United States Court of Appeals,

Fifth Circuit.

No. 93-4295.

CITY OF MORGAN CITY, Plaintiff-Intervenor-Defendant-Appellant,

v.

SOUTH LOUISIANA ELECTRIC COOPERATIVE ASSOCIATION, Defendant-IntervenorAppellee, Third Party-Plaintiff-Appellee,

and

Cajun Electric Power Cooperative, Inc., Intervenor-Plaintiff-Appellee,

and

UNITED STATES of America, thru Rural Electrification Administration (REA), Third PartyDefendant-Appellee.

Sept. 12, 1994.

Appeal from the United States District Court For the Western District of Louisiana.

Before POLITZ, Chief Judge, DAVIS and WIENER, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

This appeal revolves around a municipalit y's attempt to condemn equipment and electricity

consumers within an area annexed by the municipality . South Louisiana Electric Cooperative

Association (SLECA), the current electricity providers, along with their federal financier, the Rural

Electrification Administration (REA), oppose d t he state-law expropriation and sought summary

judgment. The district court found that the REA Administ rator had authority under the Rural

Electrification Act (REAct ), 7 U.S.C. § 901 et seq., to withhold approval of the state-law

expropriation so that the state-law expropriation was preempted under the Supremacy Clause, 837

F.Supp. 194. We affirm on the alternative ground that the state-law expropriation is preempted

because it would frustrate a federal purpose.

I.

In January 1985, the City of Morgan City annexed a small suburban area containing

approximately 252 electricity consumers. These electricity consumers were serviced by SLECA, a1 To date, SLECA has obtained 25 REA loans totalling over $38 million, $25 million of which

is outstanding.

2 To date, Cajun has obtained $3 billion in REA loans.

3 Morgan City's utility system purchases its bulk supply from the Louisiana Energy and Power

Authority and sells to its customers at a rate 157 lower than SLECA's. rural power cooperative financed by the federal government under the REAct. 1 SLECA buys it s

power in bulk from Cajun Electric Power Cooperative (Cajun), also an REA-financed cooperative. 2

To secure their federal loans, SLECA and Cajun have mortgaged their assets to the REA.

After the annexation, Morgan City, which operates its ow n municipal utility, 3 offered to

p urchase all of SLECA's property in the area, including the exclusive right to provide power to

electricity consumers in the area. When SLECA refused the o ffer, Morgan City brought this

expropriation action pursuant to L.R.S. 19:101 et seq., seeking to condemn the disputed property

rights.

Cajun intervened as a party defendant. The REA was joined as a third party defendant on the

basis of its security interest in the property at issue and removed the case to federal court.

Thereafter, the REA Administrator filed into the record a signed declaration objecting to

Morgan City's state-law expropriation on grounds that the expropriation would jeopardize the REA's

abilit y to protect its loans and would cause substantial harm to the fed eral rural electrification

program.

The Administrator asserted that the threatened expropriation would frustrate the federal rural

electrification program for several reasons. First, the annexed area is the most heavily populated part

of SLECA's service area and thus is the area SLECA is able to serve most economically and

efficient ly. Thus, the disputed area provides SLECA with its most profitable customers. According

to the Administrator, loss of this area's customer load could jeopardize SLECA's financial health and

result in a rate increase for SLECA's re maining customers. The Administrator contends that this

danger is especially acute in light of the impact of future planned expropriations in the Morgan City

area whose cumulative impact on SLECA's electric system would be devastating.

The Administrator further objected to the expropriation on grounds that the e xpropri ati oncould negatively affect not only SLECA, but the entire chain of REA-financed member cooperatives.

Cajun provides power under whole sale contracts to twelve other REA-financed distribution

cooperatives, which in turn distribute to rural elec t ricit y customers. Reduction in the volume of

Cajun's distributions as a result of this and other state-law expropriations could increase the cost of

Cajun's wholesale power. This increase in cost of electric power would be passed on to the entire

rural area serviced by federally financed member distributor cooperatives.

