Petition for Writ of Certiorari — Arcadia v. Ohio Power Co.

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

ARCADIA, OHIO, et al.,

Petitioners,

Vv.

OHIO POWER COMPANY, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

GREGG D. OTTINGER *

DUNCAN, ALLEN AND TALMAGE

1575 Eye Street, N.W.

Suite 300

Washington, D.C. 20005

(202) 289-8400

February 9, 1990 * Counsel of Record

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the Federal Energy Regulatory Commission

is entitled to judicial deference in interpreting Section

318 of the Federal Power Act (FPA), one of the Com-

mission’s own organic statutes, even though that par-~

ticular section of the Act concerns the Commission’s

jurisdiction.

2. Whether Section 318 of the FPA should be inter-

preted to oust the Federal Energy Regulatory Commis-

sion of jurisdiction over rate matters only when there is

an actual conflict between a requirement imposed by that

agency pursuant to the FPA and a requirement imposed

by the Securities and Exchange Commission pursuant to

the Public Utility Holding Company Act.

(i)

PARTIES TO THE PROCEEDING

In addition to the petitioner listed in the caption, the

following Ohio municipalities were parties in the court

below and are petitioners herein:

Bloomdaie

Bryan

Carey

Cygnet

Deshler

Greenwich

Ohio City

Plymouth

Republic

Shiloh

St. Clairsville

Sycamore

Wapakoneta

Wharton

In addition to the respondent listed in the caption, the

following parties in the court below are respondents

herein:

Federal Energy Regulatory Commission

LCP Chemicals, Ine.

Mobay Corporation

Olin Corporation

PPG Industries, Ince.

TABLE OF CONTENTS

QUESTIONS PRESENTED ......000......o cece.

PARTIES TO THE PROCEEDING .................. eens

TABLS OF AUTHORITIES ..0n.n......nn..n... cece ce eee eeecee eee.

Neen eee ee ee ee csnsnesednaserecaceesevers

ee cacinsenesevicsns sssencucersssseaeesacesseescenes-ee-

AUTHORITIES INVOLVED .........................0.cceee '

Neen eee ee lias cactvcossevnsccscccrcseecseeesesese:

REASONS FOR GRANTING THE PETITION

CONCLUSION............. Seis ietadtiiasinietiensenscetsteesesestecesees

(iii)

Page

TABLE OF AUTHORITIES

Cases Page

ACLU v. FCC, 823 F.2d 1554 (D.C. Cir. 1987),

cert. denied, 485 U.S. 959 (1988) ... 3 10

Appalachian Power Co. Vv. FPC, 328 F.2d 237 (4th

Cir.), cert. denied, 379 U.S. 829 (1964) .....9, 15, 16, 17

Chevron USA Inc. v. NRDC, 467 U.S. 837 (1984) passim

Chicago & North Western Transp. Co. Vv. Kalo

Brick & Tile Co., 450 U.S. 311 (1981) —............ 16

Department of Treasury V. FLRA, 837 F.2d 1163

EA as I skies nencsiniesnreeniowicatieonenitenmnapemnires 10

Gaither v. Myers, 404 F.2d 216 (D.C. Cir. 1968)... 16

Hardy v. Lomenzo, 349 F. Supp. 617 (S.D.N.Y.

SII viiccsa cinteasincsdniceancenpibeasesnaccnniepsaeesnimnianaliaianitelies 16

Jewett v. Comm’r, 455 U.S. 305 (1982) . ous 16

K Mart Corp. v. Cartier, Inc., 108 S.Ct. “1811

I vcs... ccenicsssieatstciusmidimdocinasbeaisineiestiuaeieniientetenants 9

Kokajko v. FERC, 873 F.2d 419 (1st Cir. 1989) 8,12

Lavine V. Milne, 424 U.S. 577 (1976) ....................... 16

Mississippi Power & Light Co. V. Mississippi | er

rel. Moore, 108 S.Ct. 2428 (1988) ........... ae 12

Missouri v. Andrews, 787 F.2d 270 (8th Cir.

1986), aff’d on other grounds sub nom. ETSI

Pipeline Project Vv. Missouri, 108 S.Ct. 805

(1988) ......... whsinssalnictsncisaliele: absiccaamsheesiiniaaaidindiialéaiedetsaiaiaes 11,14

Nantahala Power & Light Co. v. Thornburg, 476

U.S. 953 (1986). = 6, 15, 16

New York Shipping Ass’n V. FMC, 854 F.2d 1338

(D.C. Cir. 1988), cert. denied, 109 S.Ct. 866

(1989)... sadn iddindailoséiradih-ghockinadamoasneiaasaadasiaanaii 10, 14

Northwest Central Pipeline Corp. v. State Corp.

Comm'n, 109 S.Ct. 1262 (1989) apo 15

Northwestern Elec. Co. Vv. FPC, 321 U. S. 119

(1944) tat 15

Puerto Rico Maritime Shipping Auth. v. Valley

Freight Sus., 856 F.2d 546 (3d Cir. 1988) ........ 8,11

Schneidewind Vv. ANR Pipeline Co., 108 S.Ct. 1145

I nc <socne-cosenconcsenesanowsanicaeinensdecs ie uataecnaundseslaeedammmnnes 15

Udall v. Tallman, 380 U. Beh Ge kexcianvesincoosecteiana 16

Western Tn ‘Tel araph Co. Vv. FCC, 815 F.2d

BOSS GEG. CHES EED comune 16

TABLE OF AUTHORITIES—Continued

Page

Wyckoff Co. v. EPA, 796 F.2d 1197 (9th Cir.

STII ss cc cbsinidsuibsconiadinicehiges od spdngupuiataniaienmubaiaccnaeaeitane niet 8,11

Statutes and Regulations

Federal Power Act of 1935, Pub. L. No. 74-333, 49

Stat. 838 (codified as amended at 16 U.S.C. § 791

OF CO ciernensdtrentGiniicninnnnicnnenteedacmaddl passim

Section 205, 16 U.S.C. § 824d. re

Section 206, 16 U.S.C. § 824e. 3,19

Section 313, 16 U.S.C. § 825/(b) 18

Section 318, 16 U.S.C. § 825q 2.00. passim

Flood Control Act of 1944, Pub. L. No. 78-534, 58

Stat. 887 (codified as amended in scattered sec-

tions of 33 U.S.C. and 43 U.S.C.) 200 .. 11

Interstate Commerce Act, Pub. L. No. 95-473, 92

Stat. 1337 (codified as amended at 49 U.S.C.

$ 10101 et seq.)

i te ME ea cnc sovnsetoeiccs vctcceeenachencoseacecaaes 11

Maritime Labor Agreements Act of 1980, Pub. L.

No. 96-325, 94 Stat. 1021 (codified as amended

in scattered sections of 46 U.S.C.)

Section 5, 46 U.S.C. § 84le 000. 10

Public Utility Holding Company Act of 1935, Pub.

L. No. 74-333, 49 Stat. 803 (codified as amended

Oe TB Wis Oe GD voricsciciseeecccceccccccscsccmmcees ss passim

Section 1, 15 U.S.C. § T9a(b) (2) 3,18

Section 13(b), 15 U.S.C. $ 79m(b) 3, 4

Resource Conservation and Recovery Act of 1976,

Pub. L. No. 94-580, 90 Stac. 2795 (codified as

amended at 42 U.S.C. § 6901 et seq.)

Section 3006, 42 U.S.C. § 6926 0... 11

28 U.S.C. § 1254(1) ............... piisielideuibaiiaiatenaagtbiinieint 2

18 C.F.R. § 35.14 (a) (7)

Legislative Materials

H.R. Rep. No. 1903, 74th Cong., Ist Sess. 75

TABLE OF AUTFORITIES—Continued

Page

Administrative Materials

American Elec. Power Co., 46 S.E.C. 1299 (1978) .. 19

Arkansas Power & Light Co., 45 S.E.C. 567

(1974)...... A a ea NO a 19

Louisiana Power & Light Co., 26 S.E.C. Docket

CT nn ar aie lolamepsacsenie 19

McDowell County Consumers Council \ Vv. American

Elec. Power Co., 15 F.E.R.C. £ 61,257 (1981)... 16

McDowell County Consumers Council V. American

Elec. Power Co., 54 F.P.C. 361 (1975) ................ 16

New England Elec. Sys., 24 S.E.C. Docket 229

I ho dae alata a en eaainemisipaeegnanenlnniiniatns 19

Public Serv. Co. of New Mevrico, 17 F.E.R.C.

of New Mexico v. FERC, 832 F.2d 1201 (10th

I SIE cise: ccdpetiipnseadesisiiiaicvencenekcniadanceoneeceinesinennaenss 3

Vermont Yankee Nuclear Power Corp., 43 S.E.C.

BESET EEN SC OPN NU enero TO ern o ee 19

Other Authorities

Electrical World, Directory of Electric Utilities

I i ical Socehainmnalionses 17

Energy Information Administration, Annual Out-

look for United States Electric Power 1989... 17

Federal Energy Regulatory Commission, FERC

Form 1, Annual Reports of Major Electric Utili-

ties, Licensees and Others (1988) ......................... 17

Ohio Power Co., Revised Compliance Filing,

Docket No. ER82-553-004 (FERC April 24,

TID wkicoicconsonisccesteessinstidasiniannsindiosanibeinnnibpmemmiisaseress 3

Securities and Exchange Commission, Financial

and Corporate Report on Holding Companies

Registered Under the Public Utility Holding

Company Act of 1935 (Dec. 31, 1988) ................. 17, 18

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

No. ——

ARCADIA, OHIO, ef al.,

. Petitioners,

OHIO POWER COMPANY, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petitioners hereby petition for a writ of certiorari to

review the judgment of the United States Court of Ap-

peals for the District of Columbia Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, la-

28a) is reported at 880 F.2d 1400 (D.C. Cir. 1989). The

decision of the Federal Energy Regulatory Commission

(FERC) (App., infra, 31a-67a) is reported at 39

F.E.R.C. £61,098 (1987). The decision of the FERC

denying rehearing (App., infra, 68a-73a) is reported

43 F.E.R.C. 7 61,046 (1988). ,

JURISDICTION

The court of appeals rendered its judgment on July

28, 1989. Rehearing was denied on October 12, 1989.

App., infra, 29a-30a. On January 2, 1990, the Chief

Justice extended the time for filing a petition for a writ

of certiorari to and including February 9, 1990. This

Court has jurisdiction under 28 U.S.C. $ 1254/1).

AUTHORITIES INVOLVED

Section 318 of the Federal Power Act of 1955 provides

in relevant part:

Conflict of Jurisdiction. If, with respect to the

issue, sale, or guaranty of a security, . .. or the

acquisition or disposition of any security, capital as-

sets, facilities, or any other subject matter, any

person is subject both to a requirement of the Pub-

lie Utility Holding Company Act of 1935... . and

to a requirement of this chapter . . ., the requirement

of the Fublie Utility Hoiding Company Act of 1935

shall apply to such person, and such person shall not

be subject to the requirement of this chapter...

with respect to the same subject matter, unless the

Securities and Exchange Commission has exempted

such person from such requirement of the = ublic

Utility Holding Company Act of 1935, in which case

the requirements of this chapter shall apply to such

person.

16 U.S.C. § 825q.

STATEMENT

1. Petitioners are fifteen sma}! Ohio villages and cities

that purchase wholesale electric power from respondent

Ohio Power Company for resale to their residents.'| Ohio

Power is an operating public utility subsidiary of the

American Electric Power Company (AFP), which also

owns seven other electric utilities operating as an inter-

connected system in a seven-state area.

1 Petitioners include the Villages of Arcadia, Bloomdale, Carey,

Cygnet, Deshler, Greenwich, Ohio City, Plymouth, Republic, Shiloh,

Sycamore, and Wharton, and the Cities of Bryan, St. Clairsville,

and Wapakoneta. Petitioners have populations ranging from ap-

proximately 300 to 8500.

Ohio Power purchases coal for generating electricit

tos wr? — subsidiary, the Southern Ohio Coal

y is '. Coal costs are the dominant com-

em a the total cost of producing electricity from

ueled generators; in this case, for example, coal

costs make up nearly half of Ohio Power's revenues frot

sales to petitioners. See Ohio Power Co., Revised Com.

gp _— mie No. ER82-553-004 (FERC April

<2, 1950!, pecause AEP is a register ublic utility

holding company, contractual vi ae snd a

filiated companies are subject to reculation by the S “a

rities and Exchange Commission (SEC) under the P lie

Utility Holding Company Act of 1935 (PUHCA).. 15

U.S.C. § 79a(b) (2). The contract by which Ohio Pow P

purchases coal from SOCCO is subject to certain r a

ments imposed by the SEC under Section 13(b) of

PUHCA (15 U.S.C. § 79mibis, but that contract was

never specifically approved by the SEC. ~

: 4 ne 1982, the Federal Energy Regulatory Commis-

et ! deo es a rate proceeding pursuant to

lons V9 and 205 of the Federal Power Act of 1935

: a . ton - $$ 824d & 824e., Acting aie te

i protect ratepayers from excessive charges

FERC refused to allow Ohio Power < set eee :

its customers any portion of its coal costs that ‘id :

satisfy the “comparable market test” established rs

rERC's Opinion No. 133 (Public Serv. Co, a ae

ee q Gl,ize (1981), afd sub nom. Public

serv. Co, of New Mevico v. FERC. 839 F.2d 1201

(10th Cir. 1987)). Under that test, utilities ‘pur he

ing coal from affiliates may “recover no ens in

their ratepayers than the price that would have bee gig

curred if a comparable cox] supply contract hz “ “

made with a non-affiliated supplier.” 17 F E RC. at

61,246. The FERC adopted the comparable narieet t :

for two reasons: First, in FERC'’s judgment page

price limitation on fuel expense recovery from affiliated

suppliers provides the best incentive for utilities te rs

velop the least costly sources of fuel. ee. - i . _

Second, that limitation protects consumers pepe

of “self-dealing” and “rate a

in transactions between affiliates.” Jd.

In this case, FERC found that, in agenscton 2 bre

from its subsidiary, Ohio Power had paid a ws i ad

50 percent more than the market price in “rit oe

mately 94 percent mere than the market p oer diagge

and approximately 24 to 33 percent ae opens

period from 1982 to 1986. App.. infra, 5da n. ” oo

iy. FERC ordered Ohio Power to establish rates ¢

ea a rom its customers no more than the

arable market price of coal. App., ingen, Gase®

FERC also ordered Ohio Power to gue ty sel

charges of approximately $10 million to Its :

customers, which Ohio Power has done.

During the grap sesh eae on

contended that the Commiss P isdicti¢ ,

oa charges Ohio Power passes weasel od “a

Ohio Power based that ne cee ~ =

FPA, which provides that “lilt, \ es ie -

biect matter, any person 1s subject both toa

+ ed (PUM A| yore to a requirement a | or

FPA _, such person shall not be subject oh . =

quirement of this chapter... with —, ed : jis

subject matter.” 16 U.S.C. § 825q. Ohio eric

that it was required by Section 13(b) of pacooaaes —

the relevant SEC regulations to co he Phe je

“costs” of producing coal from soce _ menage a

ing salaries and a return on ——— ' — aoe

costs were considerably above compara te : A age

Ohio Power further — cpecooneo nage eo oe

, “subject matter” of coa acts ous

so jurisdiction to regulate the rig. ngcong Age Bei _

charges that Ohio Power could pass on to its

i ver’s interpretation of Sec-

C rejected Ohio Powers interp'© me <

Pie FERC observed that the SEC’s Ju isdiction un

lated to recover f

der PUHCA does not extend to setting rates, as the SEC

itself has repeatedly acknowledged. App., infra, 34a-40a.

Accordingly, FERC held that for purposes of Section 318

the relevant “subject matter’ of SEC regulation under

PUHCA was the transfer price of coal between SOCCO

and Ohio Power, not the “fuel costs Ohio Power may col-

lect from its wholesale customers.” App., infra, 37a.

According to FERC, “setting the intra-corporate price

and setting rates are not the same subject matter which

would bring section 318 into play.” Jd. FERC concluded

that there was therefore ‘‘no conflict in the regulation

by the SEC and the regulation by this Commission” and,

hence, that Section 318 did not oust FERC of jurisdic-

tion. App., infra, 37a-38a.*

3. A divided court of appeals reversed. The court did

not dispute FERC’s conclusion that its comparable mar-

ket test is necessary to protect consumers against the

risks of self-dealing and rate manipulation arising from

transactions between a public utility and its affiliates.

Nor did the court dispute FERC’s finding that, dur-

ing each year from 1981 to 1986, Ohio Power had paid

its coal subsidiary between 24 percent and 94 percent

more than market prices, and that Ohio Power had passed

those inflated costs on to its customers. Nor did the court

dispute FERC’s determination that the SEC does not,

in fact, regulate the fuel charges that are passed on

to customers of a public utility subject to PUHCA, and

that there is therefore no actual conflict between the

SEC’s exercise of its jurisdiction under PUHCA and

FEMC’s exercise of jurisdiction under the FPA. Instead,

the panel majority agreed with Ohio Power that Section

318 completely ousts FERC of jurisdiction to regulate

the fuel charges that a utility may pass along to con-

“FERC also disputed Ohio Power's claim that the SEC requires

Ohio Power to purchase coal from its subsidiary at cost, as opposed

to permitting Ohio Power to purchase coal at a price no greater

than cost. App., infra, 36a.

sumers in its rates if the SEC has any jurisdiction over

the contracts by which coal is sold to the utility.

In reaching that conclusion, the majority held, as an

initial matter, that FERC is not entitled to any defer-

ence in its interpretation of Section 318 of the F ederal

Power Act. The majority acknowledged that Chevron

USA Ine. v. NRDC, 467 U.S. 837 (1984), and other

decisions of this Court require a reviewing court to defer

to “‘an agency's construction of the statute which be

administers.’ ” App., fra, 8a (quoting Chevron, supra,

467 U.S. at 842). However, the majority held that Sec-

‘jon 318 cannot be said to be entrusted to FERC s ad-

ministration” because that provision “involves FERC

“only to the extent of FERC’s interface with regulation

of the regulated entities by the SEC under PUHCA. on

Therefore, according to the majority, the usual rule re-

quiring deference to an agency's statutory interpretation

does not apnly in this area of jurisdictional ambiguity.

