Allegheny Power v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 25, 2005 Decided February 7, 2006

No. 04-1340

ALLEGHENY POWER,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

ALLEGHENY ELECTRIC COOPERATIVE, INC.,

INTERVENOR

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Leonard W. Belter argued the cause for petitioner. With

him on the briefs were Raymond B. Wuslich and Margaret H.

Claybour.

Beth G. Pacella, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on the

brief were Cynthia A. Marlette, General Counsel, and Dennis

Lane, Solicitor.

Robert Weinberg and Eli D. Eilbott were on the brief for

intervenor in support of respondent.

2

Before: TATEL and GRIFFITH, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: This is a dispute between

a utility and the Federal Energy Regulatory Commission over

the rate for sending electricity over certain low-voltage facilities

not covered by the relevant Open Access Transmission Tariff.

We grant the utility’s petition in part and dismiss it in part.

* * *

Allegheny Energy, Inc., owns (1) Allegheny Energy Supply

Company, L.L.C., which owns and operates generation facilities,

and (2) several utilities, divided along state lines and collectively

doing business as Allegheny Power (“Allegheny”), which

deliver electric power. The Allegheny utility operating in

Pennsylvania is West Penn Power Company.

Allegheny Electric Cooperative, Inc. (“AEC”), is an

organization through which fourteen local distribution

cooperatives in Pennsylvania buy their electricity. It is a

wholesale customer of Allegheny. AEC receives electricity

from Allegheny at 18 delivery points, all West Penn facilities.

The case in essence starts with a contract that Allegheny

and AEC signed in 1994. One of the types of service provided

under the contract—and the only one that concerns us here—is

known as partial requirements service. Allegheny Power, 97

FERC ¶ 61,274, at 62,164 (2001) (“2001 Order”). In pricing

this service, Allegheny bundled the cost of generating the

3

electricity with the cost of sending it to AEC. At the time, such

bundling was commonplace in contracts between vertically

integrated utilities and their customers. Midwest ISO

Transmission Owners v. FERC, 373 F.3d 1361, 1363-64 (D.C.

Cir. 2004).

In 1996, FERC concluded that this type of bundling allowed

vertically integrated utilities to discriminate in favor of their own

generators. To ensure open and equal access to the grid and

thereby foster competition in sale and generation of power, the

Commission in Order No. 888 required every utility transmitting

electric power in interstate commerce to adopt, for the sale of its

“transmission services,” a non-discriminatory schedule of terms

and conditions, with prices reflecting transmission costs

unbundled from generation costs. Such a schedule is known as

an Open Access Transmission Tariff (“OATT”). 18 C.F.R.

§ 35.28(c)(1); Promoting Wholesale Competition Through Open

Access Non-Discriminatory Transmission Services by Public

Utilities; Recovery of Stranded Costs by Public Utilities and

Transmitting Utilities, Order No. 888, FERC Stats. & Regs.

Preambles ¶ 31,036, at 31,654, 61 Fed. Reg. 21,540, at 21,552

(1996) (“Order No. 888”).

Order No. 888 indisputably covers the service that

Allegheny provides to AEC. See Transmission Access Policy

Study Group v. FERC, 225 F.3d 667, 695-96 (D.C. Cir. 2000)

(construing Order No. 888 to cover, inter alia, any transfer of

electricity from a utility to a customer who then resells it,

regardless of the type of facilities involved), aff’d on other

grounds sub nom. New York v. FERC, 535 U.S. 1 (2002).

FERC policy requires that rates subject to Order No. 888 be

unbundled “at the earliest contractual opportunity,” which

includes the first time a contract becomes subject to extensions.

2001 Order, 97 FERC at 62,167. In Allegheny’s 1994 contract

4

with AEC, the initial term was to expire on November 30, 2001,

and the contract was to be automatically renewed annually,

subject to “revised charges, terms, and conditions,” unless either

party terminated it on two years’ notice. Id. at 62,164. In the

months leading up to the initial term’s expiration, Allegheny

informed AEC that, for the one-year renewal period beginning

December 1, 2001, it would unbundle the generation and

transmission charges, the latter to be determined by an OATT

adopted by PJM Interconnection, L.L.C. (“PJM”). Id. at 62,165.