The REA, joined by SLECA and Cajun, filed a motion to dismiss or, in the alternative, for

summary judgment, arguing that Morgan City's expropriation action was preempted by the REAct.

The district court granted the defendants' summary judgment motion and dismissed the expropriation.

The court based its ruling on tw o co nclusions: (1) the Administrator's determination that the

expropriation would be contrary to the federal rural electrification program was not arbitrary and

capricious; and (2) the REAct, 7 U.S.C. § 907, authorized the Administrator to withhold approval

of the transfer even though the transfer was involuntary. The City of Morgan City appeals.

II.

The federal

go vernment, when acting within the confines of its constitutional authority, is

empowered to preempt state law to the extent necessary to achieve a federal purpose. U.S. Const.

art. VI, cl . 2. The Supreme Court has explained that preemption of state law may occur in several

different ways. L ouisiana Public Se rvice Commission v. FCC, 476 U.S. 355, 368-69, 106 S.Ct.

1890, 1898, 90 L.Ed.2d 369 (1986). First, Congress may expressly preempt state law. P acific Gas

& Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 U.S. 190, 203, 103

S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983). Second, Congress may legislate so comprehensively that

it creates a "reasonable

... inference that Congress left no room for the States to supplement it." I d.

at 204, 103 S.Ct. at 1722. Under such circumst ances, where Congress intends that federal law

"occupy the field"—i.e., be exclusive in the area, state law within the field is preempted. Third, state

law is displaced to the extent that it conflicts with federal action. I d. This last breed of preemption,

conflict preemption, may occur in two ways. First, a provision of state law may be incompatible with

a fe deral st atute such that compliance with both is a "physical impossibility." I d. Second, even ifcompliance with both is not impossible, state law is nonetheless preempted if its application would

disturb, interfere with, or seriously compr o mise t he purposes of the federal statutory scheme. I d.

In other words, an application of state law that would frustrate the purpose of a federal statutory

scheme is preempted. See id. at 220-21, 103 S.Ct. at 1731.

In this case, we elect to turn directly to the applicability of the second variety of co nflict

preemption to the facts presented by the summary judgment evidence. See United States v. Early,

27 F.3d 140, 142 (5th Cir.1994) (court can affirm on an alternative basis). Accordingly, we save for

another day the issue of whether 7 U.S.C. § 907 by its terms confers authority on the Administrator

to withhold approval of an involuntary disposition, and instead consider only whether a conflict exists

because the proposed state-law expropriation would frustrate a federal purpose.

Under the second variety of conflict preemption, Morgan City's expropriation may be

preempted if the action wo uld frustrate a federal purpose. Stated differently, state action is

preempted if its effect is to discourage conduct that federal legislation specifically seeks to encourage.

For example, in X

erox Corp. v. County of Harris, 459 U.S. 145, 103 S.Ct. 523, 74 L.Ed.2d 323

( 1982), the Supreme Court held that a state tax could not be imposed on goods manuf actured in

Mexico, shipped to the United States, and held under bond in a customs warehouse awaiting shipment

abroad. I d. at 154, 103 S.Ct. at 528. The Court found that a long history of federal legislation

indicated a clear intent to create duty-free enclaves for such imported goods stored in this country

pending export so as to encourage merchants to use American ports. I d. at 150-52, 103 S.Ct. at 525-

27. The Court held that alt hough a st at e tax on such goods was not expressly prohibited, its

imposition was preempted because such a tax would manifestly discourage and financially penalize

the very acts the federal law was meant to foster. In this vein, we therefore turn our attention in this

case to the effect of the state-law expropriation on the federal legislation.