Interpreting the statute de novo, the court agreed with

Ohio Power’s interpretation of the phrase “subject matter

in Section 318. Noting that the SEC has jurisdiction

over “the price term of sales contracts between associated

companies,” the majority argued that “FERC has in etf-

fe-t set by order a different price verm for such a con-

tract by determining that it will not allow the contract

price as 2 cost in |Ohio Power's] rate case.” App., infra,

94. Thus, the majority found that “the same subject

matter is implicated” by the regulations of the SEC and

the FERC. App., infra, 9a-10a. The majority concluded

that Section 318 gives the SEC exclusive jurisdiction over

the costs incurred by Ohio Power under contracts with

its subsidiaries, even though those costs are passed

through to wholesale customers In rates that otherwise

would be subject to the exclusive authority of FERC.

App., infra, 9a-10a, 17a. The court relied for this con-

clusion upon an analogy to this Court's preemption of

the field” decision in Nantahala Power & Light Co. V.

Thornburg, 476 U.S. 953, 970-71 (1986), which held that

‘

FERC’s determinations of any issues underlying FERC-

set wholesale rates preempt state determir. tions con-

cerning similar issues in determining retail .ates. Be-

cause the SEC, in the majority’s view, has exclusive ju-

risdiction over all costs arising from a contract between

a PUHCA-regulated utility and its affiliate, the court

held that FERC is ousted of jurisdiction even if there

is no actual conflict between SEC regulation and FERC

regulation. App., infra, 14a-1lé6a.

Judge Mikva dissented from this part of the majority’s

opinion. He argued that Section 318 does not grant the

SEC exelusive jurisdiction over all costs arising from a

PUHCA-regulated contract. Instead, it grants the SEC

paramount authority in the event there is an actual reg-

ulatory “conflict” between a SEC requirement and an

action taken by FERC. App., infra, 19a-20a. In this

case, Judge Mikva argued, the contract costs were ap-

proved as ceilings by the SEC, but FERC’s decision to

allow only a part of those costs to be passed on to con-

sumers merely had the effect of lowering those costs be-

low the specified ceilings. App., infra, 21a-23a. Thus.

Ohio Power could comply with both requirements and

simultaneously promote the purposes of both statutes.

Therefore, Judge Mikva concluded, there was no conflict

in the requirements imposed upon Ohio Power that would

warrant ousting FERC’s jurisdiction under Section 318.

App., infra, 23a."

*’ Judge Mikva ultimately concurred in the decision to set aside

FERC’s order on the ground that, in his view, Rule 35.14(a)(7) of

FERC’s own rules precludes FERC from disallowing any costs

approved by the SEC. Rule 35.14(a)(7) provides that such costs

“shall be deemed to be reasonable” for ratemaking purposes, 18

C.F.R. § 35.14(a)(7). In its own decision in this ease. the FERC

nad held that this language merely “creates a presumption of rea-

sonableness, not a conclusive finding of reasonableness.” App., infra,

4la (emphasis added). Judge Mikva, however, disagreed with

FERC’s interpretation of its reculation, and held that the reen-

lation’s language creates a conclusive presumption. App.. infra, 24a.

The majority did not reach, or even comment upon, this issue.

os)

The court of appeals denied rehearing on October =

1989. App., infra, 29a. Judge Mikva issued a pocorn

urging rehearing because “the panel opinion wing sd

regulatory gap that can be mischievous in sign cas 4

in “this important and delicate area of inte — : é

ministration of the law.” App., infra, 30a. As Ju -

Mikva explained, “The statutory interpretation —

in by the majority . . . generates a no-man's lan where

neither the [SEC] nor FERC will patrol vagy sl

pany practices which can oppress consume} “ ae - ‘

and the public.” /d. According to Judge Mikva, trocar

gress did not intend and our eourt should not constr

such a result.”” Id.

REASONS FOR GRANTING THE PETITION

This case presents two distinct but ay Ses

questions of federal law that have widespread ig gs

not only for federal electric utility regulation, a s m

for the relationship between federal agencies and regal

ing courts. The first, which is a threshold oe

case of this kind, is whether the deference mg +

articulated in Chevron USA Ine. V. NRDC, 467 ip

937 (1984). and other decisions of this oe

an agency's interpretation of a statute that C = gottl

limits the reach of that agency’s jurisdiction. e —

below held that those principles do not apply _ ve

circumstance, and in so doing placed itself in ge “

decisions of other courts of appeals, nga? ind of

cision of the First Circuit in Kokajko Vv. FERC, “ : “

419, 422-23 (1st Cir. 1989), that of the Third rae

Puerto Rico Maritime Shipping Auth. v. Valley 2 elg ;

Sys., 856 F.2d 546, 550-52 (3d Cir. 1988), + ob

the Ninth Circuit in Wyckoff Co. v. EPA, 796 F.2d 1197,

1199-1201 (9th Cir. 1986).

The second issue is whether Section 318 of the FPA

ousts FERC of jurisdiction over a wholesale electric

rate matter even though no actual conflict exists between

a requirement imposed by that agency pursuant to the

FPA and any requirement imposed by the SEC pursu-

ant to PUHCA. The majority held that it does, and in

so doing placed itself in conflict with the Fourth Circuit’s

decision in Appalachian Power Co. v. FPC, 328 F.2d 237

(4th Cir.), cert. denied, 379 U.S. 829 (1964).

The majority’s interpretation of Section 318 also creates

a substantial “regulatory gap” (to borrow Judge Mikva’s

phrase) that will permit—indeed encourage—electrie

utilities to gouge their customers by manipulating the

prices utilities pay for goods and services provided by

affiliates. As a result, the decision below will have a

dramatic impact on electric rates paid by nearly 50 mil-

lion consumers located in most parts of the country.

1. This Court has repeatedly held that, unless Con-

gress has directly spoken to the precise question at issue,

a reviewing court must defer to any reasonable construc-

tion of a statute by the agency charged with its admin-

istration. See, e.g., Chevron USA Ine. v. NRDC, 467

U.S. 837, 842-44 (1984): K Mart Corp. Vv. Cartier, Inc.,

108 S.Ct. 1811 (1988). As noted above (supra p. 6),

the majority declined to give any deference to FERC’s

interpretation of Section 318 of the Federal Power Act,

holding that ‘Section 318 cannot be said to be entrusted

to FERC’s administration” because that provision deals

only with “the extent of FERC’s interface with regula-

tion of the regulated entities by the SEC under PUHCA.”

App., infra, 8a.

FERC, as the successor to the Federal Power Com-

mission, is the only agency responsible for administering

the Federal Power Act as a whole, and Section 318 is

part of the FPA. See Pub. L. No. 74-333, 49 Stat. 838,

839, 863 (codified as amended at 16 U.S.C. § 791 eft

seq.!.'. Accordingly, the court of appeals’ holding neces-

* The majority’s statement that “Section 318 {of the FPA} can-

not be said to be entrusted to FERC’s administration” (App., infra,

sarily rests upon that court’s view that Section 318 itself

concerns only “the extent of FERC’s interface with’ —

i.c., jurisdiction over—entities that are also regulated by

the SEC under PUHCA. In short, the court below held

that FERC’s interpretation of Section 318 is not entitled

+o any deference because that provision concerns the ex-

tent of FERC’s jurisdiction rather than the nature of

FERC’s regulatory responsibilities.

a. The amount of deference, if any, owed by a re-

viewing court to an agency's interpretation of a jurisdic-

tional provision in its organic statute is an issue on which

the courts of appeals disagree. The decision below fol-

lows the law laid down in other decisions of the D.C.

Cireuit. In New York Shipping Ass'n v. FMC, 854 F.2d

1228 (D.C. Cir. 1988). ccrt. denied, 109 S.Ct. 866 (1989),

for example, the court refused to defer to the Federal

Maritime Commission's interpretation of Section 5 of the

Maritime Labor Agreements Act of 1980 (46 U.S.C.

drawn in prior D.C. Cireuit decisions between statutes

8a) cannot be interpreted to mean that Section 518 is not part

of FERC’s organic statute, as was che case in the decision cited

by the majority. See Department of Treasury V. FLRA, 837

F.2d 1163, 1167 (D.C. Cir. 1988) (declining to give deference to

FLRA’s interpretation of statutes and regulations administered by

Office of Personnel Management). Indeed, the majority opinion

repeatedly and correctly recognized that Section 318 is part of the

Federal Power Act. See, e.g., App., infra, 2a, ta-5a, (The Federal

Power Act, in turn, was originally enacted as Title II of the Public

Utilities Act of 1925, of which the Public Utility. Holding Company

Act was Title I. See 49 Stat. 803, 838.) In stating that the FERC

does not “administer” Section 318, the majority plainly meant that.

unlike nonjurisdictional provisions of the Act, Section 318 contains

no substantive regulatory standards which FERC applies. See,

e.g.. ACLU vy. FCC, 823 F.2d 1554, $567 1.32 (D.C, Cir. 1987),

cert. denied, 485 U.S. 959 (1988) (drawing distinction, for Chevron

purposes, between jurisdictional provisions and “provisions pertain-

. oa * Lad

ing to the mechanics or inner workings of the regulatory process’ ).

dealing with the substance of an agency’s regulatory re-

sponsibilities and those dealing with the agency’s juris-

diction ‘id. at 1363 n.9), the court held that “it would

. .. be inappropriate for us to defer to the agency where,

as here, it is interpreting not the meaning of a statute

that Congress has charged it to administer, but rather

a statute merely delimiting its jurisdiction as against

that” of other regulatory agencies (id. at 1363 (alterna-

tive holding) ). At least one other court of appeals—the

fighth Circuit---has joined the D.C. Circuit in squarely

holding that an agency is “not entitied to judicial defer-

ence” when it construes a provision dealing with the

“scope of [its] statutory authority.” Missouri v. An-

drews, 787 F.2d 270, 286-87 (Sth Cir. 1986), aff'd on

other grounds sub nom. ETSI Pipeline Project v. Mis-

souri, 108 S.Ct. 805 (1988) ‘refusing to defer to inter-

pretation by Secretary of Interior of Section 9ic) of

Flood Control Act).

On the other hand, the First, Third, and Ninth Cir-

enits have held that Chevron-style deference is required

in reviewing an agency’s interpretation of its author-

ity under its organic statute. In Puerto Rico Mari-

time Shipping Auth. v. Valley Freight Sys., 856 F.2d

546 13d Cir. 1988), for example. the Third Circuit up-

held as reasonable an interpretation by the ICC of the

statutory provision giving the ICC jurisdiction over motor

carriers (49 U.S.C. § 10521), even though it noted that,

“!wlere the question being considered as an original

matter, one might reasonably prefer” the opposing party’s

interpretation. 856 F.2d at 551-52. Citing Chevron, the

court held that the “rule of deference is fully applicable

to an agency's interpretation of its own jurisdiction.”

Id. at 552. The Ninth Circuit reached the same conclu-

sion in deferring to the EPA’s interpretation of Section

3006 of the Resource Conservation and Recovery Act of

1976 (42 U.S.C. $ 6926), which concerns the allocation

of responsibility between federal and state authorities in

administering that Act. Wyckoff Co. v. EPA, 796 F.2d

1197, 1200-01 (9th Cir. 1986). Similarly, in Kokajko v.

FERC, 873 F.2d 419, 422-23 ‘1st Cir. 1989), the First

Circuit held that FERC’s interpretation of its jurisdic-

tion under Section 10‘a) of the Federal Power Act over

fees charged by regulated hydroelectric power plants for

access to associated recreational property was entitled to

Chevron-style deference. The decision below, holding that

deference is not warranted because Section 318 concerns

the limit of FERC’s authority, squarely conflicts with

each of these decisions.

Aside from this conflict in the circuits, the question

whether an agency is entitled to deference when inter-

preting a statute defining or delimiting its jurisdiction

is of substantial importance in administrative law. The

significance ~f that question is well illustrated by the

sharply divergent views expressed in the concurring and

dissenting opinions in Mississippi Power & Light Co. V.

Mississippi ex rel. Moore, 108 S.Ct. 2428 (1988). See

id. at 2443-44 (Sealia, J.. concurring in the judgment} ;

id. at 2446-47 (Brennan, J., dissenting). As the con-

curring opinion correctly observed, a large percentage of

disputes over the proper construction of administrative

statutes are, at bottom, disputes over the agency’s juris-

diction or authority. See id. at 2444 ‘Sealia, J.. coneur-

ring in the judgment).

b. The majority’s refusal to defer to FERC was

critical to the decision in this case because the majority

plainly could not have reached the result it did if it had

accorded any deference at all to FERC’s interpreta-

tion of Section 518. As previously discussed (supra p.

4), whether FERC has any jurisdiction under Section

318 over fuel charges arising from coal contracts with an

affiliated coal subsidiary depends upon whether FERC is

attempting to regulate the same “subject matter” regulated

by the SEC. But merely reading the phrase “subject

matter” cannot resolve that question: Oniy if the phrase

is interpreted broadly, as Ohio Power proposed, are “coal

costs” the relevant subject matter in this case. ‘Subject

matter,’ however, also lends itself to a narrower inter-

pretation, under which the coal price charged to Ohio

Power by its affiliate is one “subject matter,’ andthe

coal-related fuel charges passed through to Ohio Power's

customers are a separate “subject matter.” See supra

p. 5.

Recognizing the inherent ambiguity in the statutory

phrase, FERC reasonably could consider the title of Sec-

tion 318, i.e., “Conflict of Jurisdiction,” as well as other

indications of congressional purpose, all of which show

that Congress intended to limit the reach of Section 318

to irreconcilable conflicts between a requirement imposed

under PUHCA and a requirement imposed by FERC un-

der the FPA. See 16 U.S.C. $ 825q: 49 Stat. 803, 863;

see also H.R. Rep. No. 1903, 74th Cong., Ist Sess. 75

(1935) ‘Section 318 covers “any conflict arising under

this bill”). On that basis, FERC determined that the

statute should be construed to produce overlapping “‘sub-

ject matters” only when the regulatory requirements of

the SEC and FERC are in actual conflict. It there-

fore adopted a narrower interpretation of “subject mat-

ter” than that advanced in Ohio Power. See supra p. 5.

FERC also recognized that, because “|t]he SEC’s juris-

diction . . . does not extend to setting rates and deter-

mining what fuel costs” an electric utility may collect

from its customers (| App., infra, 37a!, Ohio Power's broad

interpretation would produce a regulatory gap not con-

templated by Congress. Accordingly, FERC interpreted

the statute to prevent an outcome that Congress almost

certainly would condemn.

On its face, FERC’s interpretation is the only sensible

reading of Section 318. At a minimum, FERC’s inter-

pretation is a reasonable construction of the statutory

language and, for that reason, plainly would have been

upheld if the court below had granted FERC any defer-

ence.

This case thus provides an appropriate and compelling

vehicle through which to resolve the question whether a

reviewing court must defer to an agency’s reasonable con-

struction of a portion of the agency’s organic statute de-

fining or delimiting the agency’s jurisdiction.” To be sure,

the jurisdiction problem in this case concerns not only the

scope of FERC’s authority, but also the SEC’s authority.

But any consideration of this case on the merits would

have to begin with the threshold issue of whether a re-

viewing court owes deference to an agency’s interpreta-

tion of any jurisdictional statute. Thus, that issue is

squarely posed here." Accordingly, the Court should grant

certiorari to resolve the circuit conflict over this impor-

tant question of administrative law.

2. The majority’s interpretation of Section 318 also

warrants this Court’s attention, quite aside from the

court of appeals’ refusal to accord any deference to

FERC’s interpretation. As noted earlier (supra p. 6),

the majority held that, because Ohio Power’s coal costs

were subject to regulation by the SEC, FERC was ousted

from jurisdiction, even though the SEC was merely reg-

ulating the price Ohio Power paid to its affiliate, and

even though there is no actual conflict between the two

>The court of appeals’ observation (App., infra, 8a) that FERC

did not claim any deference for its interpretation in that court

is irrelevant. FERC did not disavow deference. Moreover, the

issue is clearly appropriate for resolution now because the court of

appeals addressed and squarely decided the issue.

* Indeed, both the Eighth Circuit’s decision in Misseur?t v. An-

drews, supra, and the D.C. Circuit’s decision in New York Shipping

Ass'n, supra, also involved statutes that allocated jurisdiction be-

tween two agencies. See 787 F.2d at 281-86 (statute allocating

authority between Army and Interior departments): 854 F.2d at

1363 (statute allocating jurisdiction between NLRB and FMC).

But, like the majority’s decision below, those decisions determined

that no deference was appropriate based upon the broad principle

that an avency’s interpretation of its own jurisdiction is not entitled

to Chevron-style deference. See supra pp. 10-11.

agencies’ requirements. See supra p. 5. In essence, then,

the court of appeals applied a “preemption of the field”-

type analysis rather than a “conflict preemption”-type

analysis in determining how regulatory authority should

be allocated between two federal agencies. Compare, e.g.,

Nantahala, supra, 476 U.S. at 962-67 (field preemption

analysis under “filed rate” doctrine) and Schneidewind

Vv. ANR Pipeline Co., 108 S.Ct. 1145, 1151-56 (1988)

‘field preemption analysis), with Northwest Central Pipe-

line Corp. v. State Corp. Comm’n, 109 S.Ct. 1262, 1267-

78 (1989) ‘conflict preemption analysis).

This interpretation of Section 318 conflicts with the

decision of the Fourth Circuit in Appalachian Power Co.

Vv. FPC, 328 F.2d 237, 249-52 (4th Cir.), cert. denied,

379 U.S. 829 (1964), which involved one of Ohio Power’s

sister companies in the AEP system. Relying upon this

Court’s decision in Northwestern Elec. Co. v. FPC, 321

U.S. 119, 125 (1944), the Fourth Cirenit held that “[u]n-

der section 318 of the Federal Power Act actual conflicts

between the FPC and the SEC are resolved in favor of

the SEC.” 328 F.2d at 250 ‘emphasis added). Applying

this interpretation of Section 318, the court upheld cer-

tain accounting regulations issued by FERC’s pred-

ecessor on the ground that those regulations did not con-

flic. with accounting regulations issued by the SEC under

PUHCA, even though both sets of regulations covered

the same general subject area. Jd. at 250-52.

