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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1991
- **Citation:** 498 U.S. 73

## Text

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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)

ii
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

ii

20

iv

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 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.

15

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.

lo

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

li

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.

18

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-

20

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

la
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.

2a

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.
$ 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).

$
t

“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,

*“ El Paso Natural Gas Company, 23 FERC © 61,216, at p. 61,449
(1983).

*’ Opinion No. 164, 23 FERC © 61,218, at p. 61,457 (1983).

“ Termination of Rulemaking Dockets, 50 Fed. Reg. 24,779 (June
13, 1985), FERC Statutes and Regulations, Proposed Regulations
1977-1981 © 32,409, at p. 33,169; Revision of Fuel Cost Adjustment
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
1977-81 © 32,022.

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-
1981 © 32,409, at p. 33,169.

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,
44 Fed. Reg. 21,596 ( April 10, 1979), 6 FERC © 61,208, at p. 61,520
(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 (1987).

17 FERC P61,123 (1981). rehog denied, 12 FERC. Pele
1982), aff'd. Public Serciee Company of New Mewrico V. FERC
832 F.2d 1201 (loth Cir, 1987

7Va

used in Tennessee Gas Pipeline Co;" that the Commis-
sion should look at Ohio Power’s total coal procurement
and utilization program; and that the record shows that
Ohio Power's rates are relatively low. Therefore, the
Commission should allegedly not be concerned with the
reasonableness of Ohio Power’s coal costs because it is
the rate and not isolated expense components that must
meet the “just and reasonable” test. Ohio Power urges
that the Commission should have not ordered refunds be-
cause the Commission adopted a novel interpretation of
its fuel adjustment clause regulation, extending the mar-
ket price test of Opinion No. 133 to a utility with above
market price coal costs, and because the Commission
Waited more than three years to reverse the judge’s deci-
sion that Martinka coal costs were not unreasonable.
Ohio Power requests that if the Commission denies re-
hearing, our refund order sould be stayed pending judi-
cial review. Finally, Ohio Power argues that our order
has the effect of revising the company’s demand rates.
The company alleges this is impermissible since those
rates were settled earlier in this proceeding.

On June 1, 1987, the Municipal Wholesale Electric
Customers of Ohio Power (Municipals! filed a request
for rehearing of Opinion No. 272. The Municipals claim
that the Corimission should have ordered refunds for the
period 1280-1982 as well as from the effective date of
the rates, December 28, 1982. In addition, they request
that the Commission clarify whether refunds are to be
based on a market price determined with a 3.1% upward
adjustment.’

“Opinion No. 269, 38 FERC P61,306 (1987).

* As indicated in Opinion No. 272, the 3.1% adjustment was made
to compensate for a potential error in the historical data, for pur-
poses of determining whether Martinka coal costs have been execes-
sive. This adjustment was made out of an abundance of caution in
assessing the reasonableness of Ohio Power’s coal costs. However,
in ordering refunds, we directed the utility to calculate refunds

Tla
Discussion

The requests for rehearing raise no arguments which
warrant changing our decision in these proceedings. We
shall, however, address several points raised in the plead-
ings.

Ohio Power contends that we must conduct a “pru-
dence” analysis in order to assess the reasonableness of
its Martinka coal costs. The Commission has already
determined in Opinion No. 133 that, as a matter of
policy, affiliate coal purchases should be judged by a mar-
ket price standard, 17 FERC at p. 61,246, and our deci-
sion has been affirmed on appeal. 832 F.2d at 1212-14.
The utility’s argument that we must conduct a “pru-
dence” analysis in the circumstances of this case is with-
out merit.