1. The Goals of the REAct

In 1936, Congress enacted the REAct for the purpose of ensuring that electric service would

be provided to rural America. By enacting the legislation and creating the REA, Congress determined

that the national interest would be served by subsidizing the rural user o f electricity. Prior to theREAct, rural areas which were t hinly populated and had lower demand for electricity failed to attract

investor-owned utilities for the obvious reason that providing service to these areas was costly and

therefore unprofitable. S ee, e.g., Tri-State Generation & Transmission Assn., Inc. v. Shoshone River

Pow er, Inc., 874 F.2d 1346, 1348 (10th Cir.1989). The REA encouraged rural electrification by

providing low interest insured loans and loan guarantees to cooperatives. 7 U.S.C. § 903; s ee also

Alabama Pow er Co. v. Alabama Electric Cooperative, Inc., 394 F.2d 672 (5th Cir.1968).

In response to the REAct, rural communities formed non-profit electric dis tribution

cooperatives, such as SLECA, which were financ ed by t he REA. After these REA-financed

distribution cooperatives were formed, gr oups of cooperatives banded together to form central

generation and transmission cooperatives (G & Ts) to obtain a less expensive, long-term source of

power. To enable the formation of the G & Ts, the member distribution cooperatives entered into

long-term wholesale power contracts with the G & Ts for electricity. S ee, e.g., Tri-State, 874 F.2d

at 1348.

The REA's security for loans is limit ed to the physical assets of its borrowers and the revenue

generated by its borrowers, the G & T's and the distribution cooperatives. Thus, the relationship

amo ng t he G & Ts, distribution cooperatives and the REA is structured through these wholesale

power contracts. This contract obligates a distribution cooperative, such as SLECA, to purchase all

of its electric power over a fixed term from a G & T, such as Cajun. When lending money to a G &

T, the REA requires the G & T to enter into wholesale power contracts with member dist ributi on

cooperatives. Likewise, when the REA lends money to distribution cooperatives, the REA requires

those distribution cooperatives to enter into similar contracts with G & Ts. This arrangement ensures

that REA G & T and distribution borrowers will be able to earn revenue sufficient to meet their costs,

service their REA debt, and continue to provide permanent, low-cost electric service to rural areas.

Id.

2. Louisiana's Expropriation Statute

Morgan City seeks to condemn property, and, more significantly, the right to service

electricity consumers who are currently serviced by SLECA and Cajun under a wholesale powercontract. Louisiana's expropriation law provides generally that any Louisiana municipality may

expropriate property whenever necessary for the public interest as determined by the governing

authority of the municipalit y, or, in cases such as this, by the trial judge when the taking is contested.

LSA-R.S. 19:102.

In this case, the critic al question is whether Louisiana's expropriation law, as applied and

interpreted, would f

rust rat e t he federal purpose underlying the REAct. We recognize that the

Supreme Court has made clear that there is no litmus test for determining whether a particular

application of state law would frustrate a federal purpose:

This Court, in considering the validity of state laws in the light of

... federal laws touching the

same subject, has made use of the following expressions: conflicting; contrary to; occupying

the field; repugnance; difference; irreconcilability; inconsistency; violation; curtailment;

and interference. But none of these expressions provides an infallible constitutional test or

an exclusive constitutional yardstick. In the final analysis, there can be no one crystal clear

distinctly marked formula. Our primary function is to determine whether, under the

circumstances of th[e] particular case, [state] law stands as an obstacle to the accomplishment

and execution of the full purposes and objectives of Congress.

Hines v. Davidow itz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941).