In addition to its inconsistency with Appalachian

Power, the majority's “preemption of the field” approach

is incorrect for at least three reasons. First, as discussed

above (supra p. 13), that approach is at odds with the

language and structure of Section 318 itself. Second, the

rationale underlying the “preemption of the field’ ap-

* The majority's reliance upon this Court’s decision in Nantahala,

supra, for this holding is particularly ironic, inasmuch as the

underlying principle of that decision is deference to FERC in rate-

making matters. See 476 U.S. at 962-67.

proach is inapplicable here. Acts of Congress dealing

with interstate commerce can remain “supreme and ex-

clusive” if state laws are preempted not only when they

actually conflict with federal law, but also when they

may “interfere with federal authority over the same ac-

tivity.” Nantahala Power & Light Co. v. Thornburg,

supra, 476 U.S. at 964 (quoting Chicago & North West-

ern Transp. Co. V. Kalo Brick & Tile Co., 450 U.S. 211,

318-19 (1981)). That rationale does not apply to poten-

tial overlaps in the jurisdictions of two or more federal

agencies, because federal] authority remains supreme re-

gardless of which agency actually regulates the particu-

lar matter at issue. Third, as Judge Mikva recognized,

the majority’s approach creates an obvious “gap” in the

federal regulatory system whenever the agency retaining

jurisdiction has in fact failed to occupy the entire field.

See App., infra, 30a.*

8 Judge Mikva’s decision to concur in the result on the basis of

Section 35.14(a)(7) of FERC’s own rules does not undermine

the importance of the majority’s interpretation of Section 316.

Although he recognized the principle that a reviewing court should

defer to an agency’s interpretation of its own rules (see App., infra,

24a), Judge Mikva failed to heed that principle in concluding,

contrary to FERC’s long-standing interpretation, that the word

“deemed” in Section 35.14(a)(7) necessarily establishes a conclu-

sive presumption that any charges approved by the SEC are rea-

sonable. See supra n.3; cf. McDowell County Consumers Council

v. American Elec. Power Co., 54 F.P.C. 361 (1975) ($35.14 does

not establish conclusive presumption); 15 F.E.R.C. £ 61,257 at

61,592-93 (1981) (same). The word “deemed” is frequently used to

connote merely a rebuttable presumption. E.g., Lavine v. Milne,

424 U.S. 577, 583 (1976); Gaither v. Myers, 404 F.2d 216, 218 (D.C.

Cir. 1968); Hardy v. Lomenzo, 349 F. Supp. 617, 621 (S.D.N.Y.

1972). FERC’s interpretation, therefore, is not at odds with the

plain meaning of its own regulation, and is therefore entitled to

deference under well-settled principles. See, ¢.g., Jewett Vv. Comm’r,

455 U.S. 305, 318 (1982) ; Udall v. Tallman, 380 U.S. 1, i6-17 (1965) ;

Western Union Telegraph Co. v. FCC, 815 F.2d 1495, 1503 (D.C.

Cir. 1987).

But, even if Judge Mikva were correct, his approach would have

left FERC free to regulate the ratemaking consequences of

The decision below also warrants this Court’s atten-

tion because it creates a substantial risk that future de-

cisions of the D.C. Circuit and of other federal courts

will apply the majority’s erroneous “preemption of the

field” approach in cases involving the allocation of juris-

diction between federal agencies, thereby creating gaps

in other federal regulatory schemes. Review by this

Court is necessary to prevent that result, and to resolve

the conflict between the decision below and the Fourth

Cireuit’s decision in Appalachian Power.

3. Aside from the doctrinal importance of the issues de-

cided by the majority, the decision below will have a dra-

matic impact on electric utility rates paid by the direct

and indirect customers of every electric utility company

subject to PUHCA. Those companies serve, directly or in-

directly, approximately 49 million households and _ busi-

nesses in 30 states and the District of Columbia. See

Federal Energy Regulatory Commission, FERC Form 1,

Annual Reports of Major Electric Utilities, Licensees and

Others (1988); Electrical World, Directory of Electric

Utilities (98th ed. 1980). Those companies account for

approximately 16 percent of revenues generated by all

electric utilities. See Securities and Exchange Commis-

sion, Financial and Corporate Report on Holding Com-

panies Registered Under the Public Utility Holding Com-

pany Act of 1935 (Dec. 31, 1988) (“SEC Report” )

(PUHCA-regulated utilities account for 20.2 percent of

all revenues by invester-owned utilities); Energy Infor-

mation Administration, Annual Outlook For United

States Electric Power 1989 at 37 (‘investor-owned utili-

ties account for approximately 80 percent of total elec-

transactions between electric utilities and their affiliates prospec-

tively. FERC could simply rescind or modify its regulation, and

would then be free under Section 318 to exercise regulatory over-

sight over efforts by PUHCA-regulated electric utilities to pass

unreasonable costs on to their customers. Under the majority’s

approach, by contrast, FERC is helpless to protect ratepayers.

tricity generation'. Together, electric utilities subject to

PUHCA have assets in excess of $80 billion, and annual

revenues (as of 1988) in excess of $27 bi'lion.— SEC

Report at 2. In addition to numerous coal subsidiaries,

these companies also have nuclear fuel subsidiaries, fuel

oil subsidiaries, real estate subsidiaries, communications

subsidiaries, leasing subsidiaries, credit subsidiaries, legal

and ®ccounting subsidiaries, engineering subsidiaries,

construc.ion subsidiaries, electric generation subsidiaries

and assorted other subsidiary service companies. See id.

at 12-65.

The decision below held that the mere existence of SEC

jurisdiction over a particular transaction between an elec-

trie utility subject to PUHCA and any affiliated company

completely insulates all aspects of that transaction from

future ratemaking review by FERC, no matter What ef-

fect the transaction has on the electric rates subject to

review by FERC. Inasmuch as any challenge to a FERC

rate order ean be brought in the D.C. Cireuit (see FPA

£313(b), 16 U.S.C. § 825/(bi), the court of appeals’

decision will effectively eliminate FERC jurisdiction over

the rate consequences of all such transactions. The de-

cision below thus makes it impossible for FERC to

protect nearly 50 million ratepayers against potential

self-dealing, unnecessary “gold plating’ of plant and

equipment, and rate manipulation arising from transac-

tions between electric utilities and their affiliates. The

decision below, moreover, creates a stronc incentive for

electric utilities to adopt the holding company form, and

for new and existing holding companies to create new

subsidiaries to provide every conceivable good and serv-

ice needed for the generation, transmission and distribu-

tion of electricity. The decision, thererore, could lead to

a major restructuring of the entire industry, contrary

to Congress’s goal, articulated in PUHCA itself, of dis-

couraging public utility holding companies and the abuses

that attend them. See 15 U.S.C. $ 79a(b! (2).

19 .

The SEC, moreover, lacks both the statutory authority

and administrative apparatus necessary to protect rate-

payers against these harmful consequences. The SEC,

unlike FERC, has no statutory or administrative pro-

cedures by which a customer can initiate a complaint.

Cf. FPA $ 206; 16 U.S.C. § 824e. And the SEC, unlike

FERC, has no clear statutory authority to order re-

funds for overcharges if a utility is found to have

violated the SEC’s regulatory requirements. Cf. FPA

$ 205(e!, 16 U.S.C. $ 824d. Indeed, the SEC has re-

peatedly recognized that it has “no power over the| |

dealings {of electric utilities regulated under PUHCA|

with their customers, retail or wholesale.” American

Elec. Power Co., 46 S.E.C. 1299, 1323 (1978); aecord

Louisiana Power & Light Co., 26 S.E.C. Docket 1257,

1263 (1982); New England Elec. Sys., 24 S.E.C. Docket

229, 235 (1981); Arkansas Power & Light Co., 45 S.E.C.

567, 574 (1974): Vermont Yankee Nuclear Power Corp.,

43 S.E.C. 693, 699 (1968). The decision below, there-

fore, creates a serious gap in the regulation of electric

utilities subject to PUHCA, a gap that could not be filled

by the SEC even if it wanted to.

This case well illustrates the effects of this regulatory

gap on consumers. As previously noted (supra p. 4},

FERC found that the prices Ohio Power paid its sub-

sidiary for coal exceeded market prices by 24 percent to

94 percent from 1981 to 1986, and it required Ohio Power

to make corresponding reductions in its wholesale rates.

Inasmuch as coal costs represent approximately half the

costs of generating electricity from coal-fired generators

(supra p. 3), the rates paid by petitioners (and, there-

fore, their residents! between 1981 and 1986 were 12 to

47 percent higher than they would have been if the coal

cost component of those rates had been limited to market

prices. Thus, the decision below not omy will require

petitioners (and their residents) to repay to Ohio Power

the substantial overcharges that FERC ordered refunded

to petitioners, but also, in all likelihood, will lead to sub-

stantial increases in the rates petitioners must now pay

for electricity. All of the nearly 50 million households

and businesses that receive electricity directly or in-

directly from electric utilities subject to PUHCA can

reasonably expect similar increases as a result of the

decision below, increases they would not face if their

electric utilities were not subject to PUHCA.

In short, the panel’s decision creates a ‘“no-man’s

land” in an “important and delicate area of inter-agency

administration of the law.” App., infra, 30a (Mikva, J.).

Far from creating a mere academic curiosity, the deci-

sion below will produce a substantial and inequitable

hardship for millions of electric utility ratepayers in

most parts of the country. Only review by this Court

ean avert the doctrinal and economic mischief created by

the court of appeals’ decision.

CONCLUSION

The petition for certiorari should be granted.

Respectfully submitted,

GREGG D. OTTINGER *

DUNCAN, ALLEN AND TALMAGE

1575 Eye Street, N.W.

Suite 300

Washington, D.C. 20005

(202) 289-8400

February 9, 1990 * Counsel of Record

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

DISTRICT OF COLUMBIA CIRCUIT

No. 88-1293

. OHIO POWER COMPANY,

: Petitioner,

Vv.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent,

LCP CHEMICALS & PLASTICS, INC., et al.,

MUNICIPAL WHOLESALE ELECTRIC CUSTOMERS OF

OHIO POWER COMPANY,

Intervenors.

Argued Feb. 24, 1989

Decided July 28, 1989

Petition for Review of an Order of the

Federal Energy Regulatory Commission

“orn

Edward Berlin, with whom Andrew L. Lipps, Kenneth

G. Jaffe, Washington, D.C., and Edward J. Brady, were

on the brief, for petitioner.

Joanne Leveque, Attorney, F.E.R.C., with whom Ca-

therine C. Cook, Gen. Counsel, and Joseph 8S. Davies,

Deputy Sol., F.E.R.C., Washington, D.C., were on the

brief, for respondent.

John Estes also entered an appearance for respondent.

Gregg D. Ottinger, Washington, D.C., and T.D. Kauf-

felt, Charleston, W. Va., were on the brief, for inter-

venors, Municipal Wholesale Electric Customer of Ohio

Power Company and Industrial intervenors.

Before MIKVA, SILBERMAN, and SENTELLE, Cir-

cult Judges.

Opinion for the Court filed by Circuit Judge SEN-

TELLE.

Concurring opinion filed by Circuit Judge MIKVA.

SENTELLE, Circuit Judge:

The Federal Energy Regulatory Commission (FERC)

determined in a rate proceeding that Ohio Power Com-

pany’s cost of coal purchased from an associated company

was unreasonably high. The company has petitioned us

to vacate the order on the grounds that it is for the Se-

eurities and Exchange Commission (SEC) to determine

the reasonableness of contracts between associated com-

panies. We grant the petition for the reasons set out

below.

I. BACKGROUND

A. The Statute

The central issue raised by petitioner concerns the ap-

plied meaning of the phrase “subject matter” in section

318 of the Federal Power Act (FPA), 16 U.S.C. § 825q,

an issue to which section 13(b) of the Publie Utility

Holding Company Act of 1935 (PUHCA), 15 U.S.C.

$< 79m(b), is relevant. FPA § 318 and PUHCA § 13 were

enactel in different titles of the Public Utility Act of

1935, ch. 687, 49 Stat. 803 (1935) (codified as amended

principally at 15 U.S.C. $$ 79 to 79z-6 and 16 U.S.C.

$$ 824-825r (1982 & Supp. V. 1987) ), which initiated fed-

eral regulation of public utility holding companies there-

tofore insulated from effective state-level regulation by

their multi-state operations. The broadly remedial pur-

poses of the Public Utility Act included protection of

investors, consumers, and the public from various abusive

holding company practices, including non-arm’s-length

contracts within an associated group. See 15 U.S.C.

$ 79a(bi(2). (The definitions of public utility holding

company, associate company, and similar terms are set

out in section 2 of PUHCA, 15 U.S.C. $ 79b. Those defi-

nitions are applicable to the present case but not in

dispute. |

More particularly for our purposes, PUHCA § 13(b)

makes un'awful contracts between associates of a public

utility holding company,

except in accordance with such terms and conditions

and subject to such limitations and prohibitions as

the |[SEC! ... shall prescribe as necessary or ap-

propriate in the public interest or for the protection

of investors or consumers and to insure that sucl

contracts are performed economically and efficiently

for the benefit of such associate companies at cost,

fairly and equitably allocated among such com-

panies.

15 U.S.C. $ 79mi(b).' The SEC’s Rule 99 prohibits as-

sociated companies from making or performing contracts

' The full text of section 13(b) is as follows:

After April 1, 1936, it shall be unlawful for any subsidiary

company of any re'— ed holding company or for any mutual

service company, b, 2 of the mails or any means of instru-

mentality of interstate commerce, or otherwise, to enter into or

take any step in the performance of any service, sales, or con-

struction contract by which such company «undertakes to per-

form services or construction work for, or sell goods to, any

associate company thereof except in accordance with such terms

and conditions and subject to such limitations and prohibitions

for sale of goods or performance of services “at more

than cost.” 17 C.F.R. § 250.90(a} (2) (1988). Under

the SEC’s Rule 91, a transaction is deemed to meet that

standard when the price “does not exceed a fair and

equitable allocation of expenses . . . plus reasonable

compensation for necessary capital procured through the

issuance of capital stock... .” 17 C.F.R. § 250.91(a).

The sale between associates of seller-produced goods is

not “limited to cost,” 17 C.F.R. § 250.90(d) (2), but such

a seller still may not charge its associate more than a

fair market price. 17 C.F.R. § 250.92(b).

Under the concurrently enacted provisions of the FPA,

FERC regulates the justness and reasonableness of

wholesale rates for electric power in interstate commerce.

15 U.S.C. $$ 824, 824d, 824e.2 FERC’s authority in-

cludes the power to determine that a “contract affect-

\ing!"’ such a rate is “unjust, unreasonable, unduly dis-

eriminatory or preferential” and to prescribe a just and

reasonable contract. 16 U.S.C. $ 824e(a). Section 318

as the [SEC] by rules and regulations or order shall prescribe

as necessary or appropriate in the public interest or for the

protection of investors or consumers and to insure that such

contracts are performed economically and efficiently for the

henefit of such associate companies at cost, fairly and equitably

allocated among such companies. This provision shall not apply

to such transactions as the [SEC] by rules and regulations or

order may conditionally or unconditionally exempt as being

necessary or appropriate in the public interest or for the pro-

tection of investors or consumers, if such transactions (1) are

with any associate company which does not derive, directly or

indirectly, any material part of its income from sources within

the United States and which is not a public utility company

operating within the United States, or (2) involve special or

unusual circumstances or are not in the ordinary course of

business.

15 U.S.C. § 79m(b).

2 This power originally resided in the Federal Power Commission,

of which FERC is the successor agency. 42 U.S.C. §§ 7172(a)(1)(B)

& 7293 (1982).

of the FPA provides that, in the absence of an SEC-

granted exemption, the requirements of PUHCA govern

when a company is subject both to a requirement of the

SEC-administered PUHCA (including rules, regulations,

and orders thereunder) ‘with respect to |an itemized list

not at issue here] or any other subject matter” and of

the FERC-administered FPA (including rules, regula-

tions, and orders thereunder) ‘with respect to the same

subject matter.” 16 U.S.C. § 825q (emphasis added).

B. OPCO, SOCCO, and the SEC

Petitioner Ohio Power Company (OPCO) is an oper-

ating public utility subsidiary of American Electric

Power Company, Inc. (AEP), a public utility holding

company subject to PUHCA. OPCO purchases coal from

its wholly-owned subsidiary Southern Ohio Coal Com-

pany (‘SOCCO) on esentially a cost-pass-through basis.

Because both are associates of a public utility holding

company, it is unquestioned that the coal-sale transac-

tions between OPCO and SOCCO are subject to SEC

jurisdiction under section 13(b).

The SEC has issued four orders that touch on the

price of the OPCO-SOCCO coal transactions. Ohio Power

Company, Holding Co. Act Release No. 17,383 (Dec. 2,

1971), permitted OPCO to inject capital into the corpor-

ate shell of SOCCO so SOCCO could develop OPCO-

owned coal reserves ‘“‘to assure a reliable supply of coal.”

Id. The SEC noted that, under the proposal before it,

SOCCO’s charges to OPCO would be “based on” its ac-

tual costs plus a rate of return on capital no greater

than that approved for OPCO by the Federal Power

Commission, FERC’s statutory predecessor. /d. at 2.

There were no hearings and no findings, other than the

ultimate finding that the proposed transaction was in

the interest of the public, investors, and consumers. The

order concluded with a “proviso that nothing in this

order shall be construed as in any manner affecting the

jurisdiction of any other regulatory authority with re-

spect to the accounting or similar matter in connection

with the proposed transactions.” Jd. Ohio Power Com-

pany, Holding Co. Act Release No. 20,515, 14 S.E.C.

Docket 928 ‘Apr. 24, 1978), approved OPCO’s sale of its

coal mines and leases to SOCCO and its further capital

contribution to SOCCO. Again, the SEC stated that

“!tthe price at which SOhio |SOCCO] coal is sold to

AEP system companies wil! not exceed the cost thereof

to the seller.” /d. at 929.

The SEC required both OPCO and SOCCO to file quar-

terly financial statements and statements setting out

“the quantities of coal sold to each buyer, the price of

such coal and the method used to compute the cost of coal

sold.” Jd, at 930. Southern Ohio Coa! Co., Holding Co.

Act Release No. 21,008, 17 S.E.C. Docket 310 (Apr. 17,

1979), approved borrowings by SOCCO intended to re-

duce the cost of coal by providing cheaper capital.

Southern Ohio Coal Co., Holding Co. Act Release No.

21,537, 19 S.E.C. Docket 1309 ‘Apr. 25, 1980), approved

additions! OPCO investment in SOCCO to finance capital

improvements expected to reduce the cost of coal to

SOCCO’s buyers. As in the previous decisions, the last

order adverted briefly to the contractual relation be-

tween the associates: “The price at which [SOCCO’s|

coal will be sold to AEP system companies will not ex-

ceed the cost thereof to the seller. For this purpose,

cost will include reasonable compensation for necessary

capital.” /d. The SEC cited sections 6, 7, 9, 10, and 12

of PUHCA, 15 U.S.C. $$ 79f, 79g, 79i, 79j, 79/, as au-

thority for its various orders. None of the orders cite

section 13(b) as authority.

