Petition for Writ of Certiorari — New York v. FERC
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00 568 0CI 122006
No. OFFICE OF THE CLERK
IN THE
Supreme Court of the United States
PEOPLE OF THE STATE OF NEW YORK and THE PUBLIC
SERVICE COMMISSION OF THE STATE OF NEW YORK,
Petitioners,
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT .
PETITION FOR A WRIT OF CERTIORARI
Volume I
LAWRENCE G. MALONE*
General Counsel
JONATHAN D. FEINBERG
DIANE T. DEAN
Assistant Counsel
NYS-Dept. of Public Service
Public Service Commission
3 Empire State Plaza
Albany, NY 12223-1350
(518) 474-2510
*Counsel of Record
October | 1, 2000
(Additional Counsel on Inside Cover)
CHARLES D. GRAY
National Association of
Regulatory Utility Commissioners
l 100 Pennsylvania Avenue, N.W.
Suite 603, P.O. Box 684
Washington, D.C. 20044-0684
(202) 898-2208
CATHERINE BEDELL
General Counsel
RICHARD BELLAK
Associate General Counsel
Florida Public Service Commission
2540 Shumard Oak Boulevard
Tallahassee, Fl 32399-0850
(850) 413-6092
ALAN G. LANCE
Attorney General
DONALD L. HOWELL, II
Deputy Attorney General
Idaho Public Utilities Commission
472 West Washington Street
P.O. Box 83720
Boise, ID 83720-0074
(208) 334-0312
JOHN J. FARMER, JR.
Attorney General
State of New Jersey
By: HELENE S. WALLENSTEIN
Sr. Deputy Attorney General
Attorney for New Jersey Board
of Public Utilities |
124 Halsey Street Sth Floor
P.O. Box 45029
Newark, NJ 07101
(973) 648-4846
JOANNE SANFORD
North Carolina Utilities
Commission
ROBERT P. GRUHER
Public Staff, North Carolina
Utilities Commission
GISELE L.RANKIN
Saf Attorne
P.O. Box 29520
RALEIGH, NC 27626-0520
(919) 733-2435
WILLIAM H. CHAMBLISS
General Counsel
C. MEADE BROWDER, JR.
Attorney Virginia State
Corporation Commission
Office of General Counsel
P.O. Box 1197
Richmond, VA 23218
(804) 371-9671
CHRISTINE O. GREGOIRE
Attorney General
WILLIAM BERGGREN COLLINS
Senior Assistant Attorney General
ROBERT D. CEDARBAUM
Senior Counsel for the Washington
Utilities and Transportation Commission
P.O. Box 40128
Olympia,WA 98504-0128
(360) 664-1188
HARVEY L. REITER
for the Vermont Department of
Public Serice
MORRISON & HECKER
1150 18th Street, N.W., Suite 800
Washington, D.C. 20036
(202) 785-9100
HARRY IVEY
for the Wyoming Public Service
Commission
Attomey General's Office
State of Wyoming
123 Capitol
Cheyenne, WY 82002
(307) 777-7824
THE REPORTER COMPANY, Printers and Publishers, Inc.
181 Delaware Street, Walton, NY |3856—800-252-7181
(2817 — 2000)
Printed on Recycled Paper
i
QUESTIONS PRESENTED
1. Whether, given that Congress in 1935 stated that federal
regulation extends "only to those matters which are not subject
to regulation by the states" (Federal Power Act (FPA) § 201(a)),
and the transmission of energy from generators to retail
customers in the same state was then "subject to regulation by
the states" (as it has been since 1935), may the Federal Energy
Regulatory Commission (FERC) preempt state jurisdiction over
such intrastate retail transmissions of electric energy?
2. Whether, given that FPA § 201(b) expressly denies FERC
jurisdiction over local distribution facilities, may FERC preempt
state jurisdiction over local distribution facilities when they are
used for wholesale sales?
3. Whether FERC can assert jurisdiction over costs utilities
incur to provide retail services when those costs become
unrecoverable as a result of competition?
4. Should the Court, in resolving questions 1-3, defer to
FERC's reading of its own jurisdictional limitations?
i
PARTIES
Petitioners are the Public Service Commissions of Florida,
New York and Wyoming, the Public Utilities Commissions of
Idaho and North Carolina, the New Jersey Board of Public
Utilities, the Vermont Board of Public Utilities, the Virginia
State Corporation Commission, the Washington Utilities and
Transportation Commission, and the National Association of
Regulatory Utility Commissioners. Pursuant to Rule 29.6 of this
Court's Rules, none of the Petitioners/Intervenors State Utility
Commissions, which are governmental agencies, needs to file a
corporate disclosure statement.
The National Association of Regulatory Utility
Commissioners (NARUC) is a quasi-governmental non-profit
corporation organized under the laws of the District of
Columbia. The NARUC has no corporate parents or affiliates
that have issued shares or debt securities to the public. Within
its membership are the governmental bodies of the fifty States
engaged in the economic and safety regulation of carriers and
utilities. The remaining parties to the underlying proceeding are
listed in Petitioners’ Appendix, "Pet. App.” R.
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ................0. 00000. j
eRe Rea Lg ee Ee Pekar ee i
TABLE OF AUTHORITIES ....................05. vi
INDEX TO APPENDICES ...................00005- x
os, ors, éastddeva dens
SENSE TOT CRIT ROPE
STATUTORY PROVISIONS INVOLVED ............ 2
STATEMENT OF THE CASE ..................200- 2
A. Enactment Of The Federal Power Act ............ 2
B. FERC's Decision Under Review ................ 5
_ + | aaa re rrr Tr 7
REASONS FOR GRANTING THE WRIT .............8
SEE REM el cor eee Re Ee 10
THE DECISION ALLOWING FERC TO
PREEMPT THE STATES' REGULATION OF
THE TRANSMISSION OF ELECTRICITY
FROM A GENERATOR TO A RETAIL
CUSTOMER IN THE SAME STATE
CONFLICTS WITH THIS COURT'S
TEACHING IN HILLSBOROUGH,
IMPERMISSIBLY DEFERS TO FERC'S
READING OF THE STATUTE LIMITING
THAT AGENCY'S JURISDICTION AND
CONFLICTS WITH CONGRESS'
RESERVATION OF STATE JURISDICTION
OVER INTRASTATE TRANSMISSIONS OF
PE caceccccwhusdwdeededsoveens
THE DECISION THAT FERC MAY PREEMPT
STATE REGULATION OF UTILITIES' LOCAL
DISTRIBUTION SYSTEMS WHEN ENERGY
IS RESOLD CONFLICTS WITH CONGRESS'
DIRECTION THAT LOCAL DISTRIBUTION
OF ELECTRICITY BE REGULATED BY THE
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Seeeseeseoeeeee eoeeeeCeeeeeeseseeeeeaet 6 6¢ ¢ eo ee GS
eeeeegeeeeeeseeeeceeeeeeesceseesteeeeaenae cee 6 6 @
CONCLUSION
THE HOLDING THAT FERC MAY PREEMPT
STATE AUTHORITY OVER UTILITY COSTS
INCURRED UNDER STATE SUPERVISION
TO SERVE RETAIL CUSTOMERS VIOLATES
CONGRESS' RESERVATION OF RETAIL
ELECTRIC RATE JURISDICTION TO THE
DED pecctoneseccnussccevensesncendads
?. © kEeeRee@wTeererTeRePRPeeRPRRBRRARRPER AR RS F FS .
vi
TABLE OF AUTHORITIES
Cases: Page
American Textile Mfrs. Inst. v. Donovan, 452 U.S.
SERS cos bap da vec tededetiiawetnetdkés 15
Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv.
Comm'n, 461 U.S. 375 (1983) .................. 9,17
California v. ARC America Corp., 490 U.S. 93
SRP ate pp ely ta eR os ee 18, 19
Chemehuevi Tribe of Indi Federal P
Comm'n, 420 U.S. 395 (1975)... 0... eee, 17
Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984) .............. 911
; icut Light & P Federal P
Comm'n, 324 U.S. 515 (1945) ................. 19, 20
Duke Power Co. v. Federal Power Comm'n, 401
J.) (4.4 \aapeeeees 20
Duquesne Light Co. v. Barasch, 488 U.S. 299
EBs ster SE ip ene eee 23
Federal P Comm'n v. Florida P & Lig
Co. (FP&L), 404 U.S. 453 (1972) ............. passim
De la Cuesta, 458 U.S. 141 (1982) ................. 7
Page
Food and Drug Administrat B
Williamson Tobacco Corp., __ U.S. __, 120
NG iia a Vidcdevélevessvessavd 15
Federal P Comm'n v. Southern Californi
Edison Co., 376 U.S. 205 (1964).............. passim
'n, 513 F.2d 395
a ee a di ened sls bberesss 17
Hillsborough County, Florida v. Automated
Medical Labs, Inc., 471 U.S. 707 (1985) ........ passim
lowa Utilities Board v. Federal C se
Comm'n, 219 F.3d 744 (8th Cir. 2000).............. 15
Jersey Central Power & Light Co. v. Federal
Power Comm'n, 319 U.S. 61 (1943) ........... passim
Jones v. Rath Packing Co., 430 U.S. 519(1977) ...... 8, 10
Settee Sth Bane Comin Soteat
Communications Comm'n, 476 U.S. 355 (1986)... . 22, 25
Medtronic, Inc. v. Lohr, 518 U.S. 484 (1996) .......... 19
Regulatory Commission, 808 F.2d 1525
Cee ei ebeusbeghe 23
Nantahala Power and Light Co. v. Thornburg,
Vili
Page
Northern States Power Co. v. Federal Energy
Regulatory Comm'n, 176 F.3d 1090 (8th Cir.
1999), rehearing denied, 1999 U.S. App. LEXIS
23493 (8th Cir. 1999), cert. denied, 120 S. Ct.
2 Sr aoe Milles 4 on had 17
Oklahoma Natural Gas Co. v. FERC,, 28 F.3d
ITI ER cota Ame ye 11
Public Utilities Comm'n of Rhode Island v.
Attleboro Steam and Electric Co., 273 U.S.
SG 3 eet nade wand wesbwuWeweeasen sees passim
Rice v. Santa Fe Elevator Corp., 331 U.S. 218
SN 6 goa wa wy Veda ad podst ane dccuuae ance 10
r Vv. Burli 472 U.S. 1
RE ga De eS 5 EE 15
United States v. Bass, 404 U.S. 336 (1971) ............ 11
Wi ichi Ww V.
enee then 197 F.2d 472 (7th Cir. 1952) ........ 20
Page
Statutes:
Federal Power Act:
DEI so vce Nabepecdccesceweweans’e sees 4a
Cs Cag ewawed éckte cet ee tOede cece eenn passim
EY feck babs dsdek wacko pNenanaasas’ 3,8; 19
EE reer ee Ter ee re Te ee passim
| RPPrererrcrTecrrrrrerT cree Te re, 14
SRS Ser ererer errr. Teer eT tT 14
Prrrerr rr ere rerrecr rer Tre rT Tere 14
Dv ickshinccw ese bieduel <dueleees ean 14, 15, 17
ER. ss eds duséeweuebesee ve pwanee’ 3, 15, 16, 17
16 U.S.C.:
BODlad, GH) amb] .. ww cc ccc cree cc cree cecens 3
OEE ce ci cc vec ccteces cuseececescensens 3,8
oe od eer errr? Peer 2
xX
INDEX TO APPENDICES
Appendix A - Order of United States Court of
Appeals for the District of Columbia Circuit
III 6 dia cl Ci eel bau velees A-1
Appendix B - Judgment of United States Court of
Appeals for the District of Columbia Circuit
Ee Pau B-1
Appendix C - Opinion of United States Court of
Appeals for the District of Columbia Circuit
RRR SE aoe C-1
Appendix D - Section 31,036 Federal Energy
Regulatory Commission Regulations Preambles
I at ere. man eee me eek EL: oa D-1
Appendix E - Section 31,048 Federal Energy
Regulatory Commission Regulations Preambles
ER PT pate ey eee E-]
Appendix F - 81 FERC Section 61,248
RI ar ta ne TN a aS aD F-]
Appendix G - Statutory Provisions Involved .......... G-1
Appendix H - H. Rep., Hearings Before the
Subcommittee on Communications and Power
of the Committee on Interstate and Foreign
Commerce, 90th Cong., Ist Sess. (1967),
excerpts from Testimony of FPC Chairman
EE EE ba cosdh cb oun s ea weets 4kOwcssened H-1
Appendix I - H. Rep., Hearings Before the
Subcommittee on Interstate and Foreign
Commerce, 74th Cong., Ist Sess. (1935)
Frank R. McNinch, Chairman, Federal
Power Commission, introducing Testimony
of FPC Commissioner Clyde L. Seavey
and excerpts from Seavey Testimony .............. I-1
Appendix J - New York Times, June 8, 1935,
"Utility Foes Map Floor Fight"................... J-1
Appendix K - Hearings before the Committee on
Interstate and Foreign Commerce House of
Representatives 74th Congress, Ist Session,
(1935), excerpts from Testimony of John E.
Benton, General Solicitor, NARUC ............... K-1
Appendix L - Hearings before the Committee on
Interstate and Foreign Commerce House of
Representatives, 74th Congress, 1st Session,
(1935), excerpts from Testimony of Dozier
DeVane, Solicitor, Federal Power Commission ...... L-1
Appendix M - Hearings before a Subcommittee of
the Committee on Interstate and Foreign
Commerce House of Representatives, 80th
Congress, Ist Session (1947), excerpts from
Testimony of Howard E. Wahrenbrock, Assistant
General Counsel, Federal Power Commission ...... M-1
Appendix N - Hearings before the Subcommittee on
Communications and Power of the Committee on
Interstate and Foreign Commerce House of
Representatives, 80th Congress, Ist Session
(1947), excerpts from Testimony of Nelson Lee
Smith, Chairman, Federal Power Commission .......
Appendix O - Excerpts from Supreme Court Brief
of Federal Power Commission in Federal
Power Commission v. Florida Power &
I a rralg Sadie el eee oe ete
Appendix P - Senate Report No. 621, 74th
Congress Ist Session and House Report No.
1318, 74th Congress Ist Session (1935)............
Appendix Q - Glossary of Terms ...................
Appendix Ri - List of Parties... .. 0.0... cece ce cees
PETITION FOR A WRIT OF CERTIORARI
Petitioners/Intervenors State Public Service Commissions,
which regulate retail electric rates and service for some 63
million people, and the National Association of Regulatory
Utility Commissioners (State Commissions et al.), petition for a
writ of certiorari to review a judgment of the United States
Court of Appeals for the D.C. Circuit that allowed the Federal
Energy Regulatory Commission (FERC) to (1) preempt state
regulation of the transmission of electricity from generators to
retail customers in the same state, (2) preempt state regulation
of local systems used to deliver electricity when the electricity is
resold, and (3) set transmission rates that recover a utility's
generation costs "stranded" due to municipalization or retail
competition.
OPINIONS BELOW
The Opinion of the District of Columbia Circuit, Pet. App. C,
isat__ F.3d__, 2000 U.S. App. Lexis 15362. The Court's order
on rehearing (Pet. App.A) is not officially reported. FERC
Order 888 is reported at FERC Stats. & Regs. 31,036, 61 Fed.
Reg. 21,540. FERC's rehearing decisions (Orders 888-A and
888-B) are reported respectively at FERC Stats. & Regs.
q 31,048 and 81 FERC 4 61,248 (1997). Pertinent portions of
the FERC orders are supplied in Pet. App. D, E, and F.
JURISDICTION
The judgment of the Court of Appeals was entered June 30,
2000. The order denying rehearing was issued August 22, 2000.
The Petition for Certiorari is timely because it was filed within 90
days from the date of denial of the Petition for Rehearing
1/ “Municipalization,” "retail transmission," "wholesale sales" and other
relevant terms are defined in the Glossary of Terms contained in the
Appendices, Pet. App. Q.
2
en banc. Supreme Court Rule 13(3). The Petition for Rehearing
en banc was filed within 45 days of the D.C. Circuit's judgment,
as required by D.C. Circuit Rule 35. This Court has jurisdiction
under 28 U.S.C. § 1254(1). ,
T RY NS INV
The relevant statutory provisions are provided in Pet. App.
G.
STATEMENT OF THE CASE
A. Enactment Of The F Power A
Electric service involves the generation of electricity and either
(i) its transmission and local distribution to the ultimate
consumer (a retail sale) or (ii) its transmission to a reseller (a
wholesale sale) who transmits and distributes the power to an
end user (a retail sale). State commissions have traditionally
regulated all aspects of bundled retail transactions, including
service issues and the intrastate sale and distribution of
electricity.
Traditionally, FERC has regulated wholesale power sales and
interstate transmission of electricity, which represent a small
percentage of the total revenues from use of electric systems.
See H. Rep., Hearings Before The Subcommittee on
Communications and Power of the Committee on Interstate and
Foreign Commerce, 90th Cong., Ist Sess. (1967), 1967
Hearings, Testimony of FPC Chairman Lee C. White at 124. Pet
App. H-14. In particular, when Congress enacted the 1935
Federal Power Act (FPA), the states were regulating the rates
that utilities charged to deliver electricity from a generator to a
retail consumer in the same state. H. Rep., Hearings Before the
Subcommittee on Interstate and Foreign Commerce, 74th Cong.,
3
Ist Sess. (1935) "1935 Hearings," Testimony of FPC
Commissioner Clyde L. Seavey, at 420. Pet. App. I-4.
Congress passed the FPA not to override state regulation --
indeed it insisted state regulation was not to be affected -- but to
fill a jurisdictional gap created by a Supreme Court decision that
states could not set rates for wholesale energy sold across state
lines. Public Utilities Comm'n of Rhode Island v. Attleboro
Steam and Electric Co., 273 U.S. 83, 89 (1927). —s filled
this "Attleboro Gap" by empowering the Federal Power
Commission (FPC) to regulate wholesale electricity rates
because, in the absence of federal regulation, there would be no
regulation of interstate sales. Hence, § 201(a) provides that
federal regulation is "however, to extend only to those matters
which are not subject to regulation by the States" (emphasis
added).