PJM is a regional transmission organization that operates the

transmission facilities of its member utilities (including

Allegheny) to ensure open access.1

The PJM OATT specifies terms and conditions for the use

of all Allegheny transmission facilities with voltage of 138 kV

or greater. For Allegheny transmission facilities of lesser

voltage, the PJM OATT punts, stating simply that service “will

be provided at rates determined on a case-by-case basis.” See

Pennsylvania-New Jersey-Maryland Interconnection, 92 FERC

¶ 61,282, at 61,952 (2000) (approving this provision of the PJM

OATT); Pennsylvania-New Jersey-Maryland Interconnection,

1

Actually, Allegheny’s proposal was slightly more complex: the

charges were to be governed by PJM’s OATT only for the last eleven

months of the one-year extension period; for the first month, they were

to be governed by a different OATT devised by Allegheny itself. The

two OATTs were apparently identical in the aspect that matters for our

opinion, i.e., they both failed to specify rates for services below 138

kV. See Addendum to Agreement (Oct. 19, 2001) at 3-4 and

Attachment D (proposing a single rate for subtransmission facilities

throughout the one-year extension period, supporting the inference

that the facilities not covered by the PJM OATT were the same as

those not covered by the Allegheny OATT). Some of our references

below to the PJM OATT would be more accurate if we also mentioned

the parallel implications of the Allegheny OATT, but since it makes

no difference to the analysis, we shall omit such cumbersome details.

5

81 FERC ¶ 61,257, at 62,251 (1997) (same). For purposes of

simplicity, we will refer to the facilities whose rates are

specified in the PJM OATT as “transmission facilities” and

those whose rates are determined case-by-case as

“subtransmission facilities.”

Thus—as a result of the unbundling mandated by Order No.

888, the Allegheny-AEC contract’s terms for its initial

expiration, and the provisions of the PJM OATT—the rate that

AEC would pay for use of Allegheny’s subtransmission facilities

during the one-year renewal period was to be determined on a

“case-by-case” basis. Shortly before the expiration of the initial

contract term, Allegheny filed a unilateral addendum stating

that, for the upcoming renewal period, it would assess AEC

“sub-transmission charges for service over facilities not covered

by the OATTs,” and would calculate these charges through the

method of “direct assignment.” 2001 Order, 97 FERC at

62,165; Addendum to Agreement (Oct. 19, 2001) at 3-4 and

Attachment D. Direct assignment was the method by which

Allegheny had calculated subtransmission charges for all the

settlement agreements that it had made with other wholesale

customers whose contracts expired in the years after Order No.

888. Brief on Exceptions of Allegheny Power at 6.

Direct assignment allocates the cost of specific facilities to

customers in proportion to their use of such facilities. Direct

Testimony of Menhorn, Exh. Allegheny-1, at 2-10. The

alternative is “rolled-in” pricing, under which every customer

pays the same unit rate, based on the costs of all facilities,

rolled-in together without differentiating on the basis of the role

played by particular facilities in providing service to particular

customers. Both methods are aimed at matching a user’s rates

with the costs incurred to provide the service it enjoys. Rolled-

in pricing is thought to make sense when the facilities are

integrated, i.e., when the service to each customer is most

6

practicably seen as depending on the entirety of the facilities in

question. See generally Western Massachusetts Electric Co. v.

FERC, 165 F.3d 922, 927-28 (D.C. Cir. 1999); Maine Public

Service Co. v. FERC, 964 F.2d 5, 8 (D.C. Cir. 1992); Sierra

Pacific Power Co. v. FERC, 793 F.2d 1086, 1088 (9th Cir.

1986); Otter Tail Power Co., 12 FERC ¶ 61,169, at 61,420

(1980). To some extent, of course, the cost of information may

influence Commission judgment; even where facility usage may

be conceptually severable, the interdependency among the

facilities may be such that the calculations necessary for direct

assignment simply aren’t worth the effort.

In light of protests by AEC, the Commission conditionally

accepted Allegheny’s addendum for filing, suspended it for a

nominal period, pronounced it effective subject to refunds, and

encouraged the parties to settle. 2001 Order, 97 FERC at

62,167.