C. The Decision Below

The present dispute arose in a rate proceeding initi-

ated in 1982. All issues settled except the extent to

which OPCO could include its costs for “captive coal”

purchased from SOCCO in its recoverable cost of service.

Ohio Power Co., 39 F.E.R.C. § 61,098, at 61,274 (1987).

The Administrative Law Judge ‘ALJ; determined that

section 318 and FERC’s own regulations did not bar

FERC’s examination of the reasonableness of OPCO’s

captive coal purchases and that OPCO’s coal costs had

not been shown to be unreasonable. /d. at 61,275. The

full Commission affirmed the ALJ’s determination that

the reasonableness of OPCO’s captive coal costs were

subject to review but determined that the price of the

captive coal unreasonably exceeded a comparable market

price. Jd.

On the threshold section 318 issue, the ALJ had rea-

soned that the SEC’s regulation of the “intra-corporate

price of [captive] coal’ was not the “same subject mat-

ter,” in the section 318 sense, as FERC’s regulation of

utility rates. Jd. at 61,276. FERC agreed for two rea-

sons. First, FERC questioned whether the SEC had set

the price of captive coal at cost, since it was “not clear”

that the SEC statements regarding whether the price

would be “based on” and “not exceed” cost had mandated

a cost floor as well as ceiling. /d. FERC also cited the

SEC’s Rule 92, 17 C.F.R. § 250.92, prohibition of inter-

associate sales of goods “at a price which exceeds the

price at which the purchasers might reasonably be ex-

pected to obtain comparable goods elsewhere,” which

FERC interpreted as indicating that the SEC might re-

quire a below-cost market price, id., and SEC authority

for above-cost market prices, id. at 61,290 n. 17. FERC

indicated that OPCO might apply this authority to the

SEC for a market-based section 13 price.

Second, FERC reasoned that setting the inter-associate

price, assuming the SEC had in fact done that, simply

was not “the same subject matter,” in the section 318

sense, as setting wholesale utility rates and determining

what costs may be recovered therein. Jd. at 61,276-77.

FERC cited in support SEC staff disclaimers that SEC

section 13(b) orders set rates and an SEC section 13(b)

exemption decision that purportedly recognized FERC's

rate-making power to allow utilities within its jurisdic-

tion to recover either SEC-authorized costs “or some

other amount.” Jd. at 61.277 (quoting New England

Electric System, Holding Co. Act Release No. 22,309, 24

S.E.C. Docket 298, 307-08 | Dee. 9, 1981) 5,

The SEC has not appeared in this cause.

Il. ANALYSIS

A. Statutory Tite rpre tation

Before undertaking our analysis of ARC's interpre-

tation of section 318, we note that FERC oes not claim

for its interpretation the deference to hdministrative

agencies mandated by Chevron U.S.A. Ine. v. Natural

Pesourees Defers: Council, 467 U.S. 837, 104 S.Ct. 2778,

81 L.Ed.2d 694 (1984), nor is sue’) deference warranted.

While Cherron requires us to defer to “an agency's con-

struction of the statute which it administers,” id. at 842.

104. S.Ct. at 2781, “when an agency interprets a statute

other than that which it has been entrusted to admin-

ister, its interpretation is entitled to ro deference.” De-

partment of Treasury v. FLRA, 837 F.2d 1163, 1167

(D.C. Cir, 1988). Section 318 cannot be said to be en-

trusted to FERC’s administration. Certainly it involves

FERC, but only to the extent of FERC's interface with

regulation of the regulated entities by the SEC under

PUHCA. Therefore, FERC has rightly claimed no def-

erence for its interpretation, and we afford none.

FERC’s statutory interpretation rested on two ration-

ales: (1) that there is no conflict between the approaches

of the SEC and FERC and (2) that the same subject

matter is not involved. We discuss these in the order of

their acknowledged importance.

1. The Subject Matter Involved

FERC primarily relied on its determination that its

decision and the SEC’s decisions do not deal with “the

same subject matter” because FERC is regulating rates

whereas the SEC is regulating inter-associate transac-

tions. Section 318 governs conflicts regarding “the issue.

sale, or guaranty of a security, or assumption of obliga-

tion or liability in respect of a security, the method of

keeping accounts, the filing of reports, or the acquisition

or disposition of any security, capital assets, facilities,

or any other subject matter.” 16 U.S.C. § 825q. FERC

suggests in this Court that the present subject is some-

how not a subject within the contemplation of section 318

because Congress enumerated certain matters in section

318 with respect to which the SEC has jurisdiction under

PUHCA, see 15 U.S.C. $$ 79f-79g, 79i-79j, 79n-790, but

did not mention the non-enumerated subject under dis-

cussion.

We cannot accept this suggestion. Congress concluded

its enumeration in section 318 with the phrase “or any

other subject matter,” and the inclusiveness of these

words cannot be avoided, as FERC would have us do, by

speculating that “Congress simply wanted to include a

provision that would cover some unanticipated ‘conflict’

that might arise.” Brief for Respondent at 21 n. 21. The

price term of sales contracts between asscciated com-

panies are subject to SEC jurisdiction under PUHCA,

just as are the enumerated subjects, and are therefore a

“subject matter” under section 318 if such price term is

also subject to the requirements of the FPA or of

FERC’s rules, regulations or vrders thereunder. 16

U.S.C. $ 825q. FERC has in effect set by order a differ-

ent price term for such a contract by determining that

it will not allow the contract price as a cost in OPCO’s

rate case. Sec Nantahala Power & Light Co. v. Thorn-

burg, 476 U.S. 953, 971, 106 S.Ct. 2349, 2359, 90 L.Ed.2d

945 (1986). The conclusion that the same subject matter

10a

is implicated is inescapable. Nor can we subscribe to

FERC’s analysis that the same subject matter is not in-

volved because it sets rates and the SEC does not. Sim-

ply put, FERC’s reasoning proves too much _ because

under such an analysis there could never be a conflict

between the SEC and FERC with respect to a matter not

specifically enumerated in section 318. The absence of

conflict would not be malum in se, of course, but we

presume Congress contemplated that in fact it had con-

ferred on the SEC jurisdiction over some non-enumerated

matters that otherwise would fall within the jurisdiction

of FERC, and it therefore included the residuary phrase

in section 318 to govern those conflicts. FERC’s reading

renders the residuary language of sectiou 318 meaning-

less to that extent, and such constructions are disfavored.

See, e.g., National Ass’n of Recycling Indus. v. ICC, 660

F.2d 795, 799 (D.C. Cir. 1981). In addition, we note

that the Supreme Court has held in an analogous situa-

tion that a state’s “undoubted jurisdiction over retail

rates’’ does not empower it to redetermine issues under-

lying FERC-set wholesale rates. Nantahala Power &

Light, 476 U.S. at 970, 106 S.Ct. at 2358.

Moreover, the purposes for which the SEC is to exer-

cise jurisdiction are not as limited as FERC describes

them. The ALJ, whose reasoning was affirmed by FERC,

39 F.E.R.C. at 61,275, described the SEC’s purposes as.

ensuring “that no one of the associated companies takes

advantage of any other,” Ohio Power Co., 25 F.E.R.C.

* 63,060, at 65.183 (1983), and “keeping a reasonable

arm’s length relationship between the two associated com-

panies.”’ 7d.

These are true statements as far as they go, but they

disregard the SEC’s statutory charge to exercise its

power in the interest of consumers, as well as of investors

and the public, and “to insure that such contracts are

performed economically and efficiently.” as well as “at

cost.” 15 U.S.C. $ 79m(b) (emphasis added). Whether

lla

and how well the SEC has discharged the full scope of

its statutory duties was not before FERC and is not be-

fore us. It is sufficient for present purposes that the

SEC is charged by the statute with regulating the terms

of affiliate contracts in the interest of consumers, as well

as investors and the public, and has not exempted the

instant contract. Moreover, we observe, such purposes

as the ALJ imputed to the SEC are barely distinguish-

able, if at all, from considerations cited by FERC itself

in favor of a market test: “protection from the prospect

of self dealing,” and “a substitute for . . . arms-length

negotiations.” 39 F.E.R.C. at 61,279. The “economic

efficiency” FERC seeks to promote by the market test,

id., echoes the “economically and efficiently” language of

section 13(b) itself. The market and at-cost tests thus

seem simply different means to the same end. When

Congress enacted PUHCA, however, it specified a par-

ticular means to that end for companies subject to

PUHCA, and neither we nor FERC are empowered to

overrule that express legislative choice for companies

within the jurisdiction of the SEC.

We are not persuaded otherwise by the ambiguous dis-

claimers of rate-setting authority by the SEC and its

staff quoted by FERC in its opinion. See 39 F.E.R.C. at

61,277-78. The SEC clarifies nothing we need to under-

stand by disclaiming “ratemaking” authority: plainly,

that is not its statutory mandate nor the issue here. The

issue is the effect to be given in a ratemaking proceeding

to the SEC’s price-term regulation. The statement of the

SEC staff has little weight, but we note it asserts that

the SEC does fix a pricing formula and refers to the

intermediate steps between its decision and ratemaking

in a manner that suggests that the SEC’s staff believes

that FERC is free to set rates based on other considera-

tions. 39 F.E.R.C. at 61,277. Cf. Nantahala Power &

Light, 476 U.S. at 967-68, 106 S.Ct. at 2357-58. The

SEC staff also stated that FERC “ ‘has jurisdiction to

try issues, both of fact and of interpretation, in applying

12¢

such orders, insofar as material, to a particular rate

case,” 39 F.E.R.C. at 61,277," but that too is not dis-

positive of the present question because it does not speak

-——by its own terms, could not speak—to what considera-

tions govern the effect FERC is to give the SEC’s deter-

mination.

The purported disclaimer by the SEC itself similarly

fails to speak clearly, if at all, to the question before

FERC and before us. In New England Electric System,

Holding Co. Act Release No. 22.309, 24 S.E.C. Docket

298 (Dec. 9, 1981), the SEC had before it New England

Power Company’s (NEPCO) application for a section

13(b) exemption for the proposed future charter of a

collier then under construction. In the paragraphs quoted

by FERC, 39 F.E.R.C. at 61,277-78, the SEC determined

that it could not then assess whether the complex pricing

provisions of the future, twenty-five year charter would

conform with section 13(b)’s at-cost requirements. On

the other hand, the SEC decided that it would not retain

jurisdiction because “other regulatory effects... allay

our concern.” 24 S.E.C. Docket at 307. Specifically, the

SEC referred to FERC’s FPA jurisdiction: “The rates

allowed to NEPCO include. as a cost of service, its cost

of fuel, which as allowed to NEPCO may include either

the entire cost of transportation under the joint venture’s

charter to NEPCO, if FERC should determine that it is

just and reasonable, or some other amount.” /d. at 308.

Because the case clearly is an exemption case, however,

it is unclear whether the SEC was stating (1) its under-

standing that SEC at-cost determinations are irrelevant

to FERC rate-setting determinations or (2) the effects

that would follow upon its granting of the exemption and

the consequent lifting of whatever bay section 318 might

* Quoting “Comment of the Division of Corporate Regulation of

the Securities and Exchange Commission on the Federal Energy

Regulatory Commission Staff Preliminary Report of Investigation

in FERC Docket No. E-9206, dated July 31, 1978.”

13a

otherwise impose. Because an exemption by the: SEC

lifts the bar of section 318 to action by FERC, 16 U.S.C.

$ 825q, we are not persuaded that the decision supports

the proposition that FERC may use “some other amount”

when the SEC does not grant exemption from the cost

standard.

The clearest statement by anyone associated with the

SEC on the effect, in the absence of an exemption, of

SEC section 13‘b: determinations on FERC rate deter-

minations that has been brought to our attention is the

prepared statement of the SEC submitted to a congres-

sional committee contemplating amendment of PUHCA.

The statement, which advocated repeal of PUHCA, re-

ferred to FERC’s adoption of a market test for affiliate

contracts, the SEC’s understanding that section 13 re-

quires a cost standard for such transactions, and the

SEC’s conclusion that therefore a different federal stand-

ard applied to those companies associated with public

utility holding companies than applied to those not so

associated. The Public Utility Holding Company Act of

1935: Hearings on H.R. 5220, H.R. 5465 and H.R. 6134

before the Subcommittee on Energy Conservation and

Power of the Committee on Energy and Commerce, louse

of Representatives, 97th Cong., 2d Sess., at 582-83

(1982). (The SEC’s recommendation to repeal PUHCA,

of course, was not enacted. )

Finally in this respect, we note that FERC properly

has abandoned in this Court its citation below, 39

F.E.R.C. © 61,098, at 61,290 n. 18 & accompanying text

at 61,277, of Mississippi Indus. v. F.E.R.C., 808 F.2d

1525, 1550-51 (D.C. Cir. 1987) (per curiam), as au-

thority for its jurisdiction in the present case. The con-

tracts at issue there were characterized as contracts for

the sale of elect»icity between associated companies and

therefore outside the scope of the SEC’s jurisdiction. See

id.; compere 15 U.S.C. $ 78m(b) with 15 U.S.C. § 79b

(ai (20).

l4a

2 The existence of Conflict

FERC’s first-stated, but less important, rationale was

that no jurisdictional conflict arises because the SEC

may require market pricing and “it is not clear,” 39

F.E.R.C. at 61,276, that the SEC’s orders in the present

case impose a cost floor as well as a cost ceiling. As to

the first contention, FERC cites the SEC’s Rule 92,

which provides that the price for seller-produced goods

between associated companies may not exceed “the price

at which the purchaser might reasonably be expected to

obtain comparable goods elsewhere.” 17 C.F.R. § 250.92.

As to the second, FERC’s opinion notes that the SEC

orders never state that SOCCO’s price must equal cost,

only that it will be “based on” and ‘not exceed” cost. In

this Court, FERC points additionally to the boiler-plate

character of the language in the SEC orders regarding

the interest of the public, investors, and consumers; to

the absence of any findings by the SEC on the reason-

ableness of the SOCCO-OPCO charges: to the absence of

any findings that the coal price should be passed through

to rate payers; and to the absence of evidence that the

SEC was “closely monitoring” all costs to ensure ef-

ficiency.

We cannot accept this rationale either because it pro-

ceeds from a false premise that the bar of section 318

applies only when there is a present conflict between

SEC and FERC prescriptions. The language of section

318 in fact bars FERC jurisdiction whenever a person

is “subject . . . to a requirement,” 16 U.S.C. § 825q, of

PUHCA. OPCO plainly is so subject to section 15'b)

with respect to its contractual relations with SOCCO.

The fact that FERC’s market approach produces a cur-

rent result that does “not exceed” cost, in the words of

the SEC’s 1978 and 1980 orders, does not make OPCO

any less subject to section 13(b) or to the SEC’s orders.

In the absence of exemption, it is for the SEC rather

than FERC to determine the inter-associate price.

l5ba

FERC suggests that OPCO may apply to the SEC “or

approval of a market-based rate. 39 F.E.R.C. at 61,290

n. 17. The suggestion is not well-taken because it re-

verses Congress’s section 318 decision that the SEC has

the right of first refusal, as it were, in making such

determinations. The statutory scheme simply does not

contemplate that FERC will make the determination

and then send the subject company to the SEC for a

conforming order.

Although it does not affect cur decision, we must agree

with FERC that it tis “not clear” from the orders in

question that the SEC was particularly mindful of its

statutory powers and obligations under section 13(b).

The SEC orders devoted some attention to the cust of

capital to SOCCO and to the cost of coal to that extent.

But it is only to that extent that any concern with the

cost of coal is evident. None of the four orders cites sec-

tion 13, nor mentions expressly whatever purchase agree-

ment exists between SOCCO and OPCO, nor describes

any element of costs other than the cost of capital. We

note that section 13(b) and the SEC’s regulations there-

under do not appc to require submission of and ap-

proval of inter-asso. te agreements but only conformity

of the same with the SEC-promulgated rules. Accord-

ingly, OPCO’s assertion that the SEC “approved” the

sales agreement between OPCO and SOCCO is problema-

tic, and the references in the orders are consistent with,

and may be no more than, references in passing to

SOCCO’s apparent election of, and unexamined repre-

sentations of conformity with, the Rule 91 at-cost

method. We also note, however, that Rules 90 and 91

are regulations under section 13(b) and as _ binding

thereunder as an individualized order. We note as well

that the SEC’s 1978 Order did require OPCO to submit

quarterly reports on the price of coal and how the price

was computed. All these matters taken into account, our

decision nevertheless rests on the threshold matter of the

language of the statute, which commits the determina-

lba

tion of the inter-associate price to the SEC. Whether

the SEC acquaints itself well or ill is not our present

concern.

B. Trapped Costs

Although based upon the language of the statute, our

decision is also informed by consideration of the conse-

quences of FERC’s action in effectively prescribing an

inter-associate price. Accordingly, our decision is but-

tressed by the consistency of its consequences with Su-

preme Court precedents that disfavor conflicting regula-

tion resulting in trapped costs. In Nantahala Power &

Light, the Supreme Court held that it was impermissible

for a retail-rate-setting state utility commission to

“trap” costs by making a different allocation between

related companies of a fixed quantity of low-cost power

than had FERC at the wholesale level. 476 U.S. at

970-71, 106 S.Ct. at 2358-59. (The PUHCA was not

involved.! In a passage that is particularly instructive,

the Court indicated that

FERC’s failure actually to reform the AA |the

agreement between the related companies] does not

materially alter |the] analysis. FERC ordered

Nantahala to adjust its wholesale rates so that its

average cost per unit of power reflected an alloca-

tion of {low-cost} entitlements power different from

the allocation set forth in the AA. The effect of that

order is, for purposes of this case, essentially the

same as reformation of the agreement itself... .

By adopting a different allocation, NCUC ithe state

agency| imputes to Nantahala a different average

cost of power, notwithstanding the fact that, under

the AA, Nantahala unquestionably is not entitled

to demand that [allocation]. Consequently, Nanta-

hala is exposed to “trapped” costs. It must, under

NCUC’s order, pretend that it is paying less for

the power it receives from TVA, under agreements

17a

not subject to NCUC’s jurisdiction, than is in fact

the case.

Id. at 971, 106 S.Ct. at 2359. Although the parallels to

the present case are not precise, there are two quite clear

lessons in the passage: First, it is sufficient that FERC’s

action in the present case reforms the agreement be-

tween OPCO and SOCCO in effect rather than in fact.

