio. Ormet relies on the use of the Ormet
Power Ratio in computing the Energy Charges to argue that these
charges were proportional to Ormet's contractual reservation. How-
12
ever, Ormet was permitted unilaterally to "curtail" the Ormet total
contract demand when there was reduced market demand for alumi-
num product or for reasons of force majeure. Ormet availed itself of
this option, and when it did so, its payment obligations for that period
became detached from the Ormet Firm Power Reservation, so that the
payments bore no proportional relationship to the reserved amount of
energy.
Ormet's cost-payment obligations were limited in another respect
as well. When the Kammer units exceeded a pre-set"net heat rate,"
expressed as a ratio of British Thermal Units to kilowatt-hours,
Ormet's payments were adjusted so that it would not bear a propor-
tionate share of the higher fuel costs. In effect, this provision shifted
to Ohio Power the risk of less efficient conversion of heat to energy
(which could be the result of pollution compliance efforts). This heat-
rate adjustment provision resulted in the exclusion of actual fuel costs
from the calculation of Ormet's bills during the 1990s, an exclusion
that Ohio Power contends amounted to more than $1 million.
Under these pricing provisions, Ormet's share of the costs of oper-
ating the Kammer units did not vary in proportion to its reservation
of energy and did not bear a consistent relation to the total costs
incurred by Ohio Power in operating the Kammer units. Therefore,
the 1966 Power Agreement does not meet the requirement that Ormet
be required to pay "its proportional amount" of the Kammer units'
total costs as required by 42 U.S.C. § 7651a(27).
D
Finally, Ormet must satisfy a durational requirement in one of three
ways specified by the statute. See 42 U.S.C.§ 7651a(27)(A)-(C). It
contends that the 1966 Power Agreement was in effect for a period
of 30 years, thus satisfying the requirement of 42 U.S.C.
§ 7651a(27)(B).
Ohio Power argues that because the 1966 Power Agreement was
amended in 1969, the first three years of its term were governed by
provisions different from those applicable after 1969, which are dis-
cussed in this opinion. Accordingly, Ohio Power argues that the
Power Agreement should not be deemed to meet the 30-year dura-
13
tional requirement of § 7651a(27)(B) unless both the pre-1969 and
post-1969 provisions of the Agreement satisfy the other statutory
criteria.
Whether the Power Agreement's pre-1969 terms and post-1969
terms are materially different is a question that we need not resolve
here because we have already determined that the 1966 Power Agree-
ment, as it existed after 1969, does not satisfy at least two of the defi-
nitional requirements of 42 U.S.C. § 7651a(27). Because Ormet (1)
did not reserve energy from a specified generating unit and (2) did not
pay a proportional amount of the costs of operating such a unit, we
conclude that the 1966 Power Agreement was not a "life-of-the-unit,
firm power contractual arrangement" within the meaning of §§ 408(i)
and 402(27) of the Clean Air Act, 42 U.S.C. §§ 7651g(i), 7651a(27).
Accordingly, we affirm the judgment of the district court -- i.e.,
that Ormet is not entitled to a proportionate share of the pollution
emissions allowances allocated to the Kammer plant.
AFFIRMED
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