Settlement negotiations failed to resolve all issues, and the

matter was assigned to an ALJ to determine, inter alia, whether

Allegheny’s calculation of the subtransmission rate was just and

reasonable. Allegheny Power, 103 FERC ¶ 63,001 (2003) (“ALJ

Decision”). AEC agreed with Allegheny that direct assignment

was the proper method but disagreed on how to apply it.

Commission staff, however, argued that the rate for

subtransmission service should be calculated via the rolled-in

method, Direct Testimony of Farrokhpay, Exh. Staff-3, at 11,

which the PJM OATT was (and is) using for service over

Allegheny’s transmission facilities. Thus, Staff was effectively

proposing that Allegheny charge AEC two distinct rolled-in

rates, one that reflected the cost of the transmission facilities,

and another that reflected the cost of the subtransmission

facilities. As FERC counsel noted at oral argument, use of two

such rolled-in rates is a novelty, occasioned (in part) by PJM’s

decision to specify a rate for Allegheny’s transmission facilities

7

and to leave subtransmission to be priced case-by-case. Oral

Arg. Recording at 31:45-32:40, 33:20-33:45.

Agreeing with staff, the ALJ ordered Allegheny to calculate

the subtransmission charge to AEC by rolling in the costs of all

the West Penn subtransmission facilities. ALJ Decision, 103

FERC at PP 10-17, pp. 65,001-02. The case then went to the

full Commission, which affirmed the ALJ, Allegheny Power,

106 FERC ¶ 61,241 (2004) (“Opinion No. 469”), and later

denied Allegheny’s petition for rehearing, Allegheny Power, 108

FERC ¶ 61,151 (2004) (“Opinion No. 469-A”).

Allegheny petitions to vacate FERC’s roll-in order and to

remand with instructions to use direct assignment instead. AEC,

having abandoned its prior support for direct assignment,

intervenes in support of FERC.

* * *

To begin, we address the issues of standard of review and

burden of persuasion. Allegheny filed the addendum embodying

its proposed direct assignment rate under § 205 of the Federal

Power Act, 16 U.S.C. § 824d. Allegheny asserts (and no party

questions) that that proposal is governed by § 205(e), which

states that a utility seeking a rate increase bears “the burden of

proof to show that the increased rate . . . is just and reasonable.”

FPA § 205(e), 16 U.S.C. § 824d(e).

At the same time, Allegheny contends that insofar as the

Commission imposed its own preferred method (as distinct from

merely rejecting Allegheny’s proposal), § 206(b) of the Act, 16

U.S.C. § 824e(b), assigns the agency the burden of showing its

method to be just and reasonable. But § 206 applies only when

the Commission seeks to impose its own preferred rate in place

8

of the “existing rate.” Midwest ISO, 373 F.3d at 1368. Here, the

rate at the time of filing was a charge that bundled generation,

transmission, and subtransmission—a charge rendered unlawful

by a prior FERC rulemaking and therefore off the table in this

adjudication. In Midwest ISO, where FERC (as here) made a

rate determination without there being an existing rate or

practice to fall back on, we reviewed the agency’s decision

under the arbitrary and capricious standard, 5 U.S.C.

§ 706(2)(A), and its factual findings under the substantial

evidence standard, 16 U.S.C. § 825l(b). Midwest ISO, 373 F.3d

at 1368. We shall apply the same standard here insofar as the

agency went beyond rejecting the utility’s method and imposed

its own. The arbitrary and capricious standard speaks, of course,

to the degree of deference that we owe the agency, not to burden

of proof or persuasion. As we shall see, however, the case

relating to FERC’s imposition of its rolled-in method can be

resolved without addressing issues of burden allocation.

* * *

Before reaching the merits of Allegheny’s claims we must

address the Commission’s arguments that Allegheny failed to

preserve its objections adequately. Both arguments turn on the

Act’s jurisdictional provision that the court may consider only

objections that “have been urged before the Commission in the

application for rehearing unless there is reasonable ground for

failure so to do.” § 313(b), 16 U.S.C. § 825l(b).

The ALJ, in rejecting Allegheny’s direct assignment

proposal and imposing staff’s recommended roll-in, gave four

reasons for his decision. The first was his conclusion that the

facilities at issue were integrated. ALJ Decision, 103 FERC at

PP 11-12, p. 65,002. The remaining three reasons all concerned

independent failings in Allegheny’s support for its direct

9

assignment proposal—defects in its cost data and its

identification of facilities used by AEC. Id. at PP 10, 13, pp.