In closing the "Attleboro Gap," Congress preserved the states’
jurisdiction over the intrastate retail transmission of electricity.
In fact, the FPA expressly safeguarded state regulation of all
retail sales and local distribution systems. FPA § 201(b). While
Congress empowered the FPC to regulate wholesale sales of
electricity in interstate commerce, it expressly provided that the
FPC, now Federal Energy Regulatory Commission (FERC), was
not to regulate (a) any aspect »f the delivery of electricity from
a generator to a retail consumer in the same state,” or (b) the
use of local distribution facilities.’ This Court has emphasized
that the specific language of FPA section 201(b) expressed
Congress’ intent to draw a “bright line" easily ascertainable
between state and federal jurisdiction:
2 FPA § 201(a), (b)(1), (c) [16 U.S.C. § 824(a), (6) and (c)}; § 212(h)
[16 U.S.C. § 824k(h)}.
2/ FPA § 201(6)(1) [16 U.S.C. § 824(0)(1)).
4
What Congress did was to adopt the test
developed in the Attleboro line which denied state
power to regulate a sale ‘at wholesale to local
distributing companies’ and allowed state
regulation of a sale ‘at local retail rates tc. wit: nate
consumers.’ [citation omitted].
376 U.S. 205, 214 (1964).
The FPA's legislative history is consistent with its express
language preserving state jurisdiction. In 1935, most electric
facilities were intrastate facilities. 1935 Hearings, at 420. Pet.
App. I-12. House Rep. No. 1318, 74th Cong., Ist Sess. (1935)
at 7. Pet. App. P-22. Thus, states’ rights advocates in Congress
added the "intrastate" clause to the FPA "so that [the Act]
specifically will not apply to intrastate business." New York
Times, June 8, 1935, “Utility Foes Map Floor Fight;" see 1935
Hearings, Testimony of John E. Benton, General Solicitor,
NARUC, at 760, 763 et seq; see also Senate Rep. No. 621, 74th
Cong., Ist Sess. (1935) at 18. Pet. App. J-1; K-5 and P-4.
__ FERC's predecessor, the Federal Power Commission (FPC),
repeatedly conceded that the purposes of the FPA were limited
to filling the "Attleboro gap" and protecting state jurisdiction.
Dozier DeVane, Solicitor of the FPC, stated to the House
Committee on Interstate and Foreign Commerce that:
... [S]ection 201 is intended to give the Federal
Power Commission jurisdiction over the wholesale
rates only. (1935 Hearings at 497) ... [T]he plan
of this bill with reference to the regulation of rat
[is that] it seeks to leave in the state commissions
the power to regulate retail rates but through some
federal agency assist the state commissions making
5
available to them the proper data for the
determination of those rates.
earings, at 520. Pet. _L-14. Further, the FPC
Maa eadoel vo Congress i 1947 that its juriaction didnot
include “the regulation of rates and service outside of [the
Attleboro Gap]}.” A Bill to Amend Section 201 of the Federal
Power Act, Hearings Before Subcommittee on Interstate and
Foreign Commerce, 80th Cong., Ist Sess., (hereinafter 1947
Hearings"), at 506. Pet. App. M-1. The FPC stated "The bill
provides that the [FPC] may regulate the rates that no State
commission can regulate. The bill simply fills this gap and that is
all." 1935 Hearings at 549. Pet. App. L-34.
B. FERC's Decision Under Review
Notwithstanding the FPA's clear reservation of state authority
over retail and intrastate matters, in 1998 FERC preempted state
regulation of both the delivery of electricity from a generator to
a retail consumer in the same state and the use of local
distribution facilities to deliver electricity that is resold. FERC
envisioned the introduction of competition, not only in its
jurisdictional market (wholesale sales) but also in the state
jurisdictional retail market and concluded that competition
allowed it to expand its jurisdiction in three areas.
First, FERC asserted jurisdiction over retail transactions when
states unbundled retail rates into charges for delivery and
electricity’ Specifically, FERC reasoned that if states
‘fically identified a transmission rate, FERC could preempt
state jurisdiction over the rates end-users paid for the
transmission of energy to retail customers. Order 888,
ing (“unbundling”) a monopoly rate for delivery of energy and energy
into two rates, oe for energy and the other for delivery
6
1991-1996 FERC Regulations and Preambles (hereinafter Stats.
& Regs.) J 31,036 at 31,980. Pet. App. D-121-D-124.
Second, FERC decided that if a seller of unbundled wholesale
energy made use of a local distribution system, FERC -- not the
states -- would set the rates that the seller would pay for the use
of those local distribution facilities. Pet. App. F-7-F-8.
Depending on the level of FERC's rates, this dual regulation of
local distribution facilities could invite competitors’ suppliers to
structure "sham" wholesale sales in order to avoid state
jurisdiction. See FPA § 212(h) [directing FERC not to issue
orders that induce sham wholesale sales].
Third, FERC preempted the states’ rate treatment of power
plant costs incurred by utilities to serve retail customers, that
may be "stranded" (unrecoverable by utilities) due to
competition. While this is another area regulated by the states
since well before 1935, FERC asserted that it has authority over
the rate treatment of such "retail stranded costs," arising from a
customer's choice of a new electric supplier, because of its
claimed authority over unbundled retail transmission.
Recognizing, however, that states had authority over retail
stranded costs, FERC declined to exercise its purported
authority unless the state regulatory authority lacked power
under state law to address retail stranded costs. In those
circumstances, FERC stated it would include in transmission
rates power plant costs incurred by utilities under state
regulation to serve retail customers. FERC further asserted
jurisdiction over utility generation costs that were stranded by
retail customers becoming wholesale customers, for instance,
through the formation of municipal electric utilities or the
expansion of existing ones.*/ FERC stated that it would be the
wh An entity that had previously been served by an investor-owned electric
utility could decide to municipalize, form its own municipal electric utility,
become a wholesale customer, purchase bulk power from the wholesale
po
7
primary decision-maker on the recovery of those costs. Pet.
App. D-64-D-65, D-80-D-84, E-24-E-25, E-71-E-74. -
C. The D.C. Circuit's Decision
i f
On June 30, 2000, the D.C. Circuit®’ upheld all aspects o
FERC's preemption. Rather than examine whether Congress had
intended to allow such preemption, as required by the Supreme
Court (eg., i
De la Cuesta, 458 U.S. 141, 162 (1982)), the Panel deferred to
FERC's interpretation of the FPA's jurisdictional limitations.
Opn. at 30-31. Pet. App. C-33 to C-34.
In upholding FERC's preemption of state regulation of retail
transmission, the Court below read Federal Power Comm'n v.
Florida Power & Light Co. (FP&L), 404 U.S. 453 (1972) and
319 US. 61, 73 (1943), Opn. at 28-30, Pet. App. C-30-C-31, as
holding that FERC had jurisdiction over all unbundled
transmission of electric energy on interconnected grids, even
transmissions from a generator in the center of a state to a retail
customer next door to the generator's plant. Opn. at 28-31. Pet.
App. C-30-C-34. Reasoning in the alternative, the D.C. Circuit
noted that it felt FERC's interpretation of the FPA's jurisdictional
limitations was entitled to deference. Opn. at 31, Pet. App.
C-33-C-34.
FPA Section 201(b)(1) denies FERC authority over "facilities
used in local distribution," “except as specifically provided in this
market, and resell power to its inhabitants. In that case, utility costs
previously incurred to serve the area (such as installed generating capacity)
could be stranded. Lab a a
£/ The relevant portions of the D.C. Circuit's decision on transmission
were addressed by Judge Tatel. Slip Opinion "Opn." 4. Pet. App. C.
subchapter and subchapter III" [16 U.S.C. § 824(b)(1)]. Opn.
at 31-32, Pet. App. C-34 to C-35. Working from an assumption
that § 201(a)'s grant of power to FERC over wholesale sales
overrides § 201(b)(1)'s directive that FERC not regulate local
distribution facilities (Opn. at 24, Pet. App. C-37), the D.C.
Circuit upheld FERC's preemption of state regulation of local
distribution facilities.
The D.C. Circuit also (1) decided FERC could "backstop"
State decisions on the rate treatment of power plant costs
stranded as a result of retail competition and (2) held that FERC
could be the "primary forum" for recovery of costs stranded as
a result of the loss of retail customers to wholesale competition.
Opn. at 73-76, 80-85, Pet. App. C-80 to C-84, C-87 to C-93.
REASONS FOR GRANTING THE WRIT
The D.C. Circuit's decision conflicts with numerous decisions
of this Court. It also raises extremely important questions,
which go to the heart of a 65-year-old federal/state dual
regulatory scheme. One such question is whether a statute
designed to preserve state authority and to limit federal
regulation to matters that could not be regulated by the states
can be used to preempt state jurisdiction over services
traditionally regulated by the states.
The Supreme Court consistently has articulated a stringent
legal standard for determining whether federal law allows
preemption of state law. Where federal agency action preempts
activities traditionally regulated by the states, the Court "'start[s]
with the assumption that the historic police powers of the States
were not to be superseded ... unless that was the clear and
manifest purpose of Congress." Hillsborough County, Florida
y. Automated Medical Labs., Inc., 471 U.S. 707, 715 (1985)
(quoting Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977));
Arkansa Pt D0p. Corp Arkansas Pub. Ser
9
461 U.S. 375, 383 (1983). The Hillsborough standard is on
pete, tn mn 00 0 on ams SS ee we eS
i the teaching o
een i 467 U.S. 837 (1984), calling
for deference to agency readings of statutes they enforce, should
extend to an agency's construction of a statute that expressly
limits its authority. The Court below held that FERC should
receive deference in construing provisions of the Federal Power
Act that circumscribe its powers. Opn. at 30-31, Pet. App.
C-33-C-34.
The FPA was enacted to fill the "Attleboro gap" and leave
untouched state authority over intrastate retail services. FERC
has relied upon expanded interconnection by utilities to override
Congress’ limitation and claim jurisdiction over utility deliveries
of energy from generators to consumers in the same state. In so
doing, FERC has misapplied this Court's decisions in Federal
l and Jersey
Central, which upheld federal jurisdiction over limited aspects of
utility operations, not over intrastate retail transactions on utility
systems.
The D.C. Circuit's decision also ignored the decisions of this
Court that the Federal Power Act simply filled the "Attleboro
gap" and otherwise preserved state power over the regulation of
utilities. FPC v. Southern California Edison Co., 376 U.S. 205
(1964); Arkansas Elec. Coop, Corp. v. Arkansas Pub. Serv.
Comm'n, 461 U.S. 375, 394 (1983).
Another important ion is whether the FERC can
undermine “a. aoieie ensure reliable and reasonably
priced electricity by overriding the FPA's prohibition of federal
regulation of local distribution facilities when electric providers
structure electric sales as sales for resale. The D.C. Circuit's
decision ignores the FPA's preservation of state authority over
10
local distribution systems and its prohibition of sham wholesale
sales that would defeat state jurisdiction.
Finally, the D.C. Circuit's decision raises a question as to
whether FERC may cross the "bright line" created by this Court's
decision in FPC v. Southern California Edison and assert
jurisdiction over generation costs incurred to provide retail
service.
ARGUMENT
POINT I
THE DECISION ALLOWING FERC TO
PREEMPT THE STATES' REGULATION
OF THE TRANSMISSION OF
ELECTRICITY FROM A GENERATOR TO
A RETAIL CUSTOMER IN THE SAME
STATE CONFLICTS WITH THIS COURT'S
TEACHINC IN HILLSBOROUGH,
IMPERMISSIBLY DEFERS TO FERC'S
READING OF THE STATUTE LIMITING
THAT AGENCY'S JURISDICTION AND
CONFLICTS WITH CONGRESS'
RESERVATION OF STATE JURISDICTION
OVER INTRASTATE TRANSMISSIONS OF
ELECTRICITY
1. As discussed above, this Court has held that where the field
that a federal agency seeks to preempt was traditionally occupied
by the states "we start with the assumption that the historic
police powers of the States were not to be superseded by the
Federal Act unless that was the clear and manifest purpose of
Congress." Hillsborough County, Florida v. Automated
Medical Labs., 471 U.S. at 715 (1985), quoting Jones v. Rath
Packing, 430 U.S. at 525; see Rice v. Santa Fe Elevator Corp.,
11
331 U.S. 218, 230 (1947) (citations omitted).” It is uncontested
that (1) the states were regulating the transmission of electricity
from generators to retail customers in the same state when
Congress enacted the Federal Power Act (1935 Hearings, FPC
Solicitor Devane, at 556, Pet. App. L); and (2) there is no
evidence of a clear and manifest intent by Congress to authorize
preemption of state regulation. FERC Order 888 at 31,780 (Pet.
App. D-42).
Although the states stressed in brief and argument that FERC
had not satisfied the Hillsborough standard, the Court below
made no mention of Hillsborough, relying instead on a
misreading of |Re:
Council, 467 U.S. 837 (1984), and a misapplication of Oklahoma
Natural Gas Co. v. FERC, 28 F.3d 1281, 1283-1284 (D.C. Cir.
1994) to afford seemingly limitless deference to FERC's
interpretation of the Federal Power Act's jurisdictional
limitations.“ The D.C. Circuit's decision conflicts with
Hillsborough as well as numerous decisions of this Court.
2/ This assumption provides assurance that "the federal-state balance,"
bee 404 U.S. 336, 349 (1971), will not be disturbed
United States v. Bass, )
unintentionally by Congress or unnecessarily by the courts.
8/ Even if the Hillsborough standard of review does not apply, the D.C.
Circuit's decision to grant deference to FERC's reading of a federal statute
presents a critical issue of state/federal authority, not only because it was
made in an area of traditional state authority, but because it was made
concerning a statute expressly confining the agency's authority. Throughout
its decision, the Court below predicated its decision on deference to FERC's
construction of provisions of the Federal Power Act that are designed to
cabin that agency's own jurisdiction and reserve jurisdiction to another
regulator, i¢., the state public utility commissions (see, ¢.g., Opn. at 1,
Pet. App.C-33-C-34) ["it is the law of this circuit that the deferential
Ne ey Lapaton of ts one entutery juledicten
(citation omitted)].
12
2. The D.C. Circuit's substitution of deference under
Oklahoma Natural Gas Co. v. FERC, 28 F.2d 1281 (D.C. Cir.
1994), for the Hillsborough standard and its willingness to render
nugatory, by FERC's own admission, FPA § 201(c), present the
following, exceptionally important question: may courts uphold
federal preemption of long-standing state regulation based not on
what Congress intended when it enacted the federal agency's
enabling statute, but on what they surmise, in this case
incorrectly, to be a federal/state balance that best advances the
public interest?
It is vitally important that the Court review this case to answer
this question in the negative, and affirm that traditional state
police power regulation cannot be shunted aside based on federal
agency rules rather than explicit congressional direction. This
case uniquely presents the question of deference in the context
of a federal agency rule that has usurped more than eight decades
of state regulation of electric service.
3. The D.C. Circuit upheld FERC's position that (a) Congress
granted FERC jurisdiction of interstate transmissions of
electricity; and (b) this Court's decision in Florida Power &
Light, plus increased interconnection between utilities in different
States, render interstate all transmissions of electricity. It is the
second premise -- regarding Florida Power & Light and
increased interconnection -- that is fraught with error.
4. The DC. Circuit's reliance on Federal Power Comm'n v.
Florida Power & Light Co., 404 U.S. 453 (1972), as supporting
FERC jurisdiction over all transmissions of electricity on
interconnected grids is terribly misplaced. In that case, which
did not involve federal preemption of state regulation, the
Supreme Court held that the Federal Power Commission had
authority to examine the books of a Florida utility because one
or more electrons from Florida Power & Light's facilities flowed
out of state. 404 U.S. at 454, 461. The Court's conclusion that
13
some electrons on the utility's system flowed in interstate
commerce did not, however, suggest, even remotely, that every
electron on Florida Power's system was in interstate commerce.
Yet, based perhaps on FERC's assurance that Florida Power was
dispositive (FERC Brief at 67-69), the Court below read Florida
Power's holding that FP&L transmitted some electrons in
interstate commerce as a holding that all electrons carried by all
interconnected utilities are in interstate commerce. — Opn. at
29-30 (Pet. App. C-32 to C-33). The D.C. Circuit's inductive
expansion of Florida Power equates to an argument that because
humans have white blood cells and John Smith is a human, all of
John Smith's blood cells are white. It is fallacious. Just as the
existence of white blood cells in human beings does not render
red blood cells non-existent, the fact that some electrons cross
state lines does not render transmissions from generators to
customers in the same state interstate (See FPA § 201(c) [which
states that only transmissions from generators to customers in
different states are interstate]).
5 FERC also assured the D.C. Circuit that Jersey Central
Power & Light Co. v. Federal Power Comm'n, 319 U.S. 61, 73
electrons of the utility flowed in interstate commerce, but it noted
"that although a company may be a public utility under subsection
(e), all of its transactions do not thereby fall under the regulatory
power of the Commission" (emphasis added). 319 US. at 73; see
1947 Hearings, at 553-554. Pet. App. M-29. Indeed, the Court in
Jersey Central stressed that § 201(a), which limits FERC
j . ii . to * *,.¢ not lat 1 by the states "is dire cted to
generation, transmission and sale ..." of electricity (emphasis added).
319 US. at 74. The Court below, in direct conflict, declined to
apply § 201(a) to transmission.
6. FERC's, and subsequently the D.C. Circuit's, reliance on
FP&L and Jersey Central to justify FERC's preemption of retail
14
transmission, stands in stark contrast to repeated statements,
some under oath, by the FPC that FP&L and Jersey Central have
no relevance to the states’ jurisdiction over intrastate rates and
services.
In 1947, after Jersey Central prompted a proposal by state
commissions to amend the Federal Power Act, the FPC testified
the amendment was unnecessary, assuring Congress that
"regulation of retail rates and local services is left to the states by
the present act wh h moves in in
commerce" (emphasis added). 1947 Hearings, Testimony of
FPC Chairman Nelson Smith, at 336, Pet. App. N-14.2/
In 1967, after the Fifth Circuit decision in FP&L, FERC
testified that a proposed amendment to protect state jurisdiction
was unwarranted because "the accounting situation (such as the
one in FP&L) differs from rate jurisdiction ....", 1967 Hearings,
Testimony of FPC Chairman Lee C. White, at 125, Pet. App.
