"Once we have determined a statute's clear meaning, we adhere to that determination under the doctrine of stare decisis, and we judge an agency's later interpretation of the statute against our prior determination of the statute's meaning."
How later courts described this case
- "Once we have determined a statute's clear meaning, we adhere to that determination under the doctrine of stare decisis, and we judge an agency's later interpretation of the statute against our prior determination of the statute's meaning."
- finding that transmis- sion facilities used at wholesale are not "local distribution facilities"
- reject- ing the need for a federal liability standard for pipelines
- concluding that agency regula- tions do not require EPA to review and approve or disap- prove a state's decision to maintain existing water quality standards
Written by the judges who cited it.
The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 3, 1999 Decided June 30, 2000
As Amended Nov. 14, 2000
No. 97-1715
Transmission Access Policy Study Group, et al.
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Vermont Department of Public Service, et al.,
Intervenors
Consolidated with
98-1111, 98-1112, 98-1113, 98-1114, 98-1115, 98-1118,
98-1119, 98-1120, 98-1122, 98-1124, 98-1125, 98-1126,
98-1127, 98-1128, 98-1129, 98-1131, 98-1132, 98-1134,
98-1136, 98-1137, 98-1139, 98-1140, 98-1141, 98-1142,
98-1143, 98-1145, 98-1147, 98-1148, 98-1149, 98-1150,
98-1152, 98-1153, 98-1154, 98-1155, 98-1156, 98-1159,
98-1162, 98-1163, 98-1166, 98-1168, 98-1169, 98-1170,
98-1171, 98-1172, 98-1173, 98-1174, 98-1175, 98-1176,
98-1178,98-1180
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Sherilyn Peterson, John T. Miller, Jr., Robert C. McDiar-
mid, Stanley C. Fickle, Sara D. Schotland, Jeffrey L. Lands-
man, Lawrence G. Malone, Jeffery D. Watkiss, Richard M.
Lorenzo, Isaac D. Benkin, Wallace E. Brand, Daniel I.
Davidson, Cynthia S. Bogorad, Harvey L. Reiter and Ran-
dolph Lee Elliott argued the causes for petitioners. With
them on the briefs were William R. Maurer, Ben Finkel-
stein, David E. Pomper, Ronald N. Carroll, John Michael
Adragna, Sean T. Beeny, Wallace F. Tillman, Susan N.
Kelly, Craig W. Silverstein, A. Hewitt Rose, Bryan G. Tabler,
James D. Pembroke, David C. Vladeck, Robert F. Shapiro,
Lynn N. Hargis, Wallace L. Duncan, Richmond F. Allan,
Alan H. Richardson, Michael A. Mullett, C. Kirby Mullen,
Robert A. Jablon, Sara C. Weinberg, John F. Wickes, Jr.,
Todd A. Richardson, Brian A. Statz, John P. Cook, Charles
F. Wheatley, Jr., Christine C. Ryan, Robert S. Tongren,
Joseph P. Serio, Barry E. Cohen, Carrol S. Verosky, Jennifer
S. McGinnity, Jonathan D. Feinberg, Charles D. Gray, Rob-
ert Vandiver, Cynthia Miller, Helene S. Wallenstein, Wil-
liam H. Chambliss, C. Meade Browder, Jr., Mary W. Coch-
ran, Paul R. Hightower, Brad M. Purdy, Gisele L. Rankin,
Robert D. Cedarbaum, Edward H. Comer, Edward Berlin,
Robert V. Zener, Elizabeth W. Whittle, James H. McGrew,
Donald K. Dankner, Frederick J. Killion, Joseph L. Laksh-
manan, Stephen C. Palmer, Michael E. Ward, Steven J.
Ross, Marvin T. Griff and Thomas C. Trauger. Leja D.
Courter, Robert E. Glennon, Jr., Neil Butterklee, Zachary D.
Wilson, Sheila S. Hollis, Janice L. Lower and James B.
Ramsay entered appearances.
John H. Conway, Deputy Solicitor, Federal Energy Regu-
latory Commission, and Timm L. Abendroth and Larry D.
Gasteiger, Attorneys, argued the causes for respondent.
With them on the brief was Jay L. Witkin, Solicitor. Susan J.
Court, Special Counsel, and Edward S. Geldermann, Attor-
ney, entered appearances.
Edward Berlin argued the cause for intervenors. With
him on the briefs were J. Phillip Jordan, Robert V. Zener,
Edward H. Comer, William M. Lange, Deborah A. Moss,
James H. McGrew, Steven J. Ross, Elizabeth W. Whittle,
Richard M. Lorenzo, David M. Stahl, D. Cameron Findlay,
Peter Thornton, J. Phillip Jordan, Robert V. Zener, Robert C.
McDiarmid, Cynthia S. Bogorad, Ben Finkelstein, Peter J.
Hopkins, Margaret A. McGoldrick, Jeffery D. Watkiss, Ron-
ald N. Carroll, Sara D. Schotland, Alan H. Richardson,
Wallace L. Duncan, Richmond F. Allan, A. Hewitt Rose,
Wallace F. Tillman, Susan N. Kelly, John M. Adragna, Sean
T. Beeny and Randolph Lee Elliott. Edward J. Twomey,
Richard P. Bonnifield, Frederick H. Ritts, David L. Huard,
Dan H. McCrary, Mark A. Crosswhite, John N. Estes, III,
Kevin J. McIntyre, John S. Moot, Clark E. Downs, Martin V.
Kirkwood, Robert S. Waters, John T. Stough, Jr., Bruce L.
Richardson, Floyd L. Norton, IV, William S. Scherman,
Douglas F. John, Gary D. Bachman, Nicholas W. Fels,
Robert Weinberg, Robert A. Jablon, Peter G. Esposito, Chris-
tine C. Ryan, Sheila S. Hollis, Stephen L. Teichler, James K.
Mitchell, Gordon J. Smith, Edward J. Brady, Kevin F.
Duffy, Michael P. May, Barbara S. Brenner, Michael J.
Rustum, Sandra E. Rizzo, Kirk H. Betts, Pierre F. de Ravel
d'Esclapon, Glen L. Ortman and William D. DeGrandis
entered appearances.
Before: Sentelle, Randolph and Tatel, Circuit Judges.
Opinion for the Court filed Per Curiam1:
Table of Contents
I. Introduction 7
II. FERC's Authority to Require Open Access 11
A. Statutory Challenges: FPA ss 205 and
206 14
1. ss 205 and 206 and Otter Tail Power
Company 15
2. s 206(a) Procedural and Evidentiary
Requirements 18
3. Discriminatory Effect of Order 888 21
B. Constitutional Challenge: Fifth Amend-
ment Takings Clause 23
III. Federal versus State Jurisdiction over Trans-
mission Services 24
A. Bundled Retail Sales 26
B. Local Distribution Facilities 31
IV. Reciprocity 35
A. Indirect Regulation of Non-Jurisdictional Utilities 36
B. Limitation on Reciprocity 37
V. Stranded Cost Recovery Provisions 39
A. Wholesale Stranded Costs 40
1. FERC's Authority to Provide for
Stranded Cost Recovery 44
a. Reasonable expectation of contin-
ued service 44
__________
1 Following our normal practice in complex cases, we shared the
writing of this opinion. Judge Sentelle wrote Section II, Section
III, and Section VII. Judge Randolph wrote Section IV, Section
VI, and Section VIII. Judge Tatel wrote Section I, Section V, and
Section IX.
b. Sections 206 and 212 of the FPA 46
c. Implications of Cajun 48
2. Natural Gas Precedent and Conform-
ance to Cost Causation Principles 49
a. Natural gas precedent: AGD, K
N Energy, and UDC 50
b. Conformance to cost causation
principles 54
3. FERC's Mobile-Sierra Findings 57
a. FERC's authority to make a ge-
neric public interest finding 59
b. FERC's stranded cost public in-
terest finding 61
c. FERC's public interest finding
regarding customers 62
4. Availability of Stranded Cost Recov-
ery to Nonjurisdictional Utilities
and G & T Cooperatives 63
5. Challenges to Technical Aspects of
Order 888's Stranded Cost Recov-
ery Provisions 65
a. POSCR's challenges to the
stranded cost formula 66
b. Inclusion of known and measura-
ble costs 68
c. Treatment of energy costs in the
market option 68
d. Rescission of notice of termi-
nation provision 70
e. Provision for benefits lost 71
B. Retail Stranded Costs 72
1. Stranded Costs Arising from Retail
Wheeling 72
a. FERC's jurisdiction over
retail stranded costs 73
b. FERC's refusal to assert jurisdict-
ion over all retail stranded
costs 76
2. Stranded Costs Relating to Retail-
Turned-Wholesale Customers 80
VI. Credits for Customer-Owned Facilities and
Behind-The-Meter Generation 85
.
VII. Liability, Interface Allocation, and Discount-
ing 90
A. Liability and Indemnification 90
B. Interface Allocation 94
C. Delivery-Point-Specific Discounting 96
VIII. Tariff Terms and Conditions 100
A. Headroom Allocation 100
B. Headroom Prioritization 101
C. Duplicative Charges 102
D. Multiple Control Areas 103
E. Right-of-First-Refusal 104
IX. National Environmental Policy Act and Regu-
latory Flexibility Act Compliance 105
A. NEPA Compliance 105
1. Adequacy of Base Case 105
2. Failure to Adopt Mitigation Measures 107
B. Regulatory Flexibility Act Compliance 108
----------
Following two notices of proposed rulemaking, the Federal
Energy Regulatory Commission issued Orders 888 and 889 on
April 24, 1996.2 Reflecting the Commission's effort to end
__________
2 Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recov-
ery of Stranded Costs by Public Utilities and Transmitting Utili-
ties, Order No. 888, FERC Stats. & Regs. p 31,036, 61 Fed. Reg.
21,540 (1996), clarified, 76 FERC p 61,009 and 76 FERC p 61,347
(1996) ("Order 888"), on reh'g, Order No. 888-A, FERC Stats. and
Regs. p 31,048, 62 Fed. Reg. 12,274, clarified, 79 FERC p 61,182
(1997), on reh'g, Order No. 888-B, 81 FERC p 61,248, 62 Fed. Reg.
64,688 (1997), on reh'g, Order No. 888-C, 82 FERC p 61,046 (1998);
discriminatory and anticompetitive practices in the national
electricity market and to ensure that electricity customers
pay the lowest prices possible, these orders represent, as the
Commission described in a later order not before us, "the
foundation necessary to develop competitive bulk power mar-
kets...." Regional Transmission Organizations, Order No.
2000, 65 Fed. Reg. 810, 812 (2000).
Open access is the essence of Orders 888 and 889. Under
these orders, utilities must now provide access to their trans-
mission lines to anyone purchasing or selling electricity in the
interstate market on the same terms and conditions as they
use their own lines. By requiring utilities to transmit com-
petitors' electricity, open access transmission is expected to
increase competition from alternative power suppliers, giving
consumers the benefit of a competitive market. Most funda-
mentally, FERC's open access policies, combined with paral-
lel action now occurring on the state level, are intended to
create a market in which customers may purchase power
from any of a number of suppliers. A municipality or factory
in Florida, for example, will no longer have to purchase power
from its local utility but instead may seek cheaper power
anywhere in the country. A customer in Vermont may
purchase electricity from an environmentally friendly power
producer in California or a cogeneration facility in Oklahoma.
All key players in the electricity market have challenged
various provisions of Orders 888 and 889. Their claims range
from the hypertechnical to arguments that FERC lacks au-
thority to order open access transmission at all. Finding few
defects in the orders, we uphold them in nearly all respects.
I. Introduction
Historically, vertically integrated utilities owned genera-
tion, transmission, and distribution facilities. They sold gen-
__________
Open Access Same-Time Information System and Standards of
Conduct, Order No. 889, FERC Stats. & Regs. p 31,035, 61 Fed.
Reg. 21,737 (1996) ("Order 889"), on reh'g, Order No. 889-A, FERC
Stats. & Regs. p 31,049, 62 Fed. Reg. 12,484 (1997), on reh'g, Order
No. 889-B, 81 FERC p 61,253 (1997).
eration, transmission, and distribution services as part of a
"bundled" package. Due to technological limitations on the
distance over which electricity could be transmitted, each
utility served only customers in a limited geographic area.
And because of their natural monopoly characteristics, utili-
ties have been heavily regulated at both the federal and state
levels.
Since enactment of the Federal Power Act in 1935, the
electricity industry has undergone significant change, both
economically and technologically. Economies of scale have
justified the construction of large (greater than 500 MW)
generation facilities, such as nuclear power plants. Techno-
logical advances in the 1970s and 1980s have permitted small
plants to operate efficiently as well. See Notice of Proposed
Rulemaking, Promoting Wholesale Competition Through
Open Access Non-discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utili-
ties and Transmitting Utilities, FERC Stats. & Regs.
p 32,514 at 33,059-60, 60 Fed. Reg. 17,662 (1995) ("Open
Access NOPR"). Technological improvements also made
feasible the transmission of electric power over long distances
at high voltages. See id. p 32,514 at 33,060. Alternative
power suppliers, such as cogenerators, small power produc-
ers, and independent power producers emerged in response
to these developments. Constructing and operating genera-
tion capacity at prices lower than the embedded generation
costs of traditional utilities, these alternative suppliers have
created a wholesale market for low-cost power.
The growth of this new wholesale market faced a serious
obstacle. "As entry into wholesale power generation markets
increased," FERC explained, "the ability of customers to gain
access to the transmission services necessary to reach com-
peting suppliers became increasingly important." Id. at
33,062. Yet the owners of transmission lines, the traditional
utilities that had built the high-cost generation capacity,
denied alternative producers access to their transmission
lines on competitive terms and conditions. FERC therefore
began requiring utilities to file open access transmission
tariffs that permitted other suppliers to transmit power over
their lines under certain circumstances, such as when a utility
sought authorization to merge with another utility or to sell
power at market-based rather than cost-based rates.
Then, in 1992, Congress enacted the Energy Policy Act,
which amended sections 211 and 212 of the FPA to authorize
FERC to order utilities to "wheel" power--i.e., transmit
power for wholesale sellers of power over the utilities' trans-
mission lines--on a case-by-case basis. Pub. L. No. 102-486,
106 Stat. 2776, 2915-16 (1992) (codified at 16 U.S.C. ss 824j-
k). FERC "aggressively implemented" amended sections 211
and 212 to " 'facilitate the development of competitively
priced generation supply options, and to ensure that whole-
sale purchasers of electric energy can reach alternative power
suppliers and vice versa.' " Open Access NOPR, p 32,514 at
33,064 (quoting Notice of Proposed Rulemaking, Recovery of
Stranded Costs by Public Utilities and Transmitting Utili-
ties, FERC Stats. & Regs. p 32,507 at 32,866, 59 Fed. Reg.
35,274 (1994) ("Stranded Cost NOPR")).
Despite these efforts, a persistent barrier to the develop-
ment of a competitive wholesale power sale market remained.
The Commission found that "utilities owning or controlling
transmission facilities possess substantial market power;
that, as profit maximizing firms, they have and will continue
to exercise that market power in order to maintain and
increase market share, and will thus deny their wholesale
customers access to competitively priced electric generation;
and that these unduly discriminatory practices will deny
consumers the substantial benefits of lower electricity prices."
Open Access NOPR, p 32,514 at 33,052. Power generators
not permitted to use utilities' transmission lines on reasonable
terms have no way to transmit their power to customers.
Invoking its authority under sections 205 and 206 of the
FPA to remedy unduly discriminatory or preferential rules,
regulations, practices, or contracts affecting public utility
rates for transmission in interstate commerce, 16 U.S.C.
ss 824d-e, and building on its experience in restructuring the
natural gas industry, see Associated Gas Distribs. v. FERC,
824 F.2d 981 (D.C. Cir. 1987), the Commission issued Orders
888 and 889 to "prevent this discrimination by requiring all
public utilities owning and/or controlling transmission facili-
ties to offer non-discriminatory open access transmission
service." Open Access NOPR, p 32,514 at 33,052. Orders
888 and 889 mandate what FERC terms "functional unbun-
dling," i.e., separating utilities' wholesale transmission func-
tions from their wholesale electricity merchant functions.
Specifically, the orders require utilities to (1) file open access
nondiscriminatory tariffs that contain the minimum terms and
conditions of nondiscriminatory services prescribed by FERC
through its pro forma tariff; (2) take transmission service for
their own new wholesale sales and purchases of electric
energy under the same terms and conditions as they offer
that service to others; (3) develop and maintain a same-time
information system that will give potential and existing trans-
mission users the same access to transmission information
that the utility enjoys (called the "Open Access Same-Time
Information System" or "OASIS"); and (4) state separate
rates for wholesale generation, transmission, and ancillary
services. See Order 888, p 31,036 at 31,635-36.