65,001-02.

The Commission affirmed the ALJ’s roll-in order “for the

reasons stated by the [ALJ],” and noted that, “as pointed out by

the [ALJ] . . . , Allegheny Power failed to provide adequate

justification for its proposed direct assignment.” Opinion No.

469, 106 FERC at P 17, p. 61,850. Although the rest of the

Commission’s discussion of the ratemaking method focused

exclusively on the issue of integration, it plainly adopted by

reference all four of the reasons articulated by the ALJ. This is

enough. Gannett Rochester Newspapers, a Division of Gannett

Co. v. NLRB, 988 F.2d 198, 204 (D.C. Cir. 1993); United Food

and Commercial Workers Int’l Union v. NLRB, 880 F.2d 1422,

1436 (D.C. Cir. 1989).

Allegheny, in its petition for rehearing, objected specifically

only to the integration finding, Request of Allegheny Power

Company for Rehearing at 1-7, but also purported to incorporate

by reference the entirety of its prior Brief on Exceptions, id. at 2.

Unfortunately for Allegheny, what is sauce for the agency isn’t

sauce for petitioner. Under § 313(b) an objection cannot be

preserved “indirectly,” Officer of the Consumers’ Counsel, State

of Ohio v. FERC, 914 F.2d 290, 295 (D.C. Cir. 1990)

(construing the identical provision of the Natural Gas Act, 15

U.S.C. § 717r(b)), but must be raised with “specificity,”

Wisconsin Power & Light Co. v. FERC, 363 F.3d 453, 460 (D.C.

Cir. 2004). Allegheny notes that, in Columbia Gas

Transmission Corp. v. FERC, 404 F.3d 459, 462 (D.C. Cir.

2005) (construing 15 U.S.C. § 717r(b)), “a terse request for

rehearing was adequate when the Commission itself offered only

a half-sentence explanation in its initial order and responded to

the objection on rehearing,” Reply Brief of Petitioner at 6. But

the objection in Columbia Gas was explicit and elicited a

10

response from the Commission, 404 F.3d at 462, neither of

which can be said for Allegheny’s attempted incorporation by

reference. Allegheny therefore cannot now object to the other

three findings.

The question remains whether those three findings are

enough to support the Commission’s order. Surely they are as to

its rejection of Allegheny’s proposed direct assignment method,

as under § 205(e) Allegheny bears the burden of showing that

method to be just and reasonable. What of FERC’s decision that

Allegheny must instead conduct a roll-in of all West Penn

subtransmission facilities? Allegheny’s loss on the cost and

facility-identification issues would be fatal on the current record

if direct assignment and the West-Penn-wide roll-in were the

only two options. But that is not so here. In its petition for

rehearing, Allegheny offered a “third way,” calling for

adjustments in any rolled-in rate for AEC to remove the

allegedly distorting effect of costs and loads charged to other

subtransmission customers by direct assignment. See Request

of Allegheny Power Company for Rehearing at 7, Allegheny

Appendix (“A.A.”) at 693; see also Allegheny Brief on

Exceptions at 21-23, A.A. at 672-75; ALJ Hearing Tr. 1/28/03 at

395-99, A.A. at 573-76 (testimony of staff witness Farrokhpay

on examination by Allegheny). The ALJ’s findings on cost data

and identification of facilities do not necessarily explain the

Commission’s rejection of Allegheny’s proposal of an adjusted

roll-in.

The Commission acknowledged the proposal, Opinion No.

469-A, 108 FERC at P 20, p. 61,864, and specifically explained

its rejection of a related alternative argument (that the other

customers should have their rates converted to the rolled-in

method, rejected by FERC on the ground that their rates weren’t

before the Commission), id. at PP 35-37, 40, pp. 61,866-67. As

to the proposal itself, the Commission lumped it together with

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all of Allegheny’s objections (including its plea for direct

assignment), declared that “[a]ll of these objections . . . are

beside the point,” and rejected them all in blanket fashion,

relying upon Allegheny’s failure to substantiate its direct

assignment methodology and upon the “integration” findings

from its own previous order. Id. at PP 21-22, p. 61,865.

