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

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‘ pReice OF THE CLERK

IN THE

Siywene Court of the United States

OCTOBER TERM, 1992

ARCADIA, OHIO, et al.,

Petitioners,

Vv.

OHIO POWER COMPANY, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the District of Columbia Circuit

PETITION FOR A WRIT OF CERTIORARI

C. EMERSON DUNCAN, II Rex E,. LEE

GREGG D. OTTINGER * CARTER G. PHILLIPS

JOHN P. WILLIAMS JOSEPH R. GUERRA

DUNCAN & ALLEN SIDLEY & AUSTIN

1575 Eye Street, N.W. 1722 Eye Street, N.W.

Suite 300 Washington, D.C. 20006

Washington, D.C. 20005 (202) 736-8000

(202) 289-8400

* Counsel of Record

August 10, 1992

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

QUESTIONS PRESENTED

1, Whether §13(b) of the Public Utility Holding

Company Act, 15 U.S.C. § 79m(b), which authorizes the

Securities and Exchange Commission (SEC) to authorize

certain contracts among associate companies of registered

public utility holding companies, ousts the Federal Energy

Regulatory Commission (FERC) of its core authority to

determine the justness and reasonableness of fuel charges

an electric utility can include in wholesale rates solely

because the utility purchases its fuel through affiliate con-

tracts subject to SEC jurisdiction.

2. Whether the court of appeals erred by failing to

defer to FERC’s reasonable and consistently applied in-

terpretation of its own regulation and by instead con-

struing the regulation in a manner that divests the FERC

of any discretion to examine the justness or reasonable-

ness of fuel costs that are “subject to the jurisdiction of

[another] regulatory body.”

(i)

TABLE OF CONTENTS

QUESTIONS PRESENTED

TABLE OF AUTHORITIES

OPINIONS BELOW

JURISDICTION

PAGE eee I BES UES Y GOOD oo. cc ceccsciccicassnceccneseegsiecnsees

tele dicuedsydecmentuinicnbocedans chcajuaccuunncceas

REASONS FOR GRANTING THE PETITION

CONCLUSION

(iii)

TABLE OF AUTHORITIES

CASES Page

Arcadia Vv. Ohio Power Co., 111 S. Ct. 415 (1990) ..passim

Arkansas Vv. Oklahoma, 112 S. Ct. 1046 (1992) _.. 23

Brimm Vv. Cacke Valley Banking Co., 269 P.2d 859

CRPOM ROD gies is cicccicisccickssonsetas vocdanseemecenstueatiaeatacs 21

D&B Coal Co. v. Farmer, 618 S.W.2d 853 (Ky.

| ASEAN elettan seems Rey rc Ree SPP NONE Many Neale ee 21

Dameron V. Brodnead, 345 U.S. 322 (1953) ........... 21

Gulf States Utiis. Co. v. FPC, 411 U.S. 747

fh . : Rae REE Re NEM re Ay CR Re RIE eT OOO 12,18

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

IE ic ss :ciccin cinta teidtedeecniaanaionaiaideliaalcgaines es 21

Lavine Vv. Milne, 424 U.S. 577 (1976) ........000.0000.2.. 21

Miller v. Commonwealth, 2 S.E.2d 343 (Va.

RRA i EMEP IT Ree aS R ON OTE ete OEM 21

Mississippi Power & Light Co. Vv. Mississippi ex

rel. Moore, 487 U.S. 354 (1988) ..........00020.. 19

Nantahala Power & Light Co. v. FERC, 727 F.2d

REE I ING TRIED Scviccvsessavccsutsicdnagizaccsmmniedeneonties 23

Nantahala Power & Light Co. v. Thornburg, 476

Sc ME MR ieee cnseithdcecciep acide iinabeschadethenkstsCanpiiioe 19

Ohio Power Co. Vv. FERC, 880 F.2d 1400 (D.C.

Cir. 1989), rev’d and remanded sub nom.

Arcadia Vv. Ohio Power Co., 111 S. Ct. 415

§) . » SREARAPEIERDerate teeeee RR ASL eR RO eT a Re LT passim

ADMINISTRATIVE OPINIONS

American Elec. Power Co., 46 S.E.C. 1299 (1978)... 13

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

tI ROATTE RA er Pinion eRe Wertay Be 13

Carolina Power & Light Co., 17 F.E.R.C. 7 61,118

| SPREE Eaten BORE Se PPR ats ed Dr 22

Delmarva Power & Light Co., 24 F.E.R.C. J 61,199

REE Sa oa SER Stn Ree oe) SRE Oa 22

Electric Coops. of Kansas, 14 F.E.R.C. 61,176

(2) RES RRC or SBE a FEI ee Soe 22

Illinois Power Co., 52 FERC § 61,162 (1990)_.......... 22

In re Louisiana Power & Light Co., 26 S.E.C.

Docket 1257 (1982) .......... aaa cata aegis eA Ate 13

TABLE OF AUTHORITIES—Continued

Page

McDowell County Consumers Council, Ine. V.

American Elec. Power Co., 54 F.P.C. 361

2. | PENT ee ORE SORA TC TEM Lea 22

In re New England Elec. Sys., 24 8.E.C. Docket

SE ID hiss siicnag.scawstitae taeeanicsdaanmnad coiled ciabatta 13

In re Ohio Power Co., 14 S.E.C. Docket 928

E , | SERS CME ARM Loe Ie ney ts FERRERS. mT 3

Portland Gen. Exch., ‘Inc., 51 F.E.R.C. § 61,108

t__, HE ie eee roe heen AC Se PPI OT 23

Public Serv. Co. of New Hampshire, 6 F.E.R.C.

Ne PUD icecnietsnccaicccciccsssauamaiidinenencinamieens 22

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

7 61,123 (1981), aff'd sub nom. Public Serv.

Co. Vv. FERC, 832 F.2d 1201 (10th Cir. 1987) .... 4

Sea Robin Pipeline Co., 49 F.E.R.C. § 61,351

CP ena at ee eee 23

In re Southern Ohio Coal Co., 17 S.E.C. Docket

+. GE S| SERRSRR Se rareitary nits BF Me RACIMN Ween ctae ee arts 3

In re Southern Ohio Coal Co., 19 S.E.C. Docket

A) SRE tre) aa eatorner acne Benen REPS 3

STATUTES AND REGULATIONS

Federal Power Act, ch. 285, 41 Stat. 1063 (1935)

(codified as amended at 16 U.S.C. § 79la et

OS oi alec ateten tet eae ins OREO SITE passim

Section 205, 16 U.S.C. § 824d. ...:-...00002 si. 4,14

Section 201 (f), 16 U.S.C. § 824d (f) —...........-..... 22

Section 206,.16:U.S.C. § 8266 _....-...200...-2.-..cc.00c8. 4,13

Section 318, 16 U.S.C. § 8251 (b) -.....:-.-0..20 4.2.22... 12, 25

Section 318, 16 U.S.C. § 825q ............ eta es) 2,5

Public Utility Holding Company Act, ch. 687, 49

Stat. 803 (1935) (codified as amended at 15

TS Te We Oe ID aise cess patent passim

Section 1(c), 15 U.S.C. § 79a (c) .00002 eee 13

Section 18(b), 15 U.S.C. § 79m (b) .............---.-..- 2

has fot EF ” 1 5) TRAE eee Seen Kaen nenr mena: 2,17

18 C.F.R. § 85.14(a) (7) (1992) ......2.....2 oe. 2, 8, 20, 22

TABLE OF AUTHORITIES—Continued

OTHER AUTHORITIES Page

Electrical World, Directory of Electric Utilities

I I 13

Federal Energy Regulatory Commission, FERC

Form 1, Annual Reports of Major Electric Utili-

ties, Licensees and Others (1990) ...........0....00000-... 13

IN THE

Supreme Cot of the United States

OCTOBER TERM, 1992

No. ——

ARCADIA, OHIO, et al.,

. Petitioners,

OHIO POWER COMPANY, ¢ di.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the District ef Columbia Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioners hereby petition for a writ of certiorari to

review the judgment of the United States Court of Ap-

peals for the District of Columbia Circuit in this case.

OPINIONS BELOW

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

15a) is reported at 954 F.2d 779 (D.C. Cir. 1992). The

court of appeals denied rehearing on April 14, 1992

(App., infra, 16a-17a). The decision of the Federal

Energy Regulatory Commission (FERC) (App., infra,

18a-54a) is reported at 39 F.E.R.C. 761,098 (1987).

The decision of the FERC denying rehearing (App.,

infra, 55a-60a) is reported at 43 F.E.R.C. {| 61,046

(1988).

JURISDICTION

The court of appeals rendered its judgment on Febru-

ary 4, 1992. Rehearing was denied on April 14, 1992.

By order dated July 6, 1992, the Chief Justice extended

the time for filing a petition for a writ of certiorari to

and including August 12, 1992. This Court has jurisdic-

tion under 28 U.S.C. § 1254(1).

AUTHORITIES INVOLVED

The relevant statutory and regulatory authorities are

Section 13(b) of the Public Utility Holding Company Act,

15 U.S.C. § 79m(b) (App., infra, 61a), Section 318 of

the Federal Power Act, 16 U.S.C. § 825q (App., infra,

6la), and Section 35.14(a) (7) of FERC’s regulations,

18 C.F.R. § 35.14(a) (7) (1992) (App., infra, 62a).

STATEMENT -

1. Petitioners are fifteen small Ohio villages and cities

that purchase wholesale electric power from respondent

Ohio Power Company for resale to their residents.! Ohio

Power is an operating public utility subsidiary of the

American Electric Power Company (AEP), which also

owns seven other electric utilities operating as an inter-

connected system in a seven-state area. Because AEP is

a registered public utility holding company, Ohio Power

is subject to Titles I and II of the Public Utility Act of

1935, ch. 687, 49 Stat. 803.

Title I of that‘ Act created the Public Utility Holding

Company Act of 1935 (PUHCA), 15 U.S.C. § 79 et seq.,

which subjects public utility holding companies and their

affiliates to regulation by the Securities and Exchange

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

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

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

Wapakoneta. Petitioners have populations ranging from. approxi-

mately 300 to 8500.

Commission (SEC). Title II of the Act enacted Part 2

of the Federal Power Act (FPA), 16 U.S.C. § 824 et

seq., which authorized the Federal Power Commission,

now FERC, to regulate the transmission and sale of elec-

tric energy by public utilities.

Ohio Power purchases coal for generating electricity

from the Southern Ohio Coal Company (SOCCO), a

wholly owned subsidiary it capitalized in 1971. Under

PUHCA, Ohio Power was required to obtain the SEC’s

approval to finance some of SOCCO’s operations. As the

court of appeals observed in its initial decision in this

case, the SEC conducted no hearings and made no specific

findings prior to approving Ohio Power’s investment in

SOCCO. Ohio Power Co. v. FERC, 880 F.2d 1400, 1404

(D.C. Cir. 1989), rev’d and remanded sub nom. Arcadia

v. Ohio Power Co., 111 S. Ct. 415 (1990). In the course

of its brief order approving the capitalization, the SEC

staff simply “noted that, under the proposal before it,

SOCCO’s charges to [Ohio Power] would be ‘based on’

its actual costs plus a rate of return.” Jd.

Between 1978 and 1980, the SEC staff approved three

additional transactions between SOCCO and Ohio Power

authorizing further financing for SOCCO’s mining opera- °

tions.* In each of these orders, the SEC staff “adverted

briefly to the contractual relation between the associates,”

id., noting in each that the price at which SOCCO’s coal

would be sold to Ohio Power “will not exceed the cost”

to SOCCO. Id. (quotation omittéd). Consistent with its

cursory examination of Ohio Power’s relationship with

SOCCO, “[n]one of the [Commission staff’s four orders

cites section 13 [of PUHCA], nor mentions expressly

whatever purchase agreement exists between SOCCO and

{Ohio Power], nor describes any element of costs other

2See In re Ohio Power Co., 14 S.E.C. Docket 928 (1978);

In re Southern Ohio Coal Co., 17 S.E.C. Docket 310 (1979); Ju re

Southern Ohio Coal Co., 19 S.E.C. Docket 1309 (1980).

is |

than the cost of capital.” Jd. at 1408.° None, moreover,

specifically approved the contract by which Ohio Power

purchases coal from SOCCO and none required Ohio

Power to purchase any SOCCO coal.

2. In 1982, FERC responded to Ohio Power’s filing of

a wholesale rate increase by initiating proceedings under

Sections 205 and 206 of the FPA, 16 U.S.C. § 824d & 824e,

to determine whether the proposed rates were just and

reasonable. Acting under its mandate to protect rate-

payers from excessive charges, FERC disallowed that por-

tion of Ohio Power’s SOCCO coal costs‘ that did not

satisfy the agency’s “comparable market test.”

Under the comparable market test, first announced in

Public Serv. Co. of New Mexico, 17 F.E.R.C. { 61,123

(1981), aff'd in relevant part sub nom. Public Serv.

Co. v. FERC, 832 F.2d 1201 (10th Cir. 1987), utilities

purchasing coal from affiliates may “recover no more

from their ratepayers than the price that would have

been incurred if a comparable coal supply contract had

been made with a non-affiliated supplier.” Jd. at 61,246.

As FERC explained in disallowing Ohio Power’s ex-

cessive coal costs, the comparable market test serves two

important purposes: First, it “provides the best incen-

tive for utilities to develop the least costly sources of

fuel.” App., infra, 29a-30a. Second, it protects consumers

from the risks of “self-dealing’” and “rate manipula-

tion” that “arise[] in transactions between affiliates.”

Id. at 30a. In this case, FERC found that Ohio Power

had paid approximately 50 percent more than the market

price for coal in 1980, approximately 94 percent more

8 Section 18(b) of PUHCA is set forth, in relevant part, infra

p. 17.

4 Coal costs are the dominant component in the total cost of the

power petitioners purchase from Ohio Power, accounting for nearly

half of Ohio Power’s revenues from its sales to petitioners. See

Ohio Power Co., Revised Compliance Filing, Docket No. ER82-553-

004 (FERC Apr. 24, 1989).

than the market price in 1981, and, following FERC’s

commencement of rate proceedings, approximately 24 to

33 percent more than market price from 1983 to 1986.

App., infra, 45a & n.87.

Ohio Power contended that Section 318 of the FPA

placed the coal charges it passes on to its consumers en-

tirely beyond FERC’s jurisdiction. Entitled “Conflicts of

Jurisdiction,” Section 318 provides that

li]f, with respect to the issue, sale, or guaranty of a

security, . . . or the acquisition or disposition of any

security, capital assets, facilities, or any other subject

matter, any person is subject both to a requirement of

[the FPA] .. . and to a requirement of [the

PUHCA], the requirement of [the PUHCA] shall

apply to such person, and such person shall not be

subject to the requirement of [the FPA] .. . with

respect to the same subject matter.

16 U.S.C. § 825g. According to Ohio Power, Section 13 (b)

of PUHCA and relevant SEC regulations required it to

pay SOCCO the “costs” of producing coal, including

salaries and a return on investment, even if those costs

were considerably higher than comparable market prices.

Thus, Ohio Power argued, notwithstanding FERC’s statu-

tory mandate to ensure that wholesale rates are just

and reasonable, SEC regulation of Ohio Power’s coal

contracts precluded FERC from regulating the coal costs

the utility includes in its wholesale rates.

FERC rejected this construction of Section 318. It

observed that the SEC’s jurisdiction under PUHCA does

not extend to setting rates, as the SEC itself has repeat-

edly acknowledged. App., infra, 25a-27a. For purposes

of Section 318, FERC ruled, the relevant “subject mat-

ter” of SEC regulation under PUHCA is the transfer

price of coal between SOCCO and Ohio Power, not the

“fuel costs Ohio Power may collect from its wholesale

customers.” App., infra, 24a-25a. FERC concluded that,

because “setting the intra-corporate price and setting rates

are not the same subject matter” for purposes of Section

6 “

318, there was no conflict between its regulatory efforts

and those of the SEC and, hence, Section 318 did not oust

it of jurisdiction. /d. FERC therefore ordered Ohio

Power to establish rates that recover from its customers

no more than the comparable market price of coal, and

to refund prior overcharges that ultimately totaled ap-

proximately $10 million (App., infra, 58a), which Ohio

Power subsequently did.

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

not question the propriety of FERC’s comparable market

test or dispute the Commission’s finding that, between

1980 and 1986, Ohio Power had passed on to its cus-

tomers the excessive coal prices paid to its subsidiary.

Nor did the court dispute that the SEC lacks ratemaking

authority, does not regulate the fuel charges that utilities

subject to PUHCA may pass on to their consumers, and

did not specifically approve the contract by which Ohio

Power purchased its coal from SOCCO. Rather, the panel

majority concluded that Section 318 completely ousts

FERC of jurisdiction to regulate the fuel charges a

utility may include in its wholesale rates whenever the

SEC has any jurisdiction over the contracts under which

the utility purchases such fuel.

In so ruling, the panel majority employed a broad

“field preemption” analysis with respect to the jurisdic-

tional overlaps arising under PUHCA and the FPA. The

majority presumed that Congress “had conferred on the

SEC jurisdiction over some non-enumerated matters that -

otherwise would fall within the jurisdiction of FERC,

and . . . therefore included the residuary phrase [i.e.,

“any other subject matter”] to govern those conflicts.”

