# Petition for Writ of Certiorari — New York v. FERC

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2002
- **Citation:** 535 U.S. 1

## Text

Ci) “TILED
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
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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

C-9

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.

C-10

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

C-11

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

C-12

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

C-13

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

C-14

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.

C-15

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.

C-16
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

C-20

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

C-21

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

C-32

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

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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

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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.

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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

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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”).

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(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

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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

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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

C-50

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

C-51

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 whether FERC
has reasonably interpreted the term "economic costs." See .d. at
843. We have no doubt that it has. As FERC explained, but for
section 211 wheeling orders, there would be no stranded costs.
Stranded costs, according to FERC, are therefore economic
costs of section 211 wheeling. See Order 888-A, ¥ 31,048 at
30,390. POSCR offers nothing to undermine this eminently
reasonable interpretation of the statute.

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c. Implications of Cajun

Next, POSCR contends that our decision in Cajun Elec.
Power Coop., Inc. v. FERC, 28 F.3d 173 (D.C. Cir. 1994),
condemns stranded cost recovery as anticompetitive. A pre-
Order 888 decision, Cajun reviewed two tariffs allowing a utility,
Entergy Corporation, to sell power at market rates, and a third
tariff providing for open access to Entergy's transmission
services at cost-based rates. The third tariff gave Entergy an
Opportunity to recover stranded costs from customers who no
longer purchase power from Entergy but use its transmission
lines to reach other suppliers—exactly the circumstances in
which Order 888 provides for stranded cost recovery. Under the
tariff, the stranded cost charge was included in Entergy's
transmission rate. See id. at 175-77.

(49)Characterizing the stranded cost provision as a "tying
arrangement" under antitrust law, Cajun explained that under the
tariff, Entergy could charge a former customer for the cost of
generation services when the customer wished to purchase only
transmission services; because Entergy has a monopoly over
transmission, customers would have no choice but to pay costs
relating to generation they no longer wanted from Entergy. /d.
at 177-78. Thus, because "Entergy could use its monopoly over
transmission services to eliminate competition in the market for
generation services," the net effect of the tariffs may be
anticompetitive. /d. at 176.

Of significance to this case, however, we did not strike down
the tariffs. Instead, we remanded the case for FERC to determine
"how much competition in fact is dampened" by the stranded
cost provision. /d. at 178. Thus, contrary to POSCR's
suggestion, Cajun does not represent a blanket condemnation of
stranded cost recovery; rather, recognizing that such recovery
could be anticompetitive, Cajun directed FERC to evaluate and
justify the potential anticompetitive impact. This is precisely