(Insofar as Allegheny may suggest that the Commission has

initiated a default rule in favor of roll-in, we are unconvinced, as

the cases cited by the Commission relied on findings of

integration. See id. & n.3.) Thus, the Commission’s response to

the adjusted roll-in proposal was so framed as to make that

response’s adequacy contingent on the factual support for, and

the reasonableness of, its integration findings.

There remains a final hurdle for Allegheny on this point—

its failure to raise the adjusted roll-in issue in its briefs before

this court. But as FERC, in rejecting the adjusted roll-in on

rehearing, implicitly relied solely on the integration findings,

and as Allegheny before us plainly put FERC on notice to

defend those findings, we see no unfairness to FERC in our

addressing them, even though the route has proven circuitous.

The Commission makes a second waiver argument—

namely that Allegheny’s petition for rehearing failed to question

what the Commission says was a finding in Opinion No. 469

that the Allegheny subtransmission facilities serving AEC are

integrated with Allegheny’s larger network of transmission

facilities. Instead, says the Commission, the petition for

rehearing attacked a non-existent Commission theory—that the

facilities in question were operated as “a single integrated

subtransmission network.” Br. for Respondent at 16.

The difficulty with this argument is that it invokes a

Commission finding in Opinion No. 469 that either didn’t exist,

or existed only in such obscurity as to be undetectable by a

12

reasonable litigant. Opinion No. 469, in a section titled

“Commission Finding,” explicitly directed that the

“subtransmission service charges to AEC should be calculated

based on the system-wide average costs of Allegheny Power’s

subtransmission facilities.” Opinion No. 469, 106 FERC at P 17,

p. 61,850. In the same section it states that “we find that the

facilities used by Allegheny Power to serve AEC are part of an

integrated subtransmission/distribution network.” Id. Although

the term “distribution” is not entirely precise, it certainly refers

to lower-voltage facilities of some kind, not transmission

facilities. What is more, the “Commission Finding” says

nothing about transmission facilities. Admittedly, a more

peripheral section of Opinion No. 469—the summary of ALJ

findings—is somewhat ambiguous. Id. at P 4, p. 61,848 (stating

that the ALJ found that the facilities at issue “constitute part of

Allegheny Power’s total integrated network” and referring to the

“integrated subtransmission/distribution network serving

Allegheny Power’s entire system”). But such ambiguity cannot

override the clear language of the “Commission Finding.”

Besides, the ALJ decision to which the summary refers is quite

clear that the facilities at issue “are part of an integrated

subtransmission/distribution network.” ALJ Decision, 103

FERC at P 11, p. 65,002.

FERC counsel responds that, even if the Commission did

invoke an integrated subtransmission/distribution network in

Opinion No. 469 and introduced the theory of integration with

the larger transmission network only in Opinion No. 469-A,

Allegheny is barred by its failure to file a second petition for

rehearing to contest the new rationale. Oral Arg. Recording at

23:25-23:55. This argument relies upon Town of Norwood,

Massachusetts v. FERC, 906 F.2d 772, 775 (D.C. Cir. 1990), in

which we held that § 313(b) requires “an application for

rehearing of an order on rehearing when the later order modifies

the results of the earlier one in a significant way, raising

13

objections to the rehearing order that are substantially different

from those raised against the original one.” But Norwood

requires a second petition only when the result is different; a

petitioner need not file a second petition “when the outcome had

not been changed but the Commission had ‘supplie[d] a new

improved rationale.’” California Department of Water

Resources v. FERC, 306 F.3d 1121, 1126 (D.C. Cir. 2002)

(quoting Southern Natural Gas Co. v. FERC, 877 F.2d 1066,

1073 (D.C. Cir. 1989)); see also Norwood, 906 F.2d at 775

(“[T]he Federal Power Act does not require an endless cycle of

rehearing applications.”). The rule is thus analogous to the

circumstances under which an appellee must file a cross-appeal.

See, e.g., Freeman v. B&B Associates, 790 F.2d 145, 151 (D.C.

Cir. 1986) (“Only when an appellee attempts to overturn or

modify a district court’s judgment must the appellee file a cross-

appeal.”). Here, the rationale changed, but the result—a roll-in

of all West Penn subtransmission facilities—remained the same.