Ohio Power also argues that our market price test is
inconsistent with that used by the Commission in Ten-
nessee Gas. In Tennessee Gas, we held that in determin-
ing the reasonableness of natural gas prices paid to affil-
iate producers by pipelines, it was appropriate to compare
the weighted average price of all affiliate natural gas with
prices paid to nonaffiliates by the pipeline and _ third
parties. In this case, we have focused solely on the price
paid by Ohio Power for coal from the Martinka mine.
The decision in Tennessee Gas is inapposite to this case.
As Ohio Power admits in its request for rehearing, all
pipeline natural gas is fungible, whereas all coal is not.
In addition, the question of whether prices paid to affili-
ated coal suppliers should be averaged, where more than
one affiliate relationship is questioned in a_ particular
case, is not present in this proceeding. In any event,
Ohio Power has not presented any evidence in support of
a determination of market price under the test used in
Tennessee Gas, and, thus, failed, even under that stand-

using actual data from FERC Form 423 without making any
adjustment. 39 FERC at p. 61,289. No further clarification is
necessary.

(aa

ard, to dispel the doubts raised by Staff’s evidence as to
the reasonableness of the price paid by it for coal from
the Martinka mine.

Ohio Power's argument that we erred by revising its
demand rates is also misplaced. In approving an earlier
settlement in this proceeding, we stated that it would
hecome effective December 28, 1982, not subject to refund
as to any issue except to the extent an adjustment is
required as a result of the Commission’s determination oz
the captive coal issue. 23 FERC P61,236 (1885). Be-
cause the value of Martinka coal as calculated under the
market price test affects the amount of fuel stock and
working cash included in rate base which, in turn, affects
the level of Ohio Power's unit demand charge. our re-
quirement that Ohio Power revise its demand cnarges is
appropriate. “

A; to Ohio Power's request that we give prospective
effect only to our decision, we have already rejected the
eontention that the application of a market price stand-
ard to the facts included in this case represents a change
in Commission policy. Ohio Power argues that because it
has continued its operation of the Martinka mine pend-
ing a final Commission decision, fairness requires that
the decision be applied prospectively. The Municipals, or
the other hand, request that we apply our decision to coal!
costs paid prior to the effective date of the rates filed in
this proceeding. We carefully considered the interests of
both the utility and its customers in Opinion No. 272 in
determining that refunds should be ordered as of the
date previously chosen, and we find no reason to alter
our conclusion in light of the arguments made on rehear-
ing.

Finally, Ohio Power requests that we stay the effect
of our order pending judicial review. Section 705 of the
Administrative Procedure Act * permits an administrative
agency to stay its order if it finds that “justice so re-

55 U.S.C. § 705 (1982).

73a

quires.” The inquiry involves a balancing of the various
interests involved, including an assessment of whether
the party seeking a stay will suffer irreparable harm if
the stay is denied. Town of Highlands, N. C. v. Nan-
tahala Power & Light Co., 41 FERC P61,288 (1987);
see also Middle South Energy, Inc., 832 FERC P61,207
(1985'. In support of its request for stay, Ohio Power
foeses on the matter of irreparable harm, alleging that
if the Commission's decision is reversed, it will be diffi-
cult for the utility to recover the refunded coal costs
from its customers.

We shall deny the request for a stay. In the event an
appellate court reverses our decision, the Commission
would be empowered to order Ohio Power to be made
whole. The possibility that the utility might experience
difficulty in recouping refunds from its wholesale cus-
tomers does not constitute irreparable injury. Nantahala
Power & Light Co., 21 FERC P61,274 (1982).° Fur-
ther, the utility has not shown that the customers will
suffer little, if any, harm by delaying the payments of
refunds. We believe that the public interest supports the
rapid disbursement of refunds.

The Commission orders:

(Ai The requests for rehearing of Opinion No. 272
filed by Ohio Power and the Municipals are hereby
denied.

(Bi The alternative request by Ohio Power for a stay
of the Commission’s order issued in Opinion No. 272 is
hereby denied.

(C) Subdoekets -002 and -003 of Docket Nos. ERS&2-
553 and ER&2-554 are hereby terminated.

* See also Virginia Petroleum Jobbers Association v. FPC, 259
F.2d 921, 925 (D.C. Cir. 1958).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0718%3A02. Public record. Not legal advice.