In requiring utilities to provide open access transmission,
FERC acknowledged the dramatic change the orders would
bring about, explaining that "[t]he most critical transition
issue that arises as a result of the Commission's actions in
this rulemaking is how to deal with the uneconomic sunk
costs that utilities prudently incurred under an industry
regime that rested on a regulatory framework and a set of
expectations that are being fundamentally altered." Order
888-A, p 31,048 at 30,346. Known as "stranded costs," these
"uneconomic sunk costs" are costs that utilities incurred not
only with regulatory approval, but with the expectation of
continuing to serve their current customers. These costs will
become "stranded" when customers take advantage of open
access transmission to purchase cheaper power from suppli-
ers other than their historic utilities. Order 888 affords
utilities an opportunity to recover stranded costs from their
wholesale requirements customers, but only from those cus-
tomers who use their utility's transmission service to pur-
chase power from new suppliers, and only if the utility can
prove that it had a reasonable expectation of continued ser-
vice to that customer.
After three rehearing orders, the Commission denied any
further rehearing. All petitions for review of Orders 888 and
889 were consolidated and transferred to this circuit. We
consider these petitions in this opinion. Section II considers
challenges to FERC's authority to require utilities to file
open access tariffs as a remedy for undue discrimination.
Section III evaluates FERC's conclusion that it lacked juris-
diction to order retail unbundling yet has jurisdiction over
transmission where state commissions have unbundled retail
sales. Section IV addresses FERC's authority to require
nonpublic utilities to provide reciprocal open access transmis-
sion service. Section V considers challenges to Order 888's
stranded cost recovery provisions. Section VI evaluates peti-
tioners' arguments relating to credits for customer-owned
facilities and behind-the-meter generation. Section VII ad-
dresses discounting, interface allocation, and liability. Sec-
tion VIII evaluates other arguments relating to the terms and
conditions of the pro forma tariff. Section IX assesses
FERC's compliance with the National Environmental Policy
Act and the Regulatory Flexibility Act.
In the end, we affirm the orders in all respects except two:
we remand for FERC to explain its treatment of energy costs
in the stranded cost market option (Section V.A.5.c) and to
provide a reasonable cap on contract extensions under exist-
ing customers' right-of-first-refusal (Section VIII.E).
II. FERC's Authority to Require Open Access
Although FERC asserts that "mounting claims of undue
discrimination in transmission access" prompted its move-
ment toward open access, the open access requirement of
Order 888 is premised not on individualized findings of dis-
crimination by specific transmission providers, but on
FERC's identification of a fundamental systemic problem in
the industry. Generally, those entities that own or control
interstate transmission facilities are vertically-integrated pub-
lic utilities that also generate and sell electricity. In its 1995
notice of proposed rulemaking, FERC observed that there
were at that time approximately 328 public utilities, market-
ers, and wholesale generation entities with transmission
needs, and that approximately 137 of those owned or con-
trolled the transmission facilities. See Open Access NOPR,
p 32,514 at 33,051. Entry into the transmission market is
difficult and restricted, so those utilities that already own
transmission facilities enjoy a natural monopoly over that
field. The transmission-owning utilities can use their position
to favor their own generated electricity and to exclude com-
petitors from the market, whether by denying transmission
access outright, or by providing transmission services to
competitors only at comparatively unfavorable rates, terms,
and conditions. Utilities that own or control transmission
facilities naturally wish to maximize profit. The transmis-
sion-owning utilities thus can be expected to act in their own
interest to maintain their monopoly and to use that position to
retain or expand the market share for their own generated
electricity, even if they do so at the expense of lower-cost
generation companies and consumers.
Even before Order 888, some transmission-owning utilities
voluntarily opened their transmission facilities to third party
suppliers and purchasers of electricity; and FPA s 211 ex-
plicitly gives FERC the authority to order involuntary wheel-
ing on a case-by-case basis. The Commission decided, howev-
er, that relying upon voluntary arrangements and s 211
orders would not remedy the fundamentally anti-competitive
structure of the transmission industry. Instead, the Commis-
sion concluded, such a piecemeal approach would result in an
inefficient "patchwork" of transmission systems nationwide.
"The ultimate loser in such a regime is the consumer." Open
Access NOPR, p 32,514 at 33,071.
As an alternative, the Commission interpreted the anti-
discrimination language of FPA ss 205 and 206, 16 U.S.C.
ss 824d, 824e (1994), as giving it the authority to impose open
access as a generic remedy for its findings of systemic anti-
competitive behavior. Invoking that broad authority, in Or-
der 888, FERC requires every transmission-owning public
utility within FERC's jurisdiction to file an Open Access
Transmission Tariff (OATT) containing minimum terms and
conditions for non-discriminatory service and to take trans-
mission service for their own wholesale sales and purchases of
electric energy under those filed OATTs. In other words,
this order requires the public utilities to provide the same
transmission services to anyone purchasing or selling whole-
sale power--other public utilities, federal power suppliers and
marketers, municipalities, cooperatives, independent power
producers, qualifying facilities, or power marketers--as they
provide to themselves. The Board of Water, Light and
Sinking Fund Commissioners of the City of Dalton (Dalton)
operates a municipally-owned utility system which provides
electric power to residential, commercial, and industrial con-
sumers in the city of Dalton, Georgia. Dalton obtains trans-
mission services from the Georgia Integrated Transmission
System (ITS), which it owns along with public utility Georgia
Power Company (GPC) and two other utilities that are not
subject to FERC's jurisdiction, and which GPC operates
according to the terms of various filed agreements. Puget
Sound Energy, Inc. (Puget) is a public utility in the Pacific
Northwest, where Bonneville Power Administration, which is
not a public utility subject to Order 888's requirements,3
__________
3 Bonneville Power Administration (BPA) "is a power marketing
agency in the Pacific Northwest that markets power from thirty
federal hydroelectric projects constructed and operated by the
Corps of Engineers and the Bureau of Reclamation." In re Bonne-
ville Power Administration, Power Sale and Transmission Rates,
54 F.E.R.C. p 62,143 (1991). In Order 888, FERC concluded that
BPA is not a public utility as defined by Federal Power Act (FPA)
s 201(e), and thus is not subject to Order 888's requirements.
Order 888, p 31,036 at 31,858. FERC admitted, however, to three
circumstances under which it might review BPA's transmission
access and pricing policies: (1) if BPA files an open access tariff for
review and confirmation under the Northwest Power Act and asks
FERC to find that the tariff meets FERC's open access policies;
(2) to the extent that BPA "is a transmitting utility subject to a
request for mandatory transmission services" under FPA s 211;
and (3) to the extent that BPA receives open access transmission
from a public utility and is thereby subject to the reciprocity
provision in that public utility's pro-forma tariff. Id.
dominates the electricity transmission market. These two
industry petitioners challenge the open access requirement of
Order 888 on various statutory, constitutional, and other
grounds.
Turning first to the FPA itself, Puget and Dalton argue
that ss 205 and 206 do not give the Commission the authority
to order open access as a generic remedy; and even if the
FPA does give the agency such authority, FERC has failed to
satisfy the statutory requirements for invoking it. Dalton
also argues that Order 888 itself violates the FPA by discrim-
inating against transmission facility owners who have invest-
ed in those assets. Shifting to constitutional concerns, Puget
and Dalton, along with amicus curiae Pacific Legal Founda-
tion, maintain that Order 888 violates the Takings Clause of
the Fifth Amendment. Finally, Dalton argues that the open
access requirements of the OATT interfere with the antitrust
conditions of outstanding nuclear licenses, and thus are un-
lawful. While we consider each of these challenges separate-
ly,4 we hold that Order 888's open access requirement is
authorized by and consistent with the FPA and the Takings
Clause. We conclude also that Dalton has not yet suffered
injury from the alleged conflict between open access and the
nuclear license antitrust conditions, and that its complaint on
that issue is therefore not yet ripe for judicial review.
A. Statutory Challenges: FPA ss 205 and 206
Section 205 of the FPA broadly precludes public utilities, in
any transmission or sale subject to FERC's jurisdiction, from
"mak[ing] or grant[ing] any undue preference or advantage to
__________
4 The Commission and various intervenors on its behalf argue
extensively against our jurisdiction over these issues on the grounds
that the petitioners failed, in various ways, adequately to raise their
concerns before the agency and to preserve the issues for judicial
review. Upon careful review of the record, we can safely conclude
without further elaboration that these jurisdictional arguments are
without merit, that the Commission has had ample notice and
opportunity to address all of the petitioners' various statutory,
constitutional, and other challenges to Order 888's open access
requirement, and that we have jurisdiction to consider these issues.
any person or subject[ing] any person to any undue prejudice
or disadvantage...." 16 U.S.C. s 824d(b). Section 206 of
the FPA further provides in relevant part that
[w]henever the Commission, after a hearing had upon its
own motion or upon complaint, shall find that any rate,
charge, or classification, demanded, observed, charged,
or collected by any public utility for any transmission or
sale subject to the jurisdiction of the Commission, or that
any rule, regulation, practice, or contract affecting such
rate, charge, or classification is unjust, unreasonable,
unduly discriminatory or preferential, the Commission
shall determine the just and reasonable rate, charge,
classification, rule, regulation, practice, or contract to be
thereafter observed and in force, and shall fix the same
by order.
16 U.S.C. s 824e(a). The statutory issues before us are
whether these provisions give FERC the authority to order
involuntary wheeling as a generic remedy, and if they do,
whether FERC satisfied the procedural and evidentiary re-
quirements imposed by these provisions.
1. ss 205 and 206 and Otter Tail Power Company
The Commission did not write on a blank slate when it
interpreted FPA ss 205 and 206 as giving it the authority to
order involuntary wheeling as a generic remedy for systemic
anti-competitive behavior. Puget and Dalton argue principal-
ly that the Supreme Court's decision in Otter Tail Power Co.
v. United States, 410 U.S. 366 (1973), controls the disposition
of this issue. Otter Tail was an antitrust case in which the
Supreme Court addressed whether the district court could
require Otter Tail Power Company to wheel power for its
competitors as a remedy for monopolistic practices. Con-
trary to the company's arguments, the Supreme Court con-
cluded that the district court's order did not impermissibly
conflict with the authority of the Federal Power Commission,
FERC's predecessor, because the agency did not have the
power itself to order involuntary wheeling under Part II of
the FPA, which includes ss 205 and 206. Puget and Dalton
cite various circuit court precedents, including one from this
circuit, as construing Otter Tail to prevent the Commission
from ordering involuntary wheeling as a generic remedy.
See, e.g., Florida Power & Light Co. v. FERC, 660 F.2d 668
(5th Cir. Unit B Nov. 1981); New York State Electric & Gas
Corp. v. FERC, 638 F.2d 388 (2d Cir. 1980); Richmond
Power & Light v. FERC, 574 F.2d 610 (D.C. Cir. 1978).
Finally, Puget and Dalton note that subsequent to Otter Tail,
Congress enacted FPA s 211, 16 U.S.C. s 824j, giving FERC
the authority to impose open access on a case-by-case basis to
remedy a broad range of problems. The petitioners argue
that, if FPA ss 205 and 206 authorize the Commission to
impose open access, and if Otter Tail does not prohibit such
action, then there was no reason for Congress to enact s 211.
In response, the Commission contends that we should not
read Otter Tail as limiting its authority under FPA s 206 to
remedy discriminatory behavior, since Otter Tail was an
antitrust case and not an undue discrimination case. The
Commission also maintains that the circuit court cases cited
by the petitioners are not on point and do not prohibit a
generic open access remedy. The Commission points instead
to our decision in Associated Gas Distributors v. FERC, 824
F.2d 981, 998 (D.C. Cir. 1987) (AGD), in which we upheld a
similar open access transportation requirement imposed by
FERC on natural gas transmission, as the controlling prece-
dent. Finally, FERC argues that Congress enacted FPA
s 211 to broaden its already existing authority to order
involuntary wheeling, as FPA ss 205 and 206 authorize such
action only as a remedy for undue discrimination.
We agree with FERC that our decision in AGD controls
the disposition of this issue. In AGD, we reviewed a FERC
order imposing open access conditions on pipelines transport-
ing natural gas. See 824 F.2d at 997-1001. Considering
arguments quite similar to those made by the petitioners
here, we concluded that Otter Tail does not constrain FERC
from mandating open access where it finds circumstances of
undue discrimination to exist. See id. at 998-99. Turning to
relevant circuit precedent, we construed Richmond Power &
Light as supporting only the proposition that a refusal to
provide transmission services to another utility was not per se
unduly discriminatory and we noted that the court in Florida
Power & Light expressly left open the question of whether
FERC could impose open access conditions as a remedy for
anti-competitive behavior. See id. at 999. Further, we point-
ed out that our reading of Richmond is consistent with other
precedent, specifically Central Iowa Power Coop. v. FERC,
606 F.2d 1156 (D.C. Cir. 1979), in which we upheld FERC's
use of its authority to prevent undue discrimination to condi-
tion its approval of a power-pooling agreement upon removal
of membership criteria which denied certain privileges to
some but not all participants. See AGD, 824 F.2d at 999.
Indeed, in AGD, we noted that open access relies upon the
very same principles that we upheld in Central Iowa. See id.
Although AGD addressed open access under the anti-
discrimination provisions of the Natural Gas Act (NGA) rath-
er than FPA ss 205 and 206, we have repeatedly recognized
the similarity of the two statutes and held that they should be
interpreted consistently. See Environmental Action v.
FERC, 996 F.2d 401, 410 (D.C. Cir. 1993); Tennessee Gas
Pipeline Co. v. FERC, 860 F.2d 446, 454 (D.C. Cir. 1988); see
also Arkansas La. Gas Co. v. Hall, 453 U.S. 571, 577 n.7
(1981). Thus, AGD counsels the conclusion that, while Otter
Tail may represent a general rule that FERC's authority to
order open access is limited, the FPA, like the NGA, makes
an exception to that rule where FERC finds undue discrimi-
nation.
Moreover, as in AGD, the deferential standard of Chevron
U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984), governs our review of FERC's interpretation of
FPA ss 205 and 206. See AGD, 824 F.2d at 1001. If we
agreed with Puget and Dalton that the Supreme Court's Otter
Tail opinion dictates a particular construction of ss 205 and
206, then the Commission's contrary interpretation would not
be entitled to Chevron deference. See Maislin Indus., U.S.,
Inc. v. Primary Steel, Inc., 497 U.S. 116, 131 (1990) ("Once
we have determined a statute's clear meaning, we adhere to
that determination under the doctrine of stare decisis, and we
judge an agency's later interpretation of the statute against
our prior determination of the statute's meaning."). But
having concluded that Otter Tail does not govern the disposi-
tion of this case, we are faced solely with considering the
validity of FERC's interpretation of the FPA, a statute that
the Commission administers. In AGD, we concluded that
FERC reasonably interpreted the NGA's ambiguous anti-
discrimination provisions as giving it broad authority to reme-
dy unduly discriminatory behavior through a generic open
access requirement. See AGD, 824 F.2d at 1001. Given the
FPA's similar language, we can only reach the same conclu-
sion with respect to Order 888. For all of these reasons, we
find that the Commission has the authority under FPA
ss 205 and 206 to require open access as a generic remedy to
prevent undue discrimination.
2. s 206(a) Procedural and Evidentiary Requirements
Puget and Dalton next argue that, even if FPA ss 205 and
206 authorize FERC to impose open access generically,
s 206(a) imposes certain procedural and evidentiary require-
ments for action which the Commission failed in two separate
but related ways to satisfy. First, the petitioners claim that
FPA s 206(a) requires substantial evidence of contemporane-
ous "unjust, unreasonable, unduly discriminatory or preferen-
tial" behavior before the Commission can act. The Commis-
sion made no finding of discrimination or monopoly control on
the part of Georgia Power Company or Puget. None of the
applications or complaints filed with the Commission accused
these petitioners of unduly discriminatory or anti-competitive
behavior. Instead, the Commission premised Order 888 on a
generic finding that public utility holders as a group have
sufficient monopoly power over the transmission of electricity
to engage in unduly discriminatory and anti-competitive prac-
tices, and that this condition will worsen in the future. To
support its finding, the Commission relied upon unsubstanti-
ated allegations of discriminatory conduct in public com-
ments, its own experience in reviewing applications and com-
plaints, and its own understanding of the incentives for
monopolists to behave discriminatorily.