Thus none of the Commission’s waiver arguments insulates

from review its rejection of Allegheny’s argument that any

rolled-in rates must be adjusted. As the Commission gave no

explicit explanation for that rejection and implicitly relied only

on its integration finding, its order can survive only if its

integration finding is itself neither arbitrary nor capricious.

***

We therefore at last reach the merits of the Commission’s

treatment of integration. We find it to be arbitrary and

capricious and not supported by substantial evidence.

As noted above, FERC mandated a rolled-in rate for

Allegheny’s subtransmission facilities separate and distinct from

the PJM OATT’s rolled-in rate for Allegheny’s transmission

14

facilities. It did so for the stated reason that all the facilities—

both transmission and subtransmission—are integrated, i.e., act

together as a single piece of equipment. Opinion No. 469-A, 108

FERC at P 22, p. 61,865. Several aspects of this decision are

unexplained.

First, the Commission shifted without a word from a theory

of integration among subtransmission facilities to integration

between facilities for subtransmission and transmission. Given

that the evidence before the ALJ addressed the first and not the

second (so far as appears), this left gaps either of data or analysis

or both (matters to which we return below). At the very least, it

appeared inconsistent with the Commission’s decision in PP&L,

88 FERC ¶ 61,235 (1999), reh’g denied 95 FERC ¶ 61,160

(2001), which appeared to present a parallel issue. A utility

whose transmission rates were also determined by the PJM

OATT sought an outcome similar to the one FERC mandated

here: it wanted a separate rolled-in rate for low-voltage facilities

to be charged to those of its wholesale customers who took

delivery from those facilities. FERC rejected the request in

terms that appeared to treat integration among the

subtransmission facilities as a prerequisite. PP&L had

“provided no support for its assertions that the low voltage

facilities operate as an integrated system and that the use of the

rolled-in rate methodology is thus the proper basis for rates for

transmission service over these facilities.” 88 FERC at 61,770.

By the same token, if the record in fact showed integration

between the subtransmission and transmission facilities—that

they act together as a single piece of equipment—the precedent

invoked by FERC suggests that the solution is a rolled-in rate

encompassing both high-voltage and low-voltage facilities, not a

separate roll-in of low-voltage facilities only. The aggregated

subtransmission-transmission rate, in any event, was the solution

in all cases invoked on this point by the Commission and AEC:

15

Maine Public Service Co., 964 F.2d at 8-9; Niagara Mohawk

Power Corp., 42 FERC ¶ 61,143, at 61,532-33 (1988); Kansas

Gas & Electric Co., 39 FERC ¶ 63,013, at 65,053-55 (1987),

aff’d in relevant part, 49 FERC ¶ 61,295, at 62,117 (1989);

reh’g granted in part, 52 FERC ¶ 61,301 (1990); Utah Power &

Light Co., 24 FERC ¶ 63,108, at 65,176-79 (1983), aff’d, 27

FERC ¶ 61,258, at 61,486-87 (1984), reh’g denied, 28 FERC

¶ 61,088, at 61,165-67 (1984), aff’d sub nom. Sierra Pacific, 793

F.2d at 1087-90; Potomac Edison Co., 20 FERC ¶ 63,060, at

65,257-59 (1982), aff’d in relevant part, 23 FERC ¶ 61,106, at

61,255-56 (1983); Minnesota Power & Light Co., 16 FERC

¶ 63,012, at 65,069-80 (1981) (because the record showed no

integration between subtransmission and transmission facilities,

it did not support petitioner’s request for aggregating the cost of

the two sets of facilities), aff’d in relevant part, 21 FERC

¶ 61,233, at 61,519 (1982); see also Oral Arg. Recording at

33:30-33:40 (statement of FERC counsel that this is the “first

time the Commission had before it a case-by-case situation

where we have a roll-in of the low-voltage transmission rates,

and yes this is different”); Reply Brief of Allegheny Power

(before ALJ) at 6.