We find the Ninth Circuit's opinion in Pend Oreille helpful and persuasive in answering the

question before us. In P end Oreille, the Ninth Circuit concluded that under the Supremacy Clause,

a state municipal public utility could not condemn property owned by a federally subsidized utility

because the condemnation would interfere with the federal purpose of the REAct. P end Oreille, 417

F.2d 200, 201-02 (1969). The Ninth Circuit reasoned that the proposed condemnation of a portion

of a federally subsidized rural electrification system, even if compensated for under state law, would

impair Congress's objective of providing reliable, low-cost electricity to rural Ameri ca. The court

concluded that removal of the targeted porti on of the system would weaken the remainder of the

system and lessen its ability to function effectively:

This is not an ordinary case because what is sought to be taken here is part of a system and

even if the part taken is paid for, and if an award is made for the damage to the remaining

portion, a question r emains as t o t he capacity of the remaining portions of the system to

function.... [I]f, as a result of the condemnation, the loans were paid in full, but the remaining

portions of the system could not continue to operate with decent service and at decent rates,

the Government would have been paid but the purpose of the Rural Electrification Act would

have been frustrated.

Id. at 201. The Ninth Circuit concluded that, under these circumstances, "a state [condemnation] lawwritten so that a st at e-favored utility can by its unilateral action interfere with the federal purpose

cannot stand under the Supremacy Clause." Id. at 202.

A panel of this court followed Pend Oreille's reasoning in an analogous case, City of Madison

v. Bear Creek Water Ass'n, Inc., 816 F.2d 1057 (5th Cir.1987). In B ear Creek, we barred a

municipal utility's proposed condemnation of a densely populated porti on of a federally subsidized

rural water utility. In reaching this conclusion, the Bear Creek court reasoned that:

Even if fair value is paid for the lost facilit ies, such an action would inevitably have an adverse

effect on the remaining customers

..., in the form of lost economies of scale and resulting

higher per-user costs. To allow expanding municipalit ies to "skim the cream" by annexing

and condemning those parts of a water association with the highest population density (and

thus the lowest per-user cost) would undermine Congress's purpose of facilitating inexpensive

water supplies for farmers and other rural residents and protecting those associations' abilit y to repay their FmHA debts.

Bear Creek, 816 F.2d at 1060 (citing Big Bend, 618 F.2d 601).

Morgan City argu es t hat the relatively small number of SLECA consumers subject to this

expropriation action distinguishes this case from both Pend Oreille and Bear Creek. But 252 users

in a densely populated area is significant, obviously enough to attract Morgan City's interest in

providing electric service to the area. Here, as in B ear Creek, a municipally-owned utility seeks to

condemn an economically profitable service area developed through federal financing. The state law

auth o rizing the condemnation takes no account of the potential prejudice to rural electricity

consumers served by federally funded cooperatives. Permitting Morgan City to condemn these 252

users would pave the way for piecemeal erosion of other high-density service areas adj acent to

Morgan City and other cities. Such action could well leave federally funded cooperatives financially

unable to continue service to the remaining low-density areas not targeted by municipally-owned or

investor-owned utilities. And we do not consider this concern hypothetical in light of the evidence

in the record o f fut ure proposed annexations in the Morgan City area, as well as the Houma,

Louisiana area. See Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 130-31, 98 S.Ct. 2207,

2216, 57 L.Ed.2d 91 (1978) (hypothetical conflict not sufficient to warrant preemption). The REA's

conclusion that this attempted con demnat ion would jeopardize the federal rural electrification

program is amply supported by the record.Were Morgan City's expropriation action allowed to stand, it would "stand as an obstacle"

to the repayment of federal loans, to the financial viabilit y of federa lly financed electricity

cooperatives, and ultimately, to the maintenance of electricity service to rural areas. S ee Hines, 312

U.S. at 67, 61 S.Ct. at 404. As the Ninth Circuit noted, "Congress has declared the federal purpose

to electrify the American farm. No matter how we characterize the vehicle which gets the electricity

there, a state law so written that a state favored utility can by its unilateral action interfere with the

federal purpose cannot stand under the Supremacy Clause of the Constitution of the United States."

Pend Oreille, 417 F.2d at 202.

Because we find that the proposed state-law condemnation would frustrate the federal

purpose of providing low-cost, reliable electric service to rural areas, the state-law condemnation

proceeding is preempted under the Supremacy Clause. We t herefore affirm the district court's

dismissal of that action.

AFFIRMED.