Second, the cost-trapping “pretense” occasioned there-

by is prohibited. In the case of Mississippi Power &

Light Co. v. Mississippi ex rel. Moore, US. —-,

108 S8.Ct. 2428, 101 L.Ed.2d 322 (19881, FERC had al-

located responsibility for purchasing the expensive power

generated by the Middle South Utilities system’s Grand

Gulf 1 nuclear power plant among the system’s multiple

operating companies on a certain basis. The State of

Mississippi, however, claimed the power to disregard

FERC’s determination with respect to the operating

company within its jurisdiction because FERC had not

actually considered the prudence of building Grand Gulf

1 and therefore had not preempted Mississippi's power

to do so. The Supreme Court held that Nantahala Power

& Light controlled and preemption did not turn on

whether the particular matter of prudence was actually

decided by FERC. 108 S.Ct. at 2438-42.

Given the clear and express statutory allocation of

jurisdiction between federal agencies in section 318, Nan-

tahala Power & Light and Mississippi Power & Light are

not distinguishable from the present circumstances simply

because they involved state-federal relations or because

FERC must be re-cast in the role of the respective states

with the SEC taking the role formerly played by FERC.

As FERC points out, however, the Court did not rule

in either Nantahala Power & Light or Mississippi Power

& Light on the authority of a state (and by analogy,

FERC in the present circumstances) to second-guess the

utility on the quantity of price-regulated power it should

have purchased when cheaper power was available. 476

U.S. at 972, 106 S.Ct. at 2359; 108 S.Ct. at 2440. That

lSa

question has been answered favorably to a state (and,

by analogy, favorably to FERC in the present circum-

stanees! in Kentucky West Virginia Gas Co. v. Penn-

sylvania Pub, Util. Comm'n, 837 F.2d 600, 606-11 (3d

Cir.1988). We have no occasion to consider this ra-

tionale, however. It plainly was not part of FERC’s

analysis below, and an agency’s order must be affirmed

on the basis stated in its opinion or not at all. Federal

Power Comm'n v. Texaco Inc., 417 U.S. 380, 397, 94

S.Ct. 2315, 2326, 41 L.Ed.2d 141 (1974).

FERC also argues that there is no “trapping” because

FERC has stated that it will allow OPCO to recover in

its rates, when the facts warrant, a fair market value

for its captive coal in excess of its costs therefor. Sce

Public Serv. Co. of N.M., 17 F.E.R.C. § 61,123 (1981)

‘Opinion No. 133), aff'd in pertinent part sub nom,

Public Serv. Co. of N.M. v. FERC, 832 F.2d 1201 (10th

Cir.1987: ‘non-SEC case). The difficulty with this ele-

ment of FLRC’s argument—and indeed with its present

attempt to impose a market-based approach on petition-

er’s transactions—is that FERC does not, and appar-

ently cannot, explain how OPCO can recover in its rates

such a fair market value in excess of cost without run-

ning afoul of the SEC’s bar in 17 C.F.R. § 250.90(a) (2).

See supra p. 4. In other words, if we adopt FERC’s ap-

proach, OPCO faces a tails-we-lose situation when FERC

finds that fair market value dictates a captive coal level

cost but is prevented by SEC regulation from winning

when the other side of the coin comes up. Therefore, at-

tractive as FERC’s market approach may be in general,

its application to the PUHCA-regulated petitioner adds

nothing to FERC’s argument in the present case.

Ill. CONCLUSION

For the reasons given above, we vacate and remand

the decision of FERC. We would like to clarify that

there are two issues which we do not address. First, we

19a

do not hold that OPCO and SOCCO or any other SFC-

regulated companies are entitled to pay and receive a

price in excess of market. See 17 C.F.R. § 250.92. Sec-

ond, we do not hold that FERC may not apply a market

test to contracts between related companies that are sub-

ject to its jurisdiction but not that of the SEC. See Pub-

lic Serv. Co. of N.M., 832 F.2d at 1201. We hold only

that the statute commits to the SEC such determinations

regarding companies associated with a public utility hold-

ing company. Basing our decision as we do on this thres-

hold issue, we have no occasion to reach the further is-

sues raised by the petition.

Granted.

MIKVA, Circuit Judge, concurring:

I fully agree with my colleagues that the Federal En-

ergy Regulatory Commission (“FERC”) may not escape

the strictures of section 318 of the Federal Power Act

(“FPA”), 16 U.S.C. § 825q, simply by claiming that it

and the Securities and Exchange Commission (“SEC”)

are not regulating “the same subject matter,” for it is

clear that both agencies have ruled on the price of coal

between Ohio Power Company (“Ohio Power”) and its

subsidiary, Southern Ohio Coal Company ‘“Southern

Ohio”). See Majority Opinion (Maj. Op.”) at 1405-

1408.

In my view. however, for section 318 to divest FERC

of jurisdiction, a person must also be subject to con /firt-

ing requirements of the Public Utility Holding Company

Act (“PUHCA”), 15 U.S.C. $$ 79 et seqg., and the FPA.

I base this conclusion not only on the text of the statute,

but also because section 13 would otherwise serve no

purpose. Applying this interpretation to the case sub

judice, 1 am not convinced that the SEC’s orders (under

the PUHCA) and FERC’s decision (under the FPA) are

in conflict. Accordingly, I would uphold FERC’s deter-

mination that section 318 does not bar its jurisdiction in

this case.

20a

I concur in the judgment of my colleagues, however,

and would grant the petetion for review, on the alternate

ground that FERC’s decision is contrary to section 35.14

(ai(7) of its own regulations, 18 C.F.R. § 35.14'a1(7).

Section 318 of the FPA provides in relevant part:

: If, with respect to the issue, sale, or guaranty of

a security, * * * or the aequisition or disposition of

any security, capital assets, facilities, or any other

subiect matter, any. person is subject both to «

quirement of the Public Utility Holding Compan:

Act of 1985 * * * and toa requirement of this chap-

ter * * *, the requirement of the Public Utilit

Holding Company Act of 1935 shall apply to

person, and such person shall not be subject to the

requirement of this chapter * * * with respect to tly

same subject matter, unless the Securities and Ex-

change Commission has exempted such person from

such requirement of the Public Utility. Holding Com-

pany Act of 1935, in which case the requirements of

this chapter shall apply to such person.

16 U.S.C. £825q ‘emphasis addedi. As I parse this

provision, there is a jurisdictional conflict ‘and FERC

muct vield jurisdiction to the SEC) if, and only if, a per-

son is subject to a conflicting ‘requirement’ of both

PUHCA and the FPA, and the requirements are “with

respect to the same subject matter.” The first condition

is a logical necessity, for even if there is dual jurisdiction

over “the same subject matter” (the second condition),

if there is no conflict, then there is no need for FERC

to vield to the SEC.

As noted above, I agree with my colleagues that the

second condition has been met in this case: FERC and

the SEC are clearly regulating the same subject matter,

namely, the price of coal between Ohio Power and South-

2la

ern Ohio. I am not so sure, however, that there is a

conflict between the relevant SEC orders and FERC’:

decision below.

In 1971, the SEC (pursuant to the PUHCA) author-

ized the formation of Southern Ohio on the condition,

inter alia, that “{t|he charges for coal by Souchern Ohio

will be based on an amount equal to the actual cost of

Southern Ohio in developing the reserve and miaing such

enal, * * *.” Ohio Power Co., Release No. 17,383, at 2

(Dee. 2, 1971) (SEC) ‘emphasis added). In its 1978

_ order approving the transfer of certain mine and other

coal properties from Ohio Power to Southern Ohio, the

SEC further stated that “|t|he price at which SOhio coal

is sold to AEP System companies wi/! not exceed the cost

thereof to the seller.” Ohio Power Co., Release No.

20,515, 14 SEC Docket 928, 929 (Apr. 24, 1978) ‘em-

phasis added).

In the decision below, FERC (pursuant to the FPA)

ruled that, based on the market price for comparable

coal, the price Ohio Power paid for Southern Ohio coal

was unreasonably high: FERC therefore disallowed Ohio

Power’s request for a rate increase based on those costs.

39 FERC © 61,098, at 61,285-86 (1987), rel’q denied, 43

FERC © 61,046 (1988). ;

In this petition, Ohio Power maintains that there is a

jurisdictional eonflict by arguing (and, incidentally, im-

plicitly coneeding that section 318 requires a conflict:

that section 13(b) of the PUHCA, 15 U.S.C. $ 7T9mibi,

mandates a cost standard and that, in any event, the

SEC in this case required Southern Ohio to set its price

at cost. I disagree.

Although section 13(b) ineludes the phrase “at cost,”

Congress intended section 13(b) to avoid “excessive

charges” resulting from the lack of arm’s-length bargain-

ing and open competition between public utility holding

companies and their subsidiaries. PUHCA § 1(b)i2)

22a

‘emphasis added}, 15 U.S.C. $ 79a(bi(2): see also

North American Co. v. SEC, 327 U.S. 686, 701 & n. 11,

66 S.Ct. 785, 794 & n. 11, 90 L.Ed. 945 (1946) (citing

congressional findings underlying section 1(b)). The

SEC has interpreted section 13(b) to mean that “|nJo

subsidiary company of a registered holding company

* shall perform any service or construction for, or

sell any goods to, any associate company therefore, or

enter into any contract to Co so, at more than cost * * *.”

17 C.F.R. § 250.901a112) ‘emphasis added). Indeed, the

SEC even permits a market-price test for the sale of

goods between such affiliates. See 17 C.F.R. § 250.92(b).

I cannot conclude that section 13(b! necessarily man-

dates strict at-cost pricing between public utility holding

companies and their associates.

Ohio Power also argues that, in any event, the SEC did

not authorize a market approach in this case. But this

argument is misplaced, for the issue is whether there

is a conflict in requirements under the two statutes. Be-

cause the SEC in 1978 limited the price of coal only te

cost as a ceiling, see Ohio Power Co., Release No. 20515,

14 SEC Docket 928, 929 ‘Apr. 24, 1978), I find no con-

flict between that requirement and FERC’s requirement

that Ohio Power pay market price, where, as in this case,

the market price is less than cost. The SEC's 1971 order

is not to the contrary, for it requires only that the price

be “based on” cost: the later order imposing cost as a

ceiling is certainly “hased on” cost.

Moreover, as my colleagues note, sce Maj. Op. at 1408-

09, the SEC’s approval of the various transactions was

grounded on the financial aspects of the corporate ar-

rangements, not on the reasonableness of the price paid

for the coal. Ohic Power therefore reads too much into

the SEC orders when it claims that the SEC expressly

conditioned its approval of the affiliate arrangement on

a strict cost-based standard—Ohio Power relies too heav-

ily on what seems to be merely boilerplate language. Ac-

23a

cordingly, because I read the SEC’s orders to permit

Ohio Power to pay less than cost for the coal, FERC’s im-

position of a market price less than cost does not in this

case create a jurisdictional conflict. As FERC stated

below: “it is not clear that the SEC requires Ohio Power

to purchase coal from its subsidiary at cost, rather than

at market price. The SEC orders which Ohio Power cites

for this proposition ~ * * do not appear to mandate the

cost-based price where a market price would be lower,

rather they permit a price up to a cost-based price.” 39

FERC at 61,276.

In short, although Ohio Power has met the second

condition of section 318 ‘both agencies are regulating

the “same subject matter,”” namely, the reasonableness of

the price paid), it has not met the first. Under the facts

of this case, the SEC has not precluded a price Jess than

cost; FERC’s setting of the allowable price at a market

price less than cost therefore does not create a conflict

that would bring section 318 into play.

I note in passing that, under my view, if FERC had

sought to impose a price higher than cost ‘i.e., if the

market price determined by FERC were higher than

cost!, then FERC’s requirement would clearly conflict

With the SEC’s requirement and. under section 318.

FERC would have to abide by the SEC’s determination.

This implies that, in a case where the SEC has set cost

as a ceiling, FERC has jurisdiction to impose a market

price only if that price is less than cost. FERC in dic-

tum below, however, would have permitted Ohio Power

to recover the market price even if that price exceeded

cost. See 39 FERC at 61,287-88. Although this is a

problematic aspect of the decision below, we need not

pass on its validity under section 318, for that ease is

simply not before us today.

IT.

Ohio Power argues in the alternative that. even if

section 518 does not apply, section 35.14(a'i7) of

24a

FERC’s own rules bars it from imposing its market-

price test. I would agree and grant the petition on this

ground.

Section 35.14/a117!, which governs fuel price adjust-

ment clauses in filed rate schedules, provides in pertinent

part:

Where a utility purchases fuel from a company-

owned or controlled source, the price of which is sub-

ject to the jurisdiction of a regulatory body, sch

cost shall be deemed to be reasonable and includable

in the adjustment clause.

18 C.F.R. § 35.14(a''7! ‘emphasis added). There is no

dispute that this rule applies to the transaction in this

case; the only issue on appeal is the meaning of the word

“deemed.” FERC, affirming the administrative law judge

on this point, found that the regulation creates only a

rebuttable presumption of reasonableness. Sce 39 FERC

at 61,2S7-S8. Ohio Power challenges this conclusion, ar-

guing that the word ‘‘deemed” establishes instead a con-

clusive presumption.

The applicable standard of review is clear. Although

a reviewing court must defer to an agency's interpreta-

tion of its own rules, see Western Union Telegraph Co.

vw. FCC, 815 F.2d 1495, 1503 (D.C. Cir. 1987), no defer-

ence is owed an interpretation at odds with the plain

meaning of the text, see Union of Coneerned Scientists

v. NRC, 711 F.2d 370, 381 (D.C. Cir. 1983) (“When

an agency's interpretation flies in the face of the lan-

guage of the rules themselves, it is owed no deference.’’).

Although the provision at issue has apparently not been

interpreted in any published opinion, courts construing

the word “deemed” have generally found that it estab-

lishes a conclusive presumption. See H.P. Coffee Co. v.

Reconstruction Finance Corp., 215 F.2d 818, 822 (Emer.

Ct. App. 1954) (tinding ‘almost unanimous judicial de-

termination that the word [‘deemed’], when employed in

25a

statutory law, creates a conclusive presumption’’) (citing

cases!; see also Dameron v. Brodhead, 345 U.S. 322,

326-27, 73 S.Ct. 721, 723-24, 97 L.Ed. 1041 (1953)

(rejecting, in a case involving state taxation of a service-

man’s personal property, the argument that “deemed”

implies a rebuttable presumption, because such a con-

struction would nullify the statute); Ayzar v. Califano,

597 F.2d 68, 71 (5th Cir. 1979) (where statute provided

that an insured child is “deemed dependent” upon a

stepparent if the child was living with the stepparent at

the time of death of the natural parent, Congress in-

tended that dependency would be conclusively established

upon proof of the objective criteria); Kohn v. Myers,

266 F.2d 353, 357 (2d Cir. 1959) (“The word ‘deemed’

gives rise to a conclusive presumption or substantive rule

of law that the acquisition of assets from a bankrupt

after a petition of bankruptcy is filed is not in good faith

if the transferee knew the petition was pending and did

not have reasonable cause to believe that it was not well

founded.” )}. Numerous state court decisions, too many to

list here, are in accord.

Moreover, if the intent of the regulation were to cre-

ate a rebuttable presumption, as FERC now contends,

then the rule would be superfluous, for it has long been

settled that a utility’s costs are presumed (subject to

rebuttal! to be prudently incurred. See Missouri ex rel.

Southwestern Bell Telephone Co. v. Missouri Pub. Serv.

Comm., 262 U.S. 276, 289 n. 1, 43 S.Ct. 544, 547 n. 1, 67

L.Ed. 981 (1923): Anaheim v. FERC, 669 F.2d 799, 809

(D.C. Cir. 1981).

The history of section 35.14(a!(7) also supports Ohio

Power’s reading of the provision, for FERC has twice

proposed and rejected a different rule to accomplish the

result that it now claims flows from the existing rule.

First, as originally proposed by the Federal Power Coin-

mission (“FPC’’) in 1973, the regulation did not contain

the “deemed” language:

26a

Where the cost of fuel includes fuel from company

owned or controlled sources, that fact shall be noted

and described as part of any filing. Only the reason-

able cost of such fuel may be included. Amo-nts

collected from customers in excess of such reasonable

cost shall be subject to refund.

38 Fed. Reg. 17.253 (1973) ‘emphasis added). Only

the unitalicized sentence has been retained in the current

regulation. After public comment, the second and third

sentences were modified to its current version:

Where the cost of fuel includes fuel from company-

owned or controlled sources, that fact shall be noted

and deseribed as part of any filing. Where the util-

ity purchases fuel from a company-owned or con-

trolled source, the price of which is subject to the

jurisdiction of a requlatory body, such cost shall be

deemed reasonable and ineludable in the adjustment

clause, “ * * Fuel charges which do not appear to

be reasonable may result in the suspension of the

fue] adjustment clause or cause an investigation

thereof to be made by the Commission on its own

motion under section 206 of the Federal Power Act.

39 Fed. Reg. 28.911 (1974) ‘emphasis added'. When

the rule was eventually promulgated, the FPC explained

that “'t!he modification provide|s! that when a utility

purchases fuel from an owned or controlled source and

he price is subject to the jurisdiction of a regulatory

body. the cost of the fuel may be included in the fuel

adjustment clause.” 39 Fed. Reg. 40,583 (1974) (em-

phasis added'. The addition of the ‘deemed’ language

suggests, albeit weakly, that the prior version, which was

rejected and which provided no special treatment for af-

filiate fuel purchases subject to the jurisdiction of an-

other regulatory body, would have accomplished the result

FERC now seeks to impose.

Second. in 1979 FERC proposed to amend section

35.14(a' (7) to require utilities to file, as rate schedules,

27a

all contracts for fuel purchases from company-owned or

company-controlled sources, regardless of whether the

price was subject to the jurisdiction of a regulatory body.

See 44 Fed. Reg. 28,683 (1979). The stated purpose of

this proposal was “to further aid the Commission in ful-

filling its responsibility to ensure that utilities are pur-

chasing fuel at reasonable prices and that only allowable

costs are being passed through in the fuel cost adjustment

clause.” Jd. at 28,684; see also 45 Fed. Reg. 82,272

(1980). Although FERC later determined that its adop-

tion of a market-price test for determining the reason-

ableness of affiliate fuel costs made the proposed revision

unnecessary, sce 50 Fed. Reg. 24,779 (1985), it is signifi-

cant that FERC’s proposal would have been superfluous

had the provision already established merely a rebuttable

presumption of reasonableness, because there would have

been no question that FERC would have had independent

jurisdiction to review the contracts.