Ohio Power Co. v. FERC, 880 F.2d at 1406. “The price

term of sales contracts between associated companies. . .

subject to SEC jurisdiction under PUHCA,” the majority

held, is such a non-enumerated “subject matter” under

Section 318. Jd. Because, in the majority’s view, “FERC

has in effect set by order a different price term for such a

contract by determining that it will not allow the contract

price as a cost in [Ohio Power’s| rate[s,] ... [t]he con-

clusion that the same subject matter is implicated is

inescapable.” Jd. The majority ruled, moreover, that Sec-

tion 318 divests FERC of its otherwise exclusive juris-

diction over wholesale rates even if the FERC order and

the SEC regulation pose no actual conflict. Jd. at 1408.°

4. This Court granted a petition for certiorari filed by

the Ohio municipalities and reversed. In a unanimous

opinion, the Court rejected the court of appeals’ determina-

ton that Section 318 serves as a “general conflicts provi-

sion, policing the entire regulatory border between the

[SEC and FERC].” Aracadia v. Ohio Power Co., 111 S.

Ct. 415, 421 (1990). Rather, the Court read Section 318

to oust FERC of its jurisdiction only where “the ‘same

subject matter’ as to which the duplicative [FERC and

SEC] requirements exist [is] one of those specifically

enumerated” in Section 318. Jd.

So interpreted, the Court concluded, Section 318 does

not divest FERC of its jurisdiction. “The combination of

SEC requirements with respect to the acquisition of

SOCCO [or its coal] and FERC requirements with re-

spect to the disposition of electric power,” the Court

explained, “would not bring § 318 into play.” Jd. at 422.

Even assuming FERC’s rate order is a requirement fall-

ing within one of the four enumerated areas specified by

Section 318, “it is still a requirement with respect to a

different subject matter from (and not, as § 318 requires,

‘with respect to the same subject matter’ as)” the SEC

orders concerning the acquisition of SOCCO or its coal.

Id. The Court remanded the case for a determination

5 Judge Mikva dissented from this part of the majority’s opinion.

He argued that Section 318 does not grant the SEC exclusive juris-

diction over all costs arising from a contract subject to PUHCA.

He concurred in the decision to set aside FERC’s order on the

ground that, notwithstanding FERC’s contrary interpretation, Rule

35.14(a)(7) of FERC’s own rules precludes FERC from disallowing

any costs approved by the SEC.

whether, as Judge Mikva had concluded, FERC had

violated its own regulation, or whether the FERC-pre-

scribed rate is not just and reasonable within the mean-

ing of the FPA because it might “trap” costs. Id.

Concurring in the Court’s interpretation, Justice Ste-

vens, joined by Justice Marshall, wrote separately to

explain that there was no actual conflict between the two

agencies’ orders. Moreover, Justice Stevens noted, “the

Court of Appeals’ reading of § 318 would create a gap in

the regulatory scheme that Congress could not have in-

tended.” Jd. at 423. In this case “Ohio Power would be

allowed to buy coal at prices that would be higher than

those paid by any utility not owned by a holding company,

and then pass those higher costs along to its customers”

without any scrutiny by the agency whose “principal

goalf{] is to ensure that the rates customers pay for their

electricity are ‘just and reasonable.’” Jd. This arrange-

ment is completely inconsistent with Congress’ intent that

PUHCA “supplement not supplant the FPA” (id.) and

that utilities owned by holding companies “be subject to

the regulation of both the SEC and FERC as much as

practical.” Id. at 424.

5. On remand, the court of appeals once again invali-

dated FERC’s order. The Court concluded that FERC’s

own regulation, § 35.14(a) (7), precludes the Commission

from examining the propriety of costs included in whole-

sale rates where those costs are subject to SEC approval.

Section 35.14(a) (7) provides that fuel costs “which [are]

subject to the jurisdiction of a regulatory body .. . shall

be deemed to be reasonable and includable in the [fuel]

adjustment clause” without prior FERC review or ap-

proval. 18 C.F.R. § 35.14(a) (7) (1992). The FERC had

ruled that this language merely “creates a presumption

of reasonableness, not a conclusive finding of reasonable-

ness.” App., infra, 28a (emphasis added). Relying on

interpretations of unrelated statutes, the court of appeals

concluded that the term “deemed” must be read to create

a conclusive presumption and that FERC’s contrary in-

terpretation was therefore entitled to no deference. App.,

infra, 8a-9a. Brushing aside FERC’s prior interpreta-

tions, the court found that the plain language of the regu-

lation “requires FERC to include in Ohio Power’s whole-

sale rate the SEC-approved cost-based price for SOCCO

coal.” App., infra, 9a.

Although its interpretation of Section 35.14(a) (7) pro-

vided Ohio Power “with some succor from the overlapping

regulatory jurisdiction of both the SEC and of FERC,”

App., infra, 10a, the court recognized that FERC could

readily revise its regulation. App., infra, 9a. It there-

fore decided whether the regulatory efforts of the SEC and

FERC created an irreconcilable conflict and, if so, which

agency’s authority is paramount. The lower court an-

swered the first of these questions affirmatively, reason-

ing that, by disallowing a portion of Ohio Power’s coal

price from. its wholesale rate, FERC was “undeniably

affecting the economic relationship between Ohio Power

and SOCCO” that the SEC had approved. App., infra,

lla. The resolution of this “conflict,” the court ruled,

depends upon the plain language of Section 13(b) of

PUHCA, which empowers the SEC “to approve the price

of inter-associate sales of goods, such as coal, and directs

the SEC. to price these goods ‘at cost, fairly and equita-

bly allocated among [associated] companies.’” Jd. In-

voking the canon of construction that specific statutory

provisions take precedence over more general provisions,

the court concluded that “the SEC’s specific statutory

mandate to establish a cost-based price” necessarily trumps

FERC’s “general charge to establish ‘just and reasonable’

wholesale electric rates.” Jd. The court thus held that

Section 13(b) of PUHCA affirmatively ‘“constrain[s]

FERC from altering [an SEC-approved] price under its

‘just and reasonable’ rate-setting authority.” App., infra,

12a.

The court rejected FERC’s contention that, as Justice

Stevens had concluded, the two agency orders could co-

exist because the SEC order simply set at most a ceiling

on the amount Ohio Power could pay for SOCCO coal.

The court also ignored its earlier recognition that the SEC

had not been “particularly mindful of its statutory

powers and obligations under section 13(b)” when issu-

ing its orders and had not “describe[d] any element of

[SOCCO’s] costs other than the cost of capital.” Ohio

Power Co. V. FERC, 880 F.2d at 1408. Accordingly, the

court concluded that, because “Congress’s use of the term

‘at cost’ indicates that cost serves as a ceiling and a floor,”

App., infra, 13a, the SEC staff orders “are better read”

as requiring Ohio Power to pay no more or less than

cost to SOCCO for its coal. App., infra, 14a. Thus, the

fact that FERC’s market-based price may not have ex-

ceeded SOCCO’s cost was, in the court’s view, irrelevant:

“To the extent there is downward flexibility in a cost-

based price, . . . Congress did not make room for anyone

other than the SEC to exercise this flexibility.” App.,

infra, 18a-14a.

Finally, the court suggested that its holding was not

inconsistent with Congress’ intent in passing PUHCA

and the FPA. FERC was not powerless to affect SEC-

approved prices; the Commission, like any private citizen,

could “comment” on any proposed inter-affiliate transac-

tion published in the Federal Register. App., infra, 14a.

Moreover, the court observed, FERC could “conceivably

ask the SEC to investigate whether the cost-based price

for SOCCO coal violated” any PUHCA regulations. /d.

REASONS FOR GRANTING THE PETITION

The decision of the court of appeals recreates the “regu-

latory gap” that this Court intended to and did close in

Arcadia. Like its interpretation of Section 318 of the

FPA, the lower court’s decision to clothe Section 13(b)

of PUHCA with preemptive force will permit—indeed

encourage—electric utilities to gouge their customers by

manipulating the prices utilities pay for goods and services

provided by their affiliates. What is worse, while the

earlier decision disarmed the FERC from protecting con-

sumers, the new ruling creates an even larger gap by

precluding both federal and state regulators from disallow-

ing costs in either wholesale or retail rates, no matter how

much those costs exceed the market prices charged in com-

parable transactions by unaffiliated companies. As a re-

sult, the decision below will not only have a dramatic and

immediate impact on the electric rates paid by petitioners’

customers, but will affect nearly 50 million industrial,

commercial and residential consumers across the country.

These untoward consequences, which justified certiorari

to review the previous decision, are in no way compelled

by Section 13(b) of PUHCA. Indeed, the lower court’s

interpretation of that provision is fundamentally incon-

sistent with, and in fact renders nugatory, this Court’s

interpretation of Section 318 of the FPA. Properly con-

strued, Section 13(b) of PUHCA provides that SEC ap-

proval simply saves an affiliate transaction from con-

demnation as per se illegal; it does not immunize such

transactions from all other regulatory scrutiny. The deci-

sion below adds an unenumerated area of SEC preeminence

to those specifically identified in Section 318 of the FPA.

Nor does the alternative basis for the decision below—

that FERC violated its own regulation—in any way de-

tract from the need for this Court to review the court of

appeals’ interpretation of Section 13(b). By virtue of the

court’s interpretation of Section 18(b), FERC cannot

amend its regulation and thereby re-assert its authority to

regulate SEC-approved fuel costs. Moreover, the lower

court’s unjustified refusal to defer to FERC’s reasonable

and consistent interpretation of its own regulation is itself

an independent reason to review the decision below.

1. a. The Public Utility Act of 1935 had “two primary

and related purposes: to curb abusive practices of public

utility companies by bringing them under effective control,

and to provide effective federal regulation of the expand-

ing business of transmitting and selling electric power in

interstate comerce.” Gulf States Utils. Co. v. FPC, 411

U.S. 747, 758 (1973). As Justice Stevens explained, Title

I of the Act, PUHCA, entrusted the first of these goals

to the SEC, “the agency with the expertise in financial

transactions and corporate finance. ... The SEC carries

out its duties essentially by monitoring inter-affiliate finan-

cial transactions and eliminating potential conflicts of in-

terest.” Arcadia, 111 S. Ct. at 423 (Stevens, J., concur-

ring). Title II of the Act, the FPA, placed responsibility

for the second of these broad statutory objectives on the

FPC, now FERC. Unlike the SEC, FERC has the author-

ity and possesses the technical expertise to regulate the

transmission and sale of electric energy.

The decision below held that, under Section 13(b) of

PUHCA, SEC jurisdiction over any inter-affiliate trans-

action involving the sale of goods or services completely

insulates all aspects of that transaction from future

ratemaking review by FERC, no matter what effect the

transaction has on wholesale electric rates. Because any

challenge to a FERC rate order can be brought in the

D.C. Circuit see 16 U.S.C. § 8251 (b), the court of appeals’

decision will effectively eliminate FERC jurisdiction over

the rate consequences of all such transactions. As a result,

the decision below strips FERC of its ability to protect

the nearly 50 million ratepayers across the country that

receive electricity directly or indirectly from PUHCA-

regulated utilities * from potential self-dealing, unneces-

sary “gold plating” of plant and equipment, and rate

manipulation arising from transactions between electric

utilities and their affiliates.7 The decision, moreover,

creates a strong incentive for electric utilities to adopt the

holding company form, and for new and existing holding

companies te create new subsidiaries to provide every

conceivable good and service needed for the generation,

transmission and distribution of electricity—incentives

that contravene PUHCA’s explicitly stated goals of sim-

plifying and, as soon as practicable, eliminating public

utility holding companies. 15 U.S.C. § 79a(c).

The SEC lacks the expertise, authority and adminis-

trative apparatus to protect ratepayers against these

harmful consequences. As the SEC itself has repeatedly

acknowledged, it has “no power over the[] dealings lof

electric utilities regulated under PUHCA] with their

customers, retail or wholesale.” American Elec. Power

Co., 46 S.E.C. 1299, 1823 (1978). Nor, as a conse-

quence, does it have any expertise in setting or assessing

wholesale electric rates. Unlike FERC, moreover, the

SEC has no statutory or administrative procedures by

which a customer can initiate a complaint, cf. FPA § 206

16 U.S.C. § 824e; and it has no clear authority to order

®See Federal Energy Regulatory Commission, FERC Form 1,

Annual Reports of Major Electric Utilities, Licensees and Others

(1990) ; Electrical World, Directory of Electric Utilities (100th ed.

1992).

7 The potential for rate manipulation is readily demonstrated by

the suspiciously malleable “cost” of SOCCO’s coal. The cost of that

coal was nearly twice the market price before FERC initiated rate

review proceedings, yet shortly thereafter fell to just 24 percent

above market price. See supra pp. 4-5.

8 Accord In re Louisiana Power & Light Co., 26 S.E.C. Docket

1257. 1263 (1982); In re New England Elec. Sys., 24 S.E.C. Docket

229, 235 (1981); Arkansas Power & Light Co., 45 S.E.C. 567, 574

(1974).

refunds for overcharges if a utility is found to have

violated the SEC’s regulatory requirements. Cf. FPA

§ 205(e), 16 U.S.C. § 824d. The decision below, therefore,

creates a serious gap in the regulation of electric utilities

subject to PUHCA, one that Congress, in seeking to curb

holding company abuses, could not have intended to create,

and one that the SEC is wholly unprepared to fill.

The magnitude of this gap, and its impact on rate-

payers, is illustrated by this very case. In the initial order

approving the capitalization of SOCCO, the SEC staff

conducted no hearings whatever and made no specific find-

ings with respect to any aspect of the prices SOCCO might

charge for coal it might sell to Ohio Power. Ohio Power

Co. v. FERC, 880 F.2d .at 1404. In its three subsequent

orders, the staff simply ‘“adverted briefly to the con-

tractual relation between the associates.” Jd. In none

of the four orders did the SEC staff cite Section 13(b)

of PUHCA or describe any element of SOCCO’s proposed

costs other than the cost of capital, nor did it specifically

approve any contract by which Ohio Power purchases coal

from SOCCO. Certainly, no order of the SEC required

Ohio Power to purchase its coal from a high-cost affiliate.

Indeed, so cursory are these orders that the court below

could only speculate, primarily on the basis of Congress’

use of the phrase “at cost,” as to whether the SEC staff

had established cost as both a ceiling and a floor for

SOCCO’s coal prices. Yet, these orders, are now construed

to strip the FERC of its authority to discharge one of its

central statutory duties—determining the justness and

reasonableness of wholesale electric rates.°

The effect this regulatory gap has on ratepayers is

apparent. The prices Ohio Power paid its subsidiary- for

®* Contrary to the lower court’s suggestion, FERC plainly cannot

protect ratepayers by commenting on proposed inter-affiliate trans-

actions published in the Federal Register. In this very case, for

instance, FERC could not have anticipated in 1971 the extent to

which Ohio Power would continue to purchase coal from SOCCO

when its costs greatly exceeded the market price.

coal exceeded market prices by 24 percent to 94 percent

from 1981 to 1986. App., infra, 45a & n.87. Because coal

costs represent approximately half the costs of generating

electricity from Ohio Power’s coal-fired generators (supra

n.4), the rates paid by petitioners (and, therefore, their

residents) between 1981 and 1986 were 12 to 47 percent

higher than they would have been if the coal cost com-

ponent of those rates had been constrained by the market.

Thus, the decision below will not only require petitioners

(and their residents) to repay to Ohio Power the approx-

imately $5 million in overcharges that FERC ordered

refunded to petitioners, but also is likely to lead to sub-

stantial increases in the future as well. Indeed, a great

many of the nearly 50 million households and businesses

that receive electricity directly or indirectly from utilities

subject to PUHCA can reasonably expect similar increases

as a result of the decision below, increases in both whole-

sale and retail rates that they would not face if their

electric utilities were not subject to PUHCA.

b. The decision below has spawned at least as wide

a regulatory gap as the one this Court closed in Arcadia

and has rendered the Court’s prior ruling essentially a

nullity. In Arcadia, this Court held that SEC approval

of Ohio Power’s dealings with SOCCO did not preempt

FERC’s ratemaking authority because the two agencies

1 Although the holding of the court of appeals applies directly

to the ratemaking function of the FERC, its logic clearly preempts

all state regulation as well. Thus, even though Ohio Power’s coal

costs may significantly increase the retail price of electricity in

ways the state commissions would find impermissible, the state

public utility commissions will be required to pass through those

costs. The “regulatory gap” created by the court of appeals on

remand, therefore, is in fact wider than the one it created with its

first opinion. Moreover, the inability of the states to regulate these

rates under the court’s interpretation of Section 13(b) further

undermines any argument that the lower court’s alternative holding

on the regulation minimizes the need for this Court to resolve the

statutory issue. See infra pp. 24-25.

were regulating “different subject matter[s].” 111 S. Ct.

at 422 (emphasis in original). The SEC, the Court con-

cluded, was regulating “Ohio Power’s acquisition of coal,”

while FERC regulated Ohio Power’s “disposition of elec-

tric power.” Jd. at 422 n.3 (first emphasis added).

The court of appeals, however, determined that FERC

was effectively regulating “the economic relationship be-

tween Ohio Power and SOCCO” by refusing to allow Ohio

Power to pass through the full price it paid SOCCO for

coal. App., mfra, lla. In that court’s view, Section

13(b) of PUHCA, without even mentioning FERC, com-

mits that subject to the SEC’s exclusive jurisdiction. The

lower court’s interpretation of Section 13(b), therefore,

has given preemptive force to the very SEC orders that

this Court concluded did not oust FERC of its ratemak-

ing authority. Its interpretation, moreover, gives rise

to the very dangers of regulatory disjunction that this

Court’s earlier decision should have eliminated.