C-54 C-55

what FERC has done in Order 888. It expressly considered the relies so heavily on FERC's natural gas orders and our decisions
anticompetitive effects of stranded cost recovery. See Order reviewing them, we begin by summarizing them in some detail.
888-A, J 31,048 at 30,372-74. Then, stressing the transitional
nature of the recovery and the fact that recovery was compelled Finding practices in the natural gas industry "unduly
by the open access requirement, which utilities could not have discriminatory" in violation of the Natural Gas Act, FERC began
anticipated, FERC concluded that the limited anticompetitive by issuing Order 436, which "unbundled" pipeline transportation
effects of stranded cost recovery were both a necessary and and merchant functions. Regulation of Natural Gas Pipelines
acceptable consequence of the transition to competition. See id. After Partial Wellhead Decontrol, Order No. 436, FERC Stats.
Not only has POSCR offered no evidence that would lead us to & Regs. J 30,665, 50 Fed. Reg. 42,408 (1985) (rehearing orders
question FERC's conclusion, but such judgments about omitted). At the time of Order 436, pipelines were facing
anticompetitive effects are "the kind of reasonable agency enormous liabilities under long-term "take-or-pay" contracts.
prediction about the future impact of its own regulatory policies Entered into when gas prices were expected to rise, these
to which we ordinarily defer." Louisiana Energy and Power contracts obligated pipelines to purchase minimum quantities of
Auth. v. FERC, 141 F.3d 364, 370 (D.C. Cir. 1998). gas from wellhead producers at fixed prices that turned out to be
well in excess of market prices. See Associated Gas Distributors
2. Natural Gas Precedent and Conformance to Cost Causation v. FERC, 824 F.2d 981, 1021 (D.C. Cir. 1987) ("AGD").
Principles Although FERC estimated take-or-pay liabilities at billions of
dollars, and although Order 436 would exacerbate the take-or-
Having rejected POSCR's arguments that FERC lacks pay problem by providing incentives to pipeline customers to
authority to authorize stranded cost recovery, we turn to its purchase gas from cheaper suppliers, FERC declined to take any
(50)argument that FERC has failed adequately to explain why action with respect to the contracts. In AGD, we found that
Order 888 requires departing customers to pay one-hundred FERC's decision to do nothing failed to meet the requirements of
percent of stranded costs. In support of this argument, POSCR reasoned decisionmaking, citing FERC's "seeming (51)blindness
claims that our decisions reviewing FERC's restructuring of the to the possible impact of Order No.436 on take-or-pay liability"
natural gas industry require cost sharing; it also argues that and permanent market distortions that may result from FERC's
Order 888's stranded cost recovery conflicts with the cost inaction. /d. at 1021-23, 1025. Specifically, we noted, in words
causation principles that traditionally govern allocation of costs. echoed by FERC years later in Order 888, that consumers who
purchased from the "least nimble" local distribution companies
a. Natural gas precedent: AGD, K N Energy, and UDC would "be stuck with the burden of the overpriced gas." /d. at
1023.
In introducing competition into the electricity industry, FERC
has taken essentially the same path that it took in restructuring In response to AGD, FERC issued Order 500. Regulation of
the natural gas industry, although what FERC has done in a Natural Gas Pipelines After Partial Wellhead Decontrol, Order
single order in the electricity industry (Order 888) it did in a No. 500, FERC Stats. & Regs. ] 30,761, 52 Fed. Reg. 30,334
series of orders in the natural gas industry. Because POSCR (1987) (rehearing orders omitted). Recognizing that no one

segment of the gas industry was wholly responsible for the take-

C-56

or-pay problem, Order 500 allowed pipelines to recover take-or-
pay costs through "equitable sharing." Pipelines that willingly
absorbed twenty-five to fifty percent of their costs could require
sales customers to match that amount through a fixed charge.
Pipelines could recover any balance through commodity rates or
volumetric surcharges, borne by both sales and transportation
customers. For an overview of these components of Order 500,
see K N Energy, Inc. v. FERC, 968 F.2d 1295, 1297-98 (D.C.
Cir. 1992). We sustained this approach in K N Energy, holding
that even though Order 500 replaced traditional "cost causation"
principles with cost spreading and value-of-service concepts, it
did not violate Natural Gas Act section 4's requirement that rates
be just and reasonable. /d. at 1301-02. Citing statements in AGD
that “all actors in the natural gas industry" are "candidates" for
absorbing take-or-pay liability, we relied on "the unusual
circumstances surrounding the take-or-pay problem, and the
limited nature—both in time and scope—of the Commission's
departure from the cost-causation principle." /d. at 1301.

Concluding that Order 436 had been only partially successful
in introducing competition into the natural gas industry, FERC
issued its third major restructuring order, Order 636. Pipeline
Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation; and Regulation of Natural
Gas Pipelines After Partial Wellhead Decontrol, Order No. 636,
FERC Stats. & Regs. | 30,939, 57 Fed. (52) Reg. 13,267 (1992)
(rehearing orders omitted). That order imposed mandatory
unbundling of sales and transportation services and allowed sales
customers to reduce the amount of gas they had to purchase
pursuant to existing contracts. When customers took advantage
of this option and purchased gas from sources other than the
pipelines, the pipelines were once again left with substantial take-
or-pay liabilities. Labeling the costs of reducing these liabilities
gas supply realignment or GSR costs, Order 636 authorized
pipelines to bill current transportation customers for one-
hundred percent of their GSR costs by charging either a

C-57

negotiated exit fee or reservation fee surcharge. Order 636 also
authorized pipelines to recover all stranded costs in rate filings.
In the natural gas industry, stranded costs represented the costs
of pipeline assets (such as storage facilities) used to provide
bundled sales services that were not directly assignable to
transportation customers. For an overview of these components
of Order 636, see United Distribution Cos. v. FERC, 88 F.3d
1105, 1125-27, 1176-78 (D.C. Cir. 1996) ("UDC").