Puget and Dalton additionally assert that FPA s 206(a)
requires that the requisite findings of undue discrimination be
made in the context of a hearing. Although they concede
that a rulemaking proceeding can satisfy the statute's hearing
requirement, Puget and Dalton maintain that the rulemaking
proceeding nevertheless must clearly identify the challenged
activities and actors, and give the accused actors the opportu-
nity to demonstrate that their activities were not unlawful.
The petitioners protest that the Commission's notice-and-
comment rulemaking process did not afford them such oppor-
tunity.
FERC claims the discretion under NLRB v. Bell Aerospace
Co., 416 U.S. 267, 293 (1974), to choose between rulemaking
and case-by-case adjudication; and FERC contends that its
generic rulemaking process fully satisfied the requirements of
FPA s 206(a). FERC concedes that it relied upon general
findings of systemic monopoly conditions and the resulting
potential for anti-competitive behavior, rather than evidence
of monopoly and undue discrimination on the part of individu-
al utilities. Citing our opinion in Wisconsin Gas Co. v.
FERC, 770 F.2d 1144, 1166 (D.C. Cir. 1985), however, FERC
maintains that such findings are sufficient to substantiate its
decision to impose the open access requirement. Finally,
FERC observes that we rejected these same arguments in
AGD. See 824 F.2d at 1008 (citing Wisconsin Gas, 770 F.2d
at 1165-68).
Again, we must agree with the Commission. In American
Public Gas Ass'n v. FPC, we held that the Commission could
exercise its authority under NGA s 5(a), the provision paral-
lel to FPA s 206, through rulemaking as well as adjudication.
See 567 F.2d 1016, 1064-67 (D.C. Cir. 1977); see also Wiscon-
sin Gas, 770 F.2d at 1153 (articulating the American Public
Gas holding). Congress subsequently ratified the American
Public Gas holding when it enacted the Department of Ener-
gy Organization Act, 42 U.S.C. s 7173(c) (1994). See Wiscon-
sin Gas, 770 F.2d at 1153 n.8 (acknowledging the Act). That
statute provides that "the establishment of rates and charges
under the Federal Power Act [16 U.S.C. 791a et seq.] or the
Natural Gas Act [15 U.S.C. 717 et seq.], may be conducted by
rulemaking procedures." 42 U.S.C. s 7173(c) (brackets in
original). By passing a statute adopting the holding of
American Public Gas, and explicitly applying that rule to the
FPA as well as the NGA, Congress signaled its intent that
the hearing requirements of NGA s 5(a) and FPA s 206(a)
be interpreted similarly.
Interpreting the hearing requirement of NGA s 5(a), we
have said that, while the Commission cannot rely solely on
"unsupported or abstract allegations," the agency is also not
required to make "specific findings," so long as the agency's
factual determinations are reasonable. See Wisconsin Gas,
770 F.2d at 1158. In AGD, we applied Wisconsin Gas in
holding that the Commission was not required to make
specific findings that individual rates charged by individual
pipelines were unlawful, or to offer empirical proof for all the
propositions upon which its order depended, before promul-
gating a generic rule to eliminate undue discrimination. See
AGD, 824 F.2d at 1008-09. Upon comparison of the order
considered in AGD with Order 888, if anything, FERC more
thoroughly documented the reasons for its actions in Order
888 than in the earlier natural gas order.
Puget claims that AGD and Wisconsin Gas are distinguish-
able, and that this case is governed by Electricity Consumers
Resource Council v. FERC, 747 F.2d 1511 (D.C. Cir. 1984), in
which we reversed FERC's adoption of a rate based on an
economic theory in the absence of a discussion of the practical
applications of that theory. See 747 F.2d at 1514. As the
AGD court recognized, however, the court in Electricity
Consumers was persuaded that the Commission had distorted
the economic theory it claimed to apply. See AGD, 824 F.2d
at 1008. Just as the pipelines in AGD did, Puget has failed to
articulate exactly how FERC has distorted the theories on
which it relies in Order 888. Additionally, the AGD court
rejected the idea that "Electricity Consumer's reference to
'economic theory' was intended to invalidate agency reliance
on generic factual predictions merely because they are typi-
cally studied in the field called economics." Id. Following
the rationale of Wisconsin Gas and AGD, we conclude that
FERC has satisfied the requirements for invoking its authori-
ty under FPA s 206(a).
3. Discriminatory Effect of Order 888
Dalton charges that, even if the FPA permits FERC to
impose involuntary wheeling generally, the open access re-
quirement of Order 888 causes rather than remedies discrimi-
nation, and therefore violates FPA s 206(a)'s express re-
quirement that FERC act against undue discrimination.
Specifically, Dalton and the other non-jurisdictional owners of
the Georgia ITS facilities invested millions of dollars in those
facilities in order to use the facilities each owns and receive
reciprocal open access transmission services from the other
owners. Under the Open Access Transmission Tariff
(OATT), other customers do not have to make such invest-
ments to use the Georgia ITS facilities. FERC responds
that Order 888 does not unduly discriminate between old and
new customers of integrated transmission systems like the
Georgia ITS; and that if Dalton has evidence that the tariff
results in undue discrimination in its individual circum-
stances, Dalton remains free to file a petition under FPA
s 206 for redress, and FERC will consider its claim.
FERC's conclusion that its open access requirement is not
unduly discriminatory is subject only to arbitrary and capri-
cious review. See 5 U.S.C. s 706(2)(A) (1994); Sithe/
Independence Power Partners, LP v. FERC, 165 F.3d 944,
948 (D.C. Cir. 1999); Union Pacific Fuels, Inc. v. FERC, 129
F.3d 157, 161 (D.C. Cir. 1997). We conclude that FERC has
adequately explained why its open access requirement is not
unduly discriminatory. Relying upon extensive commentary
as well as its own experiences, FERC concluded that, as a
general matter, transmission industry conditions were condu-
cive to discriminatory practices and anti-competitive behavior,
such that case-by-case adjudication could not adequately ad-
dress the problem. FERC also recognized that its generic
findings may have exceptions, and thus that Order 888 may in
individual circumstances have a different result than that
intended. Therefore, Order 888 does not preclude facilities
owners the opportunity to argue their particular circum-
stances in their OATT filings or, as with Dalton, in their own
petitions for relief under FPA s 206(a). Rather, Order 888
merely shifts from a regulatory norm in which a user of
transmission services must demonstrate to FERC an individ-
ualized need for open access to one in which a provider of
transmission services must present to FERC individualized
circumstances requiring relief from open access. As the
petitioners have a mechanism by which they can seek relief
for their particular concerns, we find nothing arbitrary or
capricious about FERC's conclusion that its approach to open
access is not unduly discriminatory.
In another stab at demonstrating the discriminatory effect
of Order 888's open access requirement, Dalton alerts us to
an agreement entered into between it and Georgia Power
Company (GPC) in partial implementation of antitrust condi-
tions contained in operating licenses issued by the Nuclear
Regulatory Commission for jointly owned nuclear facilities
connected to the Georgia ITS. Those antitrust conditions
require GPC to provide Dalton with transmission services
until the nuclear licenses expire, long after the ITS Agree-
ment terminates. Dalton alleges that limitations imposed by
Order 888 on Dalton's rights upon termination of the ITS
Agreement are inconsistent with GPC's obligations under the
nuclear licenses, and that the interference will result in
discrimination against Dalton. FERC maintains that it
agreed in addressing GPC's Order 888 compliance filing to
treat the ITS Agreements separately.
Ultimately, Dalton has offered no present injury from the
alleged conflict, so this issue is not ripe for review. Dalton
will only be injured if, upon termination of the ITS Agree-
ment, Order 888 interferes with Dalton's right to transmis-
sion services. Dalton's own argument suggests as much,
observing that FERC "left to GPC the decision whether it
'must, but cannot, comply with separate orders' of NRC and
FERC and whether it will present evidence of such conflict to
either Commission," and complaining that even if GPC does
act, "the orders under review provide no assurance that the
competitive transmission and other service rights provided by
the nuclear licenses will be respected under the OATT." Br.
of Petitioner Dalton at 23 (quoting Order 888-A, p 31,048 at
30,452). In short, GPC and FERC are still in the process of
determining whether the antitrust provisions even conflict
with Order 888, as well as how to deal with any such
inconsistency.5 Accordingly, this issue is not appropriate for
judicial review at this time.
B. Constitutional Challenge: Fifth Amendment Takings
Clause
Puget and amicus curiae Pacific Legal Foundation (Pacific)
contend that Order 888 violates the Takings Clause of the
Fifth Amendment. These petitioners maintain that Order
888's open access requirement engineers a "taking" in two
ways: First, that FERC's open access requirement effects a
regulatory taking by arbitrarily changing pricing methodolo-
gy in a way that excessively deprives transmission owners of
their investments in facilities; and, second, that the open
access requirement allows a physical invasion, a permanent
physical occupation, by taking away the transmission owners'
right to exclude competitors from their transmission proper-
ty. We cannot grant relief on either ground.
When the action of the federal government effects a "tak-
ing" for Fifth Amendment purposes, there is no inherent
constitutional defect, provided just compensation is available.
At bottom, both of the petitioners' Fifth Amendment claims
turn not on whether open access effects a taking, but whether
FERC's cost-based transmission pricing policies in the end
provide just compensation. The remedy of just compensation
is not within our jurisdiction but that of the United States
Court of Federal Claims, under the Tucker Act, 28 U.S.C.
s 1491. See Bell Atlantic Tel. Cos. v. Federal Communica-
tions Comm'n, 24 F.3d 1441, 1444 n.1 (D.C. Cir. 1994);
Railway Labor Executives' Ass'n v. United States, 987 F.2d
806, 815-16 (D.C. Cir. 1993).
We recognize that our jurisdiction to review an agency's
construction of a statute necessarily involves an exercise of
__________
5 GPC's management of the Georgia ITS is subject to the di-
rection of a committee that includes Dalton representatives.
the policy of avoiding constitutional issues where possible,
even though the issues may concern arguable takings amena-
ble to Tucker Act remedy, "when 'there is an identifiable
class of cases in which application of a statute will necessarily
constitute a taking.' " Bell Atlantic, 24 F.3d at 1445 (D.C.
Cir. 1994) (quoting United States v. Riverside Bayview
Homes, Inc., 474 U.S. 121, 128 n.5 (1985)). We need not
decide whether this case falls within that category, however,
because even if it did, any takings problem created by Order
888 does not raise such significant constitutional doubt as to
require us to construe the FPA to prohibit FERC from
ordering open access. If there is a taking, and a claim for
just compensation, then that is a Tucker Act matter to be
pursued in the Court of Federal Claims, and not before us.
III. Federal versus State Jurisdiction
over Transmission Services
Vertically integrated utilities use their own facilities to
generate, transmit, and distribute electricity to their custom-
ers. Traditionally, the customer paid one combined rate for
both the power and its delivery, thus the industry refers to
such sales as "bundled." To the extent that bundled sales are
made directly to the end user of the electricity, they are also
recognized as retail sales. Utilities may also sell the electrici-
ty they generate at wholesale to other utilities or other
resellers of power, which then resell that power to their own
customers. Thus, the same utility may use its facilities to
serve both retail and wholesale customers. Vertically inte-
grated utilities use their transmission facilities to move elec-
tricity over long distances, and use local distribution lines to
deliver the electricity to the end user.
Even before Congress enacted the FPA, the Supreme
Court held that states could not regulate wholesale sales of
electricity. See Public Utils. Comm'n of R.I. v. Attleboro
Steam & Elec. Co., 273 U.S. 83 (1927). A few years later in
1935, Congress included in the FPA a provision giving the
Federal Power Commission, FERC's predecessor agency, the
authority to regulate "the sale of [electric] energy at whole-
sale," as well as "the transmission of electric energy in
interstate commerce." FPA s 201(a), 16 U.S.C. s 824(a)
(1994). Congress also limited federal regulation "to those mat-
ters which are not subject to regulation by the States," id.,
and reserved to the states "jurisdiction ... over facilities
used for the generation of electric energy or over facilities
used in local distribution or only for the transmission of
electric energy in intrastate commerce...." FPA s 201(b),
16 U.S.C. s 824(b). Pursuant to these provisions, FERC has
regulated wholesale power sales and interstate transmissions,
and state agencies have retained jurisdiction over bundled
retail transactions, including service issues and the intrastate
sale and distribution of electricity through local distribution
facilities.
Initially, as most transactions involved either a wholesale or
a retail sale, and correspondingly transmission or local distri-
bution facilities, this regulatory division of labor was straight-
forward in application. Indeed, in 1935, when Congress
enacted the FPA, the networks of high-voltage, long-distance
transmission lines which today crisscross the United States
did not exist. Instead, vertically integrated utilities individu-
ally built facilities sufficient to meet the power needs of their
customers. Over time, however, the landscape of the electric
industry changed.
Utilities decided to cover demand spikes by sharing power,
rather than by building more generation capacity. The trans-
mission grid developed from these arrangements. Eventual-
ly, nonutility generators started producing electricity; and
power marketers began to buy and resell electricity to other
power marketers, utilities, or even directly to consumers.
These industry participants do not own transmission lines, so
they rely upon the utilities that own such facilities to provide
transmission services. In addition to their traditional bun-
dled sales activity, vertically integrated utilities started "un-
bundling" their own services and developing their own power
marketing units to buy and sell electricity at wholesale.
Some states even mandate unbundling of retail services. As
a result of these changes, facilities once used solely for local
distribution of bundled retail sales now engage regularly in
unbundled wholesale transmissions and retail delivery as well.
Thus, while the electricity world once neatly divided into
spheres of retail versus wholesale sales, and local distribution
versus transmission facilities, such is no longer the case.
In Order 888, FERC reinterpreted FPA s 201 to accom-
modate the new industry practices and conditions. FERC
left the regulation of bundled retail transmissions to the
states, concluding that "when transmission is sold at retail as
part and parcel of the delivered product called electric ener-
gy, the transaction is a sale of electric energy at retail."
Order 888, p 31,036 at 31,781. Nevertheless, FERC asserted
jurisdiction over all unbundled retail transmissions, and left
to the states only the sales portion of unbundled retail
transactions, on the ground that FPA s 201 gives it jurisdic-
tion without qualification over all transmission by public
utilities in interstate commerce. See id. Also, while ac-
knowledging that FPA s 201(b) explicitly places retail trans-
missions by "facilities used in local distribution" beyond the
Commission's jurisdiction, FERC adopted a seven factor jur-
isdictional test for determining which facilities fall within that
category, and claimed exclusive authority over those that do
not. See id. at 31,780, 31,784. In the present litigation, each
of these changes is challenged, with some petitioners claiming
that FERC went too far, and others contending that the
Commission did not go far enough in asserting jurisdiction.
A. Bundled Retail Sales
Several state regulatory commissions complain that FERC
exceeded the boundaries of its statutory authority by assert-
ing jurisdiction over unbundled retail transmissions. These
state petitioners argue that the plain meaning and history of
FPA s 201(a) gives FERC the authority to regulate only
transmissions of electricity consumed in a state other than
that in which the electricity was generated, if the transmis-
sion was not otherwise subject to state regulation. The
states historically have regulated retail transmissions as part
of bundled retail sales of electricity, while FERC has regulat-
ed wholesale transmissions; and the division of regulatory
jurisdiction should not change merely because those transac-
tions have now been unbundled into separate generation,
transmission, and sales components.
Two groups of transmission dependent utilities, TAPS and
TDU Systems, and the nation's largest power wholesaler,
Enron Power Marketing (collectively the "unbundling and
discounting" or "U&D" petitioners), both intervene on the
side of FERC with respect to the states' claim, and separate-
ly challenge FERC's interpretation of its jurisdiction on
different grounds. The U&D petitioners contend that FERC
impermissibly limited its jurisdiction by leaving the regulation
of bundled retail transmissions to the states. These parties
maintain that FERC has the authority to regulate both
bundled and unbundled retail transmissions, and that FERC
violates FPA s 206 by limiting the scope of Order 888 to the
latter. To establish that bulk transmission by utilities is
transmission in interstate commerce regardless of whether
the power is sold at wholesale or retail, the U&D petitioners
cite particularly FPC v. Florida Power & Light Co., 404 U.S.