H-15. Moreover, FERC stated in its brief to the Supreme Court
in FP&L that an affirmance of its order would only empower it
to order FP&L interconnection (§ 202), review mergers and
financing (§§ 203, 204) and regulate wholesale rates (§§ 201(b),
205) (FERC FP&L Br., 23, 24, Pet. App. O-3 to 0-4). Citing
FPC v. Southern Cal., 376 U.S. at 210-216, and the FPA's
legislative history, FERC readily acknowledged that it could not
regulate retail matters (FERC FP&L Br., 21, 31, Pet. App. O-2,
O-10). Contrast such assurances with FERC's insistence in this
case that FP&L supports FERC preemption of all unbundled
transmission (FERC D.C. Circuit Br.).
7. In ignoring FERC's inconsistency regarding Florida Power
and Jersey Central, the D.C. Circuit lost sight of this Court's
2’ House of Representatives Report No. 1318 (1935), at 8, stated that "the
[Federal Power] Commission is given no jurisdiction over local rates even
-- eenlaganemeaemninteaiannn
ne ommerce
15
recent teaching that a federal agency's prior assurances to
Congress are, indeed, relevant to subsequent jurisdictional
— ~ US. _, 120. Ct. 1291,
1312-1314 (2000). The D.C. Circuit also failed to apply the
doctrine of judicial estoppel, in conflict with decisions by other
ircuits. That is, FERC, having taken the position in its Brief in
Florida Power & Light that Florida Power & Light and Jersey
Central do not preempt state jurisdiction, is estopped from
ing the opposite. iliti
em Braun sonal 219 F.3d 744, 756 (8th Cir. 2000).
In any event, the D.C. Circuit's decision misreads Florida Power
and Jersey Central. Neither decision supports FERC preemption
of retail transmission.
8 The DC. Circuit's conclusion that all electricity
transmissions are interstate renders meaningless FPA §§ 201(a),
(b), (c), § 205 and § 212(h) and ignores 201(c)'s limitation on
201(b) (see American Textile Mfrs. Inst. _v. Donovan, a " ~
452 U.S. 490, 513 (1981)) [all parts of a statute
afforded meaning]; iber_v
472 US. 1, 8 (1985) [all parts of a statute should be read in
pari materia]).
Section 205 allows FERC to regulate only “the transmission
sale of electric energy subj
Commission” (emphasis added). Section 201(a) provides that
federal jurisdiction shall "extend only to those matters which are
not subject to regulation by the states." The Supreme Court has
held that "[§ 201(a)'s] limitation is directed at ... transmission
and sale ...." Jersey Central, 319 U.S. at 74-75. If §§ 205 and
201(a) and Jersey Central leave any doubt that FERC cannot
preempt state regulation of retail transmissions from generators
to customers in the same state (which are most transmissions),
§ 201(b) and (c) -- together -- state that FERC's jurisdiction shall
apply only to the transmission of electric energy transmitted
16
from a State and consumed at any point outside thereof"
(emphasis added) (§ 201(c)).
Congress would not have specified that FERC's transmission
jurisdiction was limited to energy "transmitted from a state and
consumed at any point outside thereof" (FPA § 201(c)) if it
intended FERC to regulate the transmission of all energy. When
the term "interstate commerce" in § 201(b) is read with
§ 201(c)'s definition of interstate commerce, as it must be, FERC
preemption must be rejected because, having jurisdiction only of
the transmission of electricity "transmitted from a state and
consumed at any point outside thereof" (§ 201(c)), FERC cannot
preempt state regulation of transmission from a generator to a
retail customer in the same state. 12/
9. FERC's position runs contrary not only to the FPA as
enacted in 1935, but to subsequent amendments added in 1992.
Section 212(h) provides that "[n]othing in this subsection shall
affect any authority of any State or local government under State
law concerning the transmission of electric energy directly to an
ultimate consumer." Thus, Congress not only expressly
prohibited FERC from regulating matters, such as retail
transmission, that were being regulated by the states in 1935
(§ 201(a)), and prohibited FERC from regulating the
transmission of electricity from a generator to a retail customer
in the same state (§ 201(b) and (c)), but it has recently declared
that no provision in the subsection should be read as affecting the
authority of any state over the transmission of electric energy to
retail customers (§ 212(h)). The Panel's deference to FERC's
position that 201(b) allows it to override all state laws regarding
retail transmission directly conflicts with 212(h)'s unequivocal
directive.
42’ FERC essentially conceded this point in acknowledging that its
preemption decision rendered § 201(c) nugatory, except for Alaska, Hawaii
and Texas, (FERC D.C. Circuit brief at 67).
17
10. FERC's position that all transmission is subject to its
jurisdiction also broadsides the admitted purpose of the FPA,
which was to fill the "Attleboro gap" (the regulation of interstate
transmission and sale of electricity). This Court has held that
ngress adopted the test developed in Attleboro. FPC vy.
Southam California Edison Co.. 376 U.S. at214. The Attleboro
clearly would have allowed states to control retail intrastate
senaetionn techetiantmnentedente cute qxieiner. Indeed,
the states regulated such sales in 1935 and thereafter.
11. The D.C. Circuit's conclusion that FERC may preempt
state jurisdiction over intrastate retail transmissions conflicts with
unnecessary such case-by-case is"], and the recent decision
in NOTLLUICIT es r 0, 1096 (8 hCir. 1999) :
Comm'n, 176 F.3d 1090, th Cir. , rehearing denied,
1999 U.S. App. LEXIS 23493 (8th Cir. 1999), cert. denied, 120
S. Ct. 1221, U.S. __ (2000) [FERC's “attempt to regulate
the curtailment of electric transmission on native/retail
consumers is unlawful" under the "bright line").
12. Rather than analyze §§ 201(b)(c), 205, 212(h), or the
ample evidence of Congressional intent to safeguard state
regulation, the Court below pointed to increased interconnection
between electric utilities ee en Cas
upholding FERC preemption. Opn. at 24-26, Pet App. C-
— As a threshold matter, technological changes after
Congress has ruled cannot expand an agency's jurisdiction
beyond the limits set by Congress.
Chemehuevi Tribe of Indians
v. Fedsral Power Comm'n, 420 U.S. 395, 422-424 (1975),
'‘n 513 F.2d 395, 401-402
Henry v. Federal Power Comm'n, 2 a
C. Cir. 1975). Further, although the grid in 1935 was
sophletlassed than today, i was exfilelnty interconnected 10
allow 18% of all energy to be imported from other states. 74th
Congress, Ist Session: Senate Report No. 621, at 17, House
Report No. 1318, at 7, Pet. App. P-1. Finally, this Court has
held that mere interconnection of electric utilities is not enough
to defeat state jurisdiction.
Arkansas Elec. Coop. Corp. v.
Arkansas Public Serv. Comm'n, 461 U.S. 375, 394 (1983).
13. The D.C. Circuit's decision was apparently driven by its
view that the electric industry is involved in a transition toward
increased competition and that, as the Panel stated, this is an
"age of interconnected transmission grids, and ... accompanying
technological complexities ...." Opn. at 31, Pet. App. C-34. No
basis whatsoever is provided by this claim to infer that Congress
line-drawing can be ignored or to endorse FERC's unauthorized
decision to redraw those lines. FERC's preemption of
established state regulatory jurisdiction and authority is not in
any sense "pro-competitive." Indeed, FERC's position has the
effect of discouraging states from implementing retail
competition and otherwise serving as regulatory laboratories for
national progress. A state that unbundles retail service and
thereby provides for competition will lose its jurisdiction over
retail transmission service. Retail customers will be deprived of
their accustomed state forum and have to seek relief in
Washington.
14. Moreover, FERC's attempted seizure of the regulatory
authority explicitly conferred on the states by Congress is at odds
with this Court's antitrust holdings, the body of law most directly
concerned with competition. As the Court held in California v.
ARC America Corp., 490 U.S. 93 (1989), federal antitrust laws
do not preempt cases brought under applicable state antitrust
laws, even though the same alleged conduct may have sufficient
impact upon interstate commerce to support a federal antitrust
action. The Court noted that there was no explicit
Congressional intent to preempt state antitrust laws and that the
federal antitrust laws were intended to supplement, not displace,
state antitrust laws. The analogy to this case is telling. This
19
Court should grant certiorari to maintain the jurisdictional
dividing lines, just as it did in California v. ARC America Corp.
Where a state has exercised its traditional state police powers to
protect the welfare of its citizens, State authority should not be
overridden, absent explicit preemption by Congress.
Hillsborough, supra, California v. ARC America, Corp. supra,
see Medtronic v. Lohr, 518 U.S. 484 (1996).
POINT I
THE DECISION THAT FERC MAY
PREEMPT STATE REGULATION OF
UTILITIES' LOCAL DISTRIBUTION
SYSTEMS WHEN ENERGY IS RESOLD
CONFLICTS WITH CONGRESS'
DIRECTION THAT LOCAL DISTRIBUTION
OF ELECTRICITY BE REGULATED BY
THE STATES
1. The Court below concluded that § 201(a)'s grant to FERC
of authority over wholesale sales overrides § 201(b)(1)'s
directive that FERC not regulate local electric distribution
systems. Opn. at 34, Pet App. C-37. It thereby allowed FERC
to usurp state power to ensure reliable local distribution of
electricity over hundreds of thousands of miles of poles, wires
and transformers.+/
The decisi ficts with C ‘cut Light & P
324 U.S. 515, 531 (1945) where this
Court rejected a very similar argument. In that case, the
Supreme Court held that the nature of the energy being carried
1./ There are 2,509,620 miles of distribution circuits in the continental
United States (Edison Electric Institute 1998 survey data).
20
over local facilities has no relevance to § 201(b)(1)'s
juriedictional lenitation:
[Section 201(b)(1)] is the provision which loomed
importantly in the minds and speech of its
sponsors, perhaps was necessary to get the bill
passed, and is one which the Commission must
observe and the courts must enforce .... It does
not seem important whether out-of-state energy
gets into local distribution facilities. They may
Carry no energy except extra-state energy and still
be exempted under the Act. The test is whether
they are local distribution facilities.
Connecticut Power & Light, 324 U.S. at 529, 531.
The Court below, therefore, erred in reasoning that FERC may
regulate the rates charged by utilities for their use of local
distribution facilities if the energy being transmitted over the
local facilities will be resold. See Duke Power Co. v. Federal
Power Comm'n, 401 F.2d 930, 939 (D.C. Cir. 1968) [wherein
the D.C. Circuit itself noted that § 201(b) was added to remove
any possibility of FERC claiming that it could regulate "facilities
used for local distribution"); Wisconsin-Michigan Power Co. v.
Federal Power Comm'n, 197 F.2d 472, 477 (7th Cir. 1952)
["[flacilities used in local distribution’ means facilities used for
making resale and distribution to consumers, jurisdiction over
which is left to the states").
2. Admittedly, FERC does have power to define what is a
local distribution system. FPC v. Southern California Edison
Co., 376 U.S. at 210, n. 6. There is nothing, however, in this
Court's decisions that permits FERC to define "local distribution
system" and then declare that definition will not be followed. In
adopting a definition for purposes of defining the
21
transmission/distribution split, FERC is bound to respect state
jurisdiction over facilities defined as local distribution.
3. The D.C. Circuit's decision that FERC may preempt state
regulation of the rates utilities charge for the use of local
distribution facilities to complete wholesale sales presents
extremely important questions because it renders § 201(b)'s
express language meaningless and undermines the states’ ability
to protect the reliability of local distribution service. FERC's
eget arte nt eR
to evade state consumer service protections | rate recovery ©
costs necessary to ensure reliable local distribution of electricity.
_ Moreover, the Court below ignored Congress’ prohibition
against sham wholocale tranenctions, thet i, sales to wholesalers
that are really disguised sales to retail customers. In
contravention of that prohibition, FERC's order specifically
sanctions sales under federal transmission tariffs by competitive
providers that structure their transactions to make a wholesale
purchase at an end-user’s meter and then turn around and resell
electricity at that meter. In bypassing state local distribution
tariffs and charges, such transactions clearly violate Congress
prohibition against sham wholesale sales and its intent that state
authority over local electric distribution systems be protected.
22/ Federal Power Act Section 212(h) states that "[njo order issued under
this chapter shall be conditioned upon or require the transmission of electric
energy ... (2) to, or for the benefit of, an entity if such electric energy would
be sold by such entity directly to an ultimate consumer unless [exceptions
listed not relevant herein.”
22
POINT Il
THE HOLDING THAT FERC MAY
PREEMPT STATE AUTHORITY OVER
UTILITY COSTS INCURRED UNDER
STATE SUPERVISION TO SERVE RETAIL
CUSTOMERS VIOLATES CONGRESS'
RESERVATION OF RETAIL ELECTRIC
JURISDICTION TO THE STATES
1. With regard to utility generation costs that may become
unrecoverable ("stranded") when retail customers reduce
purchases from utilities due to competition, the Court below
reasoned that FERC could "backstop" state decisions on
recovery of stranded costs originally reflected in
state-jurisdictional retail rates because (1) FERC's assertion of
jurisdiction over retail stranded costs did not impinge on state
jurisdiction over rates (Opn. at 74-75, Pet. App. C-81 to C-83),
and (2) while in most cases, allowing stranded costs related to
generation facilities in transmission rates would not be a
legitimate exercise of FERC's authority, it was permissible in the
"highly unusual circumstances of this case [open access]." Opn.
at 75, Pet. App.C-83. The D.C. Circuit's decision runs contrary
to the FPC v. Southern Cal. Edison (Colton) "bright line." That
bright line over retail service favors state jurisdiction over retail
stranded costs.
2. The D.C. Circuit's first rationale fails because federal
agencies cannot trivialize state rate decisions by preempting the
cost allocations that govern the revenue requirements addressed
by the statute. See Louisiana Pub. Serv. Comm'n v. Federal
Communications Comm'n, 476 U.S. 355, 373-375 (1986) [FCC
could not preempt the states' regulation of intrastate depreciation
charges]; see also Nantahala Power and Light Co. v. Thornburg,
476 U.S. 953, 967-969 (1986) [although allocations of wholesale
costs by FERC, for the purpose of setting wholesale rates bind
23
the states, the states set retail revenue requirements for retail rate
purposes]. The Court below cited |
808 F.2d 1525,
1543-1545 (D.C. Cir. 1987) for the ————~ Ae that generation
costs can be recovered in FERC-jurisdictional rates, Opn. at
74-75, Pet. App. C-81 to C-82, but inasmuch as that case
involved wholesale rates, it does not support a conclusion that
FERC may move retail stranded costs into a FERC transmission
revenue requirement.
3. The second prong of the Court's reasoning is also
incorrect. If utility X spends $500 million on a power plant to
serve customers and 10% of the customers opt for generation
alternatives, "stranding" $50 million of X's investment, the cause
of X's revenue loss, whether it be "open access" (utility X's
willingness to carry a competitor's electricity to its customers) or
customers installing their own mini-generators, does not
transform the stranded generation costs into transmission, or
distribution, costs. Indeed, given that an "open" local
distribution system is as much of a sine qua non to retail
competition as an open transmission system, a percentage of
stranded generation costs, under the D.C. Circuit's reasoning,
should be considered retail distribution costs, which are
regulated solely by the states.
4. The D.C. Circuit concluded that FERC has not interfered
with state legislative decisions because it will only act where
state commissions have no authority to address stranded cost
recovery. Opn. at 76, Pet. App. C-83-C-84. FERC's decision to
"backstop" the states denies state legislatures the discretion to
design innovative solutions to local problems. For example, a
state legislature cannot allow utilities recovery of only a portion
of stranded costs in return for a higher rate of return or
accelerated return on capital, because of the risk that,
notwithstanding the return concessions, FERC will allow
recovery of the remaining stranded costs. That FERC may, in
24
effect, set aside decisions of state legislatures on recovery of
stranded costs conflicts with
488 U.S. 299 (1989), wherein the Court stated "[iJt cannot
seriously be contended that the Constitution prevents state
legislatures from giving specific instructions to their utility
commissions." 488 U.S. at 313.
5. Finally, the Court below concluded that FERC properly
decided it was the "primary forum" for addressing utility
generation costs stranded by the formation of municipal utilities
because FERC's open access decision makes municipalization
feasible and FERC will require a direct nexus between stranded
costs and municipalization. Opn. at 82, Pet. App. C-90. The
D.C. Circuit, however, never explained why municipalization --
a century old phenomenon by which retail customers of a utility
company are served by a newly formed municipal utility --
creates FERC jurisdiction to permit inclusion of stranded retail
generation costs in wholesale transmission rates.
6. Because (a) the states, not FERC, are able and willing to
address retail customers’ rates, and (b) Congress has never
indicated a willingness to override state legislative discretion on
the rate treatment of costs incurred to serve retail customers, the
D.C. Circuit's decision that FERC may preempt state regulation
of the rate recovery of "retail stranded costs" raises an extremely
important question.
25
CONCLUSION
As this Cou it i i
ad nse ean it is the exclusive province of
D.C. Circuit, to the detriment of cae teen ae
FERC reading of the Federal Power Act that aie
meaningless several provisions wherein Congress saf ded
state authority over intrastate and retail electric rates pe amen
The Court should grant the Petition for Certiorari to review the
C. Circuit's decision upholding FERC's transgressions of its
jurisdictional limitations, which Significantly undermine the
longstanding dual regulato
ry system that has successfully serv.
our nation’s electricity customers for dichiin. wba
Respectfully submitted,
Lawrence G. Malone
General Counsel
NYS Public Service Commission
3 Empire State Plaza
Albany, New York 12223-1350
(518) 474-2510
Jonathan D. Feinberg
Diane T. Dean
of Counsel
Dated: October 11, 2000
Albany, New York
APPENDIX A
Order of United States Court of Appeals for the
District of Columbia Circuit
filed August 22, 2000
A-1]
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 97-1715 . September Term, 1999
Transmission Access Policy Study Group,
Petitioner
Vv.