In UDC, we affirmed FERC's determination that pipelines
could recover all stranded costs through filed rates, so long as
FERC "adequately balanced the interests of investors and
ratepayers." /d. at 1180. Reaffirming the appropriateness of the
cost spreading and value-of-service principles approved in K N
Energy, we found that FERC's allocation of GSR costs to
pipeline transportation customers, as opposed to the pipelines
themselves, properly applied those principles. /d. at 1182.
Although recognizing that GSR costs stemmed from pipeline
sales customers, not transportation customers, we found that
FERC appropriately imposed the costs on transportation
customers because these customers benefitted from the
availability of lower-priced transportation and also because
FERC could not spread costs to the pre-Order 636 sales
customers since those customers no longer purchased gas from
the pipelines. /d. at 1185-86. We remanded for FERC to explain
more fully why pipelines should not have to pay some of the
costs, noting an inconsistency in the Commission's analysis:
While FERC applied cost spreading principles to justify
imposing costs on transportation customers, it (53)invoked cost
causation principles in concluding that pipelines should not have
to pay any of these costs. /d. at 1188-90. We explicitly stated,
however, that we were not saying that "it is impossible, or even
improbable, that the Commission on remand can establish a
convincing rationale for exempting the pipelines." /d. at 1189.

C-58

POSCR reads this history to require FERC to order cost
sharing, but it ignores Order 888's explanation of the difference
between natural gas restructuring and the situation in the
electricity industry. Most fundamentally, Order 888 explains,
stranded cost recovery in the electricity industry conforms to
cost causation principles, which normally govern the allocation
of costs and require customers to pay the costs they caused. See
Order 888, J 31,036 at 31,798. Cost causation principles could
not be applied in natural gas restructuring, Order 888 explains,
because many customers had already begun purchasing gas from
other suppliers before FERC had addressed the take-or-pay
problem on remand from AGD, and because the filed rate
doctrine prohibits assessing charges against former customers.
Id. at 31,800-01. Order 888 also explains that unlike stranded
costs in the electricity industry, the take-or-pay liabilities in the
gas industry were extraordinary. The billions of dollars of take-
or-pay liabilities resulted not from Order 636, but from earlier
regulatory policies that had encouraged pipelines to enter into
long-term, fixed-price gas purchase contracts, combined with
declining gas prices that made those contracts uneconomical. See
Order 888-A, § 31,048 at 30,380. Under all of these
circumstances, "[t]o have allocated these costs solely to any one
segment of the industry would have imposed a crushing new
burden on that segment." /d. at 30,380-81.

Stranded costs in the electricity industry, Order 888 explains,
are quite different. Resulting directly from Order 888, they
represent “ordinary costs that have always been, and are
currently, included in the utility's rates for electric generation
approved by the Commission." /d. at 30,382. Moreover,
wholesale customers may avoid stranded cost liability by
continuing to purchase power from their historic utility, precisely
what they probably would have done in the (54)absence of Order
888. In other words, in contrast to the natural gas industry,
where customers would have faced enormous new burdens had
FERC forced them to pay take-or-pay costs, customers in the

C-59

electricity industry face no new burdens; instead, Order 888
requires them to pay nothing more than costs they would have
had to pay in the absence of Order 888. In the electricity
industry, the only effect of stranded cost recovery is delayed
realization of the full benefits of a competitive market.

In light of these differences between the natural gas and
electricity industries and FERC's exhaustive treatment of the
natural gas restructuring in Order 888, POSCR's contention that
FERC has failed "to offer a coherent rationale, rising to the level
of reasoned decisionmaking" for not imposing cost sharing is
wholly without merit. Equally without merit is POSCR's
assertion that UDC "teaches that, were customers and utilities
benefit from an open access rule/order that leads to early
contract termination and where anticompetitive conduct by
utilities has given rise to the need for the open access order,
utilities must share transition costs." POSCR ignores three
important points. First, FERC, not this court, determined that
cost sharing was appropriate with respect to take-or-pay
liabilities. UDC merely affirmed FERC's decision. Second, K N
Energy recognized that cost sharing in the natural gas industry
was a departure from the cost causation principles that normally
apply, a departure justified by extraordinary circumstances in the
natural gas industry. K N Energy, 968 F.2d at 1301-02. And
finally, as to stranded costs that more closely resemble those at
issue in this case—for example, pipeline assets that would no
longer be fully employed when customers took advantage of
unbundling to purchase gas from alternative suppliers—FERC
ordered, and UDC affirmed, that pipelines recover one-hundred
percent of those costs.