Not only is the ruling below inconsistent in result with

this Court’s previous holding, it is fundamentally at odds

with the reasoning underlying this Court’s decision. In

Arcadia, the Court rejected the notion that the phrase

“or any other subject matter” in Section 318 ousted FERC

of jurisdiction with respect to any matter over which the

SEC possessed authority. Rather, the Court held, Section

318 preempts FERC’s authority only where the two agen-

cies both attempt to regulate a subject matter falling

within one of four specifically enumerated “areas of plainly

parallel authority granted both to the SEC, under PUHCA,

and to the FPC (FERC), under the FPA.” 111 S. Ct.

at 419.

It necessarily follows from this holding that the SEC’s

authority is paramount only with respect to those con-

flicts expressly identified by Section 318, ed that, to the

extent other unidentified conflicts arise, FERC is not

divested of its authority. The court below, however, held

that a conflict that this Court concluded was outside the

scope of Section 318 nevertheless results in preemption

of FERC authority. By giving such preemptive force to

Section 13(b) of PUHCA—which is not among the

PUHCA provisions this Court identified as the sources

of the SEC’s four areas of paramount authority, see id.

at 419-20-—the lower court has reinstated its interpreta-

tion of Section 318 in another guise. Its earlier ruling ren-

dered Section 318’s list of covered conflicts non-exclusive

by adding a “catch all” phrase “or anything else”; its

latest ruling effects the same result by finding preemp-

tion outside the conflicts of jurisdiction provision. The

inconsistency with this Court’s interpretation of Section

318 is the same in both cases and warrants review by

this Court.

ec. The inconsistency with this Court’s prior holding

is in no way compelled by the language of Section 13(b).

In concluding that Section 18(b) preempted FERC of its

authority to judge the propriety of costs included in

wholesale rates, the court below relied on the fact that

Section 13(b) directs the SEC to insure that inter-

affiliate contracts are performed “economically and effi-

ciently for the benefit of such associate companies at cost,

fairly and equitably allocated among such companies.”

15 U.S.C. § 79m(b) (emphasis added). The lower court,

however, completely ignored the context in which the

bby

phrase “at cost” appears.

Section 13(b) begins by providing that

it shall be welawful for any subsidiary company of

any registered holding company .. . to enter into .

any service for] sales . . . contract by which such

company undertakes to perform services [for] .. . or

sell goods to, any associate company thereof except in

accordance with such terms and conditions . . . as the

Commission by rules and regulations or order shall

prescribe.

Id. (emphasis added). This introductory language makes

clear that any SEC prescription that inter-affiliate sales

be made “at cost’? simply saves such sales from automatic

condemnation under Section 13(b) itself. The lower

court, however, converted the statute’s savings clause into

a grant of statutory immunity. Under the lower court’s

interpretation, contracts that would be per se unlawful

but for their compliance with an SEC-prescribed cost

standard are shielded from ali regulatory review, and

presumably all other legal challenge as well.'' The lan-

guage of the statute not only fails to support, but posi-

tively militates against, such a result.

The lower court’s myopic focus on the phrase “at cost”

led it astray in yet another critical respect. The court

concluded, based solely on the phrase “at cost,” that Sec-

tion 13(b) is more “specific” than Sections 205 and 206

of the I‘PA, and that this greater specificity gives the

former preeminence over the latter. This Court, how-

ever, did not remand this case for the court of appeals to

fashion a new conflicts rule; it remanded the case for a

determination whether “the FERC-prescribed rate is not

‘just and reasonable’ because it ‘traps’ costs which the

government itself has approved.” Arcadia, 111 S. Ct. at

422 (emphasis added).

With respect to any inquiry into the equitable nature

—i.e., the “justness and reasonableness’—of FERC-

prescribed rates, Sections 205 and 206 of the FPA are

plainly more specific provisions than Section 13(b) of

PUHCA. Section 18(b) does not even mention “rates”

let alone a utility’s electric wholesale rates; Sections 205

and 206, by contrast, speak directly to the “equities” of

11 Jt follows from the lower court’s holding that, if SEC-approved

costs cannot even be adjudged “unreasonable,” they certainly cannot

be found illegal. Thus, the reasoning of the decision below compels

the conclusion, for example, that inter-affiliate prices are immune

from scrutiny under the antitrust laws. Such a result simply under-

scores the error in the lower court’s interpretation of Section 13(b),

which is part of a statute designed, in part, to prevent anticompeti-

tive practices. Gulf States Utila. Co. v. FPC, 411 U.S. 747, 758

(1973).

Ser ERTS

a utility’s wholesale rates by directing FERC to approve

only those rates that are “just and reasonable.” * Thus,

even assuming, as the lower court did, that the SEC and

FERC requirements are irreconcilable, and that one must

therefore take precedence over the other, the statutory

provisions that most specifically address the question pre-

sented by this case are Sections 205 and 206 of the FPA.

In fact, however, because the agencies regulate dif-

ferent subjects—the SEC regulates the SOCCO-Ohio

Power relationship (i.e., “costs’) and FERC regulates

the Ohio Power-customer relationship (i.e., “rates” )—

and because the requirements of each do not conflict (7.e.,

there is no.“trapping” of costs), the lower court’s deter-

mination concerning which statutory provision is more

“specific” was not only mistaken but unnecessary. This

Court’s decisions in Nantahala Power & Light Co. V.

Thornburg, 476 U.S. 953 (1986) and Mississippi Power

& Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354

(1988), make clear that cost “trapping” arises where one

agency requires a utility to incur specific costs and a

second agency sets a price that ignores the utility’s obli-

gations. See Mississippi Power, 487 U.S. at 374 (“it ob-

viously cannot be unreasonable for [a utility] to procure

the particular quantity of high-priced . . . power that

FERC has ordered it to pay for’) (emphasis added).

Here, by contrast, nothing in the SEC’s orders requires

Ohio Power to purchase any SOCCO coal at all. Because

12 In fact, FERC considered Ohio Power’s equitable claims in its

order and disallowed refunds petitioners sought for 1980, 1981 and

virtually all of 1982. The refunds FERC ordered applied only to

rates Ohio Power collected after it was on notice that its rates were

subject to review and potential refund under the comparable market

test. App., infra, 52a. Moreover, FERC did not limit Ohio Power

to collecting the lesser of SOCCO’s “at cost” price or market price.

Rather, FERC allowed the utility to recover the market price even

if the actual cost of SOCCO’s coal was lower. Thus, FERC simply

provided Ohio Power’s affiliate with an incentive to produce coal

efficiently. Indeed, Ohio Power has claimed to have purchased

SOCCO coal at below-market prices, a fact that demonstrates that

the FERC-prescribed incentive is realistic and fair.

Ohio Power’s coal costs were incurred voluntarily, there

can be no “trapping” of those costs. See id. at 373-74

(“it might well be unreasonable for a utility to purchase

unnecessary quantities of high-cost power, even at FERC-

approved rates, if it had the legal right to refuse to buy

that power’). In any event, the court of appeals refused

teo-undertake any such inquiry and instead rendered a

decision entirely unresponsive to the specific remand or-

der. This departure from the Court’s mandate provides

an additional reason to review the decision below.

2. The lower court also ruled that, by promulgating Sec-

tion 35.14(a) (7), FERC unilaterally disabled itself from

exercising jurisdiction over all fuel costs subject to the SEC’s

approval. The court’s refusal te defer to FERC’s entirely

reasonable and in fact absolutely correct reading of its

own regulation, and the court’s substitution of its own

crabbed interpretation, provide independent issues for re-

view by this Court. Moreover, this “alternative” ground

for the decision below in no way minimizes the economic

or legal significance of the lower court’s statutory ruling

and plainly should not insulate that ruling from review.

a. Section 35.14(a)(7) of FERC’s regulations pro-

vides, in part, that “{wlhere [a] utility purchases fuel

from a company-owned or controlled source, the price of

which is subject to the jurisdiction of a regulatory body,

such cost shall be deemed to be reasonable and includable

in the |utility’s fuel] adjustment clause.” 18 C.F.R.

§ 35.14(a) (7) (1992). The court of appeals’ determina-

tion that this sentence has but one meaning, and can only

be understood as giving rise to a conclusive presumption

of justness and reasonableness, is demonstrably incorrect.

Even when read in isolation, the sentence upon’ which

the court of appeals chose to focus is ambiguous at best.

Had the agency wished to create a conclusive presump-

tion, it could have done so expressly, simply by using the

phrase “shall be presumed conclusively” instead of the

vague phrase “shall be deemed.” Moreover, had FERC

intended to abandon all review of fuel costs subject to the

jurisdiction of another agency, it should have provided

that such costs shall be presumed conclusively to be “just

and reasonable’—the terms Sections 205 and 206 of the

FPA.use to describe legal rates—and not merely “deemed

to be reasonable and includable” in ‘adjustment

clause[s].”

In holding that the regulation was unambiguous, the

court below relied on a handful of decisions involving en-

tirely different statutes in which “courts construing the

word ‘deemed’ have generally found that it establishes a

conclusive presumption.” App., infra, 8a (emphasis

added). But as the court’s own qualifying language im-

plicitly acknowledges, courts have also construed “deem”

to create only a rebuttable presumption “—a fact that

simply underscores the ambiguous nature of the word

itself and the importance of the context in which it is

used."

Here, the context makes abundantly clear that the

regulation does not give rise to a conclusive presumption.

First, such a presumption is entirely inconsistent with

the full text of the regulation, which demonstrates that

Section 35.14(a) (7)’s purpose is simply to establish which

costs a public utility may automatically include in the

fuel adjustment clause without obtaining prior FERC

approval. Thus, the final sentence of the regulation,

which the court of appeals ignored, provides that “|f]uel

charges by affiliated companies which do not appear to

be reasonable may result in the suspension of the fuel

adjustment clause or cause an investigation thereof to

13 See, e.g., Lavine Vv. Milne, 424 U.S. 577, 583 (1976) ; Brimm v.

Cache Valley Banking Co., 269 P.2d 859, 863-64 (Utah 1985) (citing

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

1972) : D&B Coal Co. v. Farmer, 613 S.W.2d 853, 854 (Ky. 1981);

Miller v. Commonwealth, 2 S.E.2d 348, 348-49 (Va. 1939).

14 In Dameron v. Brodhead, 345 U.S. 322, 326-27 (1953), a case

Judge Mikva cited in his earlier concurrence but the panel below

did not, this Court declined to interpret the word “deemed” as

creating a rebuttable presumption not because the word had a

single, unambiguous meaning, but because such an interpretation

would nullify the statute at issue.

be made by the Commission on its own motion under

section 206 of the Federal Power Act.” 18 C.F.R.

§$ 35.14(a) (7) (1992). Consistent with this sentence, just

eight months after the regulation was promulgated the

Commission authorized an investigation into fuel costs paid

by another AEP-held utility to an affiliate despite the

utility’s contention that SEC approval of its costs ren-

dered such an investigation improper. McDowell County

Consumers Council, Inc. Vv. American Elec. Power Co.,

54 F.P.C. 361 (1975).

Second, a conclusive presumption is squarely at odds

with FERC’s mandate, under Section 205(f) of the FPA,

to order a public utility to “cease any practice in connec-

tion with the [fuel adjustment] clause, if [such] clause

... does not result in the economical purchase and use of

fuel, electric energy, or other items, the cost of which is

included in any rate schedule under an automatic ad-

justment clause.” 16 U.S.C. § 824d(f). Plainly, FERC

cannot maintain a regulation that disavows its statutory

obligation to conduct periodic reviews of automatic fuel

adjustment clauses. That it did not do so in Section

35.14(a) (7) is apparent when the regulation, particularly

its last sentence, is read in its entirety.

Third, the conclusive presumption adopted by the court

of appeals cannot be reconciled with two regulatory prin-

ciples to which FERC has consistently adhered: 1)

expenses passed through fuel adjustment clauses are

reviewable, both retroactively and prospectively, in rate

proceedings under Sections 205 and 206 of the FPA";

authority to require refunds of costs previously collected under

a fuel cost adjustment clause); Delmarva Power & Light Co., 24

F.E.R.C. {| 61,199 (1983) (same); Carolina Power & Light Co., 17

F.E.R.C. | 61,118 (198T) (same); Electric Coops. of Kansas, 14

F.E.R.C. { 61,176 (1981) (same); Public Serv. Co. of New Hamp-

shire, 6 F.E.R.C. § 61,299 (1979) (same).

eae

ee — ee ee

and 2) a utility’s costs are not presumed to be prudently

incurred when they are paid to an affiliate.”

Under these circumstances, the lower court’s failure to

grant “substantial deference” to FERC’s “reasonable,

consistently held interpretation” of its own regulation

was plainly erroneous. See Arkansas v. Oklahoma, 112

S. Ct. 1046, 1059 (1992). The error in this case is par-

ticularly egregious, however, and particularly deserving

of review. In holding that “section 35.14(a) (7) estab-

lishes, as a policy matter, that if another regulatory body

has already passed on the fuel price, then FERC will

abide by that determination,” App., infra, 9a (emphasis

added), the lower court transparently substituted its

own policy judgment—one it has doggedly sought to im-

pose on FERC through its interpretation first of Section

318 of the FPA and now of Section 13(b) of PUHCA—

for the policy judgment the responsible agency chose

to make. Tellingly, the court below offered no explana-

tion for why an agency whose “principal goal[] is to en-

sure that the rates customers pay for their electricity are

‘just and reasonable,” Arcadia, 111 S. Ct. at 423

(Stevens, J., concurring), would unilaterally divest itself

of all jurisdiction to review what may often be, and in

this case was, the single largest component of wholesale

rates."7 In fact, such a disavowal of jurisdiction gives

16 See Nantahala Power & Light Co. v. FERC, 727 F.2d 1342,

1345 (4th Cir. 1984); Portland Gen. Exch., Inc., 51 F.E.R.C.

| 61,108, at 61,243-246 (1990); Sea Robin Pipeline Co., 49 F.E.R.C.

{ 61,351 (1989). This principle completely belies Ohio Power's

argument, accepted by Judge Mikva in his initial concurrence, see

Ohio Power Co. v. FERC, 880 F.2d at 1413, that reading Section

35.14(a)(7) to create only a rebuttable presumption would render

the regulation superfluous because FERC already presumes that

utility costs are prudently incurred.

17 Judge Mikva initially suggested that FERC would so disable

itself because “the purpose of section 35.14(a)(7) ... is to avoid

unreasonable fuel costs between affiliated companies” and thus, if

the SEC “has already made that determination, . . . there is no

reason for FERC to second-guess [it].” Ohio Power Co. v. FERC,

rise to the same regulatory gap and its attendant evils

that led FERC to conclude that Section 318 of the FPA

does not divest it of jurisdiction over such costs. Accord-

ingly, because the lower court, in interpreting FERC’s

regulation, simply forced a policy judgment on FERC

that the agency has not chosen to make, and because the

lower court’s interpretation of Section 35.14(a) (7) opens

the same regulatory gap this Court previously closed, this

Court should review the “alternative” basis for the deci-

sion below.

b. In any event, the regulatory ruling does not obviate

the need to review the lower court’s interpretation of

Section 13(b) of PUHCA. As the lower court itself rec-

ognized, while its interpretation of FERC’s regulation

provided Ohio Power with “some succor” from the over-

lapping jurisdiction of the SEC and FERC, “[i]Jf FERC

wishes to have § 35.14(a)(7) create only a rebuttable

presumption, ... it may do so explicitly.” App., infra, 9a.

To provide Ohio Power and all other registered public

utility holding companies complete relief from the “prob-

lem” of such regulatory overlap, therefore, the lower court

found it necessary to decide that Section 13(b) of PUHCA

preempted FERC’s ratemaking authority.

Not only was the statutory ruling necessary to the

holding below, it completely precludes FERC from re-

asserting jurisdiction over SEC-approved fue! costs

through repromulgation of its regulation, and likewise

bars state regulators from asserting jurisdiction over such

880 F.2d at 1414. Consistent with FERC’s statutory mandate, how-

ever, the purpose of its fuel adjustment clause regulation is not to

regulate costs -between affiliated companies, but to regulate the rates

utilities charge their customers. The SEC, of course, does not make

rate determinations. See supra p. 13 & n.8. In light of the agencies’

different statutory goals and fields of expertise, therefore, FERC

would have no reason to presume conclusively that SEC-approved

costs will always yield just and reasonable rates. Certainly, FERC

could not rationally presume that costs that are merely subject to

SEC review will always be reasonable.

ti ae Salk

i Epa Aci Sate dias Mea! 3h

Cte! coor tale

hn aaah i ida igen Dd;

costs. FERC is thus powerless to close the regulatory

gap or remedy the economic dislocation that the lower

court’s interpretation of Section 13(b) has caused. The

lower court’s statutory ruling, moreover, will likely escape

review altogether if it is not addressed by the Court in

this case. FERC now has no reason to alter its regula-

tion,’* and therefore, in the future, it ean be expected to

approve pass-throughs of SEC-approved fuel costs on the

basis of its unrevised (and unrevisable) regulation. Thus,

there will be no further occasion for courts to consider

whether Section 13(b) of PUHCA ousts FERC of all rate-

making authority over SEC-approved fuel costs. As a

consequence, the regulatory gap created by the statutory

ruling will go unremedied, and this Court’s ruling in

Arcadia will be completely frustrated.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

C. EMERSON DUNCAN, II REX E. LEE

GREGG D. OTTINGER * CARTER G. PHILLIPS

JOHN P. WILLIAMS JOSEPH R. GUERRA

DUNCAN & ALLEN SIDLEY & AUSTIN

1575 Eye Street, N.W. 1722 Eye Street, N.W.

Suite 300 Washington, D.C. 20006

Washington, D.C. 20005 (202) 736-8000

(202) 289-8400

* Counsel of Record

August 10, 1992

18 As FERC explained in its petition for rehearing before the

court of appeals, “repromulgation [of Section 35.14(a)(7)] would

be unavailing unless this Court overturns the panel’s statutory

ruling.” Petition for Rehearing and Suggestion for Rehearing En

Bane at 13 n.7. This is particularly true inasmuch as all FERC

orders are reviewable in the District of Columbia Circuit. See

16 U.S.C. § 8251(b). Under these circumstances, FERC cannot be

expected to undertake the entirely futile gesture of repromulgating

an unenforceable regulation.