Federal Energy Regulatory Commission,
Respondent
Vermont Department of Public Service, et al.,
Intervenors
Consolidated with 98-1111, 98-1112, 98-1113,
98-1114, 98-1115, 98-1118, 98-1119, 98-1120,
98-1122, 98-1124, 98-1125, 98-1126, 98-1127,
98-1128, 98-1129, 98-1131, 98-1132, 98-1134,
98-1136, 98-1137, 98-1139, 98-1140, 98-1141,
98-1142, 98-1143, 98-1145, 98-1147, 98-1148,
98-1149, 98-1150, 98-1152, 98-1153, 98-1154,
98-1155, 98-1156, 98-1159, 98-1162, 98-1163,
98-1166, 98-1168, 98-1169, 98-1170, 98-1171,
98-1172, 98-1173, 98-1174, 98-1175, 98-1176,
98-1178, 98-1180
BEFORE: Edwards, Chief Judge, Silberman, Williams,
Ginsburg, Sentelle, Henderson, Randolph,
Rogers, Tatel and Garland, Circuit Judges
A-2
ORDER
Upon consideration of petitioners’ petition for rehearing
en banc, and the absence of a request by any member of the
court for a vote, it is
ORDERED that the petition be denied.
Per Curiam
FOR THE COURT:
Mark J. Langer, Clerk
By: _ s/Robert A. Bonner
Robert A. Bonner
Deputy Clerk
Circuit Judges Silberman and Henderson did not participate in
this matter.
Filed On: UNITED STATES COURT OF APPEALS
FOR DISTRICT OF COLUMBIA CIRCUIT
Filed: AUG 22 2000
Clerk
APPENDIX B
Judgment of United States Court of Appeals for the
District of Columbia Circuit
filed June 30, 2000
| UNITED STATES COURT OF APPEALS
. FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 97-1715 September Term, 1999
Transmission Access Policy Study Group, et al.
. Petitioner
Vv.
Federal Energy Regulatory Commission,
Respondent
Vermont Department of Public Service, et al.,
Intervenors
Consolidated with 98-1111, 98-1112, 98-1113,
i 3 98-1114, 98-1115, 98-1118, 98-1119, 98-1120,
18 fo sae | 98-1122, 98-1124, 98-1125, 98-1126, 98-1127,
98-1128, 98-1129, 98-1131, 98-1132, 98-1134,
98-1136, 98-1137, 98-1139, 98-1140, 98-1141,
98-1142, 98-1143, 98-1145, 98-1147, 98-1148,
98-1149, 98-1150, 98-1152, 98-1153, 98-1154,
98-1155, 98-1156, 98-1159, 98-1162, 98-1163,
98-1166, 98-1168, 98-1169, 98-1170, 98-1171,
98-1172, 98-1173, 98-1174, 98-1175, 98-1176,
98-1178, 98-1180
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Before: SENTELLE, RANDOLPH and TATEL, Circuit Judges.
B-2
JUDGMENT
These causes came on to be heard on the petitions for
review of orders of the Federal Energy Regulatory Commission
and were argued by counsel. On consideration thereof, it is
ORDERED and ADJUDGED, by the Court, that the
petitions for review are granted in part and denied in part, in
accordance with the opinion for the Court filed herein this date.
FOR THE COURT:
Mark J. Langer, Clerk
By: _ s/Robert A. Bonner
Robert A. Bonner
Deputy Clerk
Date: June 30, 2000
Opinion Per Curiam
UNITED STATES COURT OF APPEALS
FOR DISTRICT OF COLUMBIA CIRCUIT
Filed: JUN 30 2000
Clerk
MANDATE
Pursuant to the provisions of Fed. R. App. Pro. 41(a)
ISSUED: 8/30/00
By: E. Brown
ATTACHED: —Amending Order
—Opinion
—Order on Costs
APPENDIX C
Opinion of United States Court of Appeals for the
District of Columbia Circuit
filed June 30, 2000
C-]
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 3, 1999 Decided June 30, 2000
No. 97-1715
TRANSMISSION ACCESS POLICY STUDY GROUP, ET AL.
PETITIONER
V.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,
INTER VENORS
Bills of costs must be filed within 14 days after entry of
judgment. The court looks with disfavor upon motions to file
bills of costs out of time.
6 ee tee ae
C-2
(2)Consolidated with
98-1111, 98-1112, 98-1113, 98-1114, 98-1115, 98-1118,
98-1119, 98-1120, 98-1122, 98-1124, 98-1125, 98-1126
98-1127, 98-1128, 98-1129, 98-1131, 98-1132, 98-1134,
98-1136, 98-1137, 98-1139, 98-1140, 98-1141, 98-1142,
98-1143, 98-1145, 98-1147, 98-1148, 98-1149, 98-1150,
98-1152, 98-1153, 98-1154, 98-1155, 98-1156, 98-1159,
98-1162, 98-1163, 98-1166, 98-1168, 98-1169, 98-1170,
98-1171, 98-1172, 98-1173, 98-1174, 98-1175, 98-1176,
98-1178, 98-1180
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Sherilyn Peterson, John T. Miller, Jr., Robert C. McDiarmid,
Stanley C. Fickle, Sara D. Schotland, Jeffrey L. Landsman,
Lawrence G. Malone, Jeffery D. Watkiss, Richard M. Lorenzo,
Isaac D. Benkin, Wallace Ek. Brand, Daniel I. Davidson,
Cynthia S. Bogorad, Harvey L. Reiter and Randolph Lee Elliott
argued the causes for petitioners With them on the briefs were
William R. Maurer, Ben Finkelstein, David E. Pomper, Ronald
N. Carroll, John Michael Adragna, Sean T. Beeny, Wallace F.
Tillman, Susan N. Kelly, Craig W. Silverstein, A. Hewitt Rose,
Bryan G. Tabler, James D. Pembroke, David C. Vladeck,
Robert F. Shapiro, Lynn N. Hargis, Wallace L. Duncan,
Richmond F. Allan, Alan H. Richardson, Michael A. Mullett,
C. Kirby Mullen, Robert A. Jablon, Sara C. Weinberg, John F.
Wickes, Jr., Todd A. Richardson, Brian A. Statz, John P. Cook,
Charles F. Wheatley, Jr., Christine C. Ryan, Robert S. Tongren,
Joseph P. Serio, Barry E. Cohen, Carrol S. Verosky, Jennifer S.
McGinnity, Jonathan D. Feinberg, Charles D. Gray, Robert
Vandiver, Cynthia Miller, Helene S. Wallenstein, William H.
Chambliss, C. Meade Browder, Jr., Mary W. Cochran, Paul R.
Hightower, Brad M. Purdy, Gisele L. Rankin, Robert D.
C-3
Cedarbaum, Edward H. Comer, Edward Berlin, (3)Robert V.
Zener, Elizabeth W. Whittle, James H. McGrew, Donald K.
Dankner, Frederick J. Killion, Joseph L. Lakshmanan, Stephen
C. Palmer, Michael E. Ward, Steven J. Ross, Marvin T. Griff
and Thomas C. Trauger. Leja D. Courter, Robert E. Glennon,
Jr., Neil Butterklee, Zachary D. Wilson, Sheila S. Hollis, Janice
L. Lower and James B. Ramsay entered appearances.
John H. Conway, Deputy Solicitor, Federal Energy
Regulatory Commission, and 7imm L. Abendroth and Larry D.
Gasteiger, Attorneys, argued the causes for respondent. With
them on the brief was Jay L. Witkin, Solicitor. Susan J. Court,
Special Counsel, and Edward S. Geldermann, Attorney, entered
appearances.
Edward Berlin argued the cause for intervenors. With him on
the briefs were J. Phillip Jordan, Robert V. Zener, Edward H.
Comer, William M. Lange, Deborah A. Moss, James H.
McGrew, Steven J. Ross, Elizabeth W. Whittle, Richard M.
Lorenzo, David M. Stahl, D. Cameron Findlay, Peter Thornton,
J. Phillip Jordan, Robert V. Zener, Robert C. McDiarmid,
Cynthia S. Bogorad, Ben Finkelstein, Peter J. Hopkins,
Margaret A. McGoldrick, Jeffery D. Watkiss, Ronald N.
Carroll, Sara D. Schotland, Alan H. Richardson, Wallace L.
Duncan, Richmond F. Allan, A. Hewitt Rose, Wallace F.
Tillman, Susan N. Kelly, John M. Adragna, Sean T. Beeny and
Randolph Lee Elliott. Edward J. Twomey, Richard P.
Bonnifield, Frederick H. Ritts, David L. Huard, Dan H.
McCrary, Mark A. Crosswhite, John N. Estes, Ill, Kevin J.
McIntyre, John S. Moot, Clark E. Downs, Martin V. Kirkwood,
Robert A. Waters, John T. Stough, Jr., Bruce L. Richardson,
Floyd L. Norton, IV, William S. Scherman, Douglas F. John,
Gary D. Bachman, Nicholas W. Fels, Robert Weinberg, Robert
A. Jablon, Peter G. Esposito, Christine C. Ryan, Sheila S.
Hollis, Stephen L. Teichler, James K. Mitchell, Gordon J.
Smith, Edward J. Brady, Kevin F. Duffy, Michael P. May,
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Barbara S. Brenner, Michael J. Rustum, Sandra E. Rizzo, Kirk
H. Betts, Pierre F. de Ravel d'Esclapon, Glen L. Ortman and
William D. DeGrandis entered appearances.
(4)Before: SENTELLE, RANDOLPH and TATEL, Circuit Judges.
Opinion for the Court filed PER CURIAM’:
TABLE OF CONTENTS
ag, rrr er 8
FERC's AUTHORITY TO REQUIRE OPEN ACCESS ... 12
A. Statutory Challenges: FPA §§ 205 and 206... 16
1. §§ 205 and 206 and Otter Tail
Power Company ............0.45+ 16
2. § 206(a) Procedural and Evidentiary
Peer 19
3. Discriminatory Effect of Order 888 ..... 22
B. Constitutional Challenge: Fifth Amendment
}; ls er 25
Ill FEDERAL VERSUS STATE JURISDICTION OVER
TRANSMISSION SERVICES ................45. 26
A. Bundled Retail Sales.................... 29
B. Local Distribution Facilities .............. 34
lV RECIPROCITY .
Utilities ...... +o <wepaw eee 39
B._ Limitation on Reciprocity
' Following our normal practice in complex cases, we shared the writing
of this opinion. Judge Sente!le wrote Section II, Section III, and Section VII.
Judge Randolph wrote Section IV, Section V1. and Section VIII. Judge Tatel
wrote Section |, Section V, and Section LX
V. STRANDED COST RECOVERY PROVISIONS
A. Wholesale Stranded Costs
(5)
C-5
FERC's Authority to Provide for
Stranded Cost Recovery ..........
a. Reasonable expectation of con-
es Ss cece eee
b. Sections 206 and 212 ofthe FPA ....
c. Implications of Cajun ............
Natural Gas Precedent and Conform-
ance to Cost Causation Principles _.. .
a. Natural gas precedent: AGD, K N
Energy, and UDC .............
b. Conformance to cost causation
EE Te
FERC's Mobile-Sierra Findings ...... .
a. FERC's authority to make a generic
public interest finding ..........
b. FERC's stranded cost public
interest finding ...............
c. FERC's public interest finding
regarding customers ............
Availability of Stranded Cost Recov-
ery to Nonjurisdictional Utilities
and G & T Cooperatives...........
Challenges to Technical Aspects of
Order 888's Stranded Cost
Recovery Provisions ............
_ POSCR's challenges to the stranded
cost formula .
Inclusion of known and measurable
costs . oF
Treatment of energy costs in the
market option
Rescission of notice of termination
provision oT Pere
Provision for benefits lost
77
77
Vi.
VIL.
VII.
IX.
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B. Retail Stranded Costs.................
1. Stranded Costs Arising from Retail
ee pe ae
a. FERC's jurisdiction over retail
i ee
b. FERC's refusal to assert jurisdiction
over all retail stranded costs ....
(6) 2. Stranded Costs Relating to Retail-
Turned-Wholesale Customers .....
CREDITS FOR CUSTOMER-OWNED FACILITIES
AND BEHIND-THE-METER GENERATION .......
LIABILITY, INTERFACE ALLOCATION, AND
I os cons ca wadhckesneeecesuess
A. Liability and Indemnification............
B. Interface Allocation ..................
C. Delivery-Point-Specific Discounting ......
TARIFF TERMS AND CONDITIONS ............
Headroom Allocation ...
m"OOW>
NATIONAL ENVIRONMENTAL POLICY ACT AND
REGULATORY FLEXIBILITY ACT COMPLIANCE .. .
A. NEPACompliance ....
1. Adequacy of BaseCase............
2. Failure to Adopt Mitigation
I 0 a Se a o's
B. Regulatory Flexibility Act Compliance ....
Headroom Prioritization ...............
Duplicative Charges ..................
Multiple Control Areas................
Right-of-First-Refusal.................
C-7
Following two notices of proposed rulemaking, the Federal
Energy Regulatory Commission issued Orders 888 and 889 on
April 24, 1996.7 Reflecting the Commission's effort to end
(7)discriminatory and anticompetitive practices in the national
electricity market and to ensure that electricity customers pay the
lowest prices possible, these orders represent, as the Commission
described in a later order not before us, “the foundation
necessary to develop competitive bulk power markets ...."
Regional Transmission Organizations, Order No. 2000, 65 Fed.
Reg. 810, 812 (2000).
Open access is the essence of Orders 888 and 889. Under
these orders, utilities must now provide access to their
transmission lines to anyone purchasing or selling electricity in
the interstate market on the same terms and conditions as they
use their own lines. By requiring utilities to transmit competitors’
electricity, open access transmission is expected to increase
competition from alternative power suppliers, giving consumers
the benefit of a competitive market. Most fundamentally, FERC's
open access policies, combined with parallel action now
occurring on the state level, are intended to create a market in
which customers may purchase power from any of a number of
suppliers. A municipality or factory in Florida, for example, will
no longer have to purchase power from its local utility but
: Promoting Wholesale Competition Through Open Access Nondiscrimi-
natory Transmission Services by Public Utilities; Recovery of Stranded
Costs by Public Utilities and Transmitting Utilities, Order No. 888, FERC
Stats. & Regs. { 31,036, 61 Fed. Reg. 21,540 (1996), clarified, 76 FERC
§ 61,009 and 76 FERC 4 61,347 (1996) ("Order 888"), on reh'g, Order No.
888-A, FERC Stats. and Regs. 4 31,048, 62 Fed. Reg. 12,274, clarified, 79
FERC 4 61,182 (1997), on reh'g, Order No. 888-B, 81 FERC 4 61,248, 62
Fed. Reg. 64,688 (1997), on reh'g, Order No. 888-C, 82 FERC { 61,046
(1998), Open Access Same-Time Information System and Standards of
Conduct, Order No. 889, FERC Stats. & Regs. ¢ 31,035, 61 Fed. Reg.
21,737 (1996) (“Order 889"), on reh'g, Order No. 889-A, FERC Stats. &
Regs. 4 31,049, 62 Fed. Reg. 12,484 (1997), on reh'g, Order No. 889-B, 81
FERC { 61,253 (1997).
C-8
instead may seek cheaper power anywhere in the country. A
customer in Vermont may purchase electricity from an
environmentally friendly power producer in California or a
cogeneration facility in Oklahoma.
All key players in the electricity market have challenged
various provisions of Orders 888 and 889. Their claims range
from the hypertechnical to arguments that FERC lacks authority
to order open access transmission at all. Finding few defects in
the orders, we uphold them in nearly all respects.
I. INTRODUCTION
Historically, vertically integrated utilities owned generation,
transmission, and distribution facilities. They sold gen-(8 )eration,
transmission, and distribution services as part of a "bundled"
package. Due to technological limitations on the distance over
which electricity could be transmitted, each utility served only
customers in a limited geographic area. And because of their
natural monopoly characteristics, utilities have been heavily
regulated at both the federal and state levels.
Since enactment of the Federal Power Act in 1935, the
electricity industry has undergone significant change, both
economically and technologically. Economies of scale have
justified the construction of large (greater than 500 MW)
generation facilities, such as nuclear power plants. Technological
advances in the 1970s and 1980s have permitted small plants to
perate efficiently as well. See Notice of Proposed Rulemaking,
Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, FERC Stats. & Regs. ¥ 32,514 at 33,059-60, 60 Fed.
Reg. 17,662 (1995) ("Open Access NOPR"). Technological
improvements also made feasible the transmission of electric
power over long distances at high voltages. See id. 9 32,514 at
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33,060. Alternative power suppliers, such as cogenerators, small
power producers, and independent power producers emerged in
response to these developments. Constructing and operating
generation capacity at prices lower than the embedded
generation costs of traditional utilities, these alternative suppliers
have created a wholesale market for low-cost power.
The growth of this new wholesale market faced a serious
obstacle. "As entry into wholesale power generation markets
increased," FERC explained, "the ability of customers to gain
access to the transmission services necessary to reach competing
suppliers became increasingly important." /d. at 33,062. Yet the
owners of transmission lines, the traditional utilities that had built
the high-cost generation capacity, denied alternative producers
access to their transmission lines on competitive terms and
conditions. FERC therefore began requiring utilities to file open
access transmission tariffs that permitted other suppliers to
transmit power over (9)their lines under certain circumstances,
such as when a utility sought authorization to merge with
another utility or to sell power at market-based rather than cost-
based rates.
Then, in 1992, Congress enacted the Energy Policy Act,
which amended sections 211 and 212 of the FPA to authorize
FERC to order utilities to "wheel" power—i.e., transmit power
for wholesale sellers of power over the utilities’ transmission
lines—on a case-by-case basis. Pub. L. No. 102-486, 106 Stat.
2776, 2915-16 (1992) (codified at 16 U.S.C. §§ 824j-k). FERC
“aggressively implemented" amended sections 211 and 212 to "
‘facilitate the development of competitively priced generation
supply options, and to ensure that wholesale purchasers of
electric energy can reach alternative power suppliers and vice
versa.’ " Open Access NOPR, 32,514 at 33,064 (quoting
Notice of Proposed Rulemaking, Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, FERC Stats. & Regs.