FERC relies heavily on an interpretation of the sec-

tion in a 1975 FPC chairman’s letter to a Senate Sub-

committee, but that letter is not persuasive. The letter

merely states that section 35.14/a) (7) creates “a pre-

sumption of reasonableness” without specifying whether

the presumption is rebuttable or conclusive. The Utility

Act of 1975: Hearings on S. 594 Before the Subcomm.

on Intergovernmenial Relations, Senate Comm. on Gov-

ernment Operations, 94th Cong., 1st Sess. 500, 514

(1975).

Finally, FERC argues that its statutory mandate to

ensure that rates are just and reasonable implies that

section 35.14/a!(7) cannot be read to foreclose FERC

from independently determining the reasonableness of

wholesale utility charges. But this argument is valid

only if one ignores section 35.14(a)(7). Although, as a

general matter, FERC may have the authority to make

an independent determination of reasonableness, section

35.14/a''7) fTorecloses such a route to the extent that

28a

the price is already subject to the jurisdiction of another

regulatory body. In other words, section 35.14/a) (7)

establishes, as a policy matter, that if another regulatory

body has already passed on the fuel price, then FERC

will abide by that determination. This reading is en-

tirely consistent with the purpose of section 35.14(a) (7),

which is to avoid unreasonable fuel costs between af-

filiated companies, for if another agency (e.g., the SEC)

has already made that determination, then there is no

reason for FERC to second-guess that decision.

* * * *

I concur with my colleagues that the petition for

review should be granted, but not on the basis of section

318 of the FPA. I do not find, in this case, a collision

between the two agencies operating in this field. Rather,

I would find that FERC erroneously construed section

35.14(a!‘'7) of its regulations to establish merely a re-

buttable presumption of reasonableness. Under the regu-

lation, because the prices of Ohio Power’s fuel from its

affiliate are subject to the jurisdiction of the SEC, such

costs must be conclusively presumed reasonable.

29a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 88-1293

OHIO POWER COMPANY,

~ Petitioner,

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent,

OHIO MUNICIPALS,

Intervenors.

Before: MIKVA, SILBERMAN and SENTELLE, Circuit Judges

ORDER

| Filed Oct. 12, 1989]

Upon consideration of the Petitions For Rehearing of

Respondent Federal Energy Regulatory Commission and

Intervenor Ohio Municipals, it is

ORDERED, by the Court, that the petitions are de

nied.

Per Curiam

FOR THE COURT:

CONSTANCE L. DUPRE

Clerk

By: s Robert A. Bonner

Rosert A. BONNER

Deputy Clerk

Circuit Judge Mikva would grant the petitions for

rehearing. His statement is attached.

30a

Statement of MIKvA, Circuit Judge

I would grant the petition for rehearing by the panel.

I continue to be concerned that the panel opinion creates

a regulatory gap that can be mischievous in future cases.

As I state in my concurring opinion when the case was

originally heard, there is no conflicting requirement im-

posed by the agencies involved with respect to the same

subject matter. Accordingly, the Federal Energy Regu-

latory Commission (FERC) was not ousted of its juris-

diction over the price of coal charged to Ohio Power

Company. The flaw in FERC’s decision stems from a

fatal conflict with its own regulations, and warrants

granting the petition for review, as the panel decision

ordained. The statutory interpretation engaged in by

the majority, however, generates a no-man’s land where

neither the Securities and Exchange Commission (SEC)

nor FERC will patrol holding company practices which

can oppress consumers, investors and the public. Con-

gress did not intend and our court should not construct

such a result.

Because the result in the instant petition would not

be affected by my interpretation of the relevant statutes,

I do not eall for a rehearing by our full court. I do con-

tinue to express a concern about what I perceive to be a

flawed parsing of the statutes involved in this important

and delicate area of interagency administration of the

law.

Sla

APPENDIX C

FEDERAL ENERGY REGULATORY COMMISSION

Docket Nos. ER82-553-000 and ER&2-554-000

OHIO POWER COMPANY

Opinion No. 272; Opinion and Order on Recovery of the

Cost of Coal Purchased From an Affiliate

(Issued April 30, 1987)

Before Commissioners: Martha O. Hesse, Chairman:

Anthony G. Sousa, Charles G. Stalon, Charles A. Tra-

bandt and C. M. Naeve.

|Note: Initial Decision of the presiding administra-

tive law judge, issued December 14, 1983, appears at 25

FERC £ 63,060. |

Appearances

Edward J. Brady, Marvin I. Resnick, Alan Kessler,

and William E. Olson for Ohio Power Company

William H. Reherts and Richard Hitt for Publie Ser-

vice Commission of West Virginia

Paul Nordstrom, Glen L. Ortman, Kenneth E. Natale,

Donald R. Allen, David P. Yaffe, and Greqq D. Ottinger

for the Municipal Wholesale Electric Customers of Ohio

Power Company

Phillip Nelson and O.C. Hall for Wheeling Electric

Company

James D. Kauffelt for Linden Chemicals and Plastic,

Inc., Mobay Chemical Corporation, and PPG Industrials,

Inc.

32a

Melvin Berger, Arthur Hays Butler, Lawrence R.

Greenfield, Michael Small, James E. Rogers, Jr., Marilyn

L. Doria, Harvey L. Reiter and Danie! Watkiss for the

staff of the Federal Energy Regulatory Commission

[Opinion No. 272 Text]

I. Introduction and Summary

On May 28, 1982, the Ohio Power Company (Ohio

Power) filed rate increases for its wholesale service to

fifteen municipalities in the State of Ohio (Docket No.

IE R82-553-000) and to its affiliate in West Virginia, the

Wheeling Electric Company ‘Docket No. ER82-554-000).

The Commission accepted settlements dealing with all as-

pects of the proposed rates except what was called the

captive coal issue which involves a challenge to the rea-

sonableness of the fuel costs recovered from Ohio Power's

wholesale customers for the coal it purchased from the

Martinka mine.’

The Martinka mine is owned and operated by the

Southern Ohio Coal Company, a wholly owned subsidiary

of Ohio Power. Ohio Power is owned by the American

Electric Power Company (AEP). AEP owns seven other

electric utilities that operate as a coordinated system in

a seven-state area. AEP is subject to regulation by the

Securities and Exchange Commission (SEC)! under the

Publie Utility Holding Company Act of 1935 (PUHCA).-

An initia. decision on the reasonableness of Ohio

Power’s coal costs was issued on December 14, 1983.°

In the initial decision the presiding judge found that:

(1) section 318 of the Federal Power Act does

not preclude the Commission from determining

whether it is just and reasonable for Ohio Power to

1See Ohio Power Company, 23 FERC © 61,236 (1983) and 24

FERC © 61,017 (1983).

215 U.S.C. § 79a (1982).

$25 FERC © 63,060 (1983).

33a

recover the full cost of its purchases from the Mar-

tinka mine from its wholesale ratepayers;

(2) the Commission’s fuel adjustment clause reg-

ulation * creates only a presumption which does not

preclude the Commission from considering the rea-

sonableness of Ohio Power’s fuel costs;

(3) Ohio Power’s coal costs are subject to a com-

parable market price test as adopted in Opinion No.

133 ° to determine the reasonableness of those costs;

and

(4) the comparable market price evidence pre-

sented to show that Ohio Power’s costs were not rea-

sonable was not credible.

The judge concluded that the prices paid by Ohio Power

for Martinka coal were reasonable.

Briefs on exceptions to the initial decision and briefs

opposing exceptions were filed by Ohio Power, Commis-

sion trial staff (staff', and the Municipal Wholesale

Electric Consumers of Ohio Power (the municipals).’

Ohio Power excepts to the judge’s ruling on the pre-

emptive effect of section 318 of the Federal Power Act

and section 35.14(a''7) of the Commission's regulations

on the Commission’s review of Ohio Power’s coal costs.

418 C.F.R. $35.14(a)(7) (1986).

5 Public Service Company of New Mexico (New Merico), 17

FERC © 61,123 (1981), appeal pending sub nom. Public Service

Company of New Mexico v. F.E.R.C., Nos. 82-1148, 84-1624 and

84-1677 (10th Cir., filed Feb. 3, 1982).

*On May 15, 1986, New England Power Company (NEP) filed

a motion with the Commission for permission to file an amicus

curiae brief in this proceeding; our staff, the municipals, the Town

of Norwood, Massachusetts, the Attorney General of Rhode Island,

and the Rhode Island Division of Public Utilities and Carriers op-

pose NEP’s motion. Because of the lateness of the filing without

good cause the Commission shall deny the motion.

34a

Ohio Power argues that the Commission can change its

regulations only prospectively. Ohio Power also objects

to the imposition of a comparable market price test on a

utility subject to PUHCA asserting that the result would

be a lower of cost or market price test, a result which

Ohio Power asserts would be confiscatory. Ohio Power

further urges that as a factual matter Ohio Power's

ownership of affiliate mines serves the purpose of deliver-

ing the lowest priced electricity possible. Staff and the

municipals except to the judge’s rejection of staff’s evi-

dence as a reliable determinant of comparable market

prices.

We affirm the judge’s rulings and reasoning regarding

the Commission's authority, pursuant to the Federal

Power Act and our regulations, to determine the veason-

ableness of coal costs Ohio Power recovers from its

wholesale customers. We disagree, however, with the

judge’s finding that those costs were reasonable. We find

the costs Ohio Power has recovered for its purchases of

Martinka coal are unreasonable when compared with

market prices and that Ohio Power therefore must re-

fund amounts collected since the effective date of the

rates in this proceeding that exceed the comparable mar-

ket price.

Il. Discussion

A. Commission Jurisdiction to Review Ohio Power's

Coal Costs

1. Section 318 of the Federal Power Act

Ohio Power urges that under PUHCA and section 318

of the Federal Power Act, the SEC has exclusive juris-

diction over the pricing of the affiliate Martinka coal.’

The presiding judge concluded that section 318 of the

Federal Power Act* does not preclude this Commission

7 Ohio Power brief on exceptions at 17-36.

16 U.S.C. § 825q (1982).

35a

from determining whether it is just and reasonable for

Ohio Power to recover from its wholesale cutomers, in

its rates, the full cost of its purchases from the Martinka

mine.”

The source of the SEC’s authority to regulate the price

at which Ohio Power purchases coal from its subsidiary

is section 13 of PUHCA."” Ohio Power contends that sec-

tion 13(b) of PUHCA mandates that it purchase coal

from its subsidiary at cost.'’ Ohio Power contends that

if the Commission orders that Ohio Power may recover

in rates only a market-based amount for the Martinka

coal, that Ohio Power will face conflicting regulation by

the SEC and the Commission which is prohibited by sec-

tion 318 of the Federal Power Act. Section 318 provides:

If, with respect to the issue, sale, or guaranty of a

security ..., or any other subject matter, any per-

son is subject both to a requirement of the Public

Utility Holding Company Act of 1935... and toa

requirement of this Act... the requirement of the

Publie Utility Holding Company Act of 1935 shall

* 25 FERC at p. 65,183.

M15 U.S.C. § 79m (1982).

' The relevant portions of section 15(b) of PUHCA, 15 U.S.C.

$ 79m(b) (1982), provide:

[I]t shall be unlawful for any subsidiary company of any

registered holding company or for any mutual service company

..., to enter into or take any step in the performance of any

service, sales, or construction contract by which such company

undertakes to perform services or construction work for, or

sell goods to, any associate company thereof except in accord-

ance with such terms and conditions and subject to such limita-

tions and prohibitions as the | Securities and Exchange] Com-

mission by rules and regulations or order shall prescribe as

necessary or appropriate in the public interest or for the pro-

tection of investors or consumers and to insure that such con-

tracts are performed economically and efficiently for the benefit

of such associate companies at cost, fairly and equitably allo-

cated among such companies.

36a

apply to such person, and such person shall not be

subject to the requirement of this Act ... with re-

spect to the same subject matter, unless the Securi-

ties and Exchange Commission has exempted such

person from such requirement of the Public Utility

Holding Company Act of 1935, in which case the re-

quirements of this Act shall apply to such person.

(Emphasis supplied. |

The judge concluded that, assuming the SFC set the

price at which Ohio Power may purchase its subsidiary’s

coal, there was no conflict of jurisdiction because the

SEC regulates the intra-corporate price of coal between

Ohio Power and its subsidiary. while this Commission

sets rates.'" The judge concluded that the same subject

matter is not subject to the requirements of both PUHC.A

and the Federal Power Act.’ We agree with the judge.

First, it is not clear that the SEC requires Ohio Power

to purchase coal from its subsidiary at cost, rather than

at market price. The SEC orders which Ohio Power cites

for this proposition state that the charges for the coal

“will be based on actua! cost.” '' and “will not exceed the

cost thereof to seller.” '° These orders authorized financ-

ing for the coal mining subsidiary. They do not appear

to mandate the cost-based price’ where a market price

would be lower, rather they permit a price up to a cost-

based price.

The SEC’s Rule 92 implements in part section 13 of

PUHCA. The rule prohibits a subsidiary of a registered

holding company from selling

any goods produced by it to any associate company

thereof, or enter into any contract to do so, at a

1225 FERC at p. 65.183.

3 Jd.

M4 SEC 1935 Act Release No. 17383, Dec. 2, 1971.

1 SEC 1935 Act Release No. 21537, April! 25, 1980.

37a

price which exceeds the price at which the purchas-

ers might reasonably be expected to obtain compar-

able goods elsewhere, or to finish them itself, giving

due regard to quality, quantity, regularity of supply,

and other factors entering into the calculation of a

fair price.'"

Thus it appears that not only does the SEC not require

a cost-based price for the subsidiary coal, the SEC may

require a market-based price for subsidiary coal if the

market price is lower than cost.’ |

More importantly, assuming that the SEC has actually

affirmatively set the price which Ohio Power must pay

its subsidiary for the Martinka coal, setting the intra-

corporate price and setting rates are not the same sub-

ject matter which would bring section 318 into play. We

have taken full account of the fact that the SEC has

jurisdiction, under PUHCA, to regulate the price of coal

purchased by Ohio Power from the Martinka mine. The

SEC’s jurisdiction, however, does not extend to setting

‘ates and determining what fuel costs Ohio Power may

collect from its wholesale customers. There is thus no

17 C.F.R. § 250.92 (1986).

17 The SEC can, pvrsuant to section 13(b), authorize a market-

based price for a transaction between a subsidiary and parent even

when that market-based price exceeds cost. See, New F:.zland Elee-

tric System, 1935 Act Release No. 22309, 24 SEC Docket (1981),

where the SEC, pursuant to the provisions of section 13(b), ex-

empted a contract from the cost limitation of 13(b) so that a market-

based approach could be used. Thus Ohio Power could apply to the

SEC for approval of a market-based pricing mechanism for its

affiliate coal if it so desired. See also, “Comment of the Division

of Corporate Regulation of the Securities and Exchange Commission

on the Federal Energy Regulatory Commission Staff Preliminary

Report of Investigation in FERC Docket No. E-9206 dated July 31,

1978” filed in Docket No. E-9206, on October 27, 1978, at 3. There-

fore as a factual matter, it does not appear that Ohio Power is

accurate in stating that a company subject to SEC jurisdiction pur-

suant to PUHCA is required always to sell its products to an

affillate at cost-based prices.

38a

conflict in the regulation by the SEC and the regulation

by this Commission."

The SEC’s Division of Corporate Regulation submitted

comments in another Commission case involving AEP af-

filiate coal purchases in which staff of the SEC explained

its view of the effect of SEC orders approving the financ-

ing of coal mining subsidiaries under PUHCA." These

comments demonstrate that the SEC recognizes that it

does not set rates:

The orders of the SEC under the 1935 Act do not set

rates for operating utility companies. There is no

conflict with FERC jurisdiction. In seiting rates,

FERC is legally beund to give due consideration to

cost of service, which certainiv includes cost of fuel

burned, but there are a number of intermediary

steps between our order authorizing an affiliate to

acquire and mine coal reserves and the rate deter-

mination....

The SEC pricing orders are final orders directed, in

conjunction with the 1935 Act and the pertinent

rules, to fixing a pricing formula until further order

of the Commission. It is the rate making authority,

1S See Mississippi Industries v. F.E.R.C., 808 F.2d 1525, 1550-51

(D.C. Cir. 1987). Appalachian Power Company, another AEP owned

utility, raised the same contention regarding SEC regulation in

MeDows ll County Consumers Council, Ine. v. American Electric

Power (McDowell County), Docket No. E-9206. The Commission.

in setting AEP’s coal purchasing practices for investigation, re-

sponded that its investigation was “instituted for the purpose of

fulfilling this Commission's statutory obligation as expressed in

Sections 202, 205, 206, 301, 306, 307 and 309 of the Federal Power

Act which are in no way repugnant to the exercise of any authority

which the SEC may choose to assert under its statute.” See 54

FPC 361, 363 (1975).

™ "Comment of the Division of Corporate Regulation of the Secu-

rities and Exchange Commission on the Federal Energy Regulatory

Commission Staff Preliminary Report of Investigation in FERC

Docket No. E-9206, dated July 31, 1978.”

39a

not the SEC, that has jurisdiction to try issues, both

of fact and of interpretation, in applying such

orders, insofar as material, to a particular rate case.

Moreover, the SEC itself, as opposed to its staff, has

recognized that its regulation of fuel-related costs, pur-

Suant to section 13(b!, is not in conflict with and does

not preclude this Commission setting rates. In New Eng-

land Electric System the SEC authorized a joint venture

in which a registered holding company and two of its

subsidiaries would participate in building a coal-fired

collier. The SEC, pursuant to section 13(b), exempted

the transaction from the cost limitations of 13(b), so

that the transportation approved by the SEC was at a

market-based price which was expected to exceed cost.

The SEC commented on the relationship of its regulation

under section 131bi of PUHCA and this Commission's

rate regulation:

We cannot assess now, when the vessel is under con-

struction, the extent to which the price to be deter-

mined under the charter will exceed cost under Sec-

tion 15(b'. Nor are we inclined to reserve jurisdic-

tion over the adjustments and redefinitions under

the charter as they develop over the next quarter

century. The charter with NEPCO has other regu-

latory effects, not under the Act we administer, that

in this case better serve the purpose and allay our

concern.

NEPCO is engaged in the production, transmission

and sale, at wholesale, of electric energy, essentially

to the utility associate companies in the NEES sys-

tem. It is a public-utility as defined in section 201/e)

of the Federal Power Act and its rates are subject

to FERC jurisdiction under section 206 thereof. The

rates allowed to NEPCO include, as a cost of service,

its cost of fuel, which as allowed to NEPCO may in-

clude either the entire cost of transportation under

the joint venture’s charter to NEPCO. if FERC

40a

should determine that it is just and reasonable, or

some other amount.