APPENDICES

™ ~ ehh ae?) ee ee ee eel) ee 8

APPENDIX A

UNITED STATES COURT OF APPEALS

DISTRICT OF COLUMBIA CIRCUIT

No. 88-1293

OHIO POWER COMPANY,

Petitioner,

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent,

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

MUNICIPAL WHOLESALE ELECTRIC CUSTOMERS OF

OHIO POWER COMPANY,

Intervenors.

On Remand fiom the United States Supreme Court

Argued Sept. 27, 1991

Decided Feb. 4, 1992

Edward Berlin, with whom Kenneth G. Jaffe and

Edward J. Brady, Washington, D.C., were on the brief,

for petitioner. Andrew L. Lipps, Washington, D.C., also

entered an appearance for petitioner.

Joseph S. Davies, Deputy Sol., with whom William S.

Scherman, Gen. Counsel, Jerome M. Feit, Sol., and Timm

Abendroth, Atty., Washington, D.C., were on the brief,

for respondent. John Estes, Joanne Leveque, and Cath-

erine C. Cook, Attys., F.E.R.C., Washington, D.C., also

entered appearances for respondent.

Gregg D. Ottinger, with whom John P. Williams, Wash-

ington, D.C., and Lee F. Feinberg, Charleston, W.V., were

on the brief, for intervenors.

James B, Liberman, Washington, D.C., was on the brief

for amici curiae Registered Holding Co. Group, urging

that the decision of the F.E.R.C. be reversed and the

matter remanded to the Com’n.

James R. Doty, Ge .. Counsel, Jacob H. Stillman, Asso-

ciate Gen. Counsel, Katherine Gresham, Asst. Gen. Coun-

sel, and Paul Gonson, Sol., S.E.C., -Washington, D.C.,

were on the brief for amicus curiae.

Before MIKVA, Chief Judge, and SILBERMAN and

SENTELLE, Circuit Judges

Opinion for the Court filed by Circuit Judge SEN-

TELLE.

SENTELLE, Circuit Judge:

Ohio Power Company, a producer of electricity, was

subjected to. the regulatory jurisdiction of two agencies

the Federal Energy Regulation Commission (“FERC”)

and the Securities and Exchange Commission (“SEC”).

Specifically, FERC determined in a wholesale rate proceed-

ing that the SEC-approved price paid by Ohio Power for

coal from its associate Southern Ohio Coal Company

(“SOCCO”) could not be included in Ohio Power’s whole-

sale rate to the extent that it was greater than the market

price for comparable coal. Ohto Power Co., 39 F.E.R.C.

61,098 (1987).

We initially granted Ohio Power’s petition to vacate the

FERC order on the ground that § 318 of the Federal Power

Act insulated SEC-approved prices from FERC alteration.

Ohio Power Co. v. FERC, 880. F.2d 1400, 1410 (D.C.Cir.

1989). Ruling that § 318 did not address the conflict faced

by Ohio Power, the Supreme Court remanded the case

_ Arcadia, Ohio v. Ohio Power Co., —— 2h. nes bh

SCt 41h. 422,112 L.Ed.2d 874 (1990). We now grant

Ohio Power’s petition to vacate the FERC order for the

reasons discussed below.

BACKGROUND

I. The Statuto y Scheme

In 1935, Congress enacted grants of authority to the

SEC and FERC’s predecessor, the Federal Power Commis-

sion, under an umbrella statute entitled the Public Utility

Act. ch. 687, 49 Stat. 803 (1935). Title I, known as the

Public Utility Holding Company Act (“PUHCA”), em-

powers the SEC to curb abuses affecting investors and

consumers created by transactions between subsidiary

associates of public utility holding companies. 49 Stat.

202 (1935) (codified as amended at 15 U.S.C. §§ 79a to

797-6). The SEC discharges its responsibilities in large

part under § 13 of the PUHCA, which makes transactions

between associate companies unlawful unless they are

approved by the SEC at terms found to be “in the public

interest or for the protection of investors or consumers.”

15 U.S.C. § 79m (b).’

1 Section 13(b) of PUHCA states in pertinent part that

it shall be unlawful for any subsidiary compan) of any registered

holding company. . . to enter into or take any step in the per-

formance of eny service, sales, or construction contract by

which such company undertakes to perform services or con-

struction work for, or sell goods, to any associate company

thereof except in accordance with such terms and conditions

and subject to such limitations and prohibitions as the Com-

mission by rules and regulations or order shall prescribe as

necessary or appropriate in the public interest or for the pro

tection of investors or consumers and to insure that such con-

tracts are performed economically and efficiently for the bene-

Title I], known as the Federal Power Act (“FPA”),

established the Federal Power Commission to oversee the

wholesale transmission and sale of interstate electric

power. 49 Stat. 888 (1935) (codified as amended at 16

U.S.C. §§ 791a-825r). FERC, which succeeded the now-

departed Federal Power Commission, fulfills a critical

part of its mandate by setting “just and reasonable”

wholesale electric rates under §§ 205 and 206 of the

FPA. 16 U.S.C. $$ 824d & 824e. Thus, under the FPA

and the PUHCA,

FERC-regulated electric power companies [such as

Ohio Power] that are subsidiaries or affiliates of

registered public utility holding companies are there-

for subject to SEC regulation as well.

Arcadia, 111 S.Ct. at 417; see also Ohio Power Co., 880

F.2d at 1402-04 (summarizing statutory backdrop of this

action).

Il. Factual Background

Ohio Power Company produces electricity with coal-

burning generation plants and is a subsidiary of one of

the nation’s largest public utility holding companies,

American Electric Power Company. In 1971, Ohio Power

entered into a lease with the owners of the Martinka

Mine for development of coal by Ohio Power’s subsidiary

and associate, SOCCO. Before Ohio Power could capital-

ize SOCCO’s mining operations by purchasing its stock,

$ 10 of PUHCA required the SEC to approve the proposed

transaction. 15 U.S.C. § 79j. In its order of December

2, 1971, the SEC determined that Ohio Power could ob-

tain coal from SOCCO at a price “based on an amount

equal to the actual cost” of coal production including a

reasonable rate of return on Ohio Power’s capital invest-

fit of such associate companies at cost, fairly and equitably

allocated among such companies.

15 U.S.C. § 79m(b).

ment. Ohio Power Co., Holding Company Act Release

(“HCAR”) No. 17,383 (1971); see Arcadia, 111 S.Ct. at

417-18 (discussing history of Ohio Power's. capitalization

of SOCCO).?

This action came initially before us as a result of a

May 28, 1982, wholesale rate increase application that

Ohio Power filed with FERC pursuant to §§ 205 and

206 of the FPA. FERC eventually accepted the applica-

tion except for Ohio Power’s request to pass through

the cost-based price that it paid for SOCCO coal. Assert-

ing that comparable coal could be obtained at a cheaper

market price, FERC found the SOCCO coal price unrea-

sonable and therefore not includable in Ohio Power’s

wholesale rate. Ohio Power Co., 39 F.E.R.C. {| 61,098, at

61,275 (1987). Ohio Power insisted the SEC alone had

jurisdiction over the price that associates may charge

each other for goods,* and sought judicia! vindication.

Before this Court, Ohio Power and FERC argued that

the controversy centered on the application of the juris-

dictional conflicts provision of the Public Utility Act,

§ 318 of the FPA. Ohio Power Co., 880 F.2d at 1405-09.

The parties agreed § 318 provided that the requirements

of the PUHCA govern when a company is subject to con-

flicting PUHCA and FPA regulation “with respect to the

same subject matter.” 16 U.S.C. § 825q. FERC defended

its order on two grounds: first, by claiming there was

no conflict between the agencies because the FERC order

required Ohio Power to pay a market price that was less

than cost and the SEC orders simply required Ohio

2 As observed by the Supreme Court, Ohio Power obtained three

additional SEC approvals for various capital transactions with

SOCCO. See Ohio Power Co., HCAR No. 20,515, 14 SEC Docket

928 \1978): Southern Ohio Coal Co., HCAR No. 21,008, 17 SEC

Docket 310 (1979); and Southern Ohio Coal Co., HCAR No. 21,537,

19 SEC Docket 1309 (1980).

8 SEC regulation 17 C.F.R. § 250.80(b) defines “goods” to in-

clude coal.

Power to pay no more than cost; and second, by assert-

ing that, regardless of conflict, since FERC was regulat-

ing wholesale rates and the SEC was regulating inter-

associates prices, the agencies were not regulating the

“same subject matter.” Ohio Power Co., 880 F.2d at

1405.

This Court agreed with Ohio Power that even if the

SEC orders were read to enshrine cost only as a ceiling,

Ohio Power was nevertheless subject to conflicting reg-

ulatory authorities in that FERC had “set by order a

different price term” for a contract approved by the

SEC. Jd. at 1406. Similarly, we found that the two

agencies were regulating the “same subject matter,” and

that therefore § 318 required FERC to defer to the

SEC’s approval of a cost-based price for SOCCO coal.

Id, at 1408-09. In a separate opinion, Judge, now Chief

Judge, Mikva concurred in the result, but on the alterna-

tive ground that FERC had violated one of its own reg-

ulations requiring it to “deem” reasonable and includable

prices set by other regulatory bodies (here, the SEC).

Id. at 1412-14 (construing FERC regulation 18 C.F.R.

§ 35.-14(a) (7)).

In its review, the Supreme Court adopted a reading of

§ 318 not advanced by “the parties, the interested agencies,

[or] the Court of Appeals,” Arcadia, 111 S.Ct. at 422

(Stevens, J., concurring), and found that the conflict

affecting Ohio Power was not covered by § 318. Id. at

421-22. The Arcadia Court read § 318 as applying only

to four specifically enumerated types of conflicts, and held

that, although Ohio Power was subject to “overlapping

regulatory jurisdiction of both the SEC and of FERC,”

id. at 417, § 318 was silent regarding the type of overlap

asserted by Ohio Power in this case. Jd. at 422.

Advising us that its interpretation of § 318 did not

“end review of the FERC order,” the Court remanded

with instructions to resolve whether: (1) as Judge Mikva

observed, FERC violated its own regulation; and (2) “the

FERC-prescribed rate” is unjust and unreasonable because

it “ ‘traps’ costs which the government ithe SEC] itself

has approved”. /d.

Justice Stevens wrote a concurring opinion, joined by

Justice Marshall, in which he found that even if the over

lap in authorities fell within the enumerated subjects of

< 318 there was “no risk of conflict between the require-

ments of the SEC and FERC in this ease.” Jd. at 423

(Stevens. J., concurring). Justices Stevens and Marshall,

therefore, agreed with FERC that the two agencies were

regulating different subject matters, with FERC over-

seeing “what portion of its fuel costs Ohio Power may

pass along to its customers” and the SEC placing a ceil-

ing on “the price which Ohio Power pays its [coal] sup-

plier—-SOCCO.” Id. The concurrence ended by comment-

ing that Congress’s intent would be frustrated by a

holding that would allow the SEC to hamper FERC’s

regulation of wholesale rates. Id. at 423-24.

ANALYSIS

I. FERC Regulation 18 C.F.R. § 35.14(a) (7)

As instructed by the Court, we have reviewed Part I]

of Judge Mikva’s concurring opiulon, which contended

that a remand was required on the ground that 18 C.F.R.

§35.14(a) (7) of FERC’s own rules precluded FERC

from “imposing its market-price test” in the face of a

cost-based coal price approved by the SEC. Ohio Power

Co., 880 F.2d at 1412-14. Judge Mikva concluded that

“ly|nder the regulation, because the prices of Ohio

Power’s fuel from its affiliate are subject to the jurisdic-

tion of the SEC, such costs must be conclusively pre-

sumed reasonable.” Jd. at 1414. We now adopt Judge

Mikva’s approach as reflecting the view of this panel.

Section 35.14(a) (7) addresses fuel price adjustment

clauses in filed rate schedules, and provides in pertinent

part:

Where the utility purchases fuel from a company-

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

ject to the jurisdiction of a regulatory body, such cost

shall be deemed to be reasonable and includable in the

adjustment clause.

18 C.F.R. § 35.14(a) (7). The dispute here focuses on the

meaning of the word “deemed,” with Ohio Power arguing

that it establishes a conclusive presumption for including

such costs, and FERC urging that it sets only a rebuttable

presumption, which in Ohio Power’s case was disproved.

Judge Mikva began by remarking that “no deference is

owed an interpretation at odds with the plain meaning of

the text.”” Ohio Power Co., 880 F.2d at 1413 (Mikva, J.,

concurring) (citing Union of Concerned Scientists v. NRC,

711 F.2d 370, 381 (D.C.Cir.1983) (“When an agency’s

interpretation flies in the face of the language of the rules

themselves, it is owed no deference.”)). He then found

that “courts construing the word ‘deemed’ have generally

found that it establishes a conclusive presumption.” Jd.

(citing, eg., H.P. Coffee Co. v. Reconstruction Finance

Corp., 215 F.2d 818, 822 (Emer.Ct.App.1954) (finding

near “unanimous judicial determination that the word

{[deemed!], when employed in statutory law, creates a con-

clusive presumption.”)). In addition to H.P. Coffee and

the other cases cited in the concurrence, we note also that

two decisions from this Circuit have construed the term

deemed and found that it created a conclusive presump-

tion. See Gaither v. Myers, 404 F.2d 216, 218 (D.C.Cir.

1968) (finding that use of term deemed in a liability

statute changed the common law rule of agency by making

agency status turn solely on the consent of an owner to

use a car, while the common law rule considered consent

one of many factors); and Forrester v. Jerman, 90 F.2d

412, 413 (D.C.Cir.1937) (interpreting same statute as in

Gaither and reaching same conclusion after finding that

deemed “is unambiguous and leaves nothing for interpre-

tation”). Given the unambiguous character of deemed,

then. we find case law amply supports our finding that the

plain language of § 35.14(a) (7) requires FERC to in-

clude in Ohio Power’s wholesale rate the SEC-approved

cost-based price for SOCCO coal.

FERC attempts to cloud the clear meaning of deemed

by pointing to the complicated rulemaking history of

$ 35.14(a) (7). Brief of Respondent at 31-32. We agree

with Judge Mikva’s past disposition of this argument and

find that, if anything, the regulatory history cuts against

a rebuttable presumption interpretation of deemed, par-

ticularly when considering the evolution of the regulation

from its proposed form in 1973 to its final promulgation

in 1974. See Ohio Power Co., 880 F.2d at 1413-14. The

original version stated that “[o]nly the reasonable cost of

fuel {purchased from an associate] may be included™ in

the wholesale rate, 38 Fed.Reg. 17,253 (1973), language

consistent with the rebuttable presumption urged by

FERC. But the regulation as ultimately issued abandoned

this formulation and instead contained the “such cost shall

be deemed reasonable and includable” language that we

read as creating a conclusive presumption. 39 Fed.Reg.

28,911 (1974).

Finally, we find prior administrative pronouncements

regarding the meaning of § 35.14(a) (7) of little moment

to the extent they are not consistent with the unambigu-

ous terms of the regulation. See Union of Concerned

Scientists. 711 F.2d at 381. If FERC wishes to have

$ 35.14(a) (7) create only a rebuttable presumption, then

it may do so explicitly through the required process. As

currently written, however, we agree with Judge Mikva

that “section 35.14(a) (7) establishes, as a policy matter,

that if another regulatory body has already passed on the

fuel price, then FERC wil! abide by that determination.”

Ohio Power Co., 880 F.2d at 1414. We therefore hold that

under § 35.14(a) (7), FERC was obliged to find “reason-

able and includabe” Ohio Power’s fuel costs as approved

by the SEC, and we remand to FERC for further findings

not inconsistent with this opinion.

10a

Il. Reconcilation of the Overlapping Regulatory

Authorities

By precluding FERC from declaring an SEC-approved

price unreasonable, our interpretation of § 35.14(a) (7)

provides Ohio Power with some succor from the “over-

lapping regulatory jurisdiction of both the SEC and of

FERC” found by the Arcadia Court. 111 S.Ct. at 417.

However, we believe that more than the regulation re-

quires this result.

In Arcadia, the Supreme Court advised us that § 318

is not the mechanism by which the overlapping regulatory

jurisdiction issue may be resolved. The Court left for us,

though, the task of deciding how to reconcile the conflict,

if any, created by FERC’s attempt to allow only a market-

based price for SOCCO coal when calculating wholesale

rates and the SEC’s orders requiring Ohio Power to pay

- either cost or no more than cost for SOCCO coal.