b. Conformance to cost causation principles
Having established that the natural gas cases impose no

obligation on FERC to order cost sharing, we next consider
POSCR's argument that the inclusion of stranded costs in

C-60

(55)transmission rates does not conform to cost causation
principles. This is so, POSCR asserts, because Order 888's
stranded cost provisions require customers to pay through
transmission rates for costs the utility previously incurred to
provide generation services.

As an initial matter, we note that payment through
transmission rates is only one of three ways that a departing
customer may pay its stranded cost obligation; the customer also
has the option of making a lump-sum payment or installment
payments. Thus POSCR's challenge seems aimed only at the
method of payment, not at the fact that payment is required. But
even viewing POSCR's challenge more broadly, as a claim that
stranded cost recovery no matter what the method of payment
violates cost causation principles, we think it lacks merit.

We have explained the cost causation principle as follows:
"Simply put, it has been traditionally required that all approved
rates reflect to some degree the costs actually caused by the
customer who must pay them." K N Energy, 968 F.2d at 1300.
Given this definition, we are puzzled by POSCR's claim that
because inclusion of stranded costs in transmission rates requires
customers to pay currently for costs incurred in the past, it
violates cost causation principles. To some degree, all utility
rates reflect past costs; utilities typically expend funds today (for
example, constructing generation facilities), fully expecting to
recover those costs through future rates. In fact, current rates
often include past costs that utilities deferred in order to avoid
rate increases. Cost causation requires not that costs be incurred
at the same time they are included in rates, but that the rates
"reflect to some degree the costs actually caused by the customer
who must pay them." /d.

In fashioning Order 888's stranded cost recovery provisions,
FERC went to great lengths to ensure that customers would be
responsible for only those costs they caused.

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[T]he Rule is consistent with the traditional cost
causation principle because it recognizes the link
between the incurrence of the stranded costs and
the decision of a (56)particular generation
customer to use open-access transmission on the
utility's system to leave the utility's generation
system and shop for power, and bases the utility's
ability to recover stranded costs on its ability to
demonstrate that it incurred costs with the
reasonable expectation that the customer would
remain on its generation system beyond the term
of the contract.

Order 888-A, J 31,048 at 30,382.

We cannot see how including stranded costs in transmission
rates instead of lump sum payments changes this analysis. To the
extent POSCR is arguing that including in a transmission rate
costs incurred to provide generation services violates cost
causation principles, we reiterate that stranded costs are not
costs of providing the physical transmission services but, as
Order 888-A explains, they are utilities’ cost of open access
transmission. See Order 888-A, J 31,048 at 30,389 & n.634.
More generally, given the fundamental changes wrought by
Order 888 and the unprecedented opportunity for customers to
purchase power ‘tom alternative suppliers, we are quite
comfortable defer: ig to FERC's judgment that stranded cost
recovery—through transmission rates or otherwise—conforms
to cost causation principles. In fact, FERC may have violated
cost causation principles had it failed to assign stranded costs to
customers who caused them.

POSCR next argues that Order 888 is unduly discriminatory
because including stranded costs in transmission rates forces
transmission customers who previously used a utility's generation
capacity to pay higher costs than new transmission customers.

C-62

Disagreeing, FERC determined that requiring customers
receiving similar services to pay different rates is necessitated by
Order 888's open access requirement. See Order 888-A, 931,048
at 30,388-90. Cf AGD, 824 F.2d at 1009 ("[T]he mere fact of
a rate disparity is not enough to constitute unlawful
discrimination.") (internal quotatio:. «a..rks omitted). Moreover,
FERC concluded, the application of cost causation principles
justifies this different treatment. See Order 888-A, J 31,048 at
30,379, 30-388-90. Seeing noth-(57)ing unreasonable (let alone
arbitrary or capricious) in FERC's policy judgment, we reject
POSCR's challenge.

Nor do we agree with POSCR's argument that stranded cost
rec

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0421%3A02. Public record. Not legal advice.