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4 32,507 at 32,866, 59 Fed. Reg. 35,274 (1994) ("Stranded Cost
NOPR")).
Despite these efforts, a persistent barrier to the development
of a competitive wholesale power sale market remained. The
Commission found that "utilities owning or controlling
transmission facilities possess substantial market power; that, as
profit maximizing firms, they have and will continue to exercise
that market power in order to maintain and increase market
share, and will thus deny their wholesale customers access to
competitively priced electric generation; and that these unduly
discriminatory practices will deny consumers the substantial
benefits of lower electricity prices." Open Access NOPR,
{| 32,514 at 33,052. Power generators not permitted to use
utilities’ transmission lines on reasonable terms have no way to
transmit their power to customers.
Invoking its authority under sections 205 and 206 of the FPA
to remedy unduly discriminatory or preferential rules,
regulations, practices, or contracts affecting public utility rates
for transmission in interstate commerce, 16 U.S.C. §§ 824d-e,
and building on its experience in restructuring the natural gas
industry, see Associated Gas Distribs. v. FERC, 824 F.2d 981
(D.C. Cir. 1987), the Commission issued Orders (10)888 and
889 to "prevent this discrimination by requiring all public utilities
owning and/or controlling transmission facilities to offer non-
discriminatory open access transmission service." Open Access
NOPR, { 32,514 at 33,052. Orders 888 and 889 mandate what
FERC terms "functional unbundling," i.e., separating utilities’
wholesale transmission functions from their wholesale electricity
merchant functions. Specifically, the orders require utilities to
(1) file open access nondiscriminatory tariffs that contain the
minimum terms and conditions of nondiscriminatory services
prescribed by FERC through its pro forma tariff; (2) take
transmission service for their own new wholesale sales and
purchases of electric energy under the same terms and conditions
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as they offer that service to others; (3) develop and maintain a
same-time information system that will give potential and
existing transmission users the same access to transmission
information that the utility enjoys (called the "Open Access
Same-Time Information System" or "OASIS"); and (4) state
separate rates for wholesale generation, transmission, and
ancillary services. See Order 888, J] 31,036 at 31,635-36.
In requiring utilities to provide open access transmission,
FERC acknowledged the dramatic change the orders would
bring about, explaining that "[t]he most critical transition issue
that arises as a result of the Commission's actions in this rule-
making is how to deal with the uneconomic sunk costs that
utilities prudently incurred under an industry regime that rested
on a regulatory framework and a set of expectations that are
being fundamentally altered." Order 888-A, {| 31,048 at 30,346.
Known as "stranded costs," these "uneconomic sunk costs" are
costs that utilities incurred not only with regulatory approval, but
with the expectation of continuing to serve their current
customers. These costs will become "stranded" when customers
take advantage of open access transmission to purchase cheaper
power from suppliers other than their historic utilities. Order 888
affords utilities an opportunity to recover stranded costs from
their wholesale requirements customers, but only from those
customers who use their utility's transmission service to purchase
power from new suppliers, and only if the utility can (11)prove
that it had a reasonable expectation of continued service to that
customer.
After three rehearing orders, the Commission denied any
further rehearing. All petitions for review of Orders 888 and 889
were consolidated and transferred to this circuit. We consider
these petitions in this opinion. Section II considers challenges to
FERC's authority to require utilities to file open access tariffs as
a remedy for undue discrimination. Section III evaluates FERC's
conclusion that it lacked jurisdiction to order retail unbundling
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yet has jurisdiction over transmission where state commissions
have unbundled retail sales. Section IV addresses FERC's
authority to require nonpublic utilities to provide reciprocal open
access transmission service. Section V considers challenges to
Order 888's stranded cost recovery provisions. Section VI
evaluates petitioners’ arguments relating to credits for customer-
owned facilities and behind-the-meter generation. Section VII
addresses discounting, interface allocation, and liability. Section
VIII evaluates other arguments relating to the terms and
conditions of the pro forma tariff. Section IX assesses FERC's
compliance with the National Environmental Policy Act and the
Regulatory Flexibility Act.
In the end, we affirm the orders in all respects except two: we
remand for FERC to explain its treatment of energy costs in the
stranded cost market option (Section V.A.5.c) and to provide a
reasonable cap on contract extensions under existing customers’
right-of-first-refusal (Section VIII.E).
Il. FERC's AUTHORITY TO REQUIRE OPEN ACCESS
Although FERC asserts that "mounting claims of undue
discrimination in transmission access" prompted its movement
toward open access, the open access requirement of Order 888
is premised not on individualized findings of discrimination by
specific transmission providers, but on FERC's identification of
a fundamental systemic problem in the industry. Generally, those
entities that own or control interstate transmission facilities are
vertically-integrated public utilities that also generate and sell
electricity. In its 1995 (12)notice of proposed rulemaking, FERC
observed that there were at that time approximately 328 public
utilities, marketers, and wholesale generation entities with
transmission needs, and that approximately 137 of those owned
or controlled the transmission facilities. See Open Access NOPR,
§ 32,514 at 33,051. Entry into the transmission market is difficult
and restricted, so those utilities that already own transmission
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facilities enjoy a natural monopoly over that field. The
transmission-owning utilities can use their position to favor their
own generated electricity and to exclude competitors from the
market, whether by denying transmission access outnght, or by
providing transmission services to competitors only at
comparatively unfavorable rates, terms, and conditions. Utilities
that own or control transmission facilities naturally wish to
maximize profit. The transmission-owning utilities thus can be
expected to act in their own interest to maintain their monopoly
and to use that position to retain or expand the market share for
their own generated electricity, even if they do so at the expense
of lower-cost generation companies and consumers.
Even before Order 888, some transmission-owning utilities
voluntarily opened their transmission facilities to third party
suppliers and purchasers of electricity, and FPA § 211 explicitly
gives FERC the authority to order involuntary wheeling on a
case-by-case basis. The Commission decided, however, that
relying upon voluntary arrangements and § 211 orders would not
remedy the fundamentally anti-competitive structure of the
transmission industry. Instead, the Commission concluded, such
a piecemeal approach would result in an inefficient "patchwork"
of transmission systems nationwide. "The ultimate loser in such
a regime is the consumer." Open Access NOPR, { 32,514 at
33,071.
As an alternative, the Commission interpreted the anti-
discrimination language of FPA §§ 205 and 206, 16 U.S.C.
§§ 824d, 824e (1994), as giving it the authority to impose open
access as a generic remedy for its findings of systemic anti-
competitive behavior. Invoking that broad authority, in Order
888, FERC requires every transmission-owning public utility
within FERC's jurisdiction to file an Open Access
(13)Transmission Tariff (OATT) containing minimum terms and
conditions for non-discriminatory service and to take
transmission service for their own wholesale sales and purchases
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of electric energy under those filed OATTs. In other words, this
order requires the public utilities to provide the same
transmission services to anyone purchasing or selling wholesale
power—other public utilities, federal power suppliers and
marketers, municipalities, cooperatives, independent power
producers, qualifying facilities, or power marketers—as they
provide to themselves. The Board of Water, Light and Sinking
Fund Commissioners of the City of Dalton (Dalton) operates a
municipally-owned utility system which provides electric power
to residential, commercial, and industrial consumers in the city
of Dalton, Georgia. Dalton obtains transmission services from
the Georgia Integrated Transmission System (ITS), which it
owns along with public utility George Power Company (GPC)
and two other utilities that are not subject to FERC's jurisdiction,
and which GPC operates according to the terms of various filed
agreements Puget Sound Energy, Inc. (Puget) is a public utility
in the Pacific Northwest, where Bonneville Power
Administration, which is not a public utility subject to Order
888's requirements,’ (14)dominates the electricity transmission
market. These two industry petitioners challenge the open access
* Bonneville Power Administration (BPA) "isa power marketing agency
in the Pacific Northwest that markets power from thirty federal hydroclectric
projects constructed and operated by the Corps of Engineers and the Bureau
of Reclamation." /n re Bonneville Power Administration, Power Sale and
Transmission Rates, 54 F.E.R.C. © 62,143 (1991). In Order 888, FERC
concluded that BPA is not a public utility as defined by Federal Power Act
(FPA) § 201(e), and thus is not subject to Order 888's requirements. Order
888, © 31,036 at 31,858. FERC admitted, however, to three circumstances
under which it might review BPA's transmission access and pricing policies:
(1) if BPA files an open access tariff for review and confirmation under the
Northwest Power Act and asks FERC to find that the tariff meets FERC's
Open access policies; (2) to the extent that BPA "is a transmitting utility
subject to a request for mandatory transmission services" under FPA § 211;
and (3) to the extent that BPA receives open access transmission from a
public utility and is thereby subject to the reciprocity provision in that public
utility's pro-forma tariff. /d.
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requirement of Order 888 on various statutory, constitutional,
and other grounds.
Turning first to the FPA itself, Puget and Dalton argue that
§§ 205 and 206 do not give the Commission the authority to
order open access as a generic remedy, and even if the FPA does
give the agency such authority, FERC has failed to satisfy the
statutory requirements for invoking it. Dalton also argues that
Order 888 itself violates the FPA by discriminating against
transmission facility owners who have invested in those assets
Shifting to constitutional concerns, Puget and Dalton, along with
amicus curiae Pacific Legal Foundation, maintain that Order 888
violates the Takings Clause of the Fifth Amendment. Finally,
Dalton argues that the open access requirements of the OATT
interfere with the antitrust conditions of outstanding nuclear
licenses, and thus are unlawful. While we consider each of these
challenges separately,‘ we hold that Order 888's open access
requirement is authorized by and consistent with the FPA and the
Takings Clause. We conclude also that Dalton has not yet
suffered injury from the alleged conflict between open access and
the nuclear license antitrust conditions, and that its complaint on
that issue is therefore not yet ripe for judicial review.
* The Commission and various intervenors on its behalf argue exten-
sively against our jurisdiction over these issues on the grounds that the
petitioners failed, in various ways, adequately to raise their concerns before
the agency and to preserve the issues for judicial review. Upon careful
review of the record, we can safely conclude without further elaboration that
these jurisdictional arguments are without merit, that the Commission has
had ample notice and opportunity to address all of the petitioners’ various
statutory, constitutional, and other challenges to Order 888's open access
requirement, and that we have jurisdiction to consider these issues.
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A. Statutory Challenges: FPA §§ 205 and 206
Section 205 of the FPA broadly precludes public utilities, in
any transmission or sale subject to FERC's jurisdiction, from
"mak[ing] or grant[ing] any undue preference or advantage to
(15)any person or subject[ing] any person to any undue prejudice
or disadvantage..." 16 U.S.C. § 824d(b). Section 206 of the
FPA further provides in relevant part that
[w]henever the Commission, after a hearing had
upon its own motion or upon complaint, shall
find that any rate, charge, or classification,
demanded, observed, charged, or collected by
any public utility for any transmission or sale
subject to the jurisdiction of the Commission, or
that any rule, regulation, practice, or contract
affecting such rate, charge, or classification is
unjust, unreasonable, unduly discriminatory or
preferential, the Commission shall determine the
just and reasonable rate, charge, classification,
rule, regulation, practice, or contract to be
thereafter observed and in force, and shall fix the
same by order.
16 U.S.C. § 824e(a). The statutory issues before us are whether
these provisions give FERC the authority to order involuntary
wheeling as a generic remedy, and if they do, whether FERC
satisfied the procedural and evidentiary requirements imposed by
these provisions
1. $$ 205 and 206 and Otter Tail Power Company
The Commission did not write on a blank slate when it
interpreted FPA §§ 205 and 206 as giving it the authority to
order involuntary wheeling as a gener‘c remedy for systemic anti-
competitive behavior. Puget and Dalton argue principally that the
C-17
Supreme Court's decision in Otter Tail Power Co. v. United
States, 410 U.S. 366 (1973), controls the disposition of this
issue. Otter Tail was an antitrust case in which the Supreme
Court addressed whether the district court could require Otter
Tail Power Company to wheel power for its competitors as a
remedy for monopolistic practices. Contrary to the company's
arguments, the Supreme Court concluded that the district court's
order did not impermissibly conflict with the authority of the
Federal Power Commission, FERC's predecessor, because the
agency did not have the power itself to order involuntary
wheeling under Part II of the FPA, which includes §§ 205 and
206. Puget and Dalton (16)cite various circuit court precedents,
including one from this circuit, as construing Otter Tail to
prevent the Commission from ordering involuntary wheeling as
a generic remedy. See, e.g., Florida Power & Light Co. v.
FERC, 660 F.2d 668 (Sth Cir. Unit B Nov. 1981); New York
State Electric & Gas Corp. v. FERC, 638 F.2d 388 (2d Cir
1980), Richmond Power & Light v. FERC, 574 F.2d 610 (D.C
Cir. 1978). Finally, Puget and Dalton note that subsequent to
Otter Tail, Congress enacted FPA § 211, 16 U.S.C. § 824),
giving FERC the authority to impose open access on a case-by-
case basis to remedy a broad range of problems. The petitioners
argue that, if FPA §§ 205 and 206 authorize the Commission to
impose open access, and if Oster Tail does not prohibit such
action, then there was no reason for Congress to enact § 211.
In response, the Commission contends that we should not
read Otter Tail as limiting its authority under FPA § 206 to
remedy discriminatory behavior, since Offer Jail was an antitrust
case and not an undue discrimination case. The Commission also
maintains that the circuit court cases cited by the petitioners are
not on point and do not prohibit a generic open access remedy.
The Commission points instead to our decision in Associated
Gas Distributors v. FERC, 824 F.2d 981, 998 (D.C. Cir. 1987)
(AGD), in which we upheld a similar open access transportation
requirement imposed by FERC on natural gas transmission, as
C-18
the controlling precedent. Finally, FERC argues that Congress
enacted FPA § 211 to broaden its already existing authority to
order involuntary wheeling, as FPA §§ 205 and 206 authorize
such action only as a remedy for undue discrimination
We agree with FERC that our decision in AGD controls the
disposition of this issue. In AGD, we reviewed a FERC order
imposing open access conditions on pipelines transporting
natural gas. See 824 F.2d at 997-1001. Considering arguments
quite similar to those made by the petitioners here, we concluded
that Otter Tail does not constrain FERC from mandating open
access where it finds circumstances of undue discrimination to
exist. See id. at 998-99. Turning to relevant circuit precedent, we
construed Richmond Power & Light as supporting only the
proposition that a refusal to (17)provide transmission services to
another utility was not per se unduly discriminatory and we
noted that the court in Florida Power & Light expressly left
open the question of whether FERC could impose open access
conditions as a remedy for anti-competitive behavior. See id. at
999. Further, we pointed out that our reading of Richmond is
consistent with other precedent, specifically Central lowa Power
Coop. v. FERC, 606 F.2D 1156 (D.C. Cir. 1979), in which we
upheld FERC's use of its authority to prevent undue
discrimination to condition its approval of a power-pooling
agreement upon removal of membership criteria which denied
certain privileges to some but not all participants. See AGD, 824
F.2d at 999. Indeed, in AGD, w2 noted that open access relies
upon the very same principles that we upheld i'n Central Jowa.
See id. Although AGD addressed open access under the anti-
discrimination provisions of the Natural Gas Act (NGA) rather
than FPA §§ 205 and 206 , we have repeatedly recognized the
similarity of the two statutes and held that they should be
interpreted consistently. See Environmental Action v. FERC,
996 F.2d 401, 410(D.C. Cir. 1993); Tennessee Gas Pipeline Co.
v. FERC, 860 F.2d 446, 454 (D.C. Cir. 1988); see also Arkansas
La. Gas Co. v. Hall, 453 U.S. 571, 577 n.7 (1981). Thus, AGD
C-19
counsels the conclusion that, while Otter Tail may represent a
general rule that FERC’s authority to order open access is
limited, the FPA, like the NGA, makes an exception to that rule
where FERC finds undue discrimination
Moreover, as in AGD, the deferential stanaard of Chevron
U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837
(1984), governs our review of FERC's interpretation of FPA
§§ 205 and 206. See AGD, 824 F.2d at 1001. If we agreed with
Puget and Dalton that the Supreme Court's Otter Jai/ opinion
dictates a particular construction of §§ 205 and 206, then the
Commission's contrary interpretation would not be entitled to
Chevron deference. See Maislin Indus., U.S., Inc. v. Primary
Steel, Inc., 497 U.S. 116, 131 (1990) ("Once we have
determined a statute's clear meaning, we adhere to that
determination under the doctrine of stare decisis, and we judge
an agency's later interpretation of the statute against (18)our
prior determination of the statute's meaning."). But having
concluded that Otter Tail does not govern the disposition of this
case, we are faced solely with considering the validity of FERC's
interpretation of the FPA, a statute that the Commission
administers. In AGD, we concluded that FERC reasonably
interpreted the NGA's ambiguous anti-discrimination provisions
as giving it broad authority to remedy unduly discriminatory
behavior through a generic open access requirement. See AGD,
824 F.2d at 1001. Given the FPA's similar language, we can only
reach the same conclusion with respect to Order 888. For ail of
these reasons, we find that the Commission has the authority
under FPA §§ 205 and 206 to require open access as a generic
remedy to prevent undue discrimination.
2. § 206(a) Procedural and Evidentiary Requirements
Puget and Dalton next argue that, even if FPA §§ 205 and
206 authorize FERC to impose open access generically, § 206(a)
imposes certain procedural and evidentiary requirements for
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action which the Commission failed in two separate but related
ways to satisfy. First, the petitioners claim that FPA § 206(a)
requires substantial evidence of contemporaneous “unjust,
unreasonable, unduly discriminatory or preferential" behavior
before the Commission can act. The Commission made no
finding of discrimination or monopoly control on the part of
Georgia Power Company or Puget. None of the applications or
complaints filed with the Commission accused these petitioners
of unduly discriminatory or anti-competitive behavior. Instead,
the Commission premised Order 888 on a generic finding that
public utility holders as a group have sufficient monopoly power
over the transmission of electricity to engage in unduly
discriminatory and anti-competitive practices, and that this
condition will worsen in the future. To support its finding, the
Commission relied upon unsubstantiated allegations of
discriminatory conduct in public comments, its own experience
in reviewing applications and complaints, and its own
understanding of the incentives for monopolists to behave
discriminatorily.