In short, the Commission appears hitherto to have applied

the following matching principles: (1) If subtransmission and

transmission facilities are integrated with each other, a single

rate rolling them both together is appropriate. (2) If

subtransmission facilities are integrated with each other, a

separate rolled-in rate for subtransmission facilities is

appropriate. As noted, in PP&L the Commission said the factual

predicate for application of Rule #2 was not shown. 88 FERC at

61,770. In Puget Sound Energy, Inc., 98 FERC ¶ 61,168 (2002),

it approved separate roll-ins for high-voltage and low-voltage

facilities, but simply on the ground that the new arrangement did

not entail a rate increase for any customer, id. at 61,622. The

Commission apparently hasn’t developed a rule specific to the

16

case where subtransmission facilities are integrated with each

other and with transmission facilities. Given the Commission’s

scuttling away from its earlier supposition that the

subtransmission facilities were integrated with each other, it

appears to be asserting the finding required for Rule #1 and yet

to have adopted the rate indicated by Rule #2.

As we suggested earlier, there seem to be gaps either in the

data before the Commission or in the necessary analysis. In part

this arises from its shift from an idea of integrated

subtransmission facilities to the broader integration claim. As

noted above, FERC originally stated—in the ALJ decision and

in Opinion No. 469—that the subtransmission facilities were

integrated among themselves. It then concluded—when denying

rehearing in Opinion No. 469-A—that those facilities were

integrated with the transmission facilities. The evidence

marshaled in the ALJ decision and in Opinion No. 469 was, not

surprisingly, aimed at proving the staff’s contention and the

agency’s conclusions in those decisions, i.e., the first proposition

and not the second. Opinion No. 469, closely following the

ALJ, focused on nine of the 18 interconnection points between

Allegheny and AEC, and invoked five defining elements of

integration:

Trial Staff states that 9 of the 18 Allegheny Power

interconnection points with AEC are normally served in

network configurations and that the integrated nature of

Allegheny Power’s facilities are based on the following: (1)

the facilities are looped, not radial; (2) energy does not flow

in just one direction over these Allegheny Power facilities;

(3) Allegheny Power serves not only AEC but also its own

customers over these facilities; (4) the looped configuration

enables Allegheny Power to provide support and added

reliability to the other looped lines; and (5) an outage on

any one of these facilities affects the power flows on other

17

facilities.

Opinion No. 469, 106 FERC at P 17, p. 61,850. Putting aside

for a moment the nine interconnection points not covered by this

finding, the integration here appears to be only what the

Commission was then claiming—integration among

subtransmission facilities. This certainly appears to be the focus

of the direct testimony of the staff engineering expert—which

the Commission decisions track very closely. Direct Testimony

of Farrokhpay, Exh. Staff-3, at 1-18, esp. 7-12.2 But when the

agency in its denial of rehearing switched to the broader

integration theory, it largely repeated the same evidence as

before, neither adding new evidence nor explaining why the old

evidence supported the new conclusion. Opinion No. 469-A,

108 FERC at P 22, p. 61,865. While at least one FERC

precedent suggests that integration of subtransmission facilities

with each other is relevant to their integration with the

transmission grid, Utah Power, 28 FERC at 61,166, here the

Commission did not articulate such a proposition, much less

establish its logical role.

The second problem relates to how the Commission fills the

gap left by the recognition that the finding on the five integration

factors covered only nine of the 18 interconnection points. By

way of background we observe that these five factors were

articulated—with similar wording and in the same sequence—in

Mansfield Municipal Electric Department v. New England

Power Co., 97 FERC ¶ 61,134, at 61,613-14 (2001). In

Northeast Texas Electric Cooperative, Inc., 108 FERC ¶ 61,084,

at P 51, p. 61,434 (2004), the Commission crowned them the

2

The expert did mention the transmission system in his oral

testimony, but he said only that some subtransmission facilities were

“connected” to the grid, ALJ Hearing Tr. 1/28/03 at 379. As FERC

counsel admits, connection does not necessarily mean integration.

18

“five-factor Mansfield Test,” and appeared to rule that a

negative showing on all five factors constituted “‘exceptional

circumstances’ that merit[] direct assignment.” (FERC didn’t

cite Mansfield in any of its decisions here or in its brief.) For the

remaining nine points, Opinion No. 469—again following the

ALJ—simply stated that those points, “while radially connected

to Allegheny Power, are typically backed up by an Allegheny

Power network of 25 kV lines.” Opinion No. 469, 106 FERC at

P 17, p. 61,850.3 It is not clear whether “back-up” is

synonymous with one of the five Mansfield factors (e.g., an

indicator that the facilities provide “support and added

reliability”) or whether it is a distinct factor that the Commission

means to add to the test. It is also unclear how the Commission

defines back-up on the facts of this case. Its entire treatment of

the concept consists of the sentence quoted above.