453 (1972), and Jersey Central Power & Light Co. v. FPC, 319
U.S. 61 (1943), two of the cases relied upon by FERC in the
Notice of Proposed Rulemaking, p 32,514 at 33,135-42. As
further support that FERC's jurisdiction extends to all inter-
state transmissions, the U&D petitioners offer NGA prece-
dent recognizing FERC's authority over all interstate gas
transportation, if not the gas being transported. See, e.g.,
FPC v. Louisiana Power & Light Co., 406 U.S. 621, 636
(1972); United Distribution Cos. v. FERC, 88 F.3d 1105, 1153
(D.C. Cir. 1996) (UDC); Mississippi River Transmission
Corp. v. FERC, 969 F.2d 1215 (D.C. Cir. 1992). These
petitioners contend that excluding bundled retail transmis-
sions from the OATT will permit discrimination and give
owners a competitive advantage, contrary to the mandate of
FPA s 206(a) that FERC eliminate undue discrimination.
Accordingly, the U&D petitioners claim that FERC erred
when it declined to mandate functional unbundling for an
owner's transmissions to bundled retail customers of (1) its
own generated power or (2) power purchased at wholesale.
In response to these challenges, FERC maintains that the
plain meaning of FPA s 201 gives the Commission jurisdic-
tion over all interstate transmissions without qualification,
while at the same time limiting jurisdiction over sales to
wholesale sales. Relying particularly on Florida Power &
Light and Jersey Central Power & Light, FERC asserts
broad jurisdiction over all transmission activities in interstate
commerce. As for bundled retail sales, FERC's position is
that once the transmission service is bundled with generation
and local distribution, it becomes merely a component of the
retail sale itself, over which FERC has no jurisdiction.
FERC maintains that natural gas jurisprudence is inapplica-
ble because the language of the NGA and FPA differ on this
issue, and the natural gas cases turned on the existence of a
regulatory gap that does not exist in the electricity field.
FERC also asserts that its interpretation of the FPA's juris-
dictional grant is entitled to deference under Chevron U.S.A.
Inc. v. Natural Resources Defense Council, 467 U.S. 837
(1984).
Both FPA s 201(a) and (b) clearly and unambiguously
confer upon FERC jurisdiction over the "transmission of
electric energy in interstate commerce." FPA s 201(c) fur-
ther provides that "electric energy shall be held to be trans-
mitted in interstate commerce if transmitted from a State and
consumed at any point outside thereof." 16 U.S.C. s 824(c).
In both Florida Power & Light and Jersey Central Power &
Light, the Supreme Court considered whether certain indirect
transmissions of electrical power across state lines represent-
ed transmissions in interstate commerce.
Jersey Central Power & Light involved the transmission of
energy generated by Jersey Central in New Jersey. Jersey
Central transmitted electricity to the New Jersey transmis-
sion facilities of another company, Public Service, which then
transmitted the power first to another of its New Jersey
facilities, and then on to a facility owned by yet a third
company and located in the middle of a body of water
separating New Jersey from Staten Island, New York. The
third company in the chain then transmitted the energy first
to its own facilities in New York, then finally and ultimately
to consumers in New York. Jersey Central's own transmis-
sion facilities were located solely in New Jersey, as were
the facilities used by Public Service to receive the transmis-
sions from Jersey Central.
The Supreme Court recognized that Jersey Central had no
control over the transmissions' destination once the electricity
was delivered to Public Service, see Jersey Central, 319 U.S.
at 65, and that the total flow of electricity from Jersey
Central to New York was small. See id. at 66. Nevertheless,
because some electricity generated by Jersey Central in New
Jersey was consumed in New York, the Court upheld
FERC's jurisdiction under FPA s 201 over Jersey Central's
transmission facilities as utilized for transmissions in inter-
state commerce. See id. at 67. The Court said that, under
FPA s 201(a) and (b), FERC's power extends over all facili-
ties "which transmit energy actually moving in interstate
commerce." Id. at 72. The Court emphasized, however, that
"mere connection" of one utility's transmission facilities to
those of another transmitting in interstate commerce was
insufficient for jurisdiction under FPA s 201. Id.
The Court revisited the issue in Florida Power & Light,
which involved certain Florida and Georgia utilities who
voluntarily connected their transmission facilities to coordi-
nate their activities and exchange power as required to meet
temporary needs. Like Jersey Central, FP&L's transmission
facilities were confined to Florida, and none of FP&L's
transmission lines directly connected with those of out-of-
state companies. Nevertheless, because FP&L was a mem-
ber of a group of interconnected utilities, its transmission
lines connected with those of other Florida utilities; and the
lines of one of those other utilities, Florida Power Corp.,
interconnected just short of Florida's northern border with
those of Georgia Power Co. Records indicated that power
transfers between FP&L and Florida Power coincided with
transfers between Florida Power and Georgia Power.
In Jersey Central, logs of the relevant companies demon-
strated at least a dozen occasions when facilities in New York
drew power from certain lines at times when Jersey Central
was the only supplier of electricity to those lines. See
Florida Power & Light, 404 U.S. at 459. By way of contrast,
there was no similar evidence that power generated by FP&L
specifically passed through Florida Power to Georgia Power,
with Florida Power serving as a mere conduit. See id. At
best, company records demonstrated instances when trans-
fers between FP&L and Florida Power occurred at or about
the same time as transfers between Florida Power and
Georgia Power. See id. at 457.
Instead, the Court considered two theories by which
FP&L's power could be deemed transmitted across state
lines. The first posited a cause and effect relationship by
which every flick of a light switch would cause every genera-
tor on a multi-state interconnected system to produce some
quantity of additional electricity to maintain the system's
balance, and thus to transmit electric energy throughout the
system and across state lines. The second theory suggested
that where the transmission lines of two utilities interconnect,
their energy commingles, such that inevitably some energy
transmitted by FP&L to Florida Power was then transmitted
to Georgia Power and across state lines.
Despite its statement in Jersey Central that "mere connec-
tion determines nothing," 319 U.S. at 72, the Court relied on
the second of these theories to conclude that FP&L's facilities
were transmitting energy in interstate commerce, and left
open the possible validity of the cause and effect theory. See
404 U.S. at 462-63. Writing in dissent, Justice Douglas
characterized the Court's opinion as "mean[ing] that every
privately owned interconnected facility in the United States
... is within the [Federal Power Commission's] jurisdiction,"
such that otherwise local utilities would now be subject to the
mandates of the federal bureaucracy. Id. at 471 (Douglas, J.,
dissenting).
The Supreme Court has interpreted the language in FPA
s 201 regarding FERC's jurisdiction over transmissions in
interstate commerce. We are bound by the High Court's
dictates to conclude that the FPA gives FERC the authority
to regulate the transmissions at issue here, whether retail or
wholesale. Even if the Court had not so spoken, however,
and even if we independently concluded that the statute's text
was less than clear, it is the law of this circuit that the
deferential standard of Chevron U.S.A. Inc. v. Natural Re-
sources Defense Council, 467 U.S. 837 (1984), applies to an
agency's interpretation of its own statutory jurisdiction. See
Oklahoma Natural Gas Co. v. FERC, 28 F.3d 1281, 1283-84
(D.C. Cir. 1994). As guided by Chevron, unless Congress has
directly spoken to the contrary, or FERC has unreasonably
or impermissibly interpreted the statute, we must defer to
the Commission's construction of ambiguous provisions of the
FPA. See Chevron, 467 U.S. at 842-43. In this age of
interconnected transmission grids, and given the accompany-
ing technological complexities, we would be hard pressed to
conclude that FERC's interpretation of s 201(c) as giving it
jurisdiction over both wholesale and retail transmissions is
unreasonable or impermissible.
Nevertheless, we are not persuaded that this conclusion
requires FERC to mandate unbundling and assert jurisdic-
tion over all retail transmissions. Just as FPA s 201 gives
FERC jurisdiction over transmissions in interstate commerce
and sales at wholesale, the statute also clearly contemplates
state jurisdiction over local distribution facilities and retail
sales. The statute is much less clear about exactly where the
lines between those activities are to be drawn. A regulator
could reasonably construe transmissions bundled with genera-
tion and delivery services and sold to a consumer for a single
charge as either transmission services in interstate commerce
or as an integral component of a retail sale. Yet FERC has
jurisdiction over one, while the states have jurisdiction over
the other. FERC's decision to characterize bundled trans-
missions as part of retail sales subject to state jurisdiction
therefore represents a statutorily permissible policy choice to
which we must also defer under Chevron. Accordingly, we
affirm FERC's decisions in Order 888 to assert jurisdiction
over unbundled retail transmissions while leaving regulation
of bundled retail transmissions to the states.
B. Local Distribution Facilities
FPA s 201(b) explicitly excludes from FERC jurisdiction
"facilities used in local distribution or only for the transmis-
sion of electric energy in intrastate commerce." 16 U.S.C.
s 824(b)(1). Historically, wholesale sales have not for the
most part involved local distribution facilities. FERC claims
that increased unbundling gives resellers the opportunity to
reconfigure the wholesale sales so that they might now occur
on those facilities which traditionally have been treated as
local distribution facilities. Moreover, FERC's assertion of
jurisdiction over the transmission component of unbundled
retail sales blurred the line between local distribution facili-
ties and facilities used for transmission in interstate com-
merce.
In Order 888, FERC claimed exclusive authority over the
regulation of facilities which sell and transmit electricity at
wholesale to customers who will resell the electricity to end
users. With respect to unbundled retail sales, FERC ac-
knowledged that transmissions by "facilities used in local
distribution" are beyond the Commission's jurisdiction, while
facilities engaged in interstate transmission are subject to
FERC jurisdiction under FPA s 201(a). Thus FERC
adopted a seven factor jurisdictional test to identify whether a
facility is a local distribution facility subject to state jurisdic-
tion or a facility engaged in interstate transmission subject to
FERC jurisdiction.6 In short, under Order 888, when a
__________
6 The Commission's seven factor test involves evaluating on a
case-by-case basis whether the activities of the facilities in question
correspond with seven specific indicators of local distribution:
(1) Local distribution facilities are normally in close proximity
to retail customers.
(2) Local distribution facilities are primarily radial in charac-
ter.
(3) Power flows into local distribution systems; it rarely, if
ever, flows out.
(4) When power enters a local distribution system, it is not
reconsigned or transported on to some other market.
(5) Power entering a local distribution system is consumed in a
comparatively restricted geographical area.
(6) Meters are based at the transmission/local distribution
public utility is engaged in wholesale transmission, FERC has
jurisdiction regardless of the nature of the facility; but when
the public utility is engaged in unbundled retail transmission,
the facts and circumstances will determine whether the facili-
ties are subject to FERC or state jurisdiction.
The state petitioners argue that FERC's dual approach
radically expands its jurisdiction and violates Congress' ex-
plicit directive in FPA s 201(b) that regulation of local distri-
bution facilities be left to the states. The states contend that
Congress clearly intended to preserve state jurisdiction over
local distribution facilities, regardless of whether the energy
comes from out of state or the sale is a wholesale sale. The
states maintain that, by claiming jurisdiction over any facility
transporting energy for resale, regardless of whether the
facility might otherwise be a local distribution facility under
the seven factor test, FERC has adopted the circular reason-
ing that wholesale sales do not occur on local distribution
facilities, so any facility that engages in wholesale activities is
not a local distribution facility. The states contend further
that FERC offers no reasoned analysis of why local distribu-
tion should be defined differently for wholesale versus retail
sales. The states finally charge that, under Order 888, nearly
identical facilities would be under federal jurisdiction and
state jurisdiction for different customers receiving indistin-
guishable service. Such a situation, they contend, will only
encourage energy marketers to choose their regulator by
using middlemen to shift the point at which title to the power
transfers, and thus undermine the jurisdictional certainty that
Order 888 states is necessary for competition.
FERC responds that it is not asserting jurisdiction over
local distribution facilities, but asserts that when a public
utility delivers unbundled energy at wholesale to a supplier
for the purpose of resale to an end user, FPA s 201 gives
FERC unqualified authority to assert jurisdiction over the
facility used to effect that transaction. When the public
utility is engaged in unbundled retail transmission, however,
__________
interface to measure flows into the local distribution system.
(7) Local distribution systems will be of reduced voltage.
Order 888, p 31,036 at 31,981.
the circumstances of a specific case will determine whether
the facilities used are subject to FERC or state jurisdiction.
The arguments by the states do no more than raise policy
concerns which are for FERC and not the court. See Arent
v. Shalala, 70 F.3d 610 (D.C. Cir. 1995).
Intervening again on FERC's behalf on this issue, the
U&D petitioners add that FERC's use of different tests is
appropriate given the differences in the two separate jurisdic-
tional grants of FPA s 201. The intervenors argue that,
given the statute's clear grant to FERC of jurisdiction over
all aspects of wholesale sales, FERC is fully justified in
employing a functional test to identify wholesale transmis-
sions. In contrast, because FERC's jurisdiction over retail
sales is limited to transmissions in interstate commerce, the
seven factor test is more appropriate.
We agree that FERC's dual approach to assessing its
jurisdiction stems from the fact that FPA s 201 contains
more than one jurisdictional grant. FPA s 201(b) denies
FERC jurisdiction over local distribution facilities "except as
specifically provided in this subchapter and subchapter III."
16 U.S.C. s 824(b)(1) (emphasis added). FPA s 201(a)
makes clear that all aspects of wholesale sales are subject to
federal regulation, regardless of the facilities used. FERC's
assertion of jurisdiction over all wholesale transmissions,
regardless of the nature of the facility, is clearly within the
scope of its statutory authority. Moreover, various cases
support the proposition that FERC regulates all aspects of
wholesale transactions. See, e.g., Duke Power Co. v. FPC,
401 F.2d 930, 935-36 (D.C. Cir. 1968) (noting that the FPC
regulates public utility facilities used in wholesale transmis-
sions or sales in interstate commerce); Arkansas Power &
Light Co. v. FPC, 368 F.2d 376, 383 (8th Cir. 1966) (stating
that the functional use of the transmission lines--wholesale
versus retail--controls); Wisconsin-Michigan Power Co. v.
FPC, 197 F.2d 472, 477 (7th Cir. 1952) (finding that transmis-
sion facilities used at wholesale are not "local distribution
facilities").
The seven factor test applies only to unbundled retail sales,
where FERC seeks to regulate pursuant to the separate
grant of jurisdictional authority over transmissions in inter-
state commerce. In this context, the definition of "facilities
used in local distribution" becomes relevant. The statute
does not define "facilities used in local distribution," but
instead leaves that task to FERC. As Chevron counsels us,
FERC's interpretation of undefined and ambiguous statutory
terms is entitled to deference. See Chevron, 467 U.S. at 842-
43.
FERC has adopted a multi-factor test to determine the
nature of transmission facilities. In a footnote, Order 888
says that distribution-only facilities which sell only at retail
will still be considered local distribution facilities. See Order
888, p 31,036 at 31,981 n.99. This is consistent with the fact
that states historically have regulated bundled retail sales to
end users. However, Order 888 implicitly recognizes the
current reality that many primarily retail utilities engage in
both local distribution and interstate transmissions, and seeks
through the seven factors to discern each facility's primary
function. We cannot agree with the state petitioners that this
approach is unreasonable or otherwise impermissible.
IV. Reciprocity
Section 6 of the Tariff contains a reciprocity provision
resting on the principle that any public utility offering "non-
discriminatory open access transmission for the benefit of
customers should be able to obtain the same non-
discriminatory access in return." Order 888, p 31,036 at
31,760. Non-public utilities--those outside the Commission's
jurisdiction because, for instance, they are state-owned, see 16
U.S.C. s 824(f)--would otherwise not have to offer open-
access. Under the Tariff, a public utility does not have to
offer them access unless they reciprocate. In order to avoid
controversies between public and non-public utilities regard-
ing reciprocal service, the Commission adopted a voluntary
"safe harbor" provision pursuant to which non-public utilities
could submit a transmission tariff to the Commission for a
determination whether it satisfied the reciprocity condition.
If it did, the public utility would have to offer service; if it did
not, the public utility could refuse service (although it had the
option of waiving the reciprocity condition, as did the Com-
mission itself).
A. Indirect Regulation of Non-Jurisdictional Utilities
Nebraska Public Power District (NPPD), a state entity,
provides electrical generation, transmission and distribution
service to wholesale and retail customers throughout Nebras-
ka.7 It claims that the Commission, through the reciprocity
provision, has reached beyond its statutory authority and is
illegally attempting to regulate entities, including NPPD, over
which the Commission has no jurisdiction, in violation of the
Federal Power Act and the Tenth Amendment to the Consti-
tution. NPPD admits that pursuant to Nebraska law, all
state power districts are obligated to provide open access
transmission service. They have been doing so for years.