(19)Puget and Dalton additionally assert that FPA § 206(a)
requires that the requisite findings of undue discrimination be
made in the context of a hearing. Although they concede that a
rulemaking proceeding can satisfy the statute's hearing
requirement, Puget and Dalton maintain that the rulemaking
proceeding nevertheless must clearly identify the challenged
activities and actors, and give the accused actors the opportunity
to demonstrate that their activities were not unlawful. The
petitioners protest that the Commission's notice-and-comment
rulemaking process did not afford them such opportunity.
FERC claims the discretion under NLRB v. Bell Aerospace
Co., 416 U.S. 267, 293 (1974), to choose between rulemaking
and case-by-case adjudication; and FERC contends that its
generic rulemaking process fully satisfied the requirements of
FPA § 206(a). FERC concedes that it relied upon general
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findings of systemic monopoly conditions and the resulting
potential for anti-competitive behavior, rather than evidence of
monopoly and undue discrimination on the part of individual
utilities. Citing our opinion in Wisconsin Gas Co. v. FERC, 770
F.2d 1144, 1166 (D.C. Cir. 1985), however, FERC maintains
that such findings are sufficient to substantiate its decision to
impose the open access requirement. Finally, FERC observes
that we rejected these same arguments in AGD. See 824 F 2d at
1008 (citing Wisconsin Gas, 770 F.2d at 1165-68).
Again, we must agree with the Commission. In American
Public Gas Ass'n v. FPC, we held that the Commission could
exercise its authority under NGA § 5(a), the provision parallel to
FPA § 206, through rulemaking as well as adjudication. See 567
F.2d 1016, 1064-67 (D.C. Cir. 1977); See also Wisconsin Gas,
770 F.2d at 1153 (articulating the American Public Gas
holding). Congress subsequently ratified the American Public
Gas holding when it enacted the Department of Energy
Organization Act, 42 U.S.C. § 7173(c) (1994). See Wisconsin
Gas, 770 F.2d at 1153 n.8 (acknowledging the Act). That statute
provides that "the establishment of rates and charges under the
Federal Power Act [16 U.S.C. 791a et seq.] or the Natural Gas
Act [15 U.S.C. 717 et seq.], may be conducted by (20)rule-
making procedures." 42 U.S.C. § 7173(c) (brackets in original).
By passing a statute adopting the holding of American Public
Gas, and explicitly applying that rule to the FPA as well as the
NGA, Congress signaled its intent that the hearing requirements
of NGA § 5(a) and FPA § 206(a) be interpreted similarly.
Interpreting the hearing requirement of NGA § 5(a), we have
said that, while the Commission cannot rely solely on
“unsupported or abstract allegations," the agency is also not
required to make “specific findings," so long as the agency's
factual determinations are reasonable. See Wisconsin Gas, 770
F.2d at 1158. In AGD, we applied Wisconsin Gas in holding that
the Commission was not required to make specific findings that
C-22
individual rates charged by individual pipelines were unlawful, or
to offer empirical proof for all the propositions upon which its
order depended, before promulgating a generic rule to eliminate
undue discrimination. See AGD, 824 F.2d at 1008-09. Upon
comparison of the order considered in AGD with Order 888, if
anything, FERC more thoroughly documented the reasons for its
actions in Order 888 than in the earlier natural gas order.
Puget claims that AGD and Wisconsin Gas are
distinguishable, and that this case is governed by Electricity
Consumers Resource Council v. FERC, 747 F.2d 1511 (D.C.
Cir. 1984), in which we reversed FERC's adoption of a rate
based on an economic theory in the absence of a discussion of
the practical applications of that theory. See 747 F.2d at 1514.
As the AGD court recognized, however, the court in Electricity
Consumers was persuaded that the Commission had distorted the
economic theory it claimed to apply. See AGD, 824 F.2d at
1008. Just as the pipelines in AGD did, Puget has failed to
articulate exactly how FERC has distorted the theories on which
it relies in Order 888. Additionally, the AGD court rejected the
idea that "Electricity Consumer's reference to ‘economic theory’
was intended to invalidate agency reliance on generic factual
predictions merely because they are typically studied in the field
called economics." /d. Following the rationale of Wisconsin Gas
and AGD, we conclude that (21)FERC has satisfied the
requirements for invoking its authority under FPA § 206(a).
3. Discriminatory Effect of Order 888
Dalton charges that, even ifthe FPA permits FERC to impose
involuntary wheeling generally, the open access requirement of
Order 888 causes rather than remedies discrimination, and
therefore violates FPA § 206(a)'s express requirement that FERC
act against undue discrimination. Specifically, Dalton and the
other non-jurisdictional owners of the Georgia ITS facilities
invested millions of dollars in those facilities in order to use the
C-23
facilities each owns and receive reciprocal open access
transmission services from the other owners. Under the Open
Access Transmission Tariff (OATT), other customers do not
have to make such investments to use the Georgia ITS facilities.
FERC responds that Order 888 does not unduly discriminate
between old and new customers of integrated transmission
systems like the Georgia ITS; and that if Dalton has evidence
that the tariff results in undue discrimination in its individual
circumstances, Dalton remains free to file a petition under FPA
§ 206 for redress, and FERC will consider its claim.
FERC's conclusion that its open access requirement is not
unduly discriminatory is subject only to arbitrary and capricious
review. See 5 U.S.C. § 706(2)(A) (1994); Sithe/Independence
Power Partners, LP v. FERC, 165 F.3d 944, 948 (D.C. Cir.
1999); Union Pacific Fuels, Inc. v. FERC, 129 F.3d 157, 161
(D.C. Cir. 1997). We conclude that FERC has adequately
explained why its open access requirement is not unduly
discriminatory. Relying upon extensive commentary as well as its
own experiences, FERC concluded that, as a general matter,
transmission industry conditions were conducive to
discriminatory practices and anti-competitive behavior, such that
case-by-case adjudication could not adequately address the
problem. FERC also recognized that its generic findings may
have exceptions, and thus that Order 888 may in individual
circumstances have a different result than that intended.
Therefore, Order 888 does not preclude facilities owners the
opportunity to argue their particular circum-(22)stances in their
OATT filings or, as with Dalton, in their own petitions for relief
under FPA § 206(a). Rather, Order 888 merely shifts from a
regulatory norm in which a user of transmission services must
demonstrate to FERC an individualized need for open access to
one in which a provider of transmission services must present to
FERC individualized circumstances requiring relief from open
access. As the petitioners have a mechanism by which they can
seek relief for their particular concerns, we find nothing arbitrary
C-24
or capricious about FERC's conclusion that its approach to open
access is not unduly discriminatory.
In another stab at demonstrating the discriminatory effect of
Order 888's open access requirement, Dalton alerts us to an
agreement entered into between it and Georgia Power Company
(GPC) in partial implementation of antitrust conditions contained
in operating licenses issued by the Nuclear Regulatory
Commission for jointly owned nuclear facilities connected to the
Georgia ITS. Those antitrust conditions require GPC to provide
Dalton with transmission services until the nuclear licenses
expire, long after the ITS Agreement terminates. Dalton alleges
that limitations imposed by Order 888 on Dalton's rights upon
termination of the ITS Agreement are inconsistent with GPC's
obligations under the nuclear licenses, and that the interference
will result in discrimination against Dalton. FERC maintains that
it agreed in addressing GPC's Order 888 compliance filing to
treat the ITS Agreements separately.
Ultimately, Dalton has offered no present injury from the
alleged conflict, so this issue is not ripe for review. Dalton will
only be injured if, upon termination of the ITS Agreement, Order
888 interferes with Dalton's right to transmission services.
Dalton's own argument suggests as much, observing that FERC
"left to GPC the decision whether it ‘must, but cannot, comply
with separate orders’ of NRC and FERC and whether it will
present evidence of such conflict to either Commission," and
complaining that even if GPC does act, "the orders under review
provide no assurance that the competitive transmission and other
service rights provided by the nuclear licenses will be respected
under the OATT." Br. (23)of Petitioner Dalton at 23 (quoting
Order 888-A, 9 41,048 at 30,452). In short, GPC and FERC are
still in the process of determining whether the antitrust
provisions even conflict with Order 888, as well as how to deal
C-25
with any such inconsistency.* Accordingly, this issue is not
appropriate for judicial review at this time.
B. Constitutional Challenge: Fifth Amendment Takings Clause
Puget and amicus curiae Pacific Legal Foundation (Pacific)
contend that Order 888 violates the Takings Clause of the Fifth
Amendment. These petitioners maintain that Order 888's open
access requirement engineers a "taking" in two ways: First, that
FERC's open access requirement effects a regulatory taking by
arbitrarily changing pricing methodology in a way that
excessively deprives transmission owners of their investments in
facilities; and, second, that the open access requirement allows
a physical invasion, a permanent physical occupation, by taking
away the transmission owners’ right to exclude competitors from
their transmission property. We cannot grant relief on either
ground.
When the action of the federal government effects a "taking"
for Fifth Amendment purposes, there is no_ inherent
constitutional defect, provided just compensation is available. At
bottom, both of the petitioners’ Fifth Amendment claims turn not
on whether open access effects a taking, but whether FERC's
cost-based transmission pricing policies in the end provide just
compensation. The remedy of just compensation is not within
our jurisdiction but that of the United States Court of Federal
Claims, under the Tucker Act, 28 U.S.C. § 1491. See Bell
Atlantic Tel. Cos. v. Federal Communications Comm'n, 24 F 3d
1441, 1444 n.1 (D.C. Cir. 1994); Railway Labor Executives’
Ass'n v. United States, 987 F.2d 806, 815-16 (D.C. Cir. 1993).
* GPC's management of the Georgia ITS is subject to the direction of a
committee that includes Dalton representatives.
C-26
We recognize that our jurisdiction to review an agency's
construction of a statute necessarily involves an exercise of
(24)the policy of avoiding constitutional issues where possible,
even though the issues may concern arguable takings amenable
to Tucker Act remedy, "when ‘there is an identifiable class of
cases in which application of a statute will necessarily constitute
a taking.’ " Bell Atlantic, 24 F.3d at 1445 (D.C. Cir. 1994)
(quoting United States v. Riverside Bayview Homes, Inc., 474
U.S. 121, 128 n.5 (1985)). We need not decide whether this case
falls within that category, however, because even if it did, any
takings problem created by Order 888 does not raise such
significant constitutional doubt as to require us to construe the
FPA to prohibit FERC from ordering open access. If there is a
taking, and a claim for just compensation, then that is a Tucker
Act matter to be pursued in the Court of Federal Claims, and not
before us.
IH]. FEDERAL VERSUS STATE JURISDICTION OVER
TRANSMISSION SERVICES
Vertically integrated utilities use their own facilities to
generate, transmit, and distribute electricity to their customers.
Traditionally, the customer paid one combined rate for both the
power and its delivery, thus the industry refers to such sales as
"bundled." To the extent that bundled sales are made directly to
the end user of the electricity, they are also recognized as retail
sales. Utilities may also sell the electricity they generate at
wholesale to other utilities or other resellers of power, which
then resell that power to their own customers. Thus, the same
utility may use its facilities to serve both retail and wholesale
customers. Vertically integrated utilities use their transmission
facilities to move electricity over long distances, and use local
distribution lines to deliver the electricity to the end user.
Even before Congress enacted the FPA, the Supreme Court
held that states could not regulate wholesale sales of electricity.
C-27
See Public Utils. Comm'n of R.I. v. Attleboro Steam & Elec.
Co., 273 U.S. 83 (1927). A few years leter in 1935, Congress
included in the FPA a provision giving the Federal Power
Commission, FERC's predecessor agency, the authority to
regulate "the sale of [electric] energy at whole-(25)sale," as well
as "the transmission of electric energy in interstate commerce.
FPA § 201(a), 16 U.S.C. § 824(a) (1994). FERC also limited
federal regulation "to those matters which are not subject to
regulation by the States," id., and reserved to the states
"jurisdiction ... over facilities used for the generation of electric
energy or over facilities used in local distribution or only for the
transmission of electric energy in intrastate commerce... FPA
§ 201(b), 16 U.S.C. § 824(b). Pursuant to these provisions,
FERC has regulated wholesale power sales and interstate
transmissions, and state agencies have retained jurisdiction over
bundled retail transactions, including service issues and the
intrastate sale and distribution of electricity through local
distribution facilities.
Initially, as most transactions involved either a wholesale or
a retail sale, and correspondingly transmission or local
distribution facilities, this regulatory division of labor was
straight-forward in application. Indeed, in 1935, when Congress
enacted the FPA, the networks of high-voltage, long-distance
transmission lines which today crisscross the United States did
not exist. Instead, vertically integrated utilities individually built
facilities sufficient to meet the power needs of their customers.
Over time, however, the landscape of the electric industry
changed.
Utilities decided to cover demand spikes by sharing power,
rather than by building more generation capacity. The
transmission grid developed from these arrangements.
Eventually, nonutility generators started producing electricity,
and power marketers began to buy and resell electricity to other
power marketers, utilities, or even directly to consumers. These
C-28
industry participants do not own transmission lines, so they rely
upon the utilities that own such facilities to provide transmission
services. In addition to their traditional bundled sales activity,
vertically integrated utilities started "unbundling" their own
services and developing their own power marketing units to buy
and sell electricity at wholesale. Some states even mandate
unbundling of retail services. As a result of these changes,
facilities once used solely for local distribution of bundled retail
sales now engage regularly in (26)unbundled wholesale
transmissions and retail delivery as well. Thus, while the
- electricity world once neatly divided into spheres of retail versus
wholesale sales, and local distribution versus transmission
facilities, such is no longer the case.
In Order 888, FERC reinterpreted FPA § 201 to
accommodate the new industry practices and conditions. FERC
left the regulation of bundled retail transmissions to the states,
concluding that "when transmission is sold at retail as part and
parcel of the delivered product called electric energy, the
transaction is a sale of electric energy at retail." Order 888, 9
31,036 at 31,781. Nevertheless, FERC asserted jurisdiction over
all unbundled retail transmissions, and left to the states only the
sales portion of unbundled retail transactions, on the ground that
FPA § 201 gives it jurisdiction without qualification over all
transmission by public utilities in interstate commerce. See id.
Also, while acknowledging that FPA § 201(b) explicitly places
retail transmissions by "facilities used in local distribution"
beyond the Commission's jurisdiction, FERC adopted a seven
factor jurisdictional test for determining which facilities fall
within that category, and claimed exclusive authority over those
that do not. See id. at 31,780, 31,784. In the present litigation,
eachy of these changes is challenged, with some petitioners
claiming that FERC went too far, and others contending that the
Commission did not go far enough in asserting jurisdiction.
C-29
A. Bundled Retail Sales
Several state regulatory commissions complain that FERC
exceeded the boundaries of its statutory authority by asserting
jurisdiction over unbundled retail transmissions. These state
petitioners argue that the plain meaning and history of FPA
§ 201(a) gives FERC the authority to regulate only transmissions
of electricity consumed in a state other than that in which the
electricity was generated, if the transmission was not otherwise
subject to state regulation. The states historically have regulated
retail transmissions as part of bundled retail sales of electricity,
while FERC has regulated wholesale transmissions, and the
division of regulatory jurisdiction should not change merely
because those transac-(27)tions have now been unbundled into
separate generation, transmission, and sales components.
Two groups of transmission dependent utilities, TAPS and
TDU Systems, and the nation's largest power wholesaler, Enron
Power Marketing (collectively the “unbundling and discounting
or "U&D" petitioners), both intervene on the side of FERC with
respect to the states’ claim, and separately challenge FERC's
interpretation of its jurisdiction on different grounds. The U&D
petitioners contend that FERC impermissibly limited its
jurisdiction by leaving the regulation of bundled retail
transmissions to the states. These parties maintain that FERC has
the authority to regulate both bundled and unbundled retail
transmissions, and that FERC violates FPA § 206 by limiting the
scope of Order 888 to the latter. To establish that bulk
transmission by utilities is transmission in interstate commerce
regardless of whether the power is sold at wholesale or retail, the
U&D petitioners cite particularly FPC v. Florida Power & Light
Co., 404 U.S. 453 (1972), and Jersey Central Power & Light
Co. v. FPPC, 319 U.S. 61 (1943), two of the cases relied upon by
FERC in the Notice of Proposed Rulemaking, 1 32,514 at
33,135-42. As further support that FERC's jurisdiction extends
to all interstate transmissions, the U&D petitioners offer NGA
C-30
precedent recognizing FERC's authority over all interstate gas
transportation, if not the gas being transported. See, e.g. FPC v.
Louisiana Power & Light Co., 406 U.S. 621, 636 (1972); United
Distribution Cos. v. FERC, 88 F.3d 1105, 1153 (D.C. Cir. 1996)
(UDC); Mississippi River Transmission Corp. v. FERC, 969
F.2d 1215 (D.C. Cir. 1992). These petitioners contend that
excluding bundled retail transmissions from the OATT will
permit discrimination and give owners a competitive advantage,
contrary to the mandate of FPA § 206(a) that FERC eliminate
undue discrimination. Accordingly, the U&D petitioners claim
that FERC erred when it declined to mandate functional
unbundling for an owner's transmissions to bundled retail
customers of (1) its own _ generated power or
(2) power purchased at wholesale.
In response to these challenges, FERC maintains that the plain
meaning of FPA § 201 gives the Commission jurisdic-(28)tion
over all interstate transmissions without qualification, while at
the same time limiting jurisdiction over sales to wholesale sales.
Relying particularly on Florida Power & Light and Jersey
Central Power & Light, FERC asserts broad jurisdiction over all
transmission activities in interstate commerce. As for bundled
retail sales, FERC's position is that once the transmission service
is bundled with generation and local distribution, it becomes
merely a component of the retail sale itself. over which FERC
has no jurisdiction. FERC maintains that natural gas
jurisprudence is inapplicable because the language of the NGA
and FPA differ on this issue, and the natural gas cases turned on
the existence of a regulatory gap that does not exist in the
electricity field. FERC also asserts that its interpretation of the
FPA's jurisdictional grant is entitled to deference under Chevron
U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837
(1984).