To begin, we do find that the overlapping authorities

have resulted in unavoidable conflicting requirements for

Ohio Power. Justice Stevens in his Arcadia concurrence

noted that the “market price for coal during the time

relevant to this proceeding has been less than SOCCOQ’s

costs.” Arcadia, 111 S.Ct. at 423. From this, he reasoned

that no conflict existed since the SEC orders did no more

than “establish a ceiling requiring that the price SOCCO

charges its affiliates for coal remain at or below its costs.”

Id.

However, Ohio Power represents that the “market price,

calculated according to FERC’s methodology, has exceeded

the cost of mining Martinka coal in some months.” Brief

of Petitioner Ohio Power at 24 & n. 15. FERC does not

contest this representation. Moreover, if one interprets

the SEC orders as establishing cost as both a floor and a

ceiling, then Ohio Power will suffer regulatory dissonance

whenever the market price deviates from cost.

lla

We are also unpersuaded by the argument that no con-

flict exists because FERC is simply regulating how much

Ohio Power can charge for power, not how much Ohio

Power pays for SOCCO coal. By declaring a portion of

the SOCCO coal price unreasonable and therefore not in-

cludable in Ohio Power’s wholesale rate, FERC is un-

deniably affecting the economic relationship between Ohio

Power and SOCCO, a relationship approved by, and under

the jurisdiction of, the SEC. Cf. Nantahala Power &

Light v. Thornburg, 476 U.S. 953, 971, 106 S.Ct. 2349,

2359, 90 L.Ed.2d 943 (1986) (overturning action of a

state regulatory body that, by its orders establishing retail

rates, required the regulated entity to “pretend that it is

paying less for the power it receives ... , under agree-

ments not subject to [the state’s] jurisdiction, than is in

fact the case.’’).

We find the resolution of this conflict in the plain lan-

guage of the statute authorizing the SEC to regulate sales

contracts of associate companies. Section 13(b) of the

PUHCA empowers the SEC to approve the price of inter-

associate sales of goods, such as coal, and directs the SEC

to price these goods “at cost, fairly and equitably allocated

among [associate] companies.” 15 U.S.C. § 79m(b).

Here, the SEC did just that with its four orders approv-

ing Ohio Power’s relationship with SOCCO, which re-

flected § 13(b)’s mandate to price SOCCO’s coal “at cost.” *

In contrast to the SEC’s specific statutory mandate to

establish a cost-based price for sales of goods between

associates, FERC can point to no equivalent authority

besides its general charge to establish “just and reason-

able’ wholesale electric rates. 16 U.S.C. §§ 824d & 824e.

Of course, it is black letter law that when a conflict arises

between specific and general provisions of the same legis-

lation, the courts should give voice to Congress’s specific

articulation of its policies and preferences. 2A NORMAN

J. SINGER, SUTHERLAND STATUTORY CONSTRUCTION § 46.05,

4 See supra note 1 and accompanying text.

12a

at 105 n. 19 (5th ed. 1992). Accordingly, we hold that

Congress in § 13(b) of the PUHCA authorized the SEC

to set the price of SOCCO coal “at cost,’ and in so

doing constrained FERC from altering that price under

its ‘‘just and reasonable” rate-setting authority.

In support of its order, FERC advances the argument

that the SEC orders “do not appear to mandate the cost-

based price where a market price could be. lower, rather

they permit a price up to a cost-based price.” Ohio Power

Co., 39 F.E.R.C. 7 61,098, at 61,276 (1987), quoted in

Brief of Respondent at 26. Citing SEC Rule 92, 17

C.F.R. § 250.92, the Commission found that “not only

does the SEC not require a cost-based price for the sub-

sidiary coal, the SEC may require a market-vased price

for subsidiary coal if the market price is lower than

cost.” Jd. (emphasis added).

Without addressing whether the SEC does in fact have

the authority to establish a lower-than-cost market price,°

even FERC concedes that Rule 92 empowers the SEC

alone to set such a price. FERC does not cite, and we

can not find, any indication in the orders that the SEC

was exercising its authority to establish a below-cost

market price for SOCCO coal. The orders do not men-

tion market price as a limit to price, nor do they require

Ohio Power to show that comparable coal was unavail-

able before paying cost for SOCCO coal.®

° The SEC does have express statutory authority under § 13(b)

to deviate from the “at cost” standard when a transaction “in-

volve[s] special or unusual circumstances.” 15 U.S.C. § 79m(b).

However, no one has suggested that the SEC invoked this source

of authority in the orders concerning Ohio Power.

® According to its brief, the SEC “has long recognized” that a

lower-of-cost-or-market interpretation would effectively eliminate

affiliate transactions by preventing investors from keeping profits

when cost is below market (to offset losses when cost is above

market). Brief of Amicus SEC at 4. See also Ohio Power Co.,

880 F.2d at 1410 (observing that FERC interpretation of SEC

orders places Ohio Power in a “tails-we-lose’

’

situation).

13a

Instead, the orders appear to embrace the cost-based

price principles required by SEC Rules 90 and 91. 17

C.F.R. §§ 250.90 & 250.91. Consistent with §13(b) of

PUHCA, SEC Rule 90(a) prohibits associates from sell-

ing goods to each other at “more than cost,” 17 C.F.R.

§ 250.90(a), and Rule 91(a) defines “more than cost”

as “not exceed{ing] a fair and equitable allocation of

expenses.” 17 C.F.R. § 250.91 (a).’ The SEC orders har-

moniously track this language. For example, the 1971

order states that the “charges for coal by [SOCCO] will

be based on an amount equal to the actual cost,” Ohio

Power Co.. HCAR No. 17,383 (1971), and the 1978 order

states that the “price at which [SOCCO] coal is sold to

[Ohio Power] will not exceed the cost thereof to the seller.”

Ohio Power Co.. HCAR No. 20,515, 14 S.E.C. Docket

928 (1978): see also Southern Ohio Coal Co., HCAR

No. 21.537, 19 S.E.C. Docket 1309 (1980) (stating that

the price of SOCCO coal “will not exceed the cost thereof

to the seller.”’).

That the 1978 and the 1980 orders, as well as SEC

Rules 90 and 91, place more emphasis on cost as a ceil-

ing rather than a floor is not surprising given the eco-

nomie incentive of associate companies to pass through

inflated costs for goods and services. See 15 U.S.C. § 79a

(b) (2) (describing the following as one of the evils that

make SEC regulation of associates necessary: “subsid-

iary public-utility companies are subjected to excessive

charges for services, construction work, equipment, and

materials”). But this concern with excessive charges does

not diminish the exclusive role cost plays in establishing

associate prices—Congress’s use of the term “at cost”

indicates that cost serves as a ceiling and a floor. To

the extent there is downward flexibility in a cost-based

7SEC Rule 90(d) does provide that the price of goods “need

not be limited to cost,” and then references the market-price cap

discussed in Rule 92; but, as stated above, this provision was not

relied upon by the SEC in this case.

l4a

price, we find that Congress did not make room for any-

one other than the SEC to exercise this flexibility. We

therefore find that the orders are better read as requir-

ing Ohio Power to pay a price ‘“‘equal to cost” for SOCCO

coal, as prescribed by §13(b) and the 1971 SEC order,

and we reject FERC’s attempt to clothe itself with the

SEC’s purported authority under Rule 92 to establish

a market-based cap.*®

In response to the congressional intent concerns ex-

pressed in Justice Stevens’s concurrence, we do not mean

to say that FERC is powerless to affect the SEC’s price-

approval process. When the SEC receives for approval

an associate transaction and the suggested prices at

which goods will be sold, SEC Rule 28 requires notice in

the Federal Register and an opportunity for comment on

the proposal. 17 C.F.R. § 250.23. Such notice was pro-

vided as part of Ohio Power’s applications-to the SEC.

Additionally, FERC could conceivably ask the SEC to

investigate whether the cost-based price for SOCCO coal

violated “any rule or regulation” of the PUHCA. See 15

U.S.C. § 79r(a). Thus, FERC may attempt to affect

the price-approval process, but Congress has granted the

SEC alone the authority to establish prices charged by

associates for goods.

Therefore, regardless of whether FERC may under

other circumstances set prices that trap costs created by

orders of other governmental entities, we hold that FERC

may not set a cost-trapping rate level where that effect

is occasioned by a recovery calculation inconsistent with

an SEC determination governing an inter-associate trans-

fer subject to § 13(b) of the PUHCA.

8 Although we grant the SEC’s views no deference, we note that

our interpretation of the SEC’s orders is consistent with their

submission in this case. See Brief of Amicus SEC at 5.

15a

CONCLUSION

In conclusion, we hold that 18 C.F.R. § 35.14(a) (7)

prevents FERC from finding the coal price approved by

the SEC not includable in determining Ohio Power’s

wholesale rate. As a separate ground for remand, we

hold that the SEC properly discharged its authority

under $13(b) of the PUHCA by setting the price of

coal sold by SOCCO to its associate Ohio Power ‘“‘at cost,”

and that FERC must respect this specific grant of au-

thority to the SEC. For the reasons given above, there-

fore. we allow the petition for review, and vacate and

remand the order of FERC for further proceedings not

inconsistent with this opinion.

l6a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 88-1293

OHIO POWER COMPANY,

Petitioner

Veo

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent

Before: Mikva, Chief Judge; Silberman and Sentelle,

Circuit Judges

ORDER

[Filed Apr. 14, 1992]

Upon consideration of the Petitions for Rehearing of

respondent and intervenor it is

ORDERED, by the Court, that the petitions are denied.

Per Curiam

FOR THE COURT:

CONSTANCE L. DUPRE

Clerk

By: /s/ Robert A. Bonner

ROBERT A. BONNER

Deputy Clerk

17a

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 88-1293

OHIO POWER COMPANY,

Petitioner

FEDERAL ENERGY REGULATORY COMMISSION,

Respond nt

Before: Mikva. Chief Judge; Wald, Edwards, Ruth B.

Ginsburg, Silberman, Buckley, Williams, D. H.

Ginsburg, Sentelle, Henderson, and Randolph,

Circuit Judges

ORDER

[Filed Apr. 14, 1992 |

The Suggestions For Rehearing En Banc of respondent

and intervenor have been circulated to the full Court. No

member of the Court requested the taking of a vote

thereon. Upon consideration of the foregoing it is

ORDERED, by the Court en banc, that the suggestions

are denied.

Per Curiam

FOR THE COURT

CONSTANCE L. DUPRE

Clerk

By: /s/ Robert A. Bonner

RoBERT A. BONNER

Deputy Clerk

ye ‘

18a

APPENDIX C

FEDERAL ENERGY REGULATORY COMMISSION

Docket Nos. ER82-553-000 and ER&2-554-000

OHIO POWER COMPANY

Opinion No, 272; Opinion and Order on Recovery of the

Cost of Coal Purchased From an Affiliate

(Issued April 30, 1987)

Before Commissioners: Martha O. Hesse, Chairman:

Anthony G. Sousa, Charles G. Stalon, Charles A. Tra-

bandt and C. M. Naeve.

|Note: Initial Decision of the presiding administra-

tive law judge, issued December 14, 19838, appears at 25

FERC © 63,060. |

Appearances

Edward J. Brady, Marvin I. Resnick, Alan Kessler,

and William EF. Olson for Ohio Power Company

William H, Roberts and Richard Hitt for Public Serv-

ice Commission of West Virginia

Paul Nordstrom, Glen L. Ortman, Kenneth E. Natale,

Denald R. Allen, David P. Yaffe, and Gregg D. Ottinger

for the Municipal Wholesale Electric Customers of Ohio

Power Company

Phillip Nelson and O.C. Hall for Wheeling Electric

Company

19a

James D. Kauffelt for Linden Chemicals and Plastic,

Inc., Mobay Chemical Corporation, and PPG Industrials,

Ine.

Melvin Berger, Arthur Hays Butler, Lawrence R.

Greenfield, Michael Small, James E. Rogers, Jr., Marilyn

L. Doria, Harvey L. Reiter and Daniel Watkiss for the

staff of the Federal Energy Regulatory Commission

[Opinion No. 272 Text}

I. Introduction and Summary

On May 28, 1982, the Ohio Power Company (Ohio

Power) filed rate increases for its wholesale service to

fifteen municipalities in the State of Ohio (Docket No.

ER2-553-000) and to its affiliate in West Virginia, the

Wheeling Electric Company (Docket No. ER82-554-000).

The Commission accepted settlements dealing with all as-

pects of the proposed rates except what was called the

captive coal issue which involves a challenge to the rea-

sonableness of the fuel costs recovered from Ohio Power’s

wholesale customers for the coal it purchased from the

Martinka mine.’

The Martinka mine is owned and operated by the

Southern Ohio Coal Company, a wholly owned subsidiary

of Ohio Power. Ohio Power is owned by the American

Electrie Power Company (AEP). AEP owns seven other

electric utilities that operate as a coordinated system in

a seven-state area. AEP is subject to regulation by the

Securities and Exchange Commission (SEC) under the

Public Utility Holding Company Act of 19385 (PUHCA).’

An initial decision on the reasonableness of Ohio

Power’s coal costs was issued on December 14, 198%

In the initial decision the presiding judge found that:

1See Ohio Power Company, 23 FERC 761,286 (1983) and 24

FERC § 61,017 (1983).

215 U.S.C. § 79a (1982).

395 FERC { 63,060 (1983).

20a

(1) section 318 of the Federal Power Act does

not preclude the Commission from determining

whether it is just and reasonable for Ohio Power to

recover the full cost of its purchases from the Mar-

tinka mine from its wholesale ratepayers;

(2) the Commission’s fuel adjustment clause reg-

ulation * creates only a presumption which does not

preclude the Commission from considering the rea-

sonableness of Ohio Power’s fuel costs;

(3) Ohio Power’s coal costs are subject to a com-

parable market price test as adopted in Opinion No.

133° to determine the reasonableness of those costs;

and

(4) the comparable market price evidence pre-

sented to show that Ohio Power’s costs were not rea-

sonable was not credible.

The judge concluded that the prices paid by Ohio Power

for Martinka coal were reasonable.

Briefs on exceptions to the initial decision and briefs

opposing exceptions were filed by Ohio Power, Commis-

sion trial staff (staff), and the Municipal Wholesale

Electric Consumers of Ohio Power (the municipals).*

Ohio Power excepts to the judge’s ruling on the pre-

emptive effect of section 318 of the Federal Power Act

#18 C.F.R. § 35.14(a)(7) (1986).

5 Public Service Company of New Mexico (New Mexico), 17

FERC { 61,123 (1981), appeal pending sub nom. Public Service

Company of New Mexico v. F.E.R.C., Nos. 82-1148, 84-1624 and

84-1677 (10th Cir., filed Feb. 3, 1982).

®On May 15, 1986, New England Power Company (NEP) filed

a motion with the Commission for permission to file an amicus

curiae brief in this proceeding; our staff, the municipals, the Town

of Norwood, Massachusetts, the Attorney General of Rhode Island,

and the Rhode Island Division of Public Utilities and Carriers op-

pose NEP’s motion. Because of the lateness of the filing without

good cause the Commission shall deny the motion.

2la

and section 35.14(a) (7) of the Commission’s regulations

on the Commission’s review of Ohio Power’s coal costs.

Ohio Power argues that the Commission can change its

regulations only prospectively. Ohio Power also objects

to the imposition of a comparable market price test on a

utility subject to PUHCA asserting that the result would

be a lower of cost or market price test, a result which

Ohio Power asserts would be confiscatory. Ohio Power

further urges that as a factual matter Ohio Power’s

ownership of affiliate mines serves the purpose of deliver-

ing the lowest priced electricity possible. Staff and the

municipals except to the judge’s rejection of staff’s evi-

dence as a reliable determinant of comparable market

prices.

We affirm the judge’s rulings and reasoning regarding

the Commission’s authority, pursuant to the Federal

Power Act and our regulations, to determine the reason-

ableness of coal costs Ohio Power recovers from its

wholesale customers. We disagree, however, with the

judge’s finding that those costs were reasonable. We f find

the costs Ohio Power has recovered for its purchases of

Martinka coal are unreasonable when compared with

market prices and that Ohio Power therefore must re-

fund amounts collected since the effective date of the

rates in this proceeding that exceed the comparabl

market price.

II. Discussion

A. Commission Jurisdiction to Review Ohio Power’s Coal

Costs

1. Section 318 of the Federal Power Act

Ohio Power urges that under PUHCA and section 318

of the Federal Power Act, the SEC has exclusive juris-

diction over the pricing of the affiliate Martinka coal.’

The presiding judge concluded that section 318 of the

7 Ohio Power brief on exceptions at 17-36.

22a

Federal Power Act* does not preclude this Commission

from determining whether it is just and reasonable for

Ohio Power to recover from its wholesale customers, in

its rates, the full cost of its purchases from the Martinka

mine.’

The source of the SEC’s authority to regulate the price

at which Ohio Power purchases coal from its subsidiary

is section 18 of PUHCA."® Ohio Power contends that sec-

tion 13(b) of PUHCA mandates that it purchase coal

from its subsidiary at cost."’ Ohio Power contends that

if the Commission orders that Ohio Power may recover

in rates only a market-based amount for the Martinka

coal, that Ohio Power will face conflicting regulation by

the SEC and the Commission which is prohibited by sec-

tion 318 of the Federal Power Act. Section 318 provides:

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

security... , or any other subject matter, any per-

son is subject both to a requirement of the Public

Utility Holding Company Act of 1935 ...and toa

816 U.S.C. § 825q (1982).

®25 FERC at p. 65,183.