This is doubtless why, after Order No. 888 issued, another
Nebraska public power district so easily obtained a safe
harbor declaration. See Omaha Pub. Power Dist., 81
F.E.R.C. p 61,054 (1997). In light of this, the Commission
argues--and we agree--that NPPD's petition is unripe.
Since NPPD already offers open access transmission, it is far
from certain that the reciprocity provision will have any effect
on it.8 It certainly has not demonstrated any particular
hardship that it would suffer if we refused to engage in pre-
enforcement judicial review. See AT&T Corp. v. Iowa Utils.
Bd., 525 U.S. 366, 386 (1999). From all that appears, no
public utility has refused, or even threatened to refuse, to
give NPPD access to its transmission system in the wake of
__________
7 "Nebraska is unique among the States in the Union in that all
generation, transmission and distribution service is provided by
public entities, municipalities and cooperatives whose governing
boards are responsible to, and serve at the voting pleasure of, the
rate-payers they serve." NPPD Brief at 2.
8 The Commission made clear that existing contracts will not be
affected. See Order 888-A, p 31,048 at 30,181.
Order No. 888.9 Given the fact that public utilities may waive
the reciprocity provision anyway, and that NPPD has the
same option of obtaining a safe harbor as did the Omaha
Public Power District, we are not persuaded that the provi-
sion is currently altering NPPD's conduct of its affairs or that
withholding judicial review will cause it any hardship whatev-
er. "Unlike the drug manufacturers in Abbott Laboratories
[v. Gardner, 387 U.S. 136 (1967)], but like the cosmetics
companies in Toilet Goods Ass'n v. Gardner, 387 U.S." 158,
164 (1967), NPPD need not change its "behavior or risk costly
sanctions." Clean Air Implementation Project v. EPA, 150
F.3d 1200, 1205 (D.C. Cir. 1998). Furthermore, exactly how
the Commission will fill in the contours of the reciprocity
provision remains to be seen. That it may defer to state
commissions, as it indicated in Houston Lighting & Power
Co., 81 F.E.R.C. p 61,015 (1997), order on reh'g, 83 F.E.R.C.
p 61,181 (1998), affects NPPD's contention that the Commis-
sion is seeking to bring about nationwide uniformity by
forcing non-public utilities to comply with its "detailed man-
dates." NPPD Brief at 5. We therefore believe the issues
raised would benefit from a more concrete setting in which
NPPD can demonstrate exactly how the reciprocity provision
has affected its primary conduct. See Clean Air Implemen-
tation Project, 150 F.3d at 1204. For all these reasons,
NPPD's challenge to the reciprocity provision is not ripe for
judicial review.
B. Limitation on Reciprocity
The Investor Owned Utilities (IOUs) challenge the follow-
ing limitation on reciprocity: non-public utilities owe recipro-
cal open access only to the public utility from which they take
open access service--not to all utilities. See IOU Brief at 40-
44; IOU Reply Brief at 18-20. These petitioners argue that
the Commission has left open the door for non-public utilities
__________
9 For this reason we find unpersuasive NPPD's claim that the
Tariff's reciprocity provision places it at a disadvantage in negotia-
tions because a public utility may simply refuse to provide service
without any fear of a Commission enforcement action. See NPPD
Reply Brief at 4-5.
to discriminate against all other utilities and that it has done
so solely because of tax considerations that no longer apply.
We agree with Commission counsel that tax considerations
were not the only basis on which the Commission's limitation
rested. The Commission stated that "the reciprocity require-
ment strikes an appropriate balance by limiting its application
to circumstances in which the non-public utility seeks to take
advantage of open access on a public utility's system." Order
888, p 31,036 at 31,762. The Commission also explained that
it "do[es] not have the authority to require non-public utilities
to make their systems generally available." Id. at 31,761.
The Commission stated also that it did not want broad open
access reciprocity to jeopardize the tax-exempt financing non-
public utilities enjoy,10 that the IRS was then reexamining the
question, id. at 31,762, and that if the tax issue is favorably
resolved, it will reconsider the matter. Order 888-A,
p 31,048 at 30,287. The IRS has now acted. See Temporary
Regulations s 1.141-7T(f), in 63 Fed. Reg. 3256 (1998). The
IOUs argue that we must therefore remand for reconsidera-
tion. See IOU Brief at 44 (citing Panhandle Eastern Pipe-
line v. FERC, 890 F.2d 435, 439 (D.C. Cir. 1989); National
Fuel Gas Supply Corp. v. FERC, 899 F.2d 1244, 1249-50
(D.C. Cir. 1990); Ciba-Geigy v. EPA, 46 F.3d 1208 (D.C. Cir.
1995)).
We think not. So far as we know, the IRS has not finalized
its temporary and proposed regulations. The IRS acknowl-
edges that its temporary regulations "raise[ ] a number of
complex technical issues" many of which "may need to be
addressed legislatively" and it anticipates that the finalization
process will take three years to accomplish. 63 Fed. Reg. at
3258-59. Second, as the Commission indicates, the possible
tax consequences of requiring open access from non-
jurisdictional utilities was its secondary concern. The Com-
mission's greater concern was its lack of jurisdiction to do
what the IOUs ask. And lastly the Commission should be
__________
10 See 26 U.S.C. ss 141, 142 (permitting "private activity" bonds
and "local furnishing" bonds, respectively).
taken at its word that it will reconsider the scope of reciproci-
ty when and if the temporary tax regulations are finalized.
V. Stranded Cost Recovery Provisions
Ordering open access transmission, Order 888-A explains
that "[t]he most critical transition issue that arises as a result
of the Commission's actions in this rulemaking is how to deal
with the uneconomic sunk costs that utilities prudently in-
curred under an industry regime that rested on a regulatory
framework and a set of expectations that are being funda-
mentally altered." Order 888-A, p 31,048 at 30,346. "If a
former wholesale requirements customer or a former retail
customer uses the new open access to reach a new supplier,"
FERC said, "we believe that the utility is entitled to recover
legitimate, prudent and verifiable costs that it incurred under
the prior regulatory regime...." Order 888, p 31,036 at
31,789.
According to FERC, these "stranded" costs consist pre-
dominantly of costs of building generation capacity, which
utilities incurred with the expectation that they would use the
additional capacity to serve existing customers. See Notice of
Proposed Rulemaking, Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities, FERC Stats. & Regs.
p 32,507 at 32,863-64, 59 Fed. Reg. 35,274 (1994) ("Stranded
Cost NOPR"). Because of the increased competition in the
generation market that will result from open access, this
capacity may become underutilized or uneconomical, i.e.,
"stranded." Stranded costs also include nonrecurring costs
approved by regulators that, in order to avoid rate increases,
were recovered over a period of years instead of at the time
the expenditures were made. Known as "regulatory assets,"
these costs include deferred income taxes, deferred pension
and other employee benefit and retirement costs, research
and development, extraordinary property losses, and the
phase-in of new plant costs. Nuclear decommissioning costs
and costs to buy out high-priced fuel and power contracts
may also become stranded as a result of open access.
Exercising its exclusive jurisdiction over wholesale power
sales, FERC through Order 888 gave utilities the opportunity
to recover their stranded costs from former wholesale cus-
tomers who take advantage of open access transmission to
purchase power from other suppliers. Order 888, p 31,036 at
31,810. With respect to stranded costs resulting from state-
ordered retail wheeling, Order 888 provides that FERC will
consider stranded cost claims only when state regulatory
agencies lack authority to do so. Id. at 31,824-25. Order 888
also designated FERC as the primary forum for stranded
cost claims stemming from what are known as new municipal-
izations and municipal annexations. See Order 888-A,
p 31,048 at 30,404; Order 888-B, 81 FERC at 62,104.
Stranded costs in these situations result from retail (as
opposed to wholesale) power sales.
Petitioners challenge nearly every aspect of FERC's
stranded cost policy as set forth in Order 888, from the
mechanics of calculating customers' stranded cost obligations
to whether FERC has authority to address stranded costs at
all. We begin with those challenges that relate to the recov-
ery of wholesale stranded costs (Section V.A), then turn to
challenges to Order 888's treatment of retail stranded costs
(Section V.B). We affirm FERC's stranded cost policy in all
respects, except we vacate that portion of the orders dealing
with the treatment of energy costs in the market option and
remand to FERC for further explanation. See Section
V.A.5.c.
A. Wholesale Stranded Costs
In requiring nondiscriminatory open access transmission as
a remedy for undue discrimination, FERC recognized that it
"cannot change the rules of the game without providing a
mechanism for recovery of the costs caused by such
regulatory-mandated change." Order 888-A, p 31,048 at
30,346. Under the pre-open access regulatory regime, utili-
ties entered into long-term contracts to make wholesale pow-
er sales to municipal, cooperative, and investor-owned utili-
ties. See Stranded Cost NOPR, p 32,507 at 32,862. Because
these customers had no source of power supply other than
their historic utility, these contracts were typically extended
at the end of their term. This produced an implicit obligation
by the utilities to continue satisfying their customers' power
needs, as well as a reciprocal expectation by customers of
continued service. See id. at 32,863-64. To satisfy expected
customer demand, utilities invested money, built facilities, and
entered into long-term fuel or power contracts, relying on the
"regulatory compact" under which utility shareholders accept-
ed lower rates of return on their investment in exchange for
the certainty of regulated rates and resulting ability to recov-
er prudently incurred costs. See Notice of Proposed Rule-
making, Promoting Wholesale Competition Through Open
Access Non-discriminatory Transmission Services by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, FERC Stats. & Regs. p 32,514 at
33,049, 60 Fed. Reg. 17,662 (1995).
Order 888 fundamentally undermines utilities' expectation
of continued service and cost recovery. A utility's require-
ments customers may now use the utility's open access trans-
mission service to purchase power from other suppliers at the
end of their contract terms. If customers leave before paying
their share of costs the historic utility incurred on their
behalf, the utility will be left with stranded costs, which it will
either absorb or shift to remaining customers.
Unless utilities are able to recover stranded costs, FERC
reasoned, their ability to compete and attract investor capital
in a deregulated market may be seriously impaired. FERC
therefore decided that it had to "address recovery of the
transition costs of moving from a monopoly-regulated regime
to one in which all sellers can compete on a fair basis and in
which electricity is more competitively priced." Order 888,
p 31,036 at 31,635. In reaching this conclusion, FERC relied
on its experience in restructuring the natural gas industry,
where this court faulted it for failing to provide transitional
mechanisms such as stranded cost recovery. FERC ex-
plained: "We have learned from our experience in the natural
gas area the importance of addressing competitive transition
issues early and with as much certainty to market partici-
pants as possible." Id.
In shaping its stranded cost recovery mechanism, FERC
had to balance two competing interests: speeding the transi-
tion to competition versus protecting utilities that had in-
curred costs with the expectation that their customers would
remain and eventually pay those costs through electricity
rates. Allowing recovery of stranded costs, FERC acknowl-
edged, would delay full realization of the benefits of open
access--lower electricity rates--because customers facing
stranded cost liability might continue purchasing power from
their historic utility even though competitors are selling
power at lower rates. See Order 888-A, p 31,048 at 30,355.
Indeed, a customer would only switch suppliers if the compet-
itor offered a rate less than the historic utility's rate plus the
customer's stranded cost liability. But given the highly regu-
lated nature of the electricity industry, in which utilities
incurred costs with the expectation of recouping them, FERC
concluded that the delay was a necessary component of its
open access program. See id. Mindful of its ultimate goal of
converting the electricity industry into a competitive market,
however, FERC fashioned the stranded cost recovery provi-
sions to be transitional, allowing utilities to recover stranded
costs only in connection with wholesale requirements con-
tracts entered into on or before July 11, 1994 (the date of the
stranded cost notice of proposed rulemaking). See 18 C.F.R.
s 35.26(b)(8), 35.26(c)(1)(v)-(vi).
As to precisely who should pay for stranded costs, utilities
and customers not surprisingly had dramatically different
positions. Customers argued that utilities should absorb
most, if not all, stranded costs. Utilities (and their investors)
argued that customers should pay.
Facing an enormously difficult task in balancing these
sharply conflicting positions, FERC crafted a rule that re-
quires customers to pay stranded costs but only in certain
circumstances. Most important, in order to recover stranded
costs from a customer, the historic utility must prove that it
had a reasonable expectation of continued service to that
particular customer for a certain number of years beyond the
end of the contract term; a utility unable to prove such an
expectation may not recover stranded costs under Order 888.
See 18 C.F.R. s 35.26(c)(2)(i). Moreover, a utility able to
demonstrate a reasonable expectation of continued service
may recover stranded costs only if its wholesale customer
actually takes advantage of the utility's open access tariff to
obtain access to a new generation supplier at the end of its
contract term (i.e., the former customer continues to use the
historic utility's transmission service but no longer purchases
power from it). See 18 C.F.R. s 35.26(b)(1)(i). Through
these two limitations, FERC balanced the interests of utilities
and customers by allowing utilities to recover their stranded
costs only if they can demonstrate a reasonable expectation of
continued service and requiring customers to pay those costs
only if they take advantage of their historic utility's open
access transmission to reach cheaper sources of power. And
of course, no customer will have to pay stranded costs at all if
it continues purchasing power from its historic utility
throughout the period during which the utility has a reason-
able expectation of continued service--precisely what the
customer would have done in the absence of Order 888's open
access requirement.
Under Order 888, stranded costs are calculated on a "reve-
nues lost" basis. A departing customer's stranded cost obli-
gation equals the estimated revenue it would have paid had it
continued to purchase power from the historic utility minus
the current market value of the power it would have pur-
chased, calculated over the period the utility is determined to
have a reasonable expectation of continued service to that
customer. See 18 C.F.R. s 35.26(c)(2)(iii). In other words,
the stranded cost formula is not tied to particular stranded
assets or contractual commitments, but rather awards utilities
the difference between the pre-open access cost-based rate
and the post-open access market rate. Once a customer's
stranded cost liability is calculated, it may pay through a
lump-sum payment, installment payments, or a surcharge to
the transmission rate charged by the historic utility. See
Order 888, p 31,036 at 31,799.
Before turning to petitioners' arguments, we emphasize
what should be obvious from the foregoing summary of Order
888: Order 888 awards stranded costs to no one. It does
nothing more than establish a mechanism by which utilities
may seek to recover stranded costs. To recover stranded
costs, a utility must demonstrate its continued expectation of
service at an evidentiary hearing. The customer may appear
at that hearing and, through evidentiary submissions of its
own, attempt to demonstrate that the utility had no such
expectation. Only after such a hearing may FERC decide
whether a utility can recover stranded costs and, if so, how
much.
Petitioners mount many challenges to Order 888's stranded
cost recovery provisions. For purposes of analysis, we group
these challenges into five categories: (1) challenges to
FERC's authority to provide for stranded cost recovery
(section V.A.1); (2) claims that Order 888 conflicts with cost
causation principles and case law developed under the Natu-
ral Gas Act (section V.A.2); (3) challenges to FERC's Mobile-
Sierra findings (section V.A.3); (4) claims that FERC arbi-
trarily and capriciously failed to provide for stranded cost
recovery by certain entities, such as transmission dependent
utilities and generation and transmission cooperatives (section
V.A.4); and (5) challenges to various technical aspects of
Order 888's stranded cost recovery provisions (section V.A.5).
1. FERC's Authority to Provide for Stranded Cost Recovery
A group called Petitioners Opposing Stranded Cost Recov-
ery ("POSCR") advances three challenges to FERC's authori-
ty to provide for stranded cost recovery: (1) as a factual
matter, utilities could never have had a reasonable expecta-
tion of continued service to wholesale customers beyond the
contract term; (2) sections 206 and 212 of the Federal Power
Act ("FPA") forbid stranded cost recovery; and (3) our
decision in Cajun Elec. Power Coop., Inc. v. FERC, 28 F.3d
173 (D.C. Cir. 1994), holds that stranded cost recovery is
anticompetitive. We consider each argument in turn.
a. Reasonable expectation of continued service
To recover stranded costs relating to a specific departing
wholesale requirements customer, a utility must show that it
had a reasonable expectation of service to that customer
beyond the term of its existing contract. See 18 C.F.R.
s 35.26(c)(2)(i). Pointing out that contracts define the extent
of the parties' obligations and that customers have long
exercised their rights to purchase power from other suppliers
at the end of their contract terms, POSCR contends that
utilities could never have had an expectation of service be-
yond their contract terms. In considering this argument it is
important to remember that Order 888 does not itself award
stranded costs; it merely establishes a procedure by which
utilities may petition FERC in individual proceedings to
recover stranded costs from a specific customer based on a
specific evidentiary showing. Utilities failing to show an
expectation of continued service will be unable to recover
stranded costs. POSCR's challenge thus amounts to a claim
that no utility could ever, under any circumstances, have had
a reasonable expectation to serve a wholesale customer be-
yond the term of its contract. We review this claim under
the APA's familiar arbitrary and capricious standard. See 5
U.S.C. s 706(2)(A); Williams Field Services Group, Inc. v.