This cursory treatment might be permissible if prior FERC

cases revealed a clear and consistent policy on how back-up is

defined and how it contributes to integration and justifies roll-in.

But the cases reveal no such policy. Perhaps most important,

they are inconsistent as to whether the back-up required to show

integration refers to back-up capability that is used with some

level of frequency or that merely has the potential for use. The

distinction is plainly important for this case, as FERC counsel

3

The quoted sentence is obviously drawn from Direct Testimony

of Farrokhpay, Exh. Staff-3, at 11. Farrokhpay later said the modifier

“25 kV” should be corrected to read “subtransmission,” ALJ Hearing

Tr. 1/23/03 at 367, and thus to extend his claim to facilities in north-

central and south-central Pennsylvania (which are 12.5 kV, 46 kV,

etc.), rather than limit it to western Pennsylvania, where the 25 kV

facilities are located. System Map; Legend for AEC Interconnection

Points, Exh. Staff-14. Thus Farrokhpay’s sentence, though obscure

for the reasons stated in the text, is more supportive of the

Commission than the Commission noticed.

19

acknowledged that there was “no evidence about how often it

[i.e., utilization of back-up] happens.” Oral Arg. Recording at

28:05-28:10; see also Direct Testimony of Farrokhpay, Exh.

Staff-3, at 10-11; ALJ Hearing Tr. 1/23/03 at 375.

In general, the Commission appears to have regarded

potential back-up as insufficient. In Minnesota Power, 21 FERC

at 61,519, the Commission adopted the decision of the ALJ, 16

FERC ¶ 63,012, who, in turn, although recognizing that certain

facilities could back up others if certain switches normally kept

open were closed (switch closure enables power transmission),

id. at 65,071, ruled that the choice of ratemaking method should

be premised on “the common, prevailing situation, not on what

physically could take place,” id. at 65,071-72 (emphasis added).

And in Niagara Mohawk, 42 FERC at 61,533, the Commission

shunned reliance on mere potential. Responding to an argument

that staff had demonstrated that certain subtransmission lines

were “only theoretically capable of providing” additional

reliability, it insisted that the evidence showed support “‘on an

everyday basis.’” Id. (citation omitted).

Qualifying this is a FERC decision of considerable

ambiguity. In Utah Power, 28 FERC at 61,166, the Commission

suggested that Minnesota Power’s focus on the “common,

prevailing situation” did not apply to a case where integration

was clearly demonstrated by other evidence; but it is unclear

why the matter would be of any consequence at all in such a

case. The Ninth Circuit, affirming Utah Power, in dictum

quoted with approval a passage from the intervenor’s brief to the

effect that parallel paths establish integration even where

connection between the two is interrupted by an open switch.

Sierra Pacific, 793 F.2d at 1088. Of course the Ninth Circuit

doesn’t establish FERC policy.

In the present case, FERC counsel, when pressed at oral

20

argument to articulate a standard, stated that the “mere

potentiality” for back-up was sufficient for roll-in. Oral Arg.

Recording at 30:10-30:20. To distinguish Minnesota Power,

counsel emphasized, Oral Arg. Recording at 34:20-36:15, that

the outcome there rested partly on the fact that closing the

switches for the sake of back-up could have damaged the

facilities, 16 FERC at 65,072, suggesting that Minnesota Power

stands for a very narrow “damage” exception to the supposed

rule that potential back-up suffices for roll-in. But counsel has

pointed to nothing said by FERC itself establishing such a

concept. SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).

The above discussion would be inaccurate if it conveyed the

impression that the actual/potential distinction is the only aspect

of “back-up” that is obscure to this court. The discussion does,

however, pinpoint what appears the most critical uncertainty in

the Commission’s handling of the matter. On remand we

assume that the Commission will address the parties’

contentions with enough clarity for any later reviewing court to

comprehend its position.

* * *

We dismiss Allegheny’s petition insofar as it challenges

FERC’s rejection of direct assignment. We vacate FERC’s

order of a West-Penn-wide roll-in and remand for the

Commission to consider whether or not an adjusted roll-in is

appropriate (and such additional alternatives as it may deem

appropriate to consider).

So ordered.