1015 U.S.C. § 79m (1982).

11 The relevant portions of section 13(b) of PUHCA, 15 U.S.C.

§ 79m(b) (1982), provide:

{I]t shall be unlawful for any subsidiary company of any

registered holding company or for any mutual service company

. .. to enter into or take any step in the performance of any

service, sales, or construction contract by which such company

undertakes to perform services or construction work for, or

sell goods to, any associate company thereof except in accord-

ance with such terms and conditions and subject to such limita-

tions and prohibitions as the [Securities and Exchange] Com-

mission by rules and regulations or order shall prescribe as

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

tection of investors or consumers and to insure that such con-

tracts are performed economically and efficiently for the benefit

of such associate companies at cost, fairly and equitably allo-

cated among such companies.

23a

requirement of this Act . . . the requirement of the

Public Utility Holding Company Act of 1935 shall

apply to such person, and such person shall not be

subject to the requirement of this Act ... with re-

spect to the same subject matter, unless the Securi-

ties and Exchange Commission has exempted such

person from such requirement of the Public Utility

Holding Company Act. of 1935, in which case the re-

quirements of this Act shall apply to such person.

(Emphasis supplied. )

The judge concluded that, assuming the SEC set the

price at which Ohio Power may purchase its subsidiary’s

coal, there was no conflict of jurisdiction because the

SEC regulates the intra-corporate price of coal between

Ohio Power and its subsidiary, while this Commission

sets rates." The judge concluded that the same subject

matter is not subject to the requirements of both PUHCA

and the Federal Power Act.’* We agree with the judge.

First, it is not clear that the SEC requires Ohio Power

to purchase coal from its subsidiary at cost, rather than

at market price. The SEC orders which Ohio Power cites

for this proposition state that the charges for the coal

“ill be based on actual cost,” and “will not exceed the

cost thereof to seller.” ’® These orders authorized financ-

ing for the coal.mining subsidiary. They do not appear

to mandate the cost-based price where a market price

would be lower, rather they permit a price up to a cost-

based price.

The SEC’s Rule 92 implements in part section 13 of

PUHCA. The rule prohibits a subsidiary of a registered

holding company from selling

1295 FERC at p. 65,183.

13 Jd.

14 SEC 1935 Act Release No. 17383, Dec. 2, 1971.

15 SEC 1935 Act Release No. 21537, April 25, 1980.

24a

any goods produced by it to any associate company

thereof, or enter into any contract to do so, at a

price which exceeds the price at which the purchas-

ers might reasonably be expected to obtain compar-

able goods elsewhere, or to finish them itself, giving

due regard to quality, quantity, regularity of supply,

and other factors entering into the calculation of a

fair price.'®

Thus it appears that not only does the SEC not require

a cost-based price for the subsidiary coal, the SEC may

require a market-based price for subsidiary coal if the

market price is lower than cost.’*

More importantly, assuming that the SEC has actually

affirmatively set the price which Ohio Power must pay

its subsidiary for the Martinka coal, setting the intra-

corporate price and setting rates are not the same sub-

ject matter which would bring section 318 into play. We

have taken full account of the fact that the SEC has

jurisdiction, under PUHCA, to regulate the price of coal

purchased by Ohio Power from the Martinka mine. The

1617 C.F.R. § 250.92 (1986).

17 The SEC can, pursuant to section 13(b), authorize a market-

based price for a transaction between a subsidiary and parent even

when that market-based price exceeds cost. See, New England Elec-

tric System, 1935 Act Release No. 22309, 24 SEC Docket (1981),

where the SEC, pursuant to the provisions of section 13(b), ex-

empted a contract from the cost limitation of 13(b) so that a market-

based approach could be used. Thus Ohio Power could apply to the

SEC for approval of a market-based pricing mechanism for its

affiliate coal if it so desired. See also, “Comment of the Division

of Corporate Regulation of the Securities and Exchange Commission

on the Federal Energy Regulatory Commission Staff Preliminary

Report of Investigation in FERC Docket No. E-9206 dated July 31,

1978” filed in Docket No. E-9206, on October 27, 1978, at 3. There-

fore as a factual matter, it does not appear that Ohio Power is

accurate in stating that a company subject to SEC jurisdiction pur-

suant to PUHCA is required always to sell its products to an

affiliate at cost-based prices.

25a

SEC’s jurisdiction, however, does not extend to setting

rates and determining what fuel costs Ohio Power may

collect from its wholesale customers. There is thus no

conflict in-the regulation by the SEC and the regulation

by this Commission."®

The SEC’s Division of Corporate Regulation submitted

comments in another Commission case involving AEP

affiliate coal purchases in which staff of the SEC explained

its view of the effect of SEC orders approving the financ-

ing of coal mining subsidiaries under PUHCA.” These

comments demonstrate that the SEC recognizes that it

does not set rates:

The orders of the SEC under the 1935 Act do not set

rates for operating utility companies. There is no

conflict with FERC jurisdiction. In setting rates,

FERC is legally bound to give due consideration to

cost of service, which certainly includes cost of fuel

burned, but there are a number of intermediary

steps between our order authorizing an affiliate to

acquire and mine coal reserves and the rate deter-

mination....

18 See Mississippi Industries v. F.E.R.C., 808 F.2d 1525, 1550-51

(D.C. Cir. 1987). Appalachian Power Company, another AEP owned

utility, raised the same contention regarding SEC regulation in

McDowell County Consumers Council, Inc. v. American Electric

Power (McDowell County), Docket No. E-9206. The Commission,

in setting AEP’s coal purchasing practices for investigation, re-

sponded that its investigation was “instituted for the purpose of

fulfilling this Commission’s statutory obligation as expressed in

Sections 202. 205, 206, 301, 306, 307 and 309 of the Federal Power

Act which are in no way repugnant to the exercise of any authority

which the SEC may choose to assert under its statute.” See 54

FPC 361, 363 (1975).

19 “Comment of the Division of Corporate Regulation of the Secu-

rities and Exchange Commission on the Federal Energy Regulatory

Commission Staff Preliminary Report of Investigation in FERC

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

26a

The SEC pricing orders are final orders directed, in

conjunction with the 1985 Act and the pertinent

rules, to fixing a pricing formula until further order

of the Commission. It is the rate making authority,

not the SEC, that has jurisdiction to try issues, both

of fact and of interpretation, in applying such

orders, insofar as material, to a particular rate case.

Moreover, the SEC itself, as opposed to its staff, has

recognized that its regulation of fuel-related costs, pur-

suant to section 13(b), is not in conflict with and does

not preclude this Commission setting rates. In New Eng-

land Electric System the SEC authorized a joint venture

in which a registered holding company and two of its

subsidiaries would participate in building a _ coal-fired

collier. The SEC, pursuant to section 13(b), exempted

the transaction from the cost limitations of 13(b), so

that the transportation approved by the SEC was at a

market-based price which was expected to exceed cost.

The SEC commented on the relationship of its regulation

under section 13(b) of PUHCA and this Commission’s

rate regulation:

We cannot assess now, when the vessel is under con-

struction, the extent to which the price to be deter-

mined under the charter will exceed cost under Sec-

tion 13(b). Nor are we inclined to reserve jurisdic-

tion over the adjustments and redefinitions under

the charter as they develop over the next quarter

century. The charter with NEPCO has other regu-

latory effects, not under the Act we administer, that

in this case better serve the purposes and allay our

concern.

NEPCO is engaged in the production, transmission

and sale, at wholesale, of electric energy, essentially

to the utility associate companies in the NEES sys-

tem. It is a public-utility as defined in section 201(e)

of the Federal Power Act and its rates are subject

27a

to FERC jurisdiction under section 206 thereof. The

rates allowed to NEPCO include, as a cost of service,

its cost of fuel, which as allowed to NEPCO may in-

clude either the entire cost of transportation under

the joint venture’s charter to NEPCO, if FERC

should determine that it is just and reasonable, or

some other amount.

Our grant of the exemption does not affect FERC’s

authority over rates; and the bilateral arrangement

under the charter following upon the exemption does

not prescribe what should be allowed to NEPCO in

revenues from its wholesale power customers for

transportation costs, either in allowed rates or under

the fuel adjustment clause. These adjusting effects

provide us sufficient assurance to determine that the

exemption from cost remains consistent with the

policy of section 13(b). In relying on this ratemak-

ing process we do not cede any of our statutory

responsibilities to another agency.”°

We believe that-the SEC’s analysis that its determina-

tion pursuant to section 13(b) of PUHCA does not af-

fect our authority to make rate determinations is in

accord with the presiding judge’s conclusion that the

SEC’s regulation pursuant to section 13(b) of PUHCA

does not preclude this Commission from determining the

reasonableness of Ohio Power’s coal costs during the

ratemaking process. We shall affirm the judge’s determi-

nation on this issue.

2. Section 35.14(a)(7) of the Commission’s Regula-

tions

Ohio Power contends that section 35.14(a)(7) of our

regulations *' precludes this Commission from looking at

the price of the Martinka coal because that coal is sub-

2024 SEC Docket at 307-08.

27118 C.F.R. § 35.14(a)(7) (1986).

28a

ject to SEC and Ohio PUC regulation. Section 35.14

(a) (7) provides in part that “where a utility purchases

fuel from a company-owned or controlled source, the

price of which is subject to the jurisdiction of a regula-

tory body, such cost shall be deemed to be reasonable and

includable in the adjustment clause.”’ Ohio Power argues

that we cannot change the regulation without notice to

those affected.

The judge concluded that section 35.14(a)(7) creates

a rebuttable presumption of reasonableness.** We agree.

As the judge noted, in 1975, six months after promulga-

tion of section 35.14(a) (7), the Chairman of the Federal

Power Commission submitted a letter to the Senate Sub-

committee on Reports, Accounting and Management, stat-

ing that section 35.14(a) (7) creates a presumption of

reasonableness, not a conclusive finding of reasonable-

ness. There is thus no retroactive change of a regulation

involved in this case.**

22 Ohio Power brief on exceptions at 57.

2325 FERC at p. 65,184.

24 ABP, and its affiliates, had actual notice of the Commission’s

belief that section 35.14(a)(7) of its regulations does not preclude

a comparable market-price investigation into its affiliate coal pur-

chases. The same issue was involved in McDowell County. Eight

months after promulgation of section 35.14(a) (7), the Commission

instituted an investigation of AEP’s coal purchasing practices, in-

cluding its purchases from affiliate coal companies which were sub-

ject to SEC regulation. 54 FPC 361 (1975). The Commission

ordered that the investigation “include all coal contracts whether

or not required to be submitted pursuant to Commission Order No.

517, 52 FPC 1304,” the order promulgating section 35.14(a)(7).

The Commission later ordered hearings on the coal cost issue pur-

suant to sections 205 and 206 of the Federal Power Act. 15 FERC

| 61,257, at p. 61,592-93 (1981).

Moreover, the SEC had made its determination before this pro-

ceeding was set fer hearing at this Commission. Had the Com-

mission considered the SEC determination to be conclusive, as Ohio

Power contends, the issue of Ohio Power’s coal costs would not

have been set for hearing.

29a

B. Determining the Reasonableness of Ohio Power's

Affiliate Fuel Purchases

Prior to Opinion No. 133 the reasonableness of affiliate

coal purchases were determined on a cost-of-service basis.

Under the Commission’s regulation at section 35.14(a) (7),

affiliate coal purchases which were subject to the regula-

tion of another agency were deemed to be reasonable.

If the affiliate transactions were not subject to the regu-

lation of another agency, the utility was required to jus-

tify the reasonableness of the cost of the affiliate coal.

In Opinion No. 1383, the Commission tested the reason-

ablenes of prices of affiliate coal purchases by comparing

them to prices available from non-affiliated suppliers in

a competitive market. The Commission found that “the

interests of consumers will best be protected by permit-

ting utilities that purchase coal from affiliates to recover

no more from their ratepayers than the price that would

have been incurred if a comparable coal supply contract

had been made with a non-affiliated supplier.” *5

Although the Federal Power Act does not mandate a

market-price test to determine the reasonableness of af-

filiate transactions, there is no legal impediment to the

use of such a test,*° and there are a number of reasons

arguing for its use. The Commission noted in Opinion

No. 133 that companies that are subject to the competi-

tive market are more efficient and innovative than those

assured of a recovery of costs and a reasonable return, and

that a market-price limitation on fuel expense recovery

from affiliated suppliers provides the best incentive for

“217 FERC at p. 61,246.

26 It is noteworthy that the Natural Gas Policy Act, 15 U.S.C.

$§ 3311-3432 (1982) establishes the comparable market price as

the ceiling for a just and reasonable amount a pipeline may pay an

affiliated producer for gas. See section 601(b)(1)(E), 15 U.S.C.

§ 3431(b)(1)(E) (1982).

30a

utilities to develop the least costly sources of fuel.*? In

addition to the economic efficiency prompted by a market-

price test, it provides protection from the prospect of

self-dealing that arises in transactions between affiliates.

What the Commission noted in stating the purpose of

the comparable market-price test required by the Natural

Gas Policy Act, for transactions between pipeline affili-

ates, is equally applicable to purchases from affiliates by

electric utilities: “At the heart of section 601(b) (1) (E)

is the simple notion that a pipeline may not grant a price

preference to its affiliate.”** In a New Mexico proceed-

ing subsequent to Opinion No. 133, the Commission char-

acterized the comparable market-price test as “an objec-

tive test” that prevents rate manipulation.*® It provides

a substitute for the arms-length negotiations that provide

objectivity and fair dealing in non-affiliate transactions.

The Commission has not deviated from its continued

support for a market-price test. As recently as 1985 the

Commission reaffirmed its departure from a_ cost-based

test of reasonableness for affiliate transactions. The

enunciation of the market-pricé test in Opinion No. 133

was given by the Commission as its reason for terminat-

ing a 1979 rulemaking that had proposed to amend section

35.14(a) (7) to delete the provision deeming reasonable

coal costs that were subject to the jurisdiction of another

regulatory agency and to require that utilities file affiliate

coal contracts regardless of jurisdiction by another

agency.*° The Commission, noting that the amendment

2717 FERC at p. 61,246.

28 El Paso Natural Gas Company, 23 FERC { 61,216, at p. 61,449

(1983).

29 Opinion No. 164, 23 FERC { 61,218, at p. 61,457 (1983).

30 Termination of Rulemaking Dockets, 50 Fed. Reg. 24,779 (June

13, 1985), FERC Statutes and Regulations, Proposed Regulations

1977-1981 § 32,409, at p. 33,169; Revision of Fuel Cost Adjustment

Clause Regulations Relating to Fuel Purchases from Company-

3la

to its regulations was proposed to effect the cost-based

policy in effect when the proposal was issued, found that

the filing of contracts was no longer necessary because

of the departure from that policy and the adoption of a

market-price test.*!

Under a market-price test, the question in this pro-

ceeding is whether the price at which Ohio Power pur-

chased Martinka coal from its affiliate is reasonable when

compared with prices in the market for alternative sup-

plies.

1. Establishing Comparable Market Prices

To establish a benchmark market price, staff identified

other coal-fired electric generating plants within 50-, 75-

and 100-mile radiuses of the Mitchell plant that use coal

with sulfur content and Btu heat content comparable to

that used at Mitchell,** and calculated the weighted aver-

age prices of contract coal delivered to those plants. The

prices were taken from FERC Form 423 and were ‘in-

creased by 3.1%.*

Owned or Company-Controlled Sources, 44 Fed. Reg. 28,683 (May

16, 1979), FERC Statutes and Regulations, Proposed Regulations

1977-81 -{ 32,022.

31 FERC Statutes and Regulations, Proposed Regulations 1977-

1981 § 32,409, at p. 33,169.

32 See, e.g., Ex. 13, Ex. 15 at 13-22, Tr. at 992-93. There is a high

concentration of coal-fired electric plants in the vicinity of the

Mitchell plant.

33 Form 423 was designed to collect data on the cost and quality

of fuel used for generating electricity. Among other things, the

data facilitates comparison of the costs of captive and non-captive

coal. See Change in Public Availability of FPC Form 423—Data on

Cost and Quality of Fuels for Electric Plants, Docket No. RM77-2,

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

(1979). The increase of 3.1% from the prices reported in Form

423 is based on a one-month audit by the Energy Information Ad-

ministration of the Department of Energy which found that report-

ing utilities had understated their costs by this percentage.

32a

The prices compared are the delivered prices, thus in-

cluding the costs of transportation. Staff’s study shows

that there are no significant differences between the

weighted average cost of comparable coal delivered within

50 miles of Mitchell and the cost of such coal delivered

within the 75- and 100-mile radiuses. Staff ultimately

relied, therefore, on prices within the 50-mile radius to

establish the comparable market price. Within that

radius, there were 13 plants which burned coal with a

sulfur content of 1-4%, the range of sulfur content in

the coal burned at Mitchell (including Martinka coal

and other coal).

The average prices of the coal at the 13 plants in

staff’s study and the prices Ohio Power paid for Martinka

coal are as follows:

Comparable Coal Martinka Percentage

(1-4% sulfur)* Coal Difference

1980 123.2MMBtu 184.9¢/MMBtu 50%

1981 138.4 268.7 94%

1982 155.4 206.8 33%

* Adjusted up by 3.1% from Form 423 data.

(a) Characteristics of Comparable Coal

A comparable market price is the price of coal that is

suitable for use at the plant in question, even if it is not

identical to the coal from the affiliated supplier. If a

certain characteristic of coal renders it unsuitable for

use at a particular plant, it may nevertheless be suitable

for purposes of price comparison, if the characteristic in

question does not affect prices in the marketplace.