FERC, 194 F.3d 110, 115 (D.C. Cir. 1999).
Responding to this same challenge in Order 888-A, FERC
explained that utilities historically had an implicit obligation
to serve customers beyond the contract term for a simple
reason: Customers had no means of reaching alternative
suppliers. See Order 888-A, p 31,048 at 30,354. As part of
that obligation to serve, FERC found, a local utility "had a
concomitant obligation to plan to supply [its] customers'
continuing needs, and planned its system taking account of
the wholesale load. In many cases the wholesale customers
participated by supplying load forecasts." Id. In making
capital decisions and predicting future demand, utilities fre-
quently consulted with their wholesale requirements custom-
ers. For these reasons, FERC concluded, utilities may have
a reasonable expectation of continued service to particular
customers. See id. at 30,354-55.
Not only is FERC's judgment about utilities' reasonable
expectations precisely the type of policy assessment to which
we owe great deference, but POSCR points to nothing sug-
gesting that FERC's reasoning is arbitrary and capricious.
In fact, POSCR's argument completely ignores the highly
regulated nature of the electricity industry prior to Order
888. Unlike competitive markets, where buyers may freely
purchase from many sellers, the monopolistic character of the
electricity industry, combined with the congressionally im-
posed regulatory structure, left requirements customers high-
ly dependent on a single supplier--their historic utility. In-
deed, as intervenors point out, utilities were even unable to
choose not to renew an expiring wholesale requirements
contract without first notifying FERC. See 18 C.F.R. s 35.15
(1995) (repealed by Order 888). Although it may well be
true, as POSCR argues, that some wholesale customers have
long been able to purchase unbundled transmission service,
we think such evidence is best reserved for individual pro-
ceedings, where a departing customer can attempt to refute
the utility's claim that it had an expectation of continued
service.
b. Sections 206 and 212 of the FPA
Section 206(a) of the FPA gives FERC authority to "deter-
mine the just and reasonable rate, charge, classification, rule,
regulation, practice, or contract to be thereafter observed and
in force" if it finds that any existing arrangement "is unjust,
unreasonable, unduly discriminatory or preferential." 16
U.S.C. s 824e(a). Relying on section 206(a) as the basis for
Order 888, FERC found that utilities had used their monopo-
ly transmission power to discriminate against potential com-
petitors and that such practices would increase as competitive
pressures in the industry increased. Order 888, p 31,036 at
31,676, 31,682.
POSCR contends that Order 888's stranded cost recovery
provisions themselves violate FERC's own construction of
section 206, the construction FERC relied on as the basis for
the open access rule. According to POSCR, "[t]he stranded
cost rule perpetuates the very 'discrimination' FERC found
unlawful, and subjects the same victims--customers held
hostage to uneconomic electric generation by transmission
monopolists--to continued abuse."
In challenging FERC's policy decision to provide for
stranded cost recovery, POSCR conflates the violation
(FERC's generic determination that utilities' practice of pro-
hibiting access to their transmission lines on reasonable terms
was unduly discriminatory) with the remedy (FERC's more
limited finding that recovery of stranded costs in particular
circumstances would not be unduly discriminatory). FERC
has not, as POSCR contends, given "unduly discriminatory"
different meanings; rather, it has applied the term in differ-
ent contexts.
POSCR's argument thus boils down to a challenge to
FERC's conclusion that the stranded cost recovery pre-
scribed in Order 888 is not unduly discriminatory, a challenge
meriting arbitrary and capricious review. Viewed through
this lens, we think FERC more than adequately explained
why it concluded that stranded cost recovery is not unduly
discriminatory--stranded cost recovery, FERC said, is transi-
tional only, follows cost causation principles, and requires
utilities to prove that they had a reasonable expectation of
continued service. FERC faced an enormously difficult task.
It had to balance the transition to competitive markets
against the need to maintain the competitiveness of utilities
that had incurred costs based on a reasonable expectation
that they would recoup them. We find nothing either arbi-
trary or capricious in how FERC struck this balance.
POSCR next contends that stranded cost recovery violates
section 212 of the FPA, which governs the rates for transmis-
sion ordered by FERC pursuant to section 211. 16 U.S.C.
ss 824j-k. Section 212
allows FERC to order "rates, charges, terms, and conditions
which permit the recovery by [a transmitting] utility of all the
costs incurred in connection with the transmission services
and necessary associated services, including, but not limited
to, an appropriate share, if any, of legitimate, verifiable and
economic costs, including taking into account any benefits to
the transmission system of providing the transmission ser-
vice, and the costs of any enlargement of transmission facili-
ties." 16 U.S.C. s 824k(a). Contending that "economic
costs" cannot be read to include payment of stranded costs,
which by definition relate to generation (not transmission)
services, POSCR reads section 212 to preclude stranded cost
recovery.
Straightforward application of the Chevron doctrine demon-
strates the lack of merit in this argument. See Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984). Because Congress has not "directly spoken to the
precise question at issue"--do "economic costs" include
stranded costs?--and because nothing in the statute pre-
cludes recovering through transmission rates costs that were
traditionally recovered through generation rates, the term
"economic costs" is ambiguous. Id. at 842.
Proceeding to Chevron's second step, we ask whether
FERC has reasonably interpreted the term "economic costs."
See id. at 843. We have no doubt that it has. As FERC
explained, but for section 211 wheeling orders, there would be
no stranded costs. Stranded costs, according to FERC, are
therefore economic costs of section 211 wheeling. See Order
888-A, p 31,048 at 30,390. POSCR offers nothing to under-
mine this eminently reasonable interpretation of the statute.
c. Implications of Cajun
Next, POSCR contends that our decision in Cajun Elec.
Power Coop., Inc. v. FERC, 28 F.3d 173 (D.C. Cir. 1994),
condemns stranded cost recovery as anticompetitive. A pre-
Order 888 decision, Cajun reviewed two tariffs allowing a
utility, Entergy Corporation, to sell power at market rates,
and a third tariff providing for open access to Entergy's
transmission services at cost-based rates. The third tariff
gave Entergy an opportunity to recover stranded costs from
customers who no longer purchase power from Entergy but
use its transmission lines to reach other suppliers--exactly
the circumstances in which Order 888 provides for stranded
cost recovery. Under the tariff, the stranded cost charge was
included in Entergy's transmission rate. See id. at 175-77.
Characterizing the stranded cost provision as a "tying
arrangement" under antitrust law, Cajun explained that un-
der the tariff, Entergy could charge a former customer for
the cost of generation services when the customer wished to
purchase only transmission services; because Entergy has a
monopoly over transmission, customers would have no choice
but to pay costs relating to generation they no longer wanted
from Entergy. Id. at 177-78. Thus, because "Entergy could
use its monopoly over transmission services to eliminate
competition in the market for generation services," the net
effect of the tariffs may be anticompetitive. Id. at 176.
Of significance to this case, however, we did not strike
down the tariffs. Instead, we remanded the case for FERC
to determine "how much competition in fact is dampened" by
the stranded cost provision. Id. at 178. Thus, contrary to
POSCR's suggestion, Cajun does not represent a blanket
condemnation of stranded cost recovery; rather, recognizing
that such recovery could be anticompetitive, Cajun directed
FERC to evaluate and justify the potential anticompetitive
impact. This is precisely what FERC has done in Order 888.
It expressly considered the anticompetitive effects of strand-
ed cost recovery. See Order 888-A, p 31,048 at 30,372-74.
Then, stressing the transitional nature of the recovery and
the fact that recovery was compelled by the open access
requirement, which utilities could not have anticipated, FERC
concluded that the limited anticompetitive effects of stranded
cost recovery were both a necessary and acceptable conse-
quence of the transition to competition. See id. Not only
has POSCR offered no evidence that would lead us to ques-
tion FERC's conclusion, but such judgments about anticom-
petitive effects are "the kind of reasonable agency prediction
about the future impact of its own regulatory policies to which
we ordinarily defer." Louisiana Energy and Power Auth. v.
FERC, 141 F.3d 364, 370 (D.C. Cir. 1998).
2. Natural Gas Precedent and Conformance to Cost Causa-
tion Principles
Having rejected POSCR's arguments that FERC lacks
authority to authorize stranded cost recovery, we turn to its
argument that FERC has failed adequately to explain why
Order 888 requires departing customers to pay one-hundred
percent of stranded costs. In support of this argument,
POSCR claims that our decisions reviewing FERC's restruc-
turing of the natural gas industry require cost sharing; it also
argues that Order 888's stranded cost recovery conflicts with
the cost causation principles that traditionally govern alloca-
tion of costs.
a. Natural gas precedent: AGD, K N Energy, and UDC
In introducing competition into the electricity industry,
FERC has taken essentially the same path that it took in
restructuring the natural gas industry, although what FERC
has done in a single order in the electricity industry (Order
888) it did in a series of orders in the natural gas industry.
Because POSCR relies so heavily on FERC's natural gas
orders and our decisions reviewing them, we begin by sum-
marizing them in some detail.
Finding practices in the natural gas industry "unduly dis-
criminatory" in violation of the Natural Gas Act, FERC
began by issuing Order 436, which "unbundled" pipeline
transportation and merchant functions. Regulation of Natu-
ral Gas Pipelines After Partial Wellhead Decontrol, Order
No. 436, FERC Stats. & Regs. p 30,665, 50 Fed. Reg. 42,408
(1985) (rehearing orders omitted). At the time of Order 436,
pipelines were facing enormous liabilities under long-term
"take-or-pay" contracts. Entered into when gas prices were
expected to rise, these contracts obligated pipelines to pur-
chase minimum quantities of gas from wellhead producers at
fixed prices that turned out to be well in excess of market
prices. See Associated Gas Distributors v. FERC, 824 F.2d
981, 1021 (D.C. Cir. 1987) ("AGD"). Although FERC esti-
mated take-or-pay liabilities at billions of dollars, and al-
though Order 436 would exacerbate the take-or-pay problem
by providing incentives to pipeline customers to purchase gas
from cheaper suppliers, FERC declined to take any action
with respect to the contracts. In AGD, we found that
FERC's decision to do nothing failed to meet the require-
ments of reasoned decisionmaking, citing FERC's "seeming
blindness to the possible impact of Order No. 436 on take-or-
pay liability" and permanent market distortions that may
result from FERC's inaction. Id. at 1021-23, 1025. Specifi-
cally, we noted, in words echoed by FERC years later in
Order 888, that consumers who purchased from the "least
nimble" local distribution companies would "be stuck with the
burden of the overpriced gas." Id. at 1023.
In response to AGD, FERC issued Order 500. Regulation
of Natural Gas Pipelines After Partial Wellhead Decontrol,
Order No. 500, FERC Stats. & Regs. p 30,761, 52 Fed. Reg.
30,334 (1987) (rehearing orders omitted). Recognizing that
no one segment of the gas industry was wholly responsible
for the take-or-pay problem, Order 500 allowed pipelines to
recover take-or-pay costs through "equitable sharing." Pipe-
lines that willingly absorbed twenty-five to fifty percent of
their costs could require sales customers to match that
amount through a fixed charge. Pipelines could recover any
balance through commodity rates or volumetric surcharges,
borne by both sales and transportation customers. For an
overview of these components of Order 500, see K N Energy,
Inc. v. FERC, 968 F.2d 1295, 1297-98 (D.C. Cir. 1992). We
sustained this approach in K N Energy, holding that even
though Order 500 replaced traditional "cost causation" princi-
ples with cost spreading and value-of-service concepts, it did
not violate Natural Gas Act section 4's requirement that rates
be just and reasonable. Id. at 1301-02. Citing statements in
AGD that "all actors in the natural gas industry" are "candi-
dates" for absorbing take-or-pay liability, we relied on "the
unusual circumstances surrounding the take-or-pay problem,
and the limited nature--both in time and scope--of the
Commission's departure from the cost-causation principle."
Id. at 1301.
Concluding that Order 436 had been only partially success-
ful in introducing competition into the natural gas industry,
FERC issued its third major restructuring order, Order 636.
Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regula-
tion of Natural Gas Pipelines After Partial Wellhead Decon-
trol, Order No. 636, FERC Stats. & Regs. p 30,939, 57 Fed.
Reg. 13,267 (1992) (rehearing orders omitted). That order
imposed mandatory unbundling of sales and transportation
services and allowed sales customers to reduce the amount of
gas they had to purchase pursuant to existing contracts.
When customers took advantage of this option and purchased
gas from sources other than the pipelines, the pipelines were
once again left with substantial take-or-pay liabilities. Label-
ing the costs of reducing these liabilities gas supply realign-
ment or GSR costs, Order 636 authorized pipelines to bill
current transportation customers for one-hundred percent of
their GSR costs by charging either a negotiated exit fee or
reservation fee surcharge. Order 636 also authorized pipe-
lines to recover all stranded costs in rate filings. In the
natural gas industry, stranded costs represented the costs of
pipeline assets (such as storage facilities) used to provide
bundled sales services that were not directly assignable to
transportation customers. For an overview of these compo-
nents of Order 636, see United Distribution Cos. v. FERC, 88
F.3d 1105, 1125-27, 1176-78 (D.C. Cir. 1996) ("UDC").
In UDC, we affirmed FERC's determination that pipelines
could recover all stranded costs through filed rates, so long as
FERC "adequately balanced the interests of investors and
ratepayers." Id. at 1180. Reaffirming the appropriateness
of the cost spreading and value-of-service principles approved
in K N Energy, we found that FERC's allocation of GSR
costs to pipeline transportation customers, as opposed to the
pipelines themselves, properly applied those principles. Id.
at 1182. Although recognizing that GSR costs stemmed from
pipeline sales customers, not transportation customers, we
found that FERC appropriately imposed the costs on trans-
portation customers because these customers benefitted from
the availability of lower-priced transportation and also be-
cause FERC could not spread costs to the pre-Order 636
sales customers since those customers no longer purchased
gas from the pipelines. Id. at 1185-86. We remanded for
FERC to explain more fully why pipelines should not have to
pay some of the costs, noting an inconsistency in the Commis-
sion's analysis: While FERC applied cost spreading princi-
ples to justify imposing costs on transportation customers, it
invoked cost causation principles in concluding that pipelines
should not have to pay any of these costs. Id. at 1188-89.
We explicitly stated, however, that we were not saying that
"it is impossible, or even improbable, that the Commission on
remand can establish a convincing rationale for exempting the
pipelines." Id. at 1189.
POSCR reads this history to require FERC to order cost
sharing, but it ignores Order 888's explanation of the differ-
ence between natural gas restructuring and the situation in
the electricity industry. Most fundamentally, Order 888 ex-
plains, stranded cost recovery in the electricity industry
conforms to cost causation principles, which normally govern
the allocation of costs and require customers to pay the costs
they caused. See Order 888, p 31,036 at 31,798. Cost causa-
tion principles could not be applied in natural gas restructur-
ing, Order 888 explains, because many customers had already
begun purchasing gas from other suppliers before FERC had
addressed the take-or-pay problem on remand from AGD,
and because the filed rate doctrine prohibits assessing
charges against former customers. Id. at 31,800-01. Order
888 also explains that unlike stranded costs in the electricity
industry, the take-or-pay liabilities in the gas industry were
extraordinary. The billions of dollars of take-or-pay liabilities
resulted not from Order 636, but from earlier regulatory
policies that had encouraged pipelines to enter into long-term,
fixed-price gas purchase contracts, combined with declining
gas prices that made those contracts uneconomical. See
Order 888-A, p 31,048 at 30,380. Under all of these circum-
stances, "[t]o have allocated these costs solely to any one
segment of the industry would have imposed a crushing new
burden on that segment." Id. at 30,380-81.
Stranded costs in the electricity industry, Order 888 ex-
plains, are quite different. Resulting directly from Order
888, they represent "ordinary costs that have always been,
and are currently, included in the utility's rates for electric
generation approved by the Commission." Id. at 30,382.