Our grant of the exemption does not affect FERC’s

authority over rates; and the bilateral arrangement

under the charter following upon the exemption does

not prescribe what should be allowed to NEPCO in

revenues from its wholesale power customers for

transportation costs, either in allowed rates or under

the fuel adjustment clause. These adjusting effects

provide us sufficient assurance to determine that the

exemption from cost remains consistent with the

policy of section 13(b}. In relying on this ratemak-

ing process we do not cede any of our statutory re-

sponsibilities to another agency.*"

We believe that the SEC’s analysis that its determina-

Von pursuant to section 13(b) of PUHCA does not af-

fect our authority to make rate determinations is in

accord with the presiding judge’s conclusion that the

SEC’s regulation pursuant to section 13'(b) of PUHCA

does not preclude this Commission from determining the

reasonableness of Ohio Power's coal costs during the

ratemaking process. We shall affirm the judge’s determi-

nation on this issue.

2. Section 35.14(a)(7) of the Commission's Requla-

tions

Ohio Power contends that section 35.14(a!)(7) of our

regulations “' precludes this Commission from looking at

the price of the Martinka coal because that coal is sub-

ject to SEC and Ohio PUC regulation. Section 35.14

(a)(7) provides in part that “where a utility purchases

fuel from a company-owned or controlled source, the

price of which is subject to the jurisdiction of a regula-

tory body, such cost shall be deemed to be reasonable and

2 24 SEC Docket at 307-08.

“118 C.F.R. § 35.14(a)(7) (1986).

4la

includable in the adjustment clause." Ohio Power argues

that we cannot change the regulation without notice to

those affected.*-

The judge concluded that section 35.14(a)(7) creates

a rebuttable presumption of reasonableness.** We agree.

As the judge noted, in 1975, six months after promulga-

tion of section 35.14(a) (7), the Chairman of the Federal

Power Commission submitted a letter to the Senate Sub-

committee on Reports, Accounting and Management, stat-

ing that section 35.14(a)(7) creates a presumption of

reasonableness, not a conclusive finding of reasonable-

ness. There is thus no retroactive change of a regulation

involved in this case.*!

B. Determining the Reasonableness of Ohio Power's

Affiliate Fuel Purchases

Prior to Opinion No. 133 the reasonableness of affiliate

coal purchases were determined on a cost-of-service basis.

-- Ohio Power brief on exceptions at 57.

“325 FERC at p. 65,184.

“4 ABP, and its affiliates, had actual notice of the Commission's

belief that section 35.14(a)(7) of its regulations does not preclude

a comparable market-price investigation into its affiliate coal pur-

chases. The same issue was involved in McDowell County. Eieht

months after promulgation of section 35.14/a)(7). the Commission

instituted an investigation of AEP’s coal purchasing practices, in-

cluding its purchases from affiliate coal companies which were sub-

ject to SEC regulation. 54 FPC 361 (1975). The Commission

ordered that the investigation “include all coal contracts whether

or not required to be submitted pursuant to Commission Order No.

517, 52 FPC 1304,” the order promulgating section 35.14(a)(7).

The Commission later ordered hearings on the coal cost issue pur-

suant to sections 205 and 206 of the Federal Power Act. 15 FERC

Moreover, the SEC had made its determination before this pro-

ceeding was set for hearing at this Commission. Had the Com-

mission considered the SEC determination to be conclusive, as Ohio

Power contends, the issue of Ohio Power's coal costs would not

have been set for hearing.

42a

Under the Commission’s regulation at section 35.14(a) (7),

affiliate coal purchases which were subject to the-regula-

tion of another agency were deemed to be reasonable.

If the affiliate transactions were not subject to the regu-

lation of another agency, the utility was required to jus-

tify the reasonableness of the cost of the affiliate coal.

In Opinion No. 133, the Commission tested the reason-

ableness of prices of affiliate coal purchases by comparing

them to prices available from non-affiliated suppliers in

a competitive market. The Commission found that “the

interests of consumers will best be protected by permit-

ting utilities that purchase coal from affiliates to recover

no more from their ratepayers than the price that would

have been incurred if a comparable coal supply contract

had been made with a non-affiliated supplier.” =

Although the Federal Power Act does not mandate a

market-price test to determine the reasonableness of af-

filiate transactions, there is no legal impediment to the

use of such a test,“" and there are a number of reasons

arguing for its use. The Commission noted in Opinion

No. 133 that companies that are subject to the competi-

tive market are more efficie.t and innovative than those

assured of a recovery of costs and a reasonable return, and

that a market-price limitation on fuel expense recovery

from affiliated suppliers provides the best incentive for

utilities to develop the least costly sources of fuel.** In

addition to the economic efficiency promoted by a market-

price test, it provides protection from the prospect of

self-dealing that arises in transactions between affiliates.

“> 17 FERC at p. 61,246.

“6 It is noteworthy that the Natural Gas Policy Act, 15 U.S.C.

$ 3311-8432 (1982) establishes the comparable market price as

he ceiling for a just and reasonable amount a pipeline may pay an

affiliated producer for gas. See section 601(b)(1)(E), 15 U.S.C.

$ 3431(b)(1)(E) (1982).

“717 FERC at p. 61,246.

43a

What the Commission noted in stating the purpose of

the comparable market-price test required by the Natural

Gas Policy Act, for transactions between pipeline affili-

ates, is equally applicable to purchases from affiliates by

electric utilities: “At the heart of section 601(b) (1) (E)

is the simple notion that a pipeline may not grant a price

preference to its affiliate.”** In a New Mevxico proceed-

ing subsequent to Opinion No. 133, the Commission char-

acterized the comparable market-price test as “an objec-

tive test” that prevents rate manipulation.“" It provides

a substitute for the arms-length negotiations that pro-

vide objectivity and fair dealing in non-affiliate trans-

actions.

The Commission has not deviated from its continued

support for a market-price test. As recently as 1985 the

Commission reaffirmed its departure from a cost-based

test of reasonableness for affiliate transdctions. The

enunciation of the market-price test in Opinion No. 133

Was given by the Commission as its reason for terminat-

ing a 1979 rulemaking that had proposed to amend seec-

tion 35.14(a1 (7) to delete the provision deeming reason-

able coal costs that were subject to the jurisdiction of

another regulatory agency and to require that utilities

file affiliate coai contracts regardless of jurisdiction by

another agency.“ The Commission, noting that the

amendment to its regulations was proposed to effect the

cost-based policy in effect when the proposal was issued,

(1983).

“ Termination of Rulemaking Dockets, 50 Fed. Reg. 24,779 (June

13, 1985), FERC Statutes and Regulations, Proposed Regulations

Clause Regulations Relating to Fuel Purchases from Company-

Owned or Company-Controlled Sources, 44 Fed. Reg. 28,683 (May

16, 1979), FERC Statutes and Regulations, Proposed Regulations

44a

found that the filing of contracts was no longer neces-

sary because of the departure from that policy and the

adoption of a market-price test.”'

Under a market-price test, the question in this pro-

ceeding is whether the price at which Ohio Power pur-

chased Martinka coal from its affiliate is reasonable when

compared with prices in the market for alternative sup-

plies.

1. Establishing Comparable Market Prices

To establish a benchmark market price, staff identified

other coal-fired electric generating plants within 50-, 75-

and 100-mile radiuses of the Mitchell plant that use coal!

with sulfur content and Btu heat content comparable to

that used at Mitchell,“ and calculated the weighted aver-

age prices of contract coal delivered to those plants. The

prices were taken from FERC Form 423 and were in-

creased by 3.1‘°.""

The prices compared are the delivered prices, thus in-

eluding the costs of transportation. Staff’s study shows

that there sre no significant differences between the

weighted average cost of comparable coal delivered within

FERC Stetetes and Regulations, Proposed Regulations 1977-

42 See, e.g., Ex. 13, Ex. 15 at 13-22, Tr. at 992-93. There is a high

concentration of coal-fired electric plants in the vicinity of the

Mitchell plant.

33 Form 423 was designed to collect data on the cost and quality

of fuel used for generating electricity. Among other things, the

data facilitates comparison of the costs of captive and non-captive

coal. See Change in Public Availability of FPC Form 4253—Data on

Cost and Quality of Fuels for Electric Plants, Docket No. RM77¥-2,

(1979). The increase of 3.1% from the prices reported in Form

423 is based on a one-month audit by the Energy Information Ad-

ministration of the Department of Energy which found that report-

ing utilities had understated their costs by this percentage.

45a

50 miles of Mitchell and the cost of such coal delivered

within the 75- and 100-mile radiuses. Staff ultimately

relied, therefore, on prices within the 50-mile radius to

establish the comparable market price. Within that

radius, there were 13 plants which burned coal with a

sulfur content of 1-4‘7, the range of sulfur content in

the coal burned at Mitchell ‘including Martinka coal

and other coal).

The average prices of the coal at the 13 plants in

staff’s study and the prices Ohio Power paid for Martinka

coal are as follows:

Comparable Coal Martinka Percentage

(1-40 sulfur)* Coal Difference

1980 123.2MMBtu 184.9¢° MMBtu 50%

1981 158.4 268.7 94%

1982 155.4 206.8 33%

* Adjusted up by 3.1% from Form 423 data.

(a) Characteristics of Comparable Coal

A comparable market price is the price of coal that is

suitable for use at the plant in question, even if it is not

identical to the coal from the affiliated supplier. If a

certain characteristic of coal renders it unsuitable for

use at a particular plant, it may nevertheless be suitable

for purposes of price comparison, if the characteristic in

question does not affect prices in the marketplace.

Staff limited its analysis of coal contracts to those for

coal with heat content and sulfur content similar to that

of coal now burned at the Mitchell plant because these

are the two characteristics of coal that most significantly

affect prices in the marketplace." Ohio Power has estab-

lished that coal with a high ash-fusion temperature is

essential to the- efficient operation of Mitchell Unit No.

2.°° Martinka coal has such a characteristic.** However,

34 Ex. 13 at 12.

83 25 FERC at p. 63,060, Ex. 4 at 17.

46a

Ohio has not established that the ash-fusion temperature

of Martinka coal commands a premium in the market-

place over coal with lower ash-fusion temperatures. It is

therefore irrelevant for purposes of establishing compar-

able prices that the precise ash-fusion temperature of the

coal included in staff’s set of comparable contracts is un-

known. We note however, that staff's evidence indicates

that coal burned at neighboring plants with dry bottom

boilers, such as Mitchell’s, which generally require coal

of higher ash-fusion temperature, does not command a

price premium over coals burned at neighboring plants

with wet bottom boilers.”’

On the other hand, the captive coal may have char-

acteristics that increase its price in the marketplace, but

are not required for the boiler. The Mitchell plant was

designed to burn coal with more than 4% sulfur content,

and meet the emission standards of the Environmental

Protection Agency.’* Martinka coa] has a sulfur content

of approximately 1.5%.*" The record in this case is clear

that Ohio Power switched to Martinka coal in Mitchell

Unit No. 2 because of its higher ash-fusion tempera-

ture, not because of its lower sulfur content.’ Some of

Ohio Power’s witnesses suggest that the low sulfur con-

tent of Martinka coal renders it more desirable for en-

vironmental reasons than the non-affiliate coals with

higher sulfur content also burned at Mitchell.‘ However,

36 Td.

37 We also note that it is clear from the record that coal with

ash-fusion temperatures that met Ohio Power’s bid specifications

was available at prices lower than Ohio Power paid for the Martinka

coal. See Section II.B.1.(e) of this Opinion.

38 295 FERC at p. 65,189, Ex. 3, at 10, Ex. 15 at 13.

49 See, e.g., 25 FERC at pp. 65,182, 65,189, Ex. 15kk at 12, Ex. 3

at 22, Ex. 15 at 6.

4 See, ¢.g., 25 FERC at p. 65,181, Ex. 4 at 17.

41 See, e.g., Ex. 4 at 15-21.

dia

there is no evidence that it is required. Ohio Power’s

use of low sulfur coal at Mitchell appears to be fortui-

tous.

As described above, staff developed its benchmark price

based on coals with 1-4 sulfur content from 13 plants.

Of the 13 plants, eight plants used coal with a range of

1-2°% sulfur content, comparable to the 1.5% sulfur con-

tent of Martinka coal.’* If it were clear that there were

no benefits from the use of low sulfur coal at the Mitchell

plant, a proper sample would exclude coals with 1-2%

sulfur content. It appears there are no appreciable bene-

fits in terms of the efficiency of the boiler’s operation.

However, while the low sulfur coal is not required to

meet environmental standards, there may be environ-

mental benefits from its use. We find that the use of

coals with 1-4‘: suifui content is a reasonable com-

promise.

(b) Characteristics of Comparable Contracts

Ohio Power objects that the prices used by staff are

derived from contracts that were executed at different

times than the date of its contract with its affiliate mine.

Furthermore, the contracts are for different lengths of

time than the term of the contract with its affiliate. In

Opinion No. 133, the Commission recognized that the

long-term reliability of a contract with an affiliate, and

the market conditions at the time a long-term contract

is negotiated, are circumstances that might justify dif-

ferences in the prices of coal that otherwise has com-

parable characteristics.'’ In a competitive market, prices

42 Staff calculated a comparable market price based on the coal

from the eight plants which used the 1-2% sulfur coal. As can be

seen. the coal at these plants was also less costly than Martinka

coal:

| Continued |

48a

fluctuate in response to supply and demand, and to

changes in the purchasing power of the dollar. There-

fore, spot prices today may not be comparable to the

prices derived from a 35-year contract executed 10 years

ago.'' Long-term contracts executed in a soft market,

i.e., When supply is greater than demand and prices are

depressed, would likely yield lower prices than contracts

entered during a period of tight supply and high de-

mand, even though the ceal involved is identical in price-

affecting characteristics.

Ohio Power argues that the contracts in staff’s study

were inappropriate in terms of contract vintage. Ohio

Power asserts that, to establish a market price, the Com-

mission should look only at contracts entered into at the

same time as its Martinka contract.’ Seventy-five per-

cent of the eontracts in staff’s study were entered into

after the Martinka contract.*° The 1970s were a period

of almost continuous inflation. Contracts made later in

the decade, after the Martinka contract, would likely re-

flect higher prices. Staff therefore argues that its use of

later-vintaged contracts tended to produce average prices

above the level that would be truly comparable to the

Martinka contract."

42 | Continued |

Comparable Coal Percentage

(1-2 sulfur)* Martinka Coal Difference

1980 141.0¢ MMBtu 184.9¢ MMBtu 31%

1981 152.9 268.7 76%

1982 176.0 206.8 18%

* Adjusted up by 3.1% from Form 423 data.

48.17 FERC at p. 61,246.

‘4 Ohio Power's contract for Martinka coal was executed in 1972

‘aterm of 35 vears.

* Ob.io Power brief opposing exception at 53-54.

’

625 FERC at p. 65,197; Ex. 15 at 15, Ex. 15RR at 5.

‘7 Staff brief on exceptions at 60 n.30.

49a

Ohio Power’s witness, Mr. Renton. testified that the

coal market was “soft” from late 1971 until early 1973."

Supply exceeded demand and prices were low. Ohio

Power’s contract for Martinka coal was dated October 1,

1972, in the midst of the soft market. The Arab oil em-

bargo and sharp increases in the world price of crude oil

in 1973 apparently caused a “tight” coal market, and

prices moved higher.’ Mr. Renton characterized the

market as soft from late 1974 through early 1979, fol-

lowed by a tight market for a brief period in 1979

through the first part of 1980." This testimony does not

indicate any circumstances in the coal market when the

Martinka coal contract was made that would justify un-

usually high prices. Nor does it indieate that prices de-

rived from later-vintaged contracts are likely to be lower

than prices reflecting the 1972 market conditions.

Staff utilized a statistical analysis technique to at-

tempt to discern a correlation between the prices paid

under its set of comparable contracts and the vintages of

those contracts. Its analysis failed to show any consis-

tent, discernible correlation." The judge ultimately con-

cluded that vintages could affect the prices, and should

be looked at carefully.** We agree. The parties have

adequately considered the possible effects of vintage on

the prices derived from staff's set of comparable con-

tracts. The only conclusion we can draw is that staff's

benchmark prices may be higher, i.e., skewed in favor

of Ohio Power, than if only contracts of the Martinka

vintage were used for comparison.

Ohio Power presented evidence of correlations between

higher prices and larger quantities of coal delivered un-

'* Tr. 639-41.

" Tr. 641.

” Tr. 642-43.

*1 25 FERC at p. 65,187. Ex. 13G at 15

‘= 25 FERC at p. 65,199.

50a

der a contract, and between higher prices and contracts

of longer duration.”’ The reliability of the data. used to

show these correlations and the validity of the conclu-

sions drawn were contested by staff. The judge declined

to draw any conclusions from the welter of conflicting

testimony on these contentions."' Staff points out that

Ohio Power failed to quantify what adjustments to staff's

benchmark prices would be warranted if Ohio Power's

alleged correlations were accepted.’ We are likewise un-

able to conclude on the basis of the record evidence that

the asserted correlations exist ‘it so, what adjustments

to the benchmark pric | warrant.

Ohio I ‘= should be

excluded 1 @ ‘al? in devel-

oping t! ‘ed prices

of coal t <igniticant

transportat prices to the

Mitchell p.ant er to test Ohio

Power's claim, ‘h plants burning

1-4) sulfur coa Litchell and found

that the average price “ light wer in 1980 (-2.7:

MMBtu or 2.5 lower!, al -ightly higher in 198]

i -O.lk or 0.1 higher’ and 1982 ¢(—-3.0- or 2.0%

higher'. Staff's analysis shows that the delivered prices

of coal to mine-mouth plants are not significantly differ-

ent from delivered prices to the other plants in the re-

gion.’ Therefore, we find staff's inclusion of mine-mouth

plants in its set of comparable contracts acceptable.

“$95 FERC at p. 65,199, Ex. 9H at 9-15.

425 FERC at p. 65,199.

See,eog., Stat? brief on exceptions at 61-62, n.30, 75-74.

™ Ex. OF, see also Ohio Power brief opposing exceptions at 49.

*? See, Ex. 156 at 17-18, Ex. 18QQ at 3.

Dla

(ii) Transportation costs

Ohio Power questioned staff's reliance on delivered

prices to plants other than Mitchell without considering

the possible effects of differing costs of transportation.