Staff limited its analysis of coal contracts to those for

coal with heat content and sulfur content similar to that

of coal now burned at the Mitchell plant because these

are the two characteristics of coal that most significantly

affect prices in the marketplace.** Ohio Power has estab-

34 Ex. 18 at 12.

33a

lished that coal with a high ash-fusion temperature is

essential to the efficient operation of Mitchell Unit No.

2.°° Martinka coal has such a characteristic.** However,

Ohio has not established that ash-fusion temperature

of Martinka coal commands a premium in the market-

place over coal with lower ash-fusion temperatures. It is

therefore irrelevant for purposes of establishing compa-

rable prices that the precise ash-fusion temperature of the

coal included in staff’s set of comparable contracts is un-

known. We note however, that staff’s evidence indicates

that coal burned at neighboring plants with dry bottom

boilers, such as Mitchell’s, which generally require coal

of higher ash-fusion temperature, does not command a

price premium over coals burned at neighboring plants

with wet bottom boilers.*?

On the other hand, the captive coal may have character-

istics that increase its price in the marketplace, but. are

not required for the boiler. The Mitchell plant was de-

signed to burn coal with more than 4% sulfur content.

and meet the emission standards of the Environmental

Protection Agency.** Martinka coal has a sulfur content

of approximately 1.5%.*” The record in this case is clear

that Ohio Power switched to Martinka coal in Mitchell

Unit No. 2 because of its higher ash-fusion temperature,

not because of its lower sulfur content.*® Some of Ohio

Power’s witnesses suggest that the low sulfur content of

35 25 FERC at p. 63,060, Ex. 4 at 17.

38 ld.

** We also note that it is clear from the record that coal with

ash-fusion temperatures that met Ohio Power's bid specifications

was available at prices lower than Ohio Power paid for the Martinka

coal. See Section I1.B.1(e) of this Opinion.

38 25 FERC at p. 65,189, Ex. 8, at 10, Ex. 15 at 13.

3° See, e.g., 25 FERC at pp. 65,182, 65,189, Ex. 15kk at 12, Ex. 3

at 22, Ex. 15 at 6.

# See, e.g., 25 FERC at p. 65,181, Ex. 4 at 17.

34a

Martinka coal renders it more desirable for environ-

mental reasons than the non-affiliate coals with higher

sulfur content also burned at Mitchell.*! However, there

is no evidence that it is required. Ohio Power’s use of low

sulfur coal at Mitchell appears to be fortuitous.

As described above, staff developed its benchmark price

based on coals with 1-4% sulfur content from 13 plants.

Of the 18 plants, eight plants used coal with a range of

1-2% sulfur content, comparable to the 1.59% sulfur con-

tent of Martinka coal.** If it were clear that there were

no benefits from the use of low sulfur coal at the Mitchell

plant, a proper sample would exclude coals with 1-2%

sulfur content. It appears there are no appreciable bene-

fits in terms of the efficiency of the boiler’s operation.

However, while the low sulfur coal is not required to

meet environmental standards, there may be environ-

mental benefits from its use. We find that the use of

coals with 1-4% sulfur content is a reasonable com-

promise.

(b) Characteristics of Comparable Contracts

Ohio Power objects that the prices used by staff are

derived from contracts that were executed at different

times than the date of its contract with its affiliate mine.

Furthermore, the contracts are of different lengths of

41 See, e.g., Ex. 4 at 15-21.

42 Staff calculated a comparable market price based on the coal

from the eight plants which used the 1-2% sulfur coal. As can be

seen, the coal at these plants was also less costly than Martinka

coal:

Comparable Coal ; Percentage

(1-2% sulfur)* Martinka Coal Difference

1980 141.0¢/MMBtu 184.9¢/MMBtu 31%

1981 152.9 268.7 76%

1982 176.0 206.8 18%

* Adjusted up by 3.1% from Form 423 data.

35a

time than the term of the contract with its affiliate. In

Opinion No. 133, the Commission recognized that the

long-term reliability of a contract with an affiliate, and

the market conditions at the time a long-term contract

is negotiated, are circumstances that might justify dif-

ferences in the prices of coal that otherwise has com-

parable characteristics.* In a competitive market, prices

fluctuate in response to supply and demand, and to

changes in the purchasing power of the dollar. There-

fore, spot prices today may not be comparable to the

prices derived from a 35-year contract executed 10 years

ago.** Long-term contracts executed in a soft market,

i.e, When supply is greater than demand and prices are

depressed, would likely yield lower prices than contracts

entered during a period of tight supply and high de-

mand, even though the coal involved is identical in price-

affecting characteristics.

Ohio Power argues that the contracts in staff’s study

were inappropriate in terms of contract vintage. Ohio

Power asserts that, to establish a market price, the Com-

mission should look only at contracts entered into at the

same time as its Martinka contract. Seventy-five per-

cent of the contracts in staff’s study were entered into

after the Martinka contract.** The 1970s were a period

of almost continuous inflation. Contracts made later in

the decade, after the Martinka contract, would likely re-

flect higher prices. Staff therefore argues that its use of

later-vintaged contracts tended to produce average prices

above the level that would be truly comparable to the

Martinka contract.*’

4317 FERC at p. 61,246.

44 Ohio Power’s contract for Martinka coal was executed in 1972

for a term of 35 years.

* Ohio Power brief opposing exception at 53-54.

#6 25 FERC at p. 65,197; Ex. 15 at 15, Ex. 15RR at 5.

47 Staff brief on exceptions at 60 n.30.

36a

Ohio Power’s witness, Mr. Renton, testified that the

coal market was “soft” from late 1971 until early 1973.

Supply exceeded demand and prices were low. Ohio

Power’s contract for Martinka coal was dated October 1,

1972, in the midst of the soft market. The Arab oil em-

bargo and sharp increases in the world price of crude oil

in 1973 apparently caused a “tight” coal market, and

prices moved higher.*® Mr. Renton characterized the

market as soft from late 1974 through early 1979, fol-

lowed by a tight market for a brief period in 1979

through the first part of 1980.°° This testimony does not

indicate any circumstances in the coal market when the

Martinka coal contract was made that would justify un-

usually high prices. Nor does it indicate that prices de-

rived from later-vintaged contracts are likely to be lower

than prices reflecting the 1972 market conditions.

Staff utilized a statistical analysis technique to at-

tempt to discern a correlation between the prices paid

under its set of comparable contracts and the vintages of

those contracts. Its analysis failed to show any consis-

tent, discernible correlation.*' The judge ultimately con-

cluded that vintages could affect the prices, and should

be looked .at carefully.°° We agree. The parties have

adequately considered the possible effects of vintage on

the prices derived from staff’s set of comparable con-

tracts. The only conclusion we can draw is that staff’s

benchmark prices may be higher, i.e., skewed in favor

of Ohio Power, than if only contracts of the Martinka

vintage were used for comparison.

48 Tr. 639-41.

49 Tr. 641.

50 Tr. 642-43.

5125 FERC at p. 65,187, Ex. 13G at 15.

52 25 FERC at p. 65,199.

37a

Ohio Power presented evidence of correlations between

higher prices and larger quantities of coal delivered un-

der a contract, and between higher prices and contracts

of longer duration. The reliability of the data used to

show these correlations and the validity of the conclu-

sions drawn were contested by staff. The judge declined

to draw any conclusions from the welter of conflicting

testimony on these contentions. Staff points out that

Ohio Power failed to quantify what adjustments to staff’s

benchmark prices would be warranted if Ohio Power’s

alleged correlations were accepted.” We are likewise un-

able to conclude on the basis of the record evidence that

the asserted correlations exist, or if so, what adjustments

to the benchmark prices they would warrant.

(1) Mine-mouth plants

Ohio Power argued that mine-mouth plants should be

excluded from the set of contracts used by staff in devel-

oping the benchmark prices because the delivered prices

of coal to such plants would not include any significant

transportation costs, while the delivered prices to the

Mitchell plant include such costs.** In order to test Ohio

Power’s claim, staff excluded mine-mouth plants burning

1-4% sulfur coal within 50 miles of Mitchell and found

that the average price was slightly lower in 1980 {—2.7¢

MMBtu or 2.3% lower), and slightly higher in 1981

(--O.le or 0.1° higher) and 1982 (--8.0¢ or 2.0%

higher). Staff’s analysis shows that the delivered prices

of coal to mine-mouth plants are not significantly differ-

ent from delivered prices to the other plants in the

53 25 FERC at p. 65,199, Ex. 9H at 9-15.

5425 FERC at p. 65,199.

55 See, e.g., Staff brief on exceptions at 61-62, n.80, 73-74.

56 Ex. 9F, see also Ohio Power brief opposing exceptions at 49.

38a

region.*” Therefore, we find staff’s inclusion of mine-

mouth plants in its set of comparable contracts acceptable.

(ti) Transportation costs

Ohio Power questioned staff’s reliance on delivered

prices to plants other than Mitchell without considering

the possible effects of differing costs of transportation.

Ohio argued that the delivered price of some alternative

coal supply might be higher (or lower), if delivered to

the Mitchell plant rather than some other plant in the

region, if the transportation costs are different.°* How-

ever, the marginal differences in the costs of transporting

coal to any point within a 50-mile radius are likely to be

small, and there is no reason to anticipate that the aver-

age of any such differing costs to other plants would be

lower than the transportation costs of shipping coal to

the Mitchell plant.*

(iti) Geographical area

Ohio Power argues that if staff’s 100-mile radius were

slightly extended it would then include three more plants

whose coal prices would significantly increase the aver-

+ ages and that “a natural break in the chain of substitu-

points out that two of the plants Ohio Power wants to in-

clude in the sample burn coal with less than 1.0% sulfur

and would thus be outside the range of comparable coal.

The coal prices at the other plant are only slightly higher

than the average of those within the 100-mile radius.*!

57 See, e.g., Ex. 186 at 17-18, Ex. 15QQ at 3.

58 Ohio Power brief opposing exceptions at 50.

59 Differing transportation costs would have to be considered if

benchmark prices were derived from only one or two comparable

contracts.

6 Ohio Power brief opposing exceptions at 48.

$1 Ex. 15QQ at 1-3.

39a

Drawing a line at 50 miles or 100 miles obviously in-

volves an element of discretion. If a 100-mile radius is

reasonable, it is unlikely that a 105-mile radius would

be unreasonable. But once the line has been drawn, and

there are reasonable arguments to support where it is

drawn, the burden is on a challenger to demonstrate con-

vineingly that the line should be drawn elsewhere. Ohio

Power’s proposal to include one more plant using coal

with comparable sulfur content does not carry that

burden.

We find that the presence of 13 plants within 50 miles

that burn coal with price-affecting characteristics suit-

able for use at Mitchell provides an adequate sample of

the relevant market by which to compare Martinka

prices.

(iv) Price premium for affiliate supply

Ohio Power claimed that, in comparing affiliate coal

prices with market prices, affiliate coal prices should be

adjusted to reflect a price premium warranted by the

security and reliability of an affiliate coal supply.*? Ohio

Power, however, makes no attempt at quantifying this

price premium. In fact, the evidence indicates that, at

least during the 1981 coal strike, the supply of Martinka

coal was not as reliable as Ohio Power alleges it to be.

We have considered the reliability premium argument

raised by Ohio Power, but find that the company failed

to meet its burden of demonstrating that such a premium

is warranted.

(v) Mine type

Finally, Ohio Power argues that staff’s inclusion of

stripmine coal in its sample tends to produce a lower

average price than if only coal from underground mines

were considered. Ohio Power asserts that coal from un-

62 Ohio Power brief opposing exceptions at 60-62.

40a

derground mines is generally more expensive than other-

wise comparable coal from strip mines.“ However, staff’s

evidence shows that the strip-mine coal in its sample

was more costly than the coal from underground mines.“

Even if Ohio Power’s assertion is generally true, there is

nothing in the record to justify paying a premium for

coal from an underground mine if suitable coal is avail-

able at less cost from a strip mine.

(d) Average Price versus Range of Prices

Ohio Power argues that when a set of contracts are

identified as comparable, the prices under these contracts

should be viewed as establishing a range of reasonable

prices. If prices under the affiliate contract fall within

the range, they should be deemed reasonable. If they are

above the highest prices in the range, refunds should be

required to bring the affiliate contract prices down to the

highest prices in the range, but no lower.® The effect of

Ohio Power’s approach would be to make the contract

with the highest prices the benchmark, and to disregard

prices under the other contracts. However, we cannot ig-

nore the other contracts in the group unless the similari-

ties between the affiliate contract and the contract with

the highest prices are so striking, and the dissimiliarities

of the other contracts in the group so significant that the

highest-paid contract should clearly serve as the bench-

mark. Ohie Power did not argue that its Martinka con-

tract was strikingly similar to the highest priced compar-

able contract.

Moreover, the use of a weighted average price is a con-

vention frequently employed to establish a reasonable

midpoint. It-is more appropriate than relying on the

highest-priced coai under any reasonably comparable con-

83 Ohio Power brief opposing exceptions at 61.

64 Ex. 15QQ at 3-5, Ex. 15RR at 6-7.

85 Ohio Power brief opposing exceptions at 4, 13-17.

86 See Tennessee Gas Pipeline Co., 38 FERC { 61,306 (1987).

4la

tract to set the market standard and effectively ignoring

all other lower prices under other reasonably comparable

contracts.

(e) Ohio Power’s Market Price Evidence

Ohio Power submitted evidence of its bid solicitations

in 1980 and 1981 for Martinka-quality coal and the re-

sponses from independent coal suppliers.’ Current bids

are not likely to reflect the same factors affecting prices

under the contract for Martinka coal, signed 10 years

earlier, and original bids are likely to be higher than

finally negotiated contracts. Nevertheless, we agree with

the judge that evidence of current bids is relevant to dis-

cerning current market prices.

Staff notes that the average delivered price of the six

lowest bidders in 1980 was roughly $1.42/MMBtu.®

This compares to the $1.41 adjusted benchmark price

that staff derived from its set of comparable transactions

(for 1-2% sulfur content coal) while Ohio Power paid

$1.85/MMBtu for Martinka Coal.* The 1981 solicitation

identified seven suppliers who bid to supply low sulfur

coal (comparable to Martinka), with ash-fusion tempera-

tures and other characteristics that met Ohio Power’s

bid specifications, at an average delivered price of

roughly $1.54 per MMBtu.” This compares to staff’s

conclusion that the comparable market price for low sul-

fur coal (1-2%) that year-was $1.53, while Ohio Power

paid $2.69 for Martinka coal.*! Thus, Ohio Power’s bid

67 Ex. 15DD.

88 Staff brief on exceptions at 42.

89 See n.42, supra.

71 See n.42, supra. The judge noted that the Martinka mine was

closed during part of 1981 because of a strike and other operating

difficulties. 25 FERC at p. 65,182. Because Ohio Power’s contract

42a

evidence can be viewed as supporting staff’s position on

comparable market prices.

The judge said that the 1980 and 1981 bid solicitations

lead to the conclusion that Martinka-quality coal could

have been obtained at a cheaper price than was paid

by Ohio Power."? However, he found this conclusion to

be tempered by the fact that the market may have been

soft in those years.** The average price of 22 offers made

in 1980 ($1.58/MMBtu) compares to staff’s adjusted

weighted average price of $1.41/MMBtu for low-sulfur

coal used within a 50-mile radius. In 1981, Ohio Power’s

average of 20 offers ($1.76/MMBtu) compares to staff’s

comparable benchmark price of $1.53/MMBtu. However,

the judge’s ultimate conclusion that Martinka prices “are

not too bad” was based on his comparisons of the $40

per ton (converted from cents per MMBtu) average of

the 1980 bids to the $44.10 per ton paid for Martinka

coal and the $45 per ton average of the 1981 bids to

the $48 per ton paid for Martinka coal in 1982 (sub-

stituting 1982 Martinka prices for 1981 prices to avoid

the distortions caused by the strike) .™

We think the prices from the lower bids are more in-

dicative of market prices. Bids are indicative of market

prices to the extent they are likely to be accepted and

form the prices for transactions. Actual transactions are

more likely to develop from among the range of lowest

bids. Consequently, we believe staff’s average of the

lower bids is more indicative of current market prices

obligates it to pay the Martinka mine’s fixed costs regardless of the

amount of production, Tr. 734, the unit cost of Martinka’s coal was

abnormally high in 1981. Therefore, the bid prices averaging $1.54

might be more properly compared to the $2.07 paid for Martinka

coal in 1982.

72.25 FERC at p. 61,195.

73 Jd.

74 Jd.

iniieiaeniammeatineemmasciiniiiiaiiiaiaaaaiiiiiaiiaiaiiiel

43a

than the average of all bids used by the judge as the

basis for his conclusions.

Ohio Power also identified four coal seams owned by

independent coal suppliers, within a 75-mile radius of the

Mitchell plant, that could provide Martinka-quality coal.”