Moreover, wholesale customers may avoid stranded cost lia-
bility by continuing to purchase power from their historic
utility, precisely what they probably would have done in the
absence of Order 888. In other words, in contrast to the
natural gas industry, where customers would have faced
enormous new burdens had FERC forced them to pay take-
or-pay costs, customers in the electricity industry face no new
burdens; instead, Order 888 requires them to pay nothing
more than costs they would have had to pay in the absence of
Order 888. In the electricity industry, the only effect of
stranded cost recovery is delayed realization of the full bene-
fits of a competitive market.
In light of these differences between the natural gas and
electricity industries and FERC's exhaustive treatment of the
natural gas restructuring in Order 888, POSCR's contention
that FERC has failed "to offer a coherent rationale, rising to
the level of reasoned decisionmaking" for not imposing cost
sharing is wholly without merit. Equally without merit is
POSCR's assertion that UDC "teaches that, where customers
and utilities benefit from an open access rule/order that leads
to early contract termination and where anticompetitive con-
duct by utilities has given rise to the need for the open access
order, utilities must share transition costs." POSCR ignores
three important points. First, FERC, not this court, deter-
mined that cost sharing was appropriate with respect to take-
or-pay liabilities. UDC merely affirmed FERC's decision.
Second, K N Energy recognized that cost sharing in the
natural gas industry was a departure from the cost causation
principles that normally apply, a departure justified by ex-
traordinary circumstances in the natural gas industry. K N
Energy, 968 F.2d at 1301-02. And finally, as to stranded
costs that more closely resemble those at issue in this case--
for example, pipeline assets that would no longer be fully
employed when customers took advantage of unbundling to
purchase gas from alternative suppliers--FERC ordered, and
UDC affirmed, that pipelines recover one-hundred percent of
those costs.
b. Conformance to cost causation principles
Having established that the natural gas cases impose no
obligation on FERC to order cost sharing, we next consider
POSCR's argument that the inclusion of stranded costs in
transmission rates does not conform to cost causation princi-
ples. This is so, POSCR asserts, because Order 888's strand-
ed cost provisions require customers to pay through transmis-
sion rates for costs the utility previously incurred to provide
generation services.
As an initial matter, we note that payment through trans-
mission rates is only one of three ways that a departing
customer may pay its stranded cost obligation; the customer
also has the option of making a lump-sum payment or install-
ment payments. Thus POSCR's challenge seems aimed only
at the method of payment, not at the fact that payment is
required. But even viewing POSCR's challenge more broad-
ly, as a claim that stranded cost recovery no matter what the
method of payment violates cost causation principles, we
think it lacks merit.
We have explained the cost causation principle as follows:
"Simply put, it has been traditionally required that all ap-
proved rates reflect to some degree the costs actually caused
by the customer who must pay them." K N Energy, 968 F.2d
at 1300. Given this definition, we are puzzled by POSCR's
claim that because inclusion of stranded costs in transmission
rates requires customers to pay currently for costs incurred
in the past, it violates cost causation principles. To some
degree, all utility rates reflect past costs; utilities typically
expend funds today (for example, constructing generation
facilities), fully expecting to recover those costs through
future rates. In fact, current rates often include past costs
that utilities deferred in order to avoid rate increases. Cost
causation requires not that costs be incurred at the same time
they are included in rates, but that the rates "reflect to some
degree the costs actually caused by the customer who must
pay them." Id.
In fashioning Order 888's stranded cost recovery provi-
sions, FERC went to great lengths to ensure that customers
would be responsible for only those costs they caused.
[T]he Rule is consistent with the traditional cost causa-
tion principle because it recognizes the link between the
incurrence of the stranded costs and the decision of a
particular generation customer to use open-access trans-
mission on the utility's system to leave the utility's
generation system and shop for power, and bases the
utility's ability to recover stranded costs on its ability to
demonstrate that it incurred costs with the reasonable
expectation that the customer would remain on its gener-
ation system beyond the term of the contract.
Order 888-A, p 31,048 at 30,382.
We cannot see how including stranded costs in transmission
rates instead of lump sum payments changes this analysis.
To the extent POSCR is arguing that including in a transmis-
sion rate costs incurred to provide generation services vio-
lates cost causation principles, we reiterate that stranded
costs are not costs of providing the physical transmission
services but, as Order 888-A explains, they are utilities' cost
of open access transmission. See Order 888-A, p 31,048 at
30,389 & n.634. More generally, given the fundamental
changes wrought by Order 888 and the unprecedented oppor-
tunity for customers to purchase power from alternative
suppliers, we are quite comfortable deferring to FERC's
judgment that stranded cost recovery--through transmission
rates or otherwise--conforms to cost causation principles. In
fact, FERC may have violated cost causation principles had it
failed to assign stranded costs to customers who caused them.
POSCR next argues that Order 888 is unduly discriminato-
ry because including stranded costs in transmission rates
forces transmission customers who previously used a utility's
generation capacity to pay higher costs than new transmis-
sion customers. Disagreeing, FERC determined that requir-
ing customers receiving similar services to pay different rates
is necessitated by Order 888's open access requirement. See
Order 888-A, p 31,048 at 30,388-90. Cf. AGD, 824 F.2d at
1009 ("[T]he mere fact of a rate disparity is not enough to
constitute unlawful discrimination.") (internal quotation
marks omitted). Moreover, FERC concluded, the application
of cost causation principles justifies this different treatment.
See Order 888-A, p 31,048 at 30,379, 30,388-90. Seeing noth-
ing unreasonable (let alone arbitrary or capricious) in
FERC's policy judgment, we reject POSCR's challenge.
Nor do we agree with POSCR's argument that stranded
cost recovery violates the filed rate doctrine, which "forbids a
regulated entity to charge rates for its services other than
those properly filed with the appropriate federal regulatory
authority." Western Resources, Inc. v. FERC, 72 F.3d 147,
149 (D.C. Cir. 1995). In Western Resources, we held that
FERC's assignment to current customers of costs relating to
take-or-pay liabilities did not violate the filed rate doctrine.
Recognizing that "a central purpose of the doctrine is to
enable purchasers to know in advance the consequences of
the purchasing decisions they make," we determined that the
doctrine was satisfied where customers received "adequate
notice of a rate in advance of the service to which it relates."
Id. at 149-50 (internal quotation marks omitted). Order 888's
stranded cost policy satisfies this requirement because cus-
tomers electing to purchase power generation from a source
other than the transmitting utility from which they had
purchased power in the past will be aware of the costs when
making that decision.
3. FERC's Mobile-Sierra Findings
Under the Supreme Court's Mobile-Sierra doctrine, where
parties have negotiated a contract that sets firm prices or
dictates a specific method of computing charges and includes
a clause denying either party the right to change such prices
or charges unilaterally, "FERC may abrogate or modify the
contract only if the public interest so requires." Texaco, Inc.
v. FERC, 148 F.3d 1091, 1095 (D.C. Cir. 1998); see also FPC
v. Sierra Pacific Power Co., 350 U.S. 348, 353-55 (1956);
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S.
332, 344-45 (1956). We have recognized that "the 'public
interest' that permits FERC to modify private contracts is
different from and more exacting than the 'public interest'
that FERC seeks to serve when it promulgates its rules."
Texaco, 148 F.3d at 1097.
FERC usually makes Mobile-Sierra determinations on a
case-by-case basis. A party seeking to modify a contract
containing a Mobile-Sierra clause petitions FERC. That
party bears the burden of convincing FERC that the modifi-
cation is in the public interest.
Order 888 departs from this normal case-by-case practice
by making two generic public interest findings, one focused
on utilities, the other on customers. These generic findings
relieve utilities and customers of the burden of demonstrating
in individual proceedings that the proposed modifications are
in the public interest. As to utilities, Order 888 ruled that it
was in the public interest to allow them to add stranded cost
amendments to their contracts if they could demonstrate, in
accordance with Order 888, that they had a reasonable expec-
tation of continued service. See Order 888-A, p 31,048 at
30,394-95. This finding rested on two considerations: that
the burden of unrecoverable stranded costs could impair
utilities' access to capital markets, which could in turn precip-
itate the departure of other customers, thus worsening the
utilities' financial condition and threatening its ability to
provide reliable service; and that allowing customers to leave
a utility without paying their share of costs would shift those
costs to other customers who lack alternative power sources.
See Order 888, p 31,036 at 31,811. For its second generic
finding, FERC concluded that it was in the public interest to
allow customers to modify their wholesale requirements con-
tracts in any way upon a showing that the terms are no
longer just and reasonable. See Order 888-A, p 31,048 at
30,189. Observing that the contracts in question "were en-
tered into during an era in which transmission providers
exercised monopoly control over access to their transmission
facilities," FERC based this finding on the unequal bargain-
ing power between utilities and customers. Id. at 30,193.
Because "[m]any of these contracts were the result of uneven
bargaining power between customers and monopolist trans-
mission providers," FERC reasoned, "the unprecedented
competitive changes that have occurred (and are continuing to
occur) in the industry may render their contracts to be no
longer in the public interest or just and reasonable." Id.
Challenging the first finding, POSCR argues that FERC
lacks authority to make a generic public interest finding that
allows for contract modification in an entire class of cases.
POSCR insists that FERC can only proceed on a case-by-
case basis, determining in each case whether a particular
contract modification is in the public interest. Even if FERC
has authority to make generic findings, POSCR goes on to
argue, FERC's Order 888 finding is unsupported by substan-
tial evidence. The investor owned utilities ("IOUs") challenge
the second finding, arguing that allowing customers to seek
modification of all contract terms, while limiting utilities to
stranded cost provisions, fails adequately to balance compet-
ing interests.
a. FERC's authority to make a generic public interest find-
ing
POSCR correctly observes that FERC has pointed to no
case in which a court affirmed a generic Mobile-Sierra find-
ing. At the same time, POSCR has cited no case prohibiting
FERC from making a generic finding, nor have we found one.
In the absence of definitive authority in either direction, and
given the unique circumstances of this case and our tradition-
al deference to FERC's expertise, we find no fault with
FERC's generic determination.
The Mobile-Sierra doctrine "represents the Supreme
Court's attempt to strike a balance between private contrac-
tual rights and the regulatory power to modify contracts
when necessary to protect the public interest." Northeast
Utilities Serv. Co. v. FERC, 55 F.3d 686, 689 (1st Cir. 1995).
In Mobile, the Supreme Court recognized that intervening
circumstances may create a situation in which contractual
terms and conditions that were just and reasonable at the
time the contract was executed are no longer just and reason-
able. 350 U.S. at 344-45. But concluding that a utility is not
typically "entitled to be relieved of its improvident bargain,"
the Sierra Court required that FERC's predecessor, the
Federal Power Commission, show more than that the con-
tract was unjust and unreasonable--the Commission had to
find that contract modification was in the public interest. 350
U.S. at 355.
In most cases, intervening circumstances are unique to the
relationship between contracting parties. See, e.g., Northeast
Utilities, 55 F.3d 686 (affirming FERC's modification to the
rate schedule of a contract as a condition for approval of a
merger between two parties to the contract). But where
intervening circumstances--in this instance, FERC-mandated
open access transmission--affect an entire class of contracts
in an identical manner, we find nothing in the Mobile-Sierra
doctrine to prohibit FERC from responding with a public
interest finding applicable to all contracts of that class.
Moreover, in providing for stranded cost recovery, FERC has
not relieved utilities of "improvident bargains," the concern of
the Sierra Court; rather, it has recognized that open access
affects all utilities in the same manner, namely, leaving them
vulnerable to potentially unrecoverable stranded costs. In
fact, to deny FERC authority to make generic findings in
such a case would simply impose on it and the parties the
repetitive burden of proving the public interest in each and
every case.
In sustaining FERC's generic finding, we are influenced by
the fact that before recovering stranded costs, a utility must
prove that it had a reasonable expectation of continued ser-
vice to a particular customer. As the IOUs invervening on
behalf of FERC explain, the need to make this showing adds
a particularized element to FERC's generic public interest
finding. Viewed this way, Order 888's generic finding is more
precisely stated as follows: It is in the public interest to allow
utilities to recover stranded costs if they can prove that they
had a reasonable expectation of continued service to particu-
lar customers. If a utility can demonstrate that it had a
reasonable expectation of continued service to a particular
customer, and incurred costs based on that expectation, then
it would be against the public interest to require other
customers or shareholders to bear those costs. As Order 888
explains, "the case-by-case findings that some commenters
seek will, in effect, be made when the Commission determines
whether to approve a proposed stranded cost amendment to a
particular contract." Order 888, p 31,036 at 31,813.
We stress that generic Mobile-Sierra findings are appro-
priate only in rare circumstances. Order 888 is just such a
circumstance. It fundamentally changes the regulatory envi-
ronment in which utilities operate, introducing meaningful
competition into an industry that since its inception has been
highly regulated and affecting all utilities in a similar way.
b. FERC's stranded cost public interest finding
Having concluded that the Mobile-Sierra doctrine permits
a generic finding in this case, we turn to POSCR's claim that
the finding was unsupported by substantial evidence.
POSCR faults FERC for failing to adduce evidence to sup-
port its conclusion that denying stranded cost recovery would
put particular utilities in financial peril. POSCR also thinks
that the impact on customers of failing to provide for strand-
ed cost recovery is insufficient to support a public interest
finding.
With respect to POSCR's first point, it is certainly true
that Sierra identified impairment of "the financial ability of
the public utility to continue its service" as one factor sup-
porting a public interest finding. Sierra, 350 U.S. at 355.
Relying on this, POSCR challenges FERC's public interest
finding on the ground that the record contains no individual
assessments of the financial condition of public utilities.
Although public interest findings made on a case-by-case
basis necessarily evaluate the harm to the particular utility
seeking modification, that is not true where, as here, FERC
implements a generic change in the industry. Just as that
change can support a generic public interest finding, that
generic finding can be supported by generic industry-wide
evidence. FERC has produced such evidence. The record
contains estimates of stranded costs amounting to $200 billion
or more. See Stranded Cost NOPR, p 32,507 at 32,866. It
also includes comments from representatives of the financial
community stating that "the prospect of not recovering
stranded costs could erode a utility's ability to attract capi-
tal."
POSCR points out that eighty-five to ninety percent of the
estimated $200 billion of stranded costs relates to retail sales,
not wholesale sales. True enough, but we find no basis for
questioning FERC's conclusion that unrecovered stranded
costs of even ten percent of $200 billion--the low end of the
wholesale stranded cost estimate--could have serious conse-
quences for utilities. See Order 888, p 31,036 at 31,790. In
any event, if POSCR turns out to be correct about the
absence of a wholesale stranded cost problem, few utilities
will avail themselves of Order 888's stranded cost recovery
provisions.
POSCR's second argument focuses on FERC's finding that
"if some customers are permitted to leave their suppliers
without paying for stranded costs, this may cause an exces-
sive burden on the remaining customers who, for whatever
reason, cannot leave and therefore may have to bear those
costs." Order 888, p 31,036 at 31,811. POSCR does not
agree with FERC that the failure to recover stranded costs
will create an "undue burden" on remaining customers. But
disagreeing with FERC is not enough. To prevail in this
court, POSCR must demonstrate that FERC's prediction that
failure to recover stranded costs will create an undue burden
on remaining customers is unsupported by substantial evi-
dence, see 16 U.S.C. s 825l(b), which is another way of saying
it is arbitrary and capricious. See Michigan Consolidated
Gas Co. v. FERC, 883 F.2d 117, 124 (D.C. Cir. 1989) ("[M]ak-
ing ... predictions is clearly within the Commission's exper-
tise and will be upheld if rationally based on record evi-
dence.") (internal quotation marks omitted). This POSCR
has failed to do.
c. FERC's public interest finding regarding customers
The IOUs mount two challenges to FERC's second public
interest finding--that it was in the public interest to allow
customers to seek modification of their wholesale require-
ments contracts. Unlike POSCR, the IOUs make no claim
that the finding lacks substantial evidence; rather, they
contend that FERC's decision to allow customers to seek
modification of all contract terms, while limiting utilities to
adding stranded cost provisions, fails to balance FERC's
competing concerns: respecting existing contractual commit-
ments and accelerating the transition to competition. They
also complain that FERC has failed adequately to explain
why affording customers this broad ability to modify their
contracts is in the public interest.