Ohio argued that the delivered price of some alternative

coal supply might be higher ‘or lower:, if delivered to

the Mitchell plant rather than some other plant in the

region, if the transportation ecsts are different. How-

ever, the marginal differences in the costs of transporting

coal to any point within a 50-mile radius are likely to be

small, and there is no reason to anticipate that the aver-

age of any such differing costs to other plants would be

lower than the transportation costs of shipping coal to

the Mitchell plant.*”

(iii) Geographical area

Ohio Power argues that if staff's 100-mile radius were

slightly extended it would then include three more plants

whose coal prices would significantly increase the aver-

ages and that “a natural break in the chain of substitu-

tion’ occurs just beyond the extended radius." Staff

points out that two of the plants Ohio Power wants to in-

clude in the sample burn coal with less than 1.0 sulfur

and would thus be outside the range of comparable coal.

The coal prices at the other plant are only slight!y higher

than the average of those within the 100-mile radius."

Drawing a line at 50 miles or 100 miles obviously in-

volves an element of discretion. If a 100-mile radius is

reasonable, it is unlikely that a 105-mile radius would

be unreasonable. But once the line has been drawn, and

*§ Ohio Power brief opposing exceptions at 50.

5” Differing transportation costs would have to be considered if

benchmark prices were derived from only one or two comparable

contracts.

“ Ohio Power brief opposing exceptions at 48.

8! Ex. 15QQ at 1-3.

52¢

there are reasonable arguments to support where it is

drawn, the burden is on a challenger to demonstrate con-

vineingly that ti. line should be drawn elsewhere. Ohio

Power's proposal to include one more plant using coal

with comparable sulfur content does not carry that

burden.

We find that the presence of 13 plants within 50 miles

that burn coal with price-affecting characteristics suit-

able for use at Mitchell prevides an adequate sample of

the relevant market by which to compare Martinka

prices.

(iv) Price premium for affiliate supply

Ohio Power claimed that, in comparing affiliate coal

prices with market prices. affiliate coal prices should be

adjusted to reflect a price premium warranted by the

security and reliability of an affiliate coal supply." Ohio

Power, however, makes no attempt at quantifying this

price premium. In fact, the evidence indicates that, at

least during the 1981 coal strike, the supply of Martinka

coal was not as reliable as Ohio Power alleges it to be.

We have considered the reliability premium argument

raised by Ohio Power, but find that the company failed

to meet its burden of demonstrating that such a premium

is warranted.

(v) Mine type

Finally, Ohio Power argues that staff's inclusion of

stripmine coal in its sample tends to produce a lower

average price than if only coal from underground mines

were considered. Ohio Power asserts that coal from un-

derground mines is generally more expensive than other-

wise comparable coal from strip mines.’' However. staff's

evidence shows that the strip-mine coal in its sample was

more costly than the coal from underground mines."!

82 Ohio Power brief opposing exceptions at 60-62.

°3 Ohio Power brief opposing exceptions at 61.

53a

Even if Ohio Power’s assertion is generally true, there is

nothing in the record to justify paying a premium for

coal from an underground mine if suitable coal is avail-

able at less cost from a strip mine.

(d) Average Price versus Range of Prices

Ohio Power argues that when a set of contracts are

identified as comparable, the prices under these contracts

should be viewed as establishing a range of reasonable

prices. If prices under the affiliate contract fall within

the range, they should be deemed reasonable. If they are

above the highest prices in the range, refunds should be

required to bring the affiliate contract prices down to the

highest prices in the range, but no lower.” The effect of

Ohio Power’s approach would be to make the contract

with the highest prices the benchmark, and to disregard

prices under the other contracts. However. we cannot ig-

nore the other contracts in the group unless the similari-

ties between the affiliate contract and the contract with

the highest prices are so striking, and the dissimilarities

of the other contracts in the group so significant that the

highest-priced contract should clearly serve as the bench-

mark. Ohio Power did not argue that its Martinka con-

tract was strikingly similar to the highest priced compar-

able contract.

Moreover, the use of a weighted average price is a con-

vention frequently employed to establish a reasonable

midpoint.” It is more appropriate than relying on the

highest-priced coal under any reasonably comparable con-

tract to set the market standard and effectively ignoring

all other lower prices under other reasonably comparable

contracts.

' Ex. 15QQ at 3-5, Ex. 15RR at 6-7.

‘5 Ohio Power brief opposing exceptions at 4, 13-17.

54 a

(e) Ohio Power's Market Price Evidence

Ohio Power submitted evidence of its bid solicitations

in 1980 and 1981 for Martinka-quality coal and the re-

sponses from independent coal suppliers." Current. bids

are not likely to refiect the same factors affecting prices

under the contract for Martinka coal, signed 10 year's

earlier, and original bids are likely to be higher than

finally negotiated contracts. Nevertheless. we agree with

the judge that evidence of current bids is relevant to dis-

cerming current market prices.

Staff notes that the average delivered price of the six

lowest bidders in 1980) was roughly $1.42 MMBtu.

This compares to the $1.41 adjusted benchmark price

that staff derived from its set of comparable transaction:

‘for 1-2’ sulfur content coal) while Ohio Power paid

$1.85 MMBtu for Martinka Coal.” The 1981 solicitation

identified seven suppliers who bid to supply low sulfur

coal (comparable to Martinka), with ash-fusion tempera-

tures and other characteristics that met Ohio Power's

bid specifications, at an average delivered price o|}

roughly $1.54 per MMBtu. This compares to stafl’s

conclusion that the comparable market price for low sul-

fur coal (1-2°° ) that year was $1.53, while Ohio Power

paid $2.69 for Martinka coal.7! Thus, Ohio Power's bid

"TEx. 15DD.

" Staff brief on exceptions at 42.

™ See n.4d2, supra,

’ Staff brief on exceptions at 43. Ex. 15LL at Sch. 6

See n4d2, svpra, The judge noted that the Martinka mine was

closed during part of 1981 because of a strike and other operating

difficulties. 25 FERC at p. 65,182. Because Ohio Power's contract

obligates it to pay the Martinka mine’s fixed costs regardless of the

amount of production, Tr. 734, the unit cost of Matrinka coal was

abnormally high in 1981. Therefore, the bid prices averaging $1.54

might he more properly compared to the $2.07 paid for Martinka

coal in 1982.

dha

evidence can be viewed as supporting staff's position on

comparable market prices.

The judge said that the 1980 and 1981 bid solicitations

lead to the conclusion that Martinka-quality coal could

have been obtained at a cheaper price than was paid

by Ohio Power.** However, he found this conclusion to

be tempered by the fact that the market may have been

soft in those years.“ The average price of 22 offers made

in 1980 ($1.58’MMBtu) compares to staff's adjusted

weighted average price of $1.41/MMBtu for low-sulfur

coal used within a 50-mile radius. In 1981, Ohio Power's

average of 20 offers ($1.76/MMBtu) compares to staff’s

comparable benchmark price of $1.53 MMBtu. However,

the judge’s ultimate conclusion that Martinka prices “are

not too bad” was based on his comparisons of the $40

per ton ‘converted from cents per MMBtu) average of

the 1980 bids to the $44.10 per ton paid for Martinka

coal and the $45 per ton average of the 1981 bids to

the $48 per ton paid for Martinka coal in 1982 (sub-

stituting 1982 Martinka prices for 1981 prices to avoid

the distortions caused by the strike) .”4

We think the prices from the lower bids are more in-

dicative of market prices. Bids are indicative of market

prices to the extent they are likely to be accepted and

form the prices for transactions. Actual transactions are

more likely to develop from among the range of lowest

bids. Consequently, we believe staff’s average of the

lower bids is more indicative of current market prices

than the average of all bids used by the judge as the

basis for his conclusions.

Ohio Power also identified four coal seams owned by

independent coal suppliers, within a 75-mile radius of the

72 25 FERC at p. 61,195.

73 Id.

74 Td.

56a

Mitchell plant, that could provide Martinka-quality coal.”

Ohio Power compared the weighted average prices of coal

from this sample of mines to show that Martinka coal

was $6.89 per ton more expensive in 1980, and $17.82

more expensive in 1981 (the abnormal year), but $6.08

per ton less expensive in 1982.*"

Ohio Power’s study was offered to show the reasonable-

ness of the cost of Martinka coal but not to serve as the

basis for repricing the coal.7 However, even if it had

been offered for the purpose of establishing a comparative

market price, we would not find it adequate. There is

substantial evidence that the relevant geographic market

based on the location of mines rather than proximate

coal-fired plants would approximate the geographic

boundary of the Department of the Interior Bureau of

Mines Districts Nos. 1-8, a much larger area than a

vo-mile radius. The coal burned in other plants near

Mitche!] comes from those districts.** Ohio Power’s bid

solicitations went to companies with mines in those dis-

tricts."". Ohio Power argues that coal from beyond 75

miles is usually not competitively priced because of the

transportation costs. However, several suppliers from

well beyond 75 miles tand within District Nos. 1-8) were

among the bidders with the lowest delivered prices.*”

Ohio Power's study focused on prices of relatively small

quantities of coal, and there are several other aspects of

the study, as the judge noted,“ that preclude us from

according it weight as an indicator of comparable market

prices.

*§ Exhibit 4 at 33-39.

"6 Exhibit 4K.

7 Ex. 4 at 37.

*§ Ex. 15 at 15, Ex. 15BB, Ex. 15CC.

79 Ex. 13 at 15.

““ Ex. 1I5LL at Sch. 6.

*1 25 FERC at p. 65,203.

Dea

2. Burden of Proof

Under section 205(e) of the Federal Power Act and

£35.13(e)(3) of the Commission’s regulations,” the

utility bears the ultimate burden of proving that its rates

are just and reasonable. Application of the burden of

proof is described in Minnesota Power & Light Co.

|U]tilities seeking a rate increase are not required

to demonstrate in their cases-in-chief that all ex-

penditures were prudent .... However, where some

other participant in the proceeding creates a serious

doubt as to the prudence of an expenditure, then the

applicant has the burden of dispelling these doubts

and proving the questioned expenditure to have been

prudent.”

The judge in this proceeding found that staff’s evidence

created a serious doubt gs to whether the price paid for

Martinka coal was prudent. He stated that Ohio Power

“convincingly erased that doubt but did this primarily

by attacking the staff's presentation rather than by an

affirmative showing of prudence.” *' The judge then found

that Ohio Power had satisfied “whatever legal require-

ment is involved in meeting its burden.” “ We disagree,

Ohio Power did not dispel the doubts raised by the staff’s

evidence and did not prove aflirmatively that its fuel

costs were reasonable.

Staff has shown that Ohio Power paid in excess of the

market price for the Martinka coal, and Ohio Power did

not rebut this showing. Moreover, Ohio Power failed to

come forward with evidence that its affiliate coal costs

were reasonable in comparison to market prices. As de-

216 U.S.C. § 824d(e) (1982): 18 C.F.R. § 35.13(e)(3) (1986).

F.E.R.C., 669 F.2d 799, 809 (D.C. Cir., 1981).

“425 FERC at p. 65,202.

85 Jd.

Ss.

a38a

scribed above, all Ohio Power sought to do was cast

doubt on different elements of staff’s case. Ohio Power

never attempted to show what the market price of coal

was and therefore failed to show affirmatively that the

prices it paid for the Martinka coal were reasonable.

Ohio Power also failed to show that staff’s evidence did

not establish a market price with which to compare the

cost of Martinka coal. We therefore shall reverse the

judge’s conclusion that Ohio Power met its burden of

establishing that its costs were reasonable.

3. Conclusion

Our review of the record leads us to conclude that

staff's market study, identifying plants within 50 miles

of Mitchell that burn cval of comparable Btu content to

that of Martinka coal and with suitable sulfur content

(within a one to four percent range), provides a reliable

calculation of comparable market prices by which to judge

the reasonableness of Ohio Power’s Martinka coal costs.

The comparison “ demonstrates that Ohio Power's costs

of Martinka coal were 50°: above market in 1980, 94°

in 1981, and 33° in 1982. We have already considered

proposed adjustments to the prices of comparable trans-

actions to account for differences between the Martinka

coal and that of comparable or suitable coal. We have

considered differences in vintage, quantity, and duration

of the contracts, and all other factors that the parties

have suggested may justify higher prices for Martinka

coal. Ohio Power has not justified disparities of the

magnitude noted above.”

86 See chart in section II.B.1. of this Opinion.

87 We note that Ohio Power's Martinka coal costs have conti:

to exceed significantly the market price derived from the plant

cluded in staff’s study. According to data from FERC Porm 42

Martinka’s prices have exceeded market by 24.2 to icc~gin th

years 1983 through September 1986. The comparisons ar Mart. d

below:

59a

Ohio Power suggests that there are many reasons for

it to enter into affiliate coal contracts. Among these rea-

sons are the effect of having affiliate coal mines on Ohio

Power's ability to negotiate favorable coal contracts with

independent coal suppliers. Ohio Power argues that the

effectiveness of its coal purchases program is shown by

the fact that its electric rates are low in comparison to

neighboring utilities’ rates. The relative level of Ohio

Power's rates. however, is not evidence that its affiliate

coal purchases are reasonable. There are a variety of

reasons, totally unrelated to coal costs, that a neighbor-

ing utility might have differing rates. We therefore are

left with a comparison of the Martinka coal prices with

market price.

In view of the significance of the deviation between

Ohio Power costs for Martinka coal and comparable mar-

ket prices, we cannot conclude that Ohio Power's pur-

chases of Martinka coal for its Mitchell plant are reason-

able costs for its ratepayers to bear. Ohio Power has not

submitted evidence which indicates otherwise. We there-

fore find that Ohio’s rates based on those costs are not

just and reasonable.

C. Establishing a Just and Reasonable Fuel Charge

Having determined that Ohio Power’s rates are not

just and reasonable, the Commission must establish a

Comparable Coal Percentage

(1-4 sulfurs* Martinke Coal Difference

1983 157.0¢ MMBtu 195.1¢ MMBtu 24.37

1984 53.4 199.5 30.1

1985 155.9 191.1 24.2

1986 ** 149.1 198.9 33.4

* Adjusted by 3.1% tor comparison purposes with staff's

1980-82 figures. We have no evidence that the underreporting

noted in E!fA’s one-month audit. and on which staff relied in

its calculations, continues to occur.

** Through September.

H0a

fuel charge that will result in a just and reasonable rate.

This proceeding is distinguishable in this respect from

the proceeding in Opinion No. 133. In that case. the

Commission affirmed the judge’s finding that the price of

affiliate coal was reasonable under the market-price test,

and it was, therefore, unnecessary for the Commission

to establish an allowable price.

In this instance, the Commission believes it is reason-

able to use a market price as the benchmark for Ohio

Power's future fue! charges for Martinka coal and from

Which to calculate refunds for overcollections. For the

“ame reasons that a market-price test is approved for

determining the reasonableness of the company’s proposed

charges, it is appropriate to use the market-price to cal-

culate the just and reasonable rate when the company’s

charges are found unreasonable, particularly in this case

where the parameters for determining a comparable mar-

ket price have been adequately developed in the market

price analysis presented by staff.

Ohio Power posed arguments on and Opposing excep-

tions to the initial decision regarding the adverse effects

that would result if this Commission reprices its coal at

a market price. For instance. Ohio Power argues that

if this Commission reprices its fuel according to market

price, while the SEC applies a cost-of-service require-

ment, it will be “whipsawed” by the two commissions.~

Ohio Power argues that its investment in the Martinka

coal mine should not be judged by focusing on a short-

term comparison with prices from alternative non-

affiliated suppliers. Even if its prices during the early

vears of the mine’s production may be above the market.

that relation may not continue. Ohio Power argues that

the payments for Martinka coal, based on costs. may be

eventually less than the comparable market prices.

See, ¢.g., Ohio Power brief on exceptions at 35.62.

“’ The costs which Ohio Power seeks to recover are the equivalent

of rate-based regulated costs. Prices under rate-base regulation

Hla

Ohio Power states that what may lock like a “bad deal”

in the short run may prove to be a “good deal” in the

long run. However, Ohio Power argues if its charges to

its wholesale ratepayers are limited to the market price

during the early years of the contract, it will lose money

on the transactions if, in the later years when market

prices may exceed the cost of producing the captive coal.

the SEC limits the affiliate transfer price to costs. There-

fore, Ohio Power suggests that it would have no oppor-

tunity to recoup the losses it may have incurred in the

early vears."”

Ohio Power argues thet the practical effect of having

this Commission revulate the transaction with Ohio

Power's ratepayers by one standard, while the SEC regu-

lates the transaction with its affiliate by another stand-

ard is to limit it to recovery under the lower of the two

standards."’ Ohio argues that this amounts to a partial

confiscation of its investment in Martinka, and is unfair

and perhaps unconstitutional.’ It is also detrimental to

public policy, Ohio Power argues, because utilities faced

with the SEC FERC “whipsaw” will forego the advan-

tages of captive coal mines.”

Ohio Power's arguinent is misplaced. As noted above.

we agree with the presiding judge’s conclusion that this

Commission regulates rates while the SEC regulates the

intra-corporate price of coal and that section 318 of the

may be high during the early ye .rs of the inclusion of new plant

in rate base. As depreciation expense is recovered, the rate base

dwindles and the return on the diminished rate base likewise

dwindles (if the rate of return is constant). This phenomenon is

called the “front-end load effect” of rate-base pricing.

“ Ohio Power brief on exceptions at 25, 63, 65.

*! See, ¢.g., Ohio Power brief on exceptions at 17, 52.

*2 Ohio Power brief on exceptions at 25, 33, 56. Ohio Power brief

opposing exceptions at 70.

*“’ Ohio Power brief on exceptions at 63.

H2a

Federal Power Act does not preclude the Commission

from determining the just and reasonable charge for Ohio

Power to recover from its wholesale customers for its

purchases from the Martinka mine.”

The amount that the SEC allows as the transfer price

of coal between Ohio Power and the Southern Ohio Coal

Company does not dictate the amount that Ohio Power

may recover in rates to its customers for fuel costs. This

Opinion orders the company to charge ratepayers, at

most, the comparable market price for Martinka coal.

Although the SEC may limit the affiliate transfer price

to costs even when market prices are higher than costs,”

for electric rate purposes Ohio Power will have the option

to charge its wholesale customers up to the market price

for that affiliate coal. Consequently, Ohio Power is not,

as it alleges, required to limit its rate recovery of

Martinka coal costs to the lower of the two standards.

Allowing Ohio Power to collect the market price, even

when the market price exceeds costs, is consistent with

our holdine in Opinion No. 133 where we stated that

“the interests of the consumers will best be protected by

permitting utilities that

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