Both FPA § 201(a) and (b) clearly and unambiguously confer
upon FERC jurisdiction over the "transmission of electric energy
C-31
in interstate commerce." FPA § 201(c) further provides that
"electric energy shall be held to be transmitted in interstate
commerce if transmitted from a State and consumed at any point
outside thereof." 16 U.S.C. § 824(c). In both Florida Power &
Light and Jersey Central Power & Light, the Supreme Court
considered whether certain indirect transmissions of electrical
power across state lines represented transmissions in interstate
commerce.
Jersey Central Power & Light involved the transmission of
energy generated by Jersey Central in New Jersey. Jersey Central
transmitted electricity to the New Jersey transmission facilities of
another company, Public Service, which then transmitted the
power first to another of its New Jersey facilities, and then on to
a facility owned by yet a third company and located in the middle
of a body of water separating New Jersey from Staten Island,
New York. The third company in the chain then transmitted the
energy first to its own facilities in New York, then finally and
ultimately to consumers in New York. Jersey Central's own
transmission facilities were located solely in New Jersey, and as
were (29)the facilities used by Public Service to receive the
transmissions from Jersey Central.
The Supreme Court recognized that Jersey Central had no
control over the transmissions’ destination once the electricity
was delivered to Public Service, see Jersey Central, 319 U.S. at
65, and that the total flow of electricity from Jersey Central to
New York was small. See id. at 66. Nevertheless, because some
electricity generated by Jersey Central in New Jersey was
consumed in New York, the Court upheld FERC's jurisdiction
under FPA § 201 over Jersey Central's transmission facilities as
utilized for transmissions in interstate commerce. See id. at 67.
The Court said that, under FPA § 201(a) and (b), FERC's power
extends over all facilities "which transmit energy actually moving
in interstate commerce." /d. at 72. The Court emphasized,
however, that "mere connection" of one utility's transmission
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facilities to those of another transmitting in interstate commerce
was insufficient for jurisdiction under FPA § 201. /d.
The Court revisited the issue in Florida Power & Light,
which involved certain Florida and Georgia utilities who
voluntarily connected their transmission facilities to coordinate
their activities and exchange power as required to meet
temporary needs. Like Jersey Central, FP&L's transmission
facilities were confined to Florida, and none of FP&L's
transmission lines directly connected with those of out-of-state
companies. Nevertheless, because FP&L was a member of a
group of interconnected utilities, its transmission lines connected
with those of other Florida utilities; and the lines of one of those
other utilities, Florida Power Corp., interconnected just short of
Florida's northern border with those of Georgia Power Co.
Records indicated that power transfers between FP&L and
Florida Power coincided with transfers between Florida Power
and Georgia Power.
In Jersey Central, logs of the relevant companies
demonstrated at least a dozen occasions when facilities in New
York drew power from certain lines at times when Jersey Central
was the only supplier of electricity to those lines. See Florida
Power & Light, 404 U.S. at 459. By way of contrast, (30)there
was no similar evidence that power generated by FP&L
specifically passed through Florida Power to Georgia Power,
with Florida Power serving as a mere conduit. See id. At best,
company records demonstrated instances when transfers between
FP&L and Florida Power occurred at or about the same time as
transfers between Florida Power and Georgia Power. See id. at
457.
Instead, the Court considered two theories by which FP&L's
power could be deemed transmitted across state lines. The first
posited a cause and effect relationship by which every flick of a
light switch would cause every generator on a multi-state
C-33
interconnected system to produce some quantity of additional
electricity to maintain the system's balance, and thus to transmit
electric energy throughout the system and across state lines. The
second theory suggested that where the transmission lines of two
utilities interconnect, their energy commingles, such that
inevitably some energy transmitted by FP&L to Florida Power
was then transmitted to Georgia Power and across state lines.
Despite its statement in Jersey Central that "mere connection
determines nothing,” 319 U.S. at 72, the Court relied on the
second of these theories to conclude that FP&L's facilities were
transmitting energy in interstate commerce, and left open the
possible validity of the cause and effect theory. See 404 US. at
462-63. Writing in dissent, Justice Douglas characterized the
Court's opinion as “mean{ing] that every privately owned
interconnected facility in the United States ... is within the
[Federal Power Commission's] jurisdiction,” such that otherwise
local utilities would now be subject to the mandates of the
federal bureaucracy. /d. at 471 (Douglas, J., dissenting).
The Supreme Court has interpreted the language in FPA §
201 regarding FERC's jurisdiction over transmissions in
interstate commerce. We are bound by the High Court's dictates
to conclude that the FPA gives FERC the authority to regulate
the transmissions at issue here, whether retail or wholesale. Even
if the Court had not so spoken, however, and even if we
independently concluded that the statute's text (3 1)was less than
clear, it is the law of this circuit that the deferential standard of
Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467
U.S. 837 (1984), applies to an agency's interpretation of its own
statutory jurisdiction. See Oklahoma Natural Gas Co. v. FERC,
28 F.3d 1281, 1283-84 (D.C. Cir. 1994). As guided by Chevron,
unless Congress has directly spoken to the contrary, or FERC
has unreasonably or impermissibly interpreted the statute, we
must defer to the Commission's construction of ambiguous
provisions of the FPA. See Chevron, 467 U.S. at 842-43. In this
C-34
age of interconnected transmission grids, and given the
accompanying technological complexities, we would be hard
pressed to conclude that FERC's interpretation of § 201(c) as
giving it jurisdiction over both wholesale and retail transmissions
is unreasonable or impermissible.
Nevertheless, we are not persuaded that this conclusion
requires FERC to mandate unbundling and assert jurisdiction
over all retail transmissions. Just as FPA § 201 gives FERC
jurisdiction over transmissions in interstate commerce and sales
at wholesale, the statute also clearly contemplates state
jurisdiction over local distribution facilities and retail sales. The
statute is much less clear about exactly where the lines between
those activities are to be drawn. A regulator could reasonably
construe transmissions bundled with generation and delivery
services and sold to a consumer for a single charge as either
transmission services in interstate commerce or as an integral
component of a retail sale. Yet FERC has jurisdiction over one,
while the states have jurisdiction over the other. FERC's decision
to characterize bundled transmissions as part of retail sales
subject to state jurisdiction therefore represents a statutorily
permissible policy choice to which we must also defer under
Chevron. Accordingly, we affirm FERC's decisions in Order 888
to assert jurisdiction over unbundled retail transmissions while
leaving regulation of bundled retail transmissions to the states.
B. Local Distribution Facilities
FPA § 201(b) explicitly excludes from FERC jurisdiction
"facilities used in local distribution or only for the transmis-
(32)sion of electric energy in intrastate commerce." 16 U.S.C. §
824(b) (1). Historically, wholesale sales have not for the most
part involved local distribution facilities. FERC claims that
increased unbundling gives resellers the Opportunity to
reconfigure the wholesale sales so that they might now occur on
those facilities which traditionally have been treated as local
C-35
distribution facilities. Moreover, FERC's assertion of jurisdiction
used for transmission in interstate commerce.
In Order 888, FERC claimed exclusive authority over the
regulation of facilities which sell and transmit electricity at
wholesale to customers who will resell the electricity to end
users. With respect to unbundled retail sales, FERC
that transmissions by “facilities used in local
distribution" are beyond the Commission's jurisdiction, while
facilities engaged in interstate transmission are subject to FERC
jurisdiction under FPA § 201(a). Thus FERC adopted a seven
factor jurisdictional test to identify whether a facility is a local
distribution facility subject to state jurisdiction or a facility
engaged in interstate transmission subject to FERC jurisdiction.
In short, under Order 888, when a (33)public utility is engaged
in wholesale transmission, FERC has jurisdiction regardless of
the nature of the facility, but when the public utility is engaged
in unbundled retail transmission, the facts and circumstances will
weve onal derivation facilis are normally in close proximity to retail
"(When power eters acaldsribution sytem, it is not consigned
© (3) Fewer comming o ical Glarivution oyetem is consumed in a compar-
wins) hasten ans boned ot the traneniesionoce distribution interface to
Order 888, 4 31,036 at 31,981.
C-36
determine whether the facilities are subject to FERC or state
jurisdiction.
The state petitioners argue that FERC's dual approach
radically expands its jurisdiction and violates Congress’ explicit
directive in FPA § 201(b) that regulation of local distribution
facilities be left to the states. The states contend that Congress
clearly intended to preserve state jurisdiction over local
distribution facilities, regardless of whether the energy comes
from out of state or the sale is a wholesale sale. The states
maintain that, by claiming jurisdiction over any facility
transporting energy for resale, regardless of whether the facility
might otherwise be a local distribution facility under the seven
factor test, FERC has adopted the circular reasoning that
wholesale sales do not occur on local distribution facilities, so
any facility that engages in wholesale activities is not a local
distribution facility. The states contend further that FERC offers
no reasoned analysis of why local distribution should be defined
differently for wholesale versus retail sales. The states finally
charge that, under Order 888, nearly identical facilities would be
under federal jurisdiction and state jurisdiction for different
customers receiving indistinguishable service. Such a situation,
they contend, will only encourage energy marketers to choose
their regulator by using middlemen to shift the point at which —
title to the power transfers, and thus undermine the jurisdictional
certainty that Order 888 states is necessary for competition.
FERC responds that it is not asserting jurisdiction over local
distribution facilities, but asserts that when a public utility
delivers unbundled energy at wholesale to a supplier for the
purpose of resale to an end user, FPA § 201 gives FERC
unqualified authority to assert jurisdiction over the facility used
to effect that transaction. When the public utility is engaged in
unbundled retail transmission, however, (34)the circumstances
of a specific case will determine whether the facilities used are
subject to FERC or state jurisdiction. The arguments by the
C-37
states do no more than raise policy concerns which are for FERC
— the court. See Arent v. Shalala, 70 F.3d 610 (D.C. Cir.
Intervening again on FERC's behalf on this issue, the U&D
petitioners add that FERC's use of different tests is appropriate
given the differences in the two separate jurisdictional grants of
FPA § 201. The interveners argue that, given the statute's clear
grant to FERC of jurisdiction over all aspects of wholesale sales,
FERC is fully justified in employing a functional test to identify
wholesale transmissions. In contrast, because FERC's jurisdiction
over retail sales is limited to transmissions in interstate
commerce, the seven factor test is more appropriate.
We agree that FERC's dual approach to assessing its
jurisdiction stems from the fact that FPA § 201 contains more
than one jurisdictional grant. FPA § 201(b) denies FERC
jurisdiction over local distribution facilities “except as
specifically provided in this subchapter and subchapter III." 16
U.S.C. § 824(b)(1) (emphasis added). FPA § 201(a) makes clear
that all aspects of wholesale sales are subject to federal
regulation, regardless of the facilities used. FERC's assertion of
jurisdiction over all wholesale transmissions, regardless of the
nature of the facility, is clearly within the scope of its statutory
authority. Moreover, various cases support the proposition that
FERC regulates all aspects of wholesale transactions. See, e.g.,
Duke Power Co. v. FPC, 401 F.2d 930. 935-36 (D.C. Cir. 1968)
(noting that the FPC regulates public utility facilities used in
wholesale transmissions or sales in interstate commerce);
Arkansas Power & Light Co. v. FPPC, 368 F.2d 376, 383 (8* Cir.
1966) (stating that the functional use of the transmission
lines—wholesale versus retail—controls); Wisconsin-Michigan
Power Co. v. FPC, 197 F.2d 472, 477 (7 Cir. 1952) (finding
that transmission facilities used at wholesale are not “local
distribution facilities”).
C-38
(35)The seven factor test applies only to unbundled retail
sales, where FERC seeks to regulate pursuant to the separate
grant of jurisdictional authority over transmissions in interstate
commerce. In this context, the definition of "facilities used in
local distribution" becomes relevant. The statute does not define
"facilities used in local distribution," but instead leaves that task
to FERC. As Chevron counsels us, FERC's interpretation of
undefined and ambiguous statutory terms is entitled to deference.
See Chevron, 467 U.S. at 842-43.
FERC has adopted a multi-factor test to determine the nature
of transmission facilities. In a footnote, Order 888 says that
distribution-only facilities which sell only at retail will still be
considered local distribution facilities. See Order 888, J 31,036
at 31,981 n.99. This is consistent with the fact that states
historically have regulated bundled retail sales to end users.
However, Order 888 implicitly recognizes the current reality that
many primarily retail utilities engage in both local distribution
and interstate transmissions, and seeks through the seven factors
to discern each facility's primary function. We cannot agree with
the state petitioners that this approach is unreasonable or
otherwise impermissible.
IV. RECIPROCITY
Section 6 of the Tariff contains a reciprocity provision resting
on the principle that any public utility offering "non-
discriminatory open access transmission for the benefit of
customers should be able to obtain the same non-discriminatory
access in return." Order 888, J 31,036 at 31,760. Non-public
utilities—those outside the Commission's jurisdiction because,
for instance, they are state-owned, see 16 U.S.C. §
824(f)—would otherwise not have to offer open-access. Under
the Tariff, a public utility does not have to offer them access
unless they reciprocate. In order to avoid controversies between
public and non-public utilities regarding reciprocal service, the
C-39
Commission adopted a voluntary "safe harbor" provision
pursuant to which non-public utilities could submit a
transmission tariff to the Commission for a (36)determination
whether it satisfied the reciprocity condition. If it did, the public
utility would have to offer service; if it did not, the public utility
could refuse service (although it had the option of waiving the
reciprocity condition, as did the Commission itself).
A. Indirect Regulation of Non-Jurisdictional Utilities
Nebraska Public Power District (NPPD), a state entity,
provides electrical generation, transmission and distribution
service to wholesale and retail customers throughout Nebraska:’
It claims that the Commission, through the reciprocity provision,
has reached beyond its statutory authority and is illegally
attempting to regulate entities, including NPPD, over which the
Commission has no jurisdiction, in violation of the Federal
Power Act and the Tenth Amendment to the Constitution. NPPD
admits that pursuant to Nebraska law, all state power districts
are obligated to provide open access transmission service. They
have been doing so for years. This is doubtless why, after Order
No. 888 issued, another Nebraska public power district so easily
obtained a safe harbor declaration. See Omaha Pub. Power Dist.
81 FERC. 4 61,054 (1997). In light of this, the Commission
argues—and we agree—that NPPD's petition is unripe. Since
NPPD already offers open access transmission, it is far from
certain that the reciprocity provision will have any effect on it."
It certainly has not demonstrated any particular hardship that it
7
“Nebraska is unique among the States in the Union in that all
. . . . . . . . . genera-
Heri teal te ney and distribution service is provided by public entities,
municipalities and cooperatives whose governing boards are responsible to,
ane Serve at the voting pleasure of, the rate-payers they serve." NPPD Brief
4
The Coin. nission made clear that existing contracts will affect
See Order 888-A, 4 31,048 at 30,181. ” — .
C-40
would suffer if we refused to engage in pre-enforcement judicial
review. See AT&T Corp. v. lowa Utils. Bd., 525 U.S. 366, 386
(1999). From all that appears, no public utility has refused, or
even threatened to refuse, to give NPPD access to its
transmission system in the wake of (37)Order No. 888.’ Given
the fact that public utilities may waive the reciprocity provision
anyway, and that NPPD has the same option of obtaining a safe
harbor as did the Omaha Public Power District, we are not
persuaded that the provision is currently altering NPPD's
conduct of its affairs or that withholding judicial review will
cause it any hardship whatever. "Unlike the drug manufacturers
in Abbott Laboratories [v. Gardner, 387 U.S. 136 (1967)], but
like the cosmetics companies in 7oilet Goods Ass'n v. Gardner,
387 U.S." 158, 164 (1967), NPPD need not change its "behavior
or risk costly sanctions." Clean Air Implementation Project v.
EPA, 150 F.3d 1200, 1205 (D.C. Cir. 1998). Furthermore,
exactly how the Commission will fill in the contours of the
reciprocity provision remains to be seen. That it may defer to
state commissions, as it indicated in Houston Lighting & Power
Co., 81 F.E.R.C. 9 61,015 (1997), order on reh'g, 83 F.E.R.C.
761,181 (1998), affects NPPD's contention that the Commission
is seeking to bring about nationwide uniformity by forcing non-
public utilities to comply with its "detailed mandates." NPPD
Brief at 5. We therefore believe the issues raised would benefit
from a more concrete setting in which NPPD can demonstrate
exactly how the reciprocity provision has affected its primary
conduct. See Clean Air Implementation Project, 150 F.3d at
1204. For all these reasons, NPPD's challenge to the reciprocity
provision is not ripe for judicial review.
* For this reason we find unpersuasive NPPD's claim that the Tariff's
reciprocity provision places it at a disadvantage in negotiations because a
public utility may simply refuse to provide service without any fear of a
Commission enforcement action. See NPPD Reply Brief at 4-5.
C-4]
B. Limitation on Reciprocity
The Investor Owned Utilities (IOUs) challenge the following
limitation on reciprocity: non-public utilities owe reciprocal open
access only to the public utility from which they take open access
service—not to all utilities. See IOU Brief at 40-44; IOU Reply
Brief at 18-20. These petitioners argue that the Commission has
left open the door for non-public utilities (38)to discriminate
against all other utilities and that it has done so solely because of
tax considerations that no longer apply.
We agree with Commission counsel that tax considerations
were not the only basis on which the Commission's limitation
rested. The Commission stated that "the reciprocity requirement
strikes an appropriate balance by limiting its application to
circumstances in which the non-public utility seeks to take
advantage of open access on a public utility's system." Order
888, J 31,036 at 31,762. The Commission also explained that it
"do[es] not have the authority to require non-public utilities to
make their systems generally available." /d. at 31,761. The
Commission stated also that it did not want broad open access
reciprocity to jeopardize the tax-exempt financing non-public
utilities enjoy,'° that the IRS was then reexamining the question,
id. at 31,762, and that if the tax issue is favorably resolved, it
will reconsider the matter. Order 888-A, 9 31,048 at 30.287. The
IRS has now acted. See Temporary Regulations § 1.141-7T(f),
in 63 Fed. Reg. 3256 (1998). The IOUs argue that we must
therefore remand for reconsideration. See IOU Brief at 44 (citing
Panhandle Eastern Pipeline v. FERC, 890 F.2d 435, 439 (D.C.