FERC gave two justifications for affording customers a
broader opportunity than utilities to modify their contracts,
both of which seem perfectly rational to us. First, Order
888-A explains, "these contracts were entered into during an
era in which transmission providers exercised monopoly con-
trol over access to their transmission facilities." Order
888-A, p 31,048 at 30,193. Also, the "unprecedented competi-
tive changes.... may affect whether such contracts continue
to be just and reasonable or not unduly discriminatory both
as to the direct customers of the contracts, as well as to
indirect, third-party consumers...." Id. at 30,193-94. In
fact, Order 888 rests on the very premise that by denying
competitors access to their transmission lines, utilities en-
gaged in undue discrimination. Confined to purchasing pow-
er from their local utilities, customers suffered from this lack
of access. In the natural gas restructuring, we affirmed
FERC's decision to allow customers to seek to modify their
sales contracts because those contracts "necessarily reflect
the pipelines' monopoly power." AGD, 824 F.2d at 1017.
The same reasons call for affirming FERC's decision here.
In addition, as FERC has explained, the harm to third parties
(i.e., customers of the wholesale requirements customers) that
may result from adherence to uneconomical contracts further
justifies its conclusion. See Order 888-A, p 31,048 at 30,194.
Remedying potential unfairness to utilities by allowing them
to seek stranded cost recovery if a customer shortens the
term of a contract, FERC struck a balance between custom-
ers and utilities that can hardly be characterized as arbitrary
or capricious.
4. Availability of Stranded Cost Recovery to Nonjurisdic-
tional Utilities and G&T Cooperatives
Section 201 of the FPA gives FERC jurisdiction over
"public utilities" but not over federal and state utilities. 16
U.S.C. s 824. Although FERC required utilities not subject
to its jurisdiction ("nonjurisdictional utilities") to provide re-
ciprocal open access transmission when they use a jurisdic-
tional utility's open access tariff, it declined to provide a
mechanism for them to recover stranded costs. Explaining
that it promulgated its reciprocity provision pursuant to
fairness concerns, not statutory authority, FERC reasoned
that it lacked jurisdiction to provide stranded cost recovery
for nonjurisdictional utilities. See Order 888-A, p 31,048 at
30,364. FERC recommended that these utilities include
stranded cost provisions in their open access tariffs; those
tariffs would be reviewed not by FERC but by the appropri-
ate regulatory authority. See id.
Dairyland petitioners contend that FERC acted arbitrarily
and capriciously in denying nonjurisdictional utilities stranded
cost recovery, arguing that the same "fairness" concerns
invoked by FERC to require reciprocal open access transmis-
sion require the award of stranded costs. To be sure, FERC
may have had authority to include stranded cost recovery as a
provision of Dairyland's open access tariff. But Dairyland
has offered no reason for thinking that FERC's refusal to do
so was arbitrary and capricious. Given the limited scope of
FERC's stranded cost provisions, its lack of jurisdiction over
entities like Dairyland, and the ability of nonjurisdictional
utilities to include stranded cost provisions in their open
access tariffs, we see no reason to question FERC's judgment
on this issue.
The same is true with respect to the transmission-
dependent utilities ("TDUs"). Like the Dairyland petitioners,
they claim that FERC acted arbitrarily and capriciously by
failing to provide a mechanism for them to recover stranded
costs. Owning few or no transmission facilities, TDUs serve
their loads using other utilities' transmission systems. Not
only are TDUs nonjurisdictional utilities, but, as Order 888-A
explains, open access does not cause their costs to become
stranded--their customers have always had an option to use
other utilities' transmission services to purchase power. See
Order 888-A, p 31,048 at 30,365.
Dairyland also contends that FERC acted arbitrarily and
capriciously when it declined to treat a generation and trans-
mission ("G&T") cooperative and its member distribution
cooperatives as a single economic unit for stranded cost
purposes. G&T cooperatives provide bundled wholesale pow-
er to their member distribution cooperatives, who in turn sell
the power to the members' retail customers. Observing that
cooperatives, unlike traditional utilities, are not vertically
integrated but instead function as single economic units,
Dairyland claims that G&T cooperatives have reasonable
expectations of continued service to retail customers of their
member cooperatives that differ substantially from the expec-
tations public utilities have with respect to retail customers of
their wholesale customers. This difference, Dairyland ar-
gues, requires FERC to allow G&T cooperatives to recover
stranded costs from their member cooperatives' customers.
Rejecting Dairyland's petition for rehearing on this point,
FERC noted that treating a G&T cooperative and its mem-
bers as a single economic unit for purposes of stranded cost
recovery would conflict with its treatment of these same
cooperatives as distinct entities in its reciprocity provisions.
Order 888-A, p 31,048 at 30,366. There, FERC agreed with
Dairyland's proposal that if a G&T cooperative seeks open
access transmission from a public utility, "then only the G&T
cooperative, and not its member distribution cooperatives,
would be required to offer [reciprocal] transmission service."
Order 888, p 31,036 at 31,763. Moreover, FERC reasoned,
recovering from a retail customer of a member cooperative is,
in effect, recovering from an indirect customer, a situation
that FERC declined to include in its stranded cost rule. See
Order 888-A, p 31,048 at 30,366.
It is true that FERC could have treated G&T cooperatives
and their members as single economic units for stranded cost
purposes. But FERC's explanation of why it chose not to do
so, particularly the fact that G&T cooperatives and their
members were treated as distinct entities for reciprocity
purposes, is entirely reasonable.
5. Challenges to Technical Aspects of Order 888's Stranded
Cost Recovery Provisions
Several petitioners mount challenges to various technical
aspects of the stranded cost recovery provisions. Before
addressing these challenges, we emphasize the very limited
scope of our review. For us to undo what FERC has done,
petitioners must persuade us that FERC's actions were arbi-
trary or capricious. "Highly deferential," the arbitrary and
capricious standard "presumes the validity of agency action."
National Mining Ass'n v. Mine Safety and Health Admin.,
116 F.3d 520, 536 (1997). Where, as here, the issue before us
"requires a high level of technical expertise, we must defer to
the informed discretion of the responsible federal agencies."
Marsh v. Oregon Natural Resources Council, 490 U.S. 360,
377 (1989) (internal quotation marks omitted). It is not
enough for petitioners to convince us of the reasonableness of
their views, see UDC, 88 F.3d at 1169 ("The existence of a
second reasonable course of action does not invalidate an
agency's determination."); those arguments should be pre-
sented to FERC, whose commissioners are appointed by the
President and confirmed by the Senate with the expectation
that they, not Article III courts, will make policy judgments.
To prevail in this court, petitioners must demonstrate that
FERC's policy judgments are arbitrary or capricious, a heavy
burden indeed. See National Treasury Employees Union v.
Hefler, 53 F.3d 1289, 1292 (D.C. Cir. 1995) ("The 'scope of
review under the "arbitrary and capricious" standard is nar-
row and a court is not to substitute its judgment for that of
the agency.' ") (quoting Motor Vehicles Mfrs. Ass'n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). With this
very deferential scope of review in mind, we turn to petition-
ers' arguments.
a. POSCR's challenges to the stranded cost formula
Reasoning that it would be burdensome to identify each
and every asset that would become underutilized as a result
of Order 888, FERC adopted a "revenues lost" formula to
determine a departing customer's stranded cost obligation.
Order 888, p 31,036 at 31,839. For each year a utility can
prove that it had a reasonable expectation of continued ser-
vice to a particular customer, the formula calculates the
customer's stranded cost obligation by subtracting the com-
petitive market value of the power the customer would have
purchased from the utility (as estimated by the utility) from
the amount the customer would have paid had it remained a
generation customer of the utility (based on FERC-approved
rates that the customer paid the prior three years). Id. at
31,839-40.
POSCR claims that this formula gives utilities no incentive
to mitigate their stranded costs. Not so. The formula
automatically provides such an incentive by subtracting from
utilities' recovery the market price of the power--utilities
that fail to sell the power at market prices will not recover
their full costs. POSCR also claims that the formula fails
accurately to measure stranded costs because it is based on
an estimate of those costs at one point in time. Responding,
FERC explained why it rejected a "true-up" provision that
would have made adjustments to the amount the customer
owed to reflect market conditions over the reasonable expec-
tation period. According to FERC, such an approach would
have created enormous uncertainty, outweighing any poten-
tial increase in accuracy. See Order 888-A, p 31,048 at
30,427-28. POSCR has offered no basis for us to question
this reasoning.
POSCR's claim that the formula gives utilities an incentive
to minimize their estimate of the market value of the power
the customer would have purchased is similarly groundless.
To avoid precisely this result, Order 888 gives customers an
option to either market or broker the capacity and associated
energy they would have purchased from their historic utility,
effectively reducing their stranded cost obligations by the
difference between the actual market value of the power and
the utility's estimate of the market value. See Order 888,
p 31,036 at 31,844. Order 888 also gives customers an option
to substitute the price of power under the customer's contract
with a new supplier for the utility's estimate of the market
value. See id.
One final point. Throughout its brief and at oral argument,
POSCR consistently referred to stranded costs as "impru-
dently incurred costs." Although it never developed this
argument, we think it worth noting that all costs included in
customers' stranded cost obligations are based on FERC-
approved rates and were included in utility rate bases as
assignable to particular customers. To us, this means that
these costs are legitimate, prudent, and verifiable.
b. Inclusion of known and measurable costs
The IOUs take issue with Order 888's stranded cost recov-
ery formula because the estimate of the price the customer
would have paid for the power is based on rates for the prior
three years; according to the IOUs, this approach fails to
consider known and measurable costs resulting from regula-
tory mandates that may have been deferred pursuant to filed
rate schedules and FERC-approved settlements. The costs
they cite include deferred costs of generation that have
already been approved for inclusion in the rate base, costs
relating to approved qualifying facility contracts, and govern-
ment-imposed costs such as deferred taxes and nuclear de-
commissioning.
Although it is true that the revenue calculation measures
only current rates and not deferred costs, Order 888 allows
customers and utilities to file for a change in the rates before
the customer's requirements contract terminates; in such
cases, FERC will calculate the customer's stranded cost
obligation based on those new rates. See Order 888-A,
p 31,048 at 30,427. While seeking to avoid detailed listings of
specific costs that may become stranded, FERC has ade-
quately preserved utilities' ability to include known, measura-
ble costs in revenue estimates through a ratemaking proceed-
ing.
c. Treatment of energy costs in the market option
The IOUs challenge FERC's treatment of energy costs in
the market option. To mitigate utilities' incentives to mini-
mize their estimates of the market value of the power (the
competitive market value estimate or "CMVE"), Order 888
affords customers an option to buy the power stranded by
their departure from the utility and resell it. Order 888,
p 31,036 at 31,844. Customers would purchase generation
capacity at the utility's estimated market value of the capacity
and associated energy at average system variable cost. Id. at
31,845. Thus if a customer believes that a utility is underesti-
mating the price at which it could sell the power, the custom-
er can buy the power and then resell it. While customers
exercising this option would still have to pay their stranded
cost obligation as calculated under the formula, they would
effectively offset the obligation by keeping the profit on the
resale of the power. Id. at 31,845 n.879.
The IOUs contend that allowing customers to pay average
variable cost for the associated energy is inconsistent with
Order 888's definition of the CMVE, which equals the market
value of both the generation capacity and associated energy.
See id. at 31,839 (defining CMVE as "the utility's estimate of
the average annual revenues ... that it can receive by selling
the released capacity and associated energy, based on a
market analysis performed by the utility"). Customers could
receive a windfall, the IOUs claim, by exercising the market
option--although they will pay average variable cost for the
associated energy, they will be able to resell it at the presum-
ably higher market price. At the same time, utilities will be
unable to recover the full market value of the power because
they will be forced to sell the associated energy at cost.
Responding to this argument in Order 888-A, FERC of-
fered two justifications for allowing customers to purchase
the associated energy at average variable cost. First, be-
cause the capacity being marketed would not generally be
associated with a single asset, customers exercising this op-
tion are purchasing a "slice of the system" and thus should
pay average variable cost. Second, customers should be able
to purchase energy at the price they currently pay, typically
average variable cost. See Order 888-A, p 31,048 at 30,433.
But neither explanation responds to the IOUs' argument that
defining CMVE as the market price of both the capacity and
associated energy is inconsistent with allowing customers
exercising the market option to purchase associated energy at
average variable cost. In its brief in this court, FERC
continues to misapprehend the IOUs' argument, largely reit-
erating the same arguments and failing to address the incon-
sistency.
The market option's stated intention is to reduce a utility's
incentive to understate the CMVE. See Order 888, p 31,036
at 31,842. If it did understate the CMVE, then customers
could buy the power from the utility and resell it, keeping the
difference. But FERC's policy of allowing customers to
purchase the associated energy at cost gives customers an
incentive to exercise the market option even when a utility
has appropriately estimated CMVE because they can buy the
energy at cost and resell it at the presumably higher market
price. FERC's failure to explain whether it intended this
result and if so, the justification for permitting customers to
receive a windfall while undercompensating utilities consti-
tutes a failure of reasoned decisionmaking. See AGD, 824
F.2d at 1030 ("We do not require that FERC reach any
particular conclusion; we merely mandate that it reach its
conclusion by reasoned decisionmaking."). We therefore va-
cate this portion of the orders and remand the issue to FERC
for further consideration.
d. Rescission of notice of termination provision
Until FERC issued Orders 888 and 889, it had required
parties to power sales contracts to notify it sixty days prior to
cancellation of a contract or termination of a contract by its
own terms. See 18 C.F.R. s 35.15 (repealed by Order 888).
Orders 888 and 889 eliminate the requirement that parties
notify FERC in advance when a contract terminates by its
own terms, but only with respect to contracts executed after
July 9, 1996; in other cases of contract cancellation or
termination, parties must still notify FERC in advance. See
18 C.F.R. s 35.15 (1999). TDU petitioners claim that in
rescinding the notice requirement, FERC ignored the fact
that utilities still have substantial market power. That some
utilities retain market power in generation, however, does not
undermine Orders 888 and 889. Through these orders,
FERC sought to move the electricity industry toward compe-
tition; by providing an open access mechanism through which
buyers may purchase power from suppliers other than trans-
mitting utilities, FERC substantially reduced utilities' market
power. Eliminating the notice requirement furthered that
policy. Moreover, customers who believe termination of their
contracts is unjust can seek relief from FERC pursuant to
section 206 of the FPA. See Order 888-A, p 31,048 at 30,393.
e. Provision for benefits lost
The TDU petitioners claim that FERC acted arbitrarily
and capriciously by failing to provide a mechanism for cus-
tomers purchasing power at below-market rates to preserve
those rates at the termination of their contract with their
historic utility. Just as utilities may have expectations of
continued service to particular customers, the TDU petition-
ers contend, customers may have reasonable expectations of
continuing to receive wholesale requirements service from
their historic utility at cost-based rates. Order 888-A says
that the Commission does "not have a sufficient basis on
which to make generic findings that customers under such
contracts may be entitled to extend a contract at the existing
rate." Order 888-A, p 31,048 at 30,393 (emphasis removed).
Moreover, the order explains, "the consequences of custom-
ers' expectations as a general matter would not have the
potential to shift significant costs to other customers," where-
as utilities' failure to recover stranded costs could potentially
shift the costs to other customers. Id.
We think that FERC has adequately explained why it
chose not to provide for benefits-lost recovery in Order 888.
Most important, FERC has not foreclosed customers in this
situation from seeking relief: As Order 888-A explains, a
customer may "exercise its procedural rights under section
206 to show that the contract should be extended at the
existing contract rate, or [ ] make such a showing in the
context of a utility's proposed termination of a contract
pursuant to the section 35.15 notice of termination (approval)
requirement." Id. (footnote omitted). Given that agencies
"enjoy[ ] broad discretion in determining how best to handle
related, yet discrete, issues in terms of procedures ... and
priorities," we think FERC's refusal to promulgate a generic
rule on this issue was entirely reasonable. Mobil Oil Explo-
ration & Producing Southeast, Inc. v. United Distrib. Cos.,
498 U.S. 211, 230 (1990).
B. Retail Stranded Costs
Recognizing state agency authority to address stranded
costs that relate to retail power sales, Order 888 limits
FERC's role as a forum for the recovery of these costs to two
situations: when customers take advantage of state-ordered
wheeling to reach new power suppliers and when former
retail customers become wholesale customers through what is
known as municipalization or municipal annexation. See Or-
der 888-A, p 31,048 at 30,402, 30,410. In the former scenario,
FERC will consider proposals for the recovery of stranded
costs only when the appropriate state regulatory commission
lacks authority to do so; in the latter situation, FERC will
serve as the primary forum for resolution of stranded cost
claims.
1. Stranded Costs Arising from Retail Wheeling
Stranded costs may result from state unbundling of retail
sales, where retail customers take advantage of state-ordered
retail wheeling to reach new generation suppliers. See Order
888, p 31,036 at 31,819. Observing that both FERC and the
states have authority to address t
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