Cir. 1989); National Fuel Gas Supply Corp. v. FERC, 899 F.2d
1244, 1249-50 (D.C. Cir. 1990); Ciba-Geigy v. EPA, 46 F.3d
1208 (D.C. Cir. 1995)).
'° See 26 U.S.C. §§ 141, 142 (permitting "private activity" bonds and
"local furnishing" bonds, respectively).
C-42
We think not. So far as we know, the IRS has not finalized its
temporary and proposed regulations. The IRS acknowledges that
its temporary regulations "raised[ ] a number of complex
technical issues" many of which "may need to be addressed
legislatively" and it anticipates that the finalization process will
take three years to accomplish. 63 Fed. Reg. at 3258-59.
Second, as the Commission indicates, the possible tax
consequences of requiring open access from non-jurisdictional
utilities was its secondary concern. The Commission's greater
concern was its lack of jurisdiction to do what the IOUs ask.
And lastly the Commission should be (39)taken at its word that
it will reconsider the scope of reciprocity when and if the
temporary tax regulations are finalized.
V. STRANDED COST RECOVERY PROVISIONS
Ordering open access transmission, Order 888-A explains that
"[t]he most critical transition issue that arises as a result of the
Commission's actions in this rulemaking is how to deal with the
uneconomic sunk costs that utilities prudently incurred under an
industry regime that rested on a regulatory framework and a set
of expectations that are being fundamentally altered." Order
888-A, J 31,048 at 30,346. “Ifa former wholesale requirements
customer or a former retail customer uses the new open access
to reach a new supplier," FERC said, "we believe that the utility
is entitled to recover legitimate, prudent and verifiable costs that
it incurred under the prior regulatory regime...." Order 888, -
q 31,036 at 31,789.
According to FERC, these "stranded" costs consist pre-
dominantly of costs of building generation capacity, which
utilities incurred with the expectation that they would use the
additional capacity to serve existing customers. See Notice of
Proposed Rulemaking, Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities, FERC Stats. & Regs.
C-43
{ 32,507 at 32,863-64, 59 Fed. Reg. 35,274 (1994) ("Stranded
Cost NOPR"). Because of the increased competition in the
generation market that will result from open access, this capacity
may become underutilized or uneconomical, i.e., "stranded."
Stranded costs also include nonrecurring costs approved by
regulators that, in order to avoid rate increases, were recovered
over a period of years instead of at the time the expenditures
were made. Known as “regulatory assets," these costs include
deferred income taxes, deferred pension and other employee
benefit and retirement costs, research and development,
extraordinary property losses, and the phase-in of new plant
costs. Nuclear decommissioning costs and costs to buy out high-
priced fuel and power contracts may also become stranded as a
result of open access.
(40)Exercising its exclusive jurisdiction over wholesale power
sales, FERC through Order 888 gave utilities the opportunity to
recover their stranded costs from former wholesale customers
who take advantage of open access transmission to purchase
power from other suppliers. Order 888, 31,036 at 31,810. With
respect to stranded costs resulting from state-ordered retail
wheeling, Order 888 provides that FERC will consider stranded
cost claims only when state regulatory agencies lack authority to
do so. /d. at 31,824-25. Order 888 also designated FERC as the
primary forum for stranded cost claims stemming from what are
known as new municipalizations and municipal annexations. See
Order 888-A, 7 31,048 at 30,404; Order 888-B, 81 FERC at
62,104. Stranded costs in these situations result from retail (as
opposed to wholesale) power sales.
Petitioners challenge nearly every aspect of FERC's stranded
cost policy as set forth in Order 888, from the mechanics of
calculating customers’ stranded cost obligations to whether
FERC has authority to address stranded costs at all. We begin
with those challenges that relate to the recovery of wholesale
stranded costs (Section V.A), then turn to challenges to Order
C-44
888's treatment of retail stranded costs (Section V.B). We affirm
FERC's stranded cost policy in all respects, except we vacate
that portion of the orders dealing with the treatment of energy
costs in the market option and remand to FERC for further
explanation. See Section V.A.5.c.
A. Wholesale Stranded Costs
In requiring nondiscriminatory open access transmission as a
remedy for undue discrimination, FERC recognized that it
"cannot change the rules of the game without providing a
mechanism for recovery of the costs caused by such regulatory-
mandated change." Order 888-A, ] 31,048 at 30,346. Under the
pre-open access regulatory regime, utilities entered into long-
term contracts to make wholesale power sales to municipal,
cooperative, and investor-owned utilities. See Stranded Cost
NOPR, 4 32,507 at 32,862. Because these customers had no
source of power supply other than (41 )their historic utility, these
contracts were typically extended at the end of their term. This
produced an implicit obligation by the utilities to continue
satisfying their customers’ power needs, as well as a reciprocal
expectation by customers of continued service. See id. at
32,863-64. To satisfy expected customer demand, utilities
invested money, built facilities, and entered into long-term fuel
or power contracts, relying on the "regulatory compact" under
which utility shareholders accepted lower rates of return on their
investment in exchange for the ‘certainty of regulated rates and
resulting ability to recover prudently incurred costs. See Notice
of Proposed Rulemaking, Promoting Wholesale Competition
Through Open Access Non-discriminatory Transmission
Services by Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, FERC Stats. & Regs.
q 32,514 at 33,049, 60 Fed. Reg. 17,662 (1995).
Order 888 fundamentally undermines utilities' expectation of
continued service and cost recovery. A utility's requirements
C-45
customers may now use the utility's open access transmission
service to purchase power from other suppliers at the end of
their contract terms. If customers leave before paying their share
of costs the historic utility incurred on their behalf, the utility will
be left with stranded costs, which it will either absorb or shift to
remaining customers.
Unless utilities are able to recover stranded costs, FERC
reasoned, their ability to compete and attract investor capital in
a deregulated market may be seriously impaired. FERC therefore
decided that it had to "address recovery of the transition costs of
moving from a monopoly-regulated regime to one in which all
sellers can compete on a fair basis and in which electricity is
more competitively priced." Order 888, J 31,036 at 31,635. In
reaching this conclusion, FERC relied on its experience in
restructuring the natural gas industry, where this court faulted it
for failing to provide transitional mechanisms such as stranded
cost recover. FERC explained: "We have learned from our
experience in the natural gas area the importance of addressing
competitive transition issues early and with as much certainty to
market participants as possible." /d.
(42)In shaping its stranded cost recovery mechanism, FERC
had to balance two competing interests: speeding the transition
to competition versus protecting utilities that had incurred costs
with the expectation that their customers would remain and
eventually pay those costs through electricity rates. Allowing
recovery of stranded costs, FERC acknowledged, would delay
full realization of the benefits of open access—lower electricity
rates—because customers facing stranded cost liability might
continue purchasing power from their historic utility even though
competitors are selling power at lower rates. See Order 888-A,
{] 31,048 at 30,355. Indeed, a customer would only switch
suppliers if the competitor offered a rate less than the historic
utility's rate plus the customer's stranded cost liability. But given
the highly regulated nature of the electricity industry, in which
C-46
utilities incurred costs with the expectation of recouping them,
FERC concluded that the delay was a necessary component of
its open access program. See id. Mindful of its ultimate goal of
converting the electricity industry into a competitive market,
however, FERC fashioned the stranded cost recovery provisions
to be transitional, allowing utilities to recover stranded costs only
in connection with wholesale requirements contracts entered into
on or before July 11, 1994 (the date of the stranded cost notice
of proposed rulemaking). See 18 C.F.R. § 35.26(b)(8),
35.26(c)(1)(v)-(vi).
As to precisely who should pay for stranded costs, utilities
and customers not surprisingly had dramatically different
positions. Customers argued that utilities should absorb most, if
not all, stranded costs. Utilities (and their investors) argued that
customers should pay.
Facing an enormously difficult task in balancing these sharply
conflicting positions, FERC crafted a rule that requires
customers to pay stranded costs but only in certain
circumstances. Most important, in order to recover stranded
costs from a customer, the historic utility must prove that it had
a reasonable expectation of continued service to that particular
customer for a certain number of years beyond the end of the
contract term; a utility unable to prove such an expectation may
not recover stranded costs under Order 888. (43)See 18 C.F.R.
§ 35.26(c)(2)(i). Moreover, a utility able to demonstrate a
reasonable expectation of continued service may recover
stranded costs only if its wholesale customer actually takes
advantage of the utility's open access tariff to obtain access to a
new generation supplier at the end of its contract term (i.e., the
former customer continues to use the historic utility's
transmission service but no longer purchases power from it). See
18C.F.R. §35,26(b)(1)(i). Through these two limitations, FERC
balanced the interests of utilities and customers by allowing
utilities to recover their stranded costs only if they can
C-47
demonstrate a reasonable expectation of continued service and
requiring customers to pay those costs only if they take
advantage of their historic utility's open access transmission to
reach cheaper sources of power. And of course, no customer will
have to pay stranded costs at all if it continues purchasing power
from its historic utility throughout the period during which the
utility has a reasonable expectation of continued service
—precisely what the customer would have done in the absence
of Order 888's open access requirement.
Under. Order 888, stranded costs are calculated on a
"revenues lost" basis. A departing customer's stranded cost obli-
gation equals the estimated revenue it would have paid had it
continued to purchase power from the historic utility minus the
current market value of the power it would have purchased,
calculated over the period the utility is determined to have a
reasonable expectation of continued service to that customer.
See 18 C.F.R. § 35.26(c)(2)iii). In other words, the stranded
cost formula is not tied to particular stranded assets or
contractual commitments, but rather awards utilities the
difference between the pre-open access cost-based rate and the
post-open access market rate. Once a customer's stranded cost
liability is calculated, it may pay through a lump-sum payment,
installment payments, or a surcharge to the transmission rate
charged by the historic utility. See Order 888, 9 31,036 at
31,799.
Before turning to petitioners’ arguments, we emphasize what
should be obvious from the foregoing summary of Order 888:
Order 888 awards stranded costs to no one. It does (44)nothing
more than establish a mechanism by which utilities may seek to
recover stranded costs. To recover stranded costs, a utility must
demonstrate its continued expectation of service at an
evidentiary hearing. The customer may appear at that hearing
and, through evidentiary submissions of its own, attempt to
demonstrate that the utility had no such expectation. Only after
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such a hearing may FERC decide whether a utility can recover
stranded costs and, if so, how much.
Petitioners mount many challenges to Order 888's stranded
cost recovery provisions. For purposes of analysis, we group
these challenges into five categories: (1) challenges to FERC's
authority to provide for stranded cost recovery (section V.A.1);
(2) claims that Order 888 conflicts with cost causation principles
and case law developed under the Natural Gas Act (section
V.A.2); (3) challenges to FERC's Mobile-Sierra findings (section
V.A.3); (4) claims that FERC arbitrarily and capriciously failed
to provide for stranded cost recovery by certain entities, such as
transmission dependent utilities and generation and transmission
cooperatives (section V.A.4); and (5) challenges to various
technical aspects of Order 888's stranded cost recovery
provisions (section V.A.5).
1. FERC's Authority to Provide for Stranded Cost Recovery
A group called Petitioners Opposing Stranded Cost Recovery
("POSCR") advances three challenges to FERC's authority to
provide for stranded cost recovery: (1) as a factual matter,
utilities could nver have had a reasonable expectation of
continued service to wholesale customers beyond the contract
term; (2) sections 206 and 212 of the Federal Power Act
("FPA") forbid stranded cost recovery; and (3) our decision in
Cajun Elec. Power Coop., Inc. v. FERC, 28 F.3d 173 (D.C. Cir.
1994), holds that stranded cost recovery is anticompetitive. We
consider each argument in turn.
a. Reasonable expectation of continued service
To recover stranded costs relating to a specific departing
wholesale requirements customer, a utility must show that it
(45)had a reasonable expectation of service to that customer
beyond the term of its existing contract. See 18 C.F.R. §
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35.26(c)(2)(i). Pointing out that contracts define the extent of
the parties’ obligations and that customers have long exercised
their rights to purchase power from other suppliers at the end of
their contract terms, POSCR contends that utilities could never
have had an expectation of service beyond their contract terms.
In considering this argument it is important to remember that
Order 888 does not itself award stranded costs; it merely
establishes a procedure by which utilities may petition FERC in
individual proceedings to recover stranded costs from a specific
customer based on a specific evidentiary showing. Utilities failing
to show an expectation of continued service will be unable to
recover stranded costs. POSCR's challenge thus amounts to a
claim that no utility could ever, under any circumstances, have
had a reasonable expectation to serve a wholesale customer
beyond the term of its contract. We review this claim under the
APA's familiar arbitrary and capricious standard. See 5 U.S.C.
§ 706(2)(A); Williams Field Services Group, Inc. v. FERC, 194
F.3d 110, 115 (D.C. Cir. 1999).
Responding to this same challenge in Order 888-A, FERC
explained that utilities historically had an implicit obligation to
serve customers beyond the contract term for a simple reason:
Customers had no means of reaching alternative suppliers. See
Order 888-A, 9 31,048 at 30,354. As part of that obligation to
serve, FERC found, a local utility "had a concomitant obligation
to plan to supply [its] customers’ continuing needs, and planned
its system taking account of the wholesale load. In many cases
the wholesale customers participated by supplying load
forecasts." /d. In making capital decisions and predicting future
demand, utilities frequently consulted with their wholesale
requirements customers. For these reasons, FERC concluded,
utilities may have a reasonable expectation of continued service
to particular customers. See id. at 30,354-55.
Not only is FERC's judgment about utilities’ reasonable
expectations precisely the type of policy assessment to which we
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owe great deference, but POSCR points to nothing sug-
(46)gesting that FERC's reasoning is arbitrary and capricious. In
fact, POSCR's argument completely ignores the highly regulated
nature of the electricity industry prior to Order 888. Unlike
competitive markets, where buyers may freely purchase from
many sellers, the monopolistic character of the electricity
industry, combined with the congressionally imposed regulatory
structure, left requirements customers highly dependent on a
single supplier—their historic utility. Indeed, as interveners point
out, utilities were even unable to choose not to renew an
expiring wholesale requirements contract without first notifying
FERC. See 18 C.F.R. § 35.15 (1995) (repealed by Order 888).
Although it may well be true, as POSCR argues, that some
wholesale customers have long been able to purchase unbundled
transmission service, we think such evidence is best reserved for
individual proceedings, where a department customer can
attempt to refute the utility's claim that it had an expectation of
continued service.
b. Sections 206 and 212 of the FPA
Section 206(a) of the FPA gives FERC authority to
"determine the just and reasonable rate, charge, classification,
rule, regulation, practice, or contract to be thereafter observed
and in force” if it finds that any existing arrangement "is unjust,
unreasonable, unduly discriminatory or preferential." 16 U.S.C.
§ 824e(a). Relying on section 206(a) as the basis for Order 888,
FERC found that utilities had used their monopoly transmission
power to discriminate against potential competitors and that such
practices would increase as competitive pressures in the industry
increased. Order 888, { 31,036 at 31,676, 31,682.
POSCR contends that Order 888's stranded cost recovery
provisions themselves violate FERC's own construction of
section 206, the construction FERC relied on as the basis for the
open access rule. According to POSCR, "[t}he stranded cost rule
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perpetuates the very ‘discrimination' FERC found unlawful, and
subjects the same victims—customers held hostage to
uneconomic electric generation by transmission monopolists—to
continued abuse."
(47)In challenging FERC's policy decision to provide for
stranded cost recovery, POSCR conflates the violation (FERC's
generic determination that utilities’ practice of prohibiting access
to their transmission lines on reasonable terms was unduly
discriminatory) with the remedy (FERC's more limited finding
that recovery of stranded costs in particular circumstances would
not be unduly discriminatory). FERC has not, as POSCR
contends, given "unduly discriminatory" different meanings;
rather, it has applied the term in different contexts.
POSCR's argument thus boils down to a challenge to FERC's
conclusion that the stranded cost recovery prescribed in Order
888 is not unduly discriminatory, a challenge meriting arbitrary
and capricious review. Viewed through this lens, we think FERC
more than adequately explained why it concluded that stranded
cost recovery is not unduly discriminatory—stranded cost
recovery, FERC said, is transitional only, follows cost causation
principles, and requires utilities to prove that they had a
reasonable expectation of continued service. FERC faced an
enormously difficult task. It had to balance the transition to
competitive markets against the need to maintain the
competitiveness of utilities that had incurred costs based on a
reasonable expectation that they would recoup them. We find
nothing either arbitrary or capricious in how FERC struck this
POSCR next contends that stranded cost recovery violates
section 212 of the FPA, which governs the rates for transmission
ordered by FERC pursuant to section 211. 16 U.S.C. §§ 824j-k.
Because FERC-jurisdictional utilities are no longer subject to
sections 211 and 212, this argument relates only to those
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situations in which FERC orders nonjurisdictional transmitting
utilities to wheel under section 211 and these utilities then seek
to recover stranded costs in their transmission rates. See 18
C.F.R. §35.26(c)(1)(vi)-(vii). Section 212 allows FERC to order
"rates, charges, terms, and conditions which permit the recovery
by [a transmitting] utility of all the costs incurred in connection
with the transmission services and necessary associated services,
including, but not limited to, an appropriate share, if any, of
legitimate, verifiable and (48)economic costs, including taking
into account any benefits to the transmission system of providing
the transmission service, and the costs of any enlargement of
transmission facilities.” 16 U.S.C. § 824k(a). Contending that
"economic costs" cannot be read to include payment of stranded
costs, which by definition relate to generation (not transmission)
services, POSCR reads section 212 to preclude stranded cost
recovery.
Straightforward application of the Chevron doctrine
demonstrates the lack of merit in this argument. See Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984). Because Congress has not “directly spoken to the
precise question at issue"—do "economic costs" include stranded
costs?—and because nothing in the statute precludes recovering
through transmission rates costs that were traditionally recovered
through generation rates, the term “economic costs" is
ambiguous. /d. at 842.
Proceeding to Chevron's second step, we ask wh
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