Ohio_Power compared the weighted average prices of coal

from this sample of mines to show that Martinka coal

was $6.89 per ton more expensive ‘in 1980, and $17.82

more expensive in 1981 (the abnormal year), but $6.08

per ton less expensive in 1982.76

Ohio Power’s study was offered to show the reasonable-

ness of the cost of Martinka coal but not to serve as the

basis for repricing the coal.” However, even if it had

been offered for the purpose of establishing a comparative

market price, we would not find it adequate. There is

substantial evidence that the relevant geographic market

based on the location of mines rather than proximate

coal-fired plants would approximate the geographic

boundary of the Department of the Interior Bureau of

Mines Districts Nos. 1-8, a much larger area than a

75-mile radius. The coal burned in other plants near

Mitchell comes from those districts.78 Ohio Power’s bid

solicitations went to companies with mines in those dis-

tricts.” Ohio Power argues that coal from beyond 75

miles is usually not competitively priced because of the

transportation costs. However, several suppliers from

well beyond 75 miles (and within District Nos. 1-8) were

among the bidders with the lowest delivered prices.*°

Ohio Power’s study focused on prices of relatively small

5 Exhibit 4 at 33-39,

"6 Exhibit 4K.

"7 Ex. 4 at 37.

‘8 Ex. 15 at 15, 15BB, Ex. 15CC.

9 Ex. 13 at 15.

80 Ex. 15LL at Sch. 6.

44a

quantities of coal, and there are several other aspects of

the study, as the judge noted,*' that preclude us from

according it weight as an indicator of comparable market

prices. |

2. Burden of Proof

Under section 205(e) of the Federal Power Act and

§ 35.13(e) (3) of the Commission’s regulations,** the

utility bears the ultimate burden of proving that its rates

are just and reasonable. Application of the burden of

proof is described in Minnesota Power & Light Co.

|U]tilities seeking a rate increase are not required

to demonstrate in their cases-in-chief that all ex-

penditures were prudent .... However, where some

other participant in the proceeding creates a serious

doubt as to the prudence of an expenditure, then the

applicant has the burden of dispelling these doubts

and proving the questioned expenditure to have been

prudent.**

The judge in this proceeding found that staff’s evidence

created a serious doubt as to whether the price paid for

Martinka coal was prudent. He stated that Ohio Power

“convincingly erased that doubt but did this primarily

by attacking the staff’s presentation rather than by an

affirmative showing of prudence.” ** The judge then found

that Ohio Power had satisfied “whatever legal require-

ment is involved in meeting its burden.” ** We disagree.

Ohio Power did not dispel the doubts raised by the staff’s

evidence and did not prove affirmatively that its fuel

costs were reasonable.

8125 FERC at p. 65,2038.

8216 U.S.C. § 824d(e) (1982); 18 C.F.R. § 35.13(e) (3) (1986).

8311 FERC { 61,312, at p. 61,645 (1980). See also, Anaheim v.

F.E.R.C., 669 F.2d 799, 809 (D.C. Cir., 1981)

8425 FERC at p. 65,202.

85 Id.

45a

Staff has shown that Ohio Power paid in excess of the

market price for the Martinka coal, and Ohio Power did

not rebut this showing. Moreover, Ohio Power failed to

come forward with evidence that its affiliate coal costs

were reasonable in comparison to market prices. As de-

scribed above, all Ohio Power sought to do was cast

doubt on different elements of staff’s case. Ohio Power

never attempted to show what the market price of coal

was and therefore failed to show affirmatively that the

prices it paid for the Martinka coal were reasonable.

Ohio Power also failed to show that staff’s evidence did

not establish a market price with which to compare the

cost of Martinka coal. We therefore shall reverse the

judge’s conclusion that Ohio Power met. its burden of

establishing that its costs were reasonable.

3. Conclusion

Our review of the record leads us to conclude that

staff’s market study, identifying plants within 50 miles

of Mitchell that burn coal of comparable Btu content to

that of Martinka coal and with suitable sulfur content

(within a one to four percent range), provides a reliable

calculation of comparable market prices by which to judge

the reasonableness of Ohio Power’s Martinka coal costs.

The comparison * demonstrates that Ohio Power’s costs

of Martinka coal were 50% above market in 1980, 94%

in 1981, and 33% in 1982. We have already considered

proposed adjustments to the prices of comparable trans-

actions to account for differences between the Martinka

coal and that of comparable or suitable coal. We have

considered differences in vintage, quantity, and duration

of the contracts, and all other factors that the parties

have suggested may justify higher prices for Martinka

coal. Ohio Power has not justified disparities of the

magnitude noted above.*?

86 See chart in section II.B.1. of this Opinion.

87 We note that Ohio Power’s Martinka coal costs have continued

to exceed significantly the market price derived from the plants in-

46a

Ohio power suggests that there are many reasons for

it to enter into affiliate coal contracts. Among these rea-

sons are the effect of having affiliate coal mines on Ohio

Power’s ability to negotiate favorable coal contracts with

independent coal suppliers. Ohio Power argues that the

effectiveness of its coal purchases program is shown by

the fact that its electric rates are low in comparison to

neighboring utilities’ rates. The relative level of Ohio

Power's rates, however, is not evidence that its affiliate

coal purchases are reasonable. There are a variety of

reasons, totally unrelated to coal costs, that a neighbor-

ing utility might have differing rates. We therefore are

left with a comparison of the Martinka coal prices with

market price.

In view of the significance of the deviation between

Ohio Power costs for Martinka coal and comparable mar-

ket prices, we cannot conclude that Ohio Power’s pur-

chases of Martinka coal for its Mitchell plant are reason-

able costs for its ratepayers to bear. Ohio Power has not

submitted evidence which indicates otherwise. We there-

fore find that Ohio’s rates based on those costs are not

just and reasonable.

cluded in staff’s study. According to data from FERC Form 423,

Martinka’s prices have exceeded market by 24.2% to 33.4% in the

years 1983 through September 1986. The comparisons are charted

below:

Comparable Coal Percentage

(1-4% sulfur)* Mertinka Coal Difference

1983 157.0¢ MMBtu 195.1¢ MMBtu 24.3%

1984 153.4 199.5 30.1

1985 53.9 191.1 24.2

1986** 149.1 _ 198.9 33.4

* Adjusted by 3.1% for comparison purposes with staff's

1980-82 figures. We have no evidence that the underreporting

noted in EIA’s one-month audit, and on which staff relied in

its calculations, continues to occur.

** Through September.

47a

C. Establishing a Just and Reasonable Fuel Charge

Having determined that Ohio Power’s rates are not

just and reasonable, the Commission must establish a

fuel charge that will result in a just ‘and reasonable rate.

This proceeding is distinguishable in this respect from

the proceeding in Opinion No. 133. In that case, the

Commission affirmed the judge’s finding that the price of

affiliate coal was reasonable under the market-price fest,

and it was, therefore, unnecessary for the Commission

to establish an allowable price.

In this instance, the Commission believes it is reason-

able to use a market price as the benchmark for Ohio

Power’s future fuel charges for Martinka coal and from

which to calculate refunds for overcollections. For the

same reasons that a market-price test is approved for

determining the reasonableness of the company’s proposed

charges, it is appropriate to use the market-price to cal-

culate the just and reasonable rate when the company’s

charges are found unreasonable, particularly in this case

where the parameters for determining a comparable mar-

ket price have been adequately developed in the market

price analysis presented by staff.

Ohio Power posed arguments on and opposing excep-

tions to the initial decision regarding the adverse effects

that would result if this Commission reprices its coal at

a market price. For instance, Ohio Power argues that

if this Commission reprices its fuel according to market

price, while the SEC applies a cost-of-service require-

ment, it will be “whipsawed” by the two commissions.*®

Ohio Power argues that its investment in the Martinka

coal mine should not be judged by focusing on a short-

term comparison with prices from alternative non-

affiliated suppliers. Even if its prices during the early

years of the mine’s production may be above the market,

that relation may not continue. Ohio Power argues that

88 See, e.g., Ohio Power brief on exceptions at 35, 62.

48a

the payments for Martinka coal, based on costs, may. be

eventually less than the comparable market prices.“

Ohio Power states that what may look like a “bad deal”

in the short run may prove to be a “good deal’ in: the

long run. However, Ohio Power argues if its charges to

its wholesale ratepayers are limited to the market price

during the early years of the contract, it will lose money

on the transactions if, in the later years when market

prices may exceed the cost of producing the captive coal,

the SEC limits the affiliate transfer price to costs. There-

fore, Ohio Power suggests that it would have no oppor-

tunity to recoup the losses it may have incurred in the

early years.”

Ohio Power argues that the practical effect of having

this Commission régulate the transaction with Ohio

Power’s ratepayers by one standard, while the SEC regu-

lates the transaction with its affiliate by another stand-

ard is to limit it to recovery under the lowere@f the two

standards.”"' Ohio argues that this amounts to a partial

confiscation of its investment in Martinka, and is unfair

and perhaps unconstitutional.” It is also detrimental to

public policy, Ohio Power argues, because utilities faced

with the SEC FERC “whipsaw” will forego the advan-

tages of captive coal mines.”*

8? The costs which Ohio Power seeks to recover are the equivalent

of rate-based regulated costs. Prices under rate-base regulation

may be high during the early years of the inclusion of new plant

in rate base. As depreciation expense is recovered, the rate base

dwindles and the return on the diminished rate base likewise

dwindles (if the rate of return is constant). This phenomenon is

called the “front-end load effect” of rate-base pricing.

“Ohio Power brief on exceptions at 25, 63, 65.

91 See, e.g., Ohio Power brief on exceptions at 17, 52.

2 Ohio Power brief on exceptions at 25, 33, 56. Ohio Power brief

opposing exceptions at 70.

%3 Ohio Power brief on exceptions at 63.

49a

Ohio Power’s argument is misplaced. As noted above,

we agree with the presiding judge’s conclusion that this

Commission regulates rates while the SEC regulates the

intra-corporate price of coal and that section 318 of the

Federal Power Act does not preclude the Commission

from determining the just and reasonable charge for

Ohio Power to recover from its wholesale customers for

its purchases from the Martinka mine.”

The amount that the SEC allows as the transfer price

of coal between Ohio Power and the Southern Ohio Coal

Company does not dictate the amount that Ohio Power

may recover in rates to its customers for fuel costs. This

Opinion orders the company to charge ratepayers, at

most, the comparable market price for Martinka coal.

Although the SEC may limit the affiliate transfer price

to costs even when market prices are higher than costs,”

for electric rate purposes Ohio Power will have the option

to charge its wholesale customers up to the market price

for that affiliate coal. Consequently, Ohio Power is not,

at it alleges, required to limit its rate recovery of Mar-

tinka coal costs to the lower of the two standards.

Allowing Ohio Power to collect the market price, even

when the market price exceeds costs, is consistent with

our holding in Opinion No. 133 where we stated that

“the interests of the consumers will best be protected by

permitting utilities that purchase coal from affiliates to

recover no more from their ratepayers than the price tha

would have been incurred if a comparable coal supply

contract had been made with a non-affiliated supplier.” *”

When market prices are lower than costs, tying fuel

charges to the comparable market price assures that rate-

payers will pay for affiliate coal no more than they would

have paid for non-affiliate coal. On the other hand, when

*% 25 FERC at p. 65,183.

% But see n.17, supra.

617 FERC at p. 61,246.

50a

the market price exceeds costs, ratepayers will still be

paying no more than what they would pay for non-

affiliate coal, and will not be harmed by the affiliate re-

lationship.

Establishing the comparable market price as the allow-

able fuel charge for affiliate coal supplies in this case

will provide an incentive to Ohio Power to ensure that

its subsidiary coal company is as innovative and operates

as efficiently as possible.*7 The lower the affiliated con--

pany’s costs, the higher Ohio Power’s potential return on

investment. ,

By allowing the collection of the comparable market

price, regardless of whether the price is higher or lower

than costs, Ohio Power will not be limited to collecting

market price only when costs may be higher, which would

preclude it from recouping high start-up costs as the

costs of mining drop relative to market price. Establish-

ing the reasonable cost of the affiliate coal supply by a

comparison with the competitive market allows Ohio

Power the same chance to earn a return on investment

in its affiliate coal mine as an independent supplier of

coal. It is Commission policy that a regulated company

should not receive less revenue for its sales due solely to

the mere affiliation between supplier and purchaser.*®

Whether or not Ohio Power’s commitment to Martinka

coal proves to be “a good deal” over the long run will

depend on Ohio Power’s ability to recover its investment

in the mine, plus a reasonable return, without charging

its ratepayers for fuel costs in excess of comparable mar-

ket prices. However, this consideration is irrelevant when

a comparable market price is established as a just and

reasonable rate. Under the rational of tying affiliate coal

costs to the comparable market price, not only must cost

%7 Jd.

98 Columbia Gulf Transmission Company, Opinion No. 47, 8

FERC 61,002 (1979), reh’g denied, 9 FERC 61,355 (1979).

5la

recovery be limited to the market price when actual costs

exceed market price, but fuel charges must be allowed

up to the market price, even if actual costs are less.

Therefore, if, as Ohio Power argues in this case, its in-

vestment in the Martinka coal mine will prove to be a

good deal in the long run, it will benefit by recouping

losses that result from the refunds of excessive fuel costs

required by this Opinion and order.

D). Calculation of Coal Cost Recovery and Refund

The benchmark price mechanism approved and ordered

in this Opinion will establish, for Ohio Power’s Mar-

tinka coal, the market price, which will be the just and rea-

sonable fuel adjustment charge under the Federal Power

Act. The Commission will change the benchmark price

mechanism only prospectively, if it can be shown that it

no longer serves as a valid tool for determining compar-

able market prices. As ordgred below, Ohio Power must

calculate refunds and future fuel adjustment clause col-

lections based on the benchmark price mechanism ap-

proved in this Opinion. The benchmark price will be

based on data from FERC Form 423 and will be derived

from the weighted average delivered price of contract

coal to plants within 50 miles of the Mitchell plant and

having a sulfur content of 1-4% and a Btu content of not

less than 11,500 Btus per pound.”

Refunds for excessive coal costs collected through the

fuel adjustment clause prior to the filed rates in this

proceeding are not mandatory. Staff recommends refunds

only from the dates that Ohio Power’s proposed rates

in this proceeding became effective subject to refund—

July 29, 1982 for the Wheeling Electric Company, and

December 28, 1982 for the municipals.'”

*° The Mitchell plant’s boilers require Goal of not less than 11,500

Btus per pound. Ex. 15 at 13, Ex. 3 at 36.

100 The suspension order in these proceedings established these

The municipals, on the other hand, seek refunds for

all of 1980, 1981 and 1982, in addition to excesive fuel

costs collected since December 28, 1982. The municipals

point out that we have authority to require refunds of

any costs previously collected under a fuel adjustment

clause, if such costs are found to be imprudent, unjust

or unreasonable, regardless of whether such costs were

recovered through rates collected subject to refund.'”

We must determine whether, and if so to what extent,

refunds of historical coal costs are warranted in light of

the interests of the customer andthe utility." For the

reasons stated below, we will require refunds for Ohio

Power’s collections of its Martinka coal costs only after

the effective date of the rate increases under these pro-

ceedings.

The Commission did not adopt the comparable market-

price test for the reasonableness of affiliated coal costs

until the issuance of Public Service Company of New

Mexico, Opinion No. 133, on November 9, 1981. Prior to

that date Ohio Power would not necessarily have antici-

pated that fuel charges within the cost-based limits im-

posed by the SEC might not be acceptable under this

Commission’s regulation. No one challenged the reason-

ableness of these affiliate coal costs until the instant pro-

ceeding. As such, no-refunds will be ordered for exces-

sive costs collected prior to the effective date of supersed-

ing rates in this proceeding.

01 Public Service Company of New Hampshire, Opinion No. 37,

6 FERC § 61,299 (1979) ; Electric Cooperatives of Kansas, 14 FERC

{61,176 (1981); Carolina Power & Light Company, 17 FERC

{61,118 (1981); and Delmorva Power and Light Company, 24

FERC 61,199, at p. 61,461 (1983).

102 Second Taxing District of the City of Norwalk v. F.E.R.C.,

683 F.2d 477, 490 (D.C. Cir. 1982).

53a

The Commission orders:

(A) The initial decision is affirmed and adopted to the

extent it is not-inconsistent with this Opinion and order.

Eixceptions to the initial decision not granted in this

Opinion are denied.

(B) Ohio Power shall file revised rates in accordance

with this Opinion and order, and refund the difference

between amounts collected subject to refund and amounts

payable under the revised rates. Refunds shall be made

with interest, in accordance with 18 C.F.R. > 35.19 (a)

(1986),

of issuance of this Opinion and order, an amendment to

its fuel adjustment clause. This amendment shall specify

the method, consistent with paragraph (D), for estimat-

ing monthly fuel charges for billing purposes (unless a

lagged fuel adjustment is used) and any true-up proce-

dures to adjust for actual data as it becomes available.

(D) Ohio Power shall calculate the comparable market

prices for its purchases of Martinka coal for delivery

to. its Mitchell plant in accordance with the following

method and on the basis of data filed with the Commis-

sion on FERC Form 423, and may include up to the

comparable market price of Martinka coal in calculating

that portion of its monthly fuel charge related to fuel

costs associated with genération from the Mitchell plant.

The comparable market price shall be the weighted aver-

age delivered price of contract coal, having a sulfur con-

tent of 1-4% and a Btu content of not less than 11.500

Btus per pound, to plants within 50 miles of the Mitchell

plant. To the extent Ohio Power calculates the compa-

‘able market price on the basis of estimates, for fuel

clause purposes it shall adjust its fuel charge on the

basis of the data filed with the Commission on FERC

Form 423 within six months of calculating any compa-

rable market price on the basis of estimates. Ohio Power

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must also revise its demand rates to reflect benchmark

prices for Martinka coal used at its Mitchell plant in its

Period II working capital estimates.

(E) Ohio Power shall make refunds in accordance

with paragraph (B) and implement the procedures re-

quired by paragraphs (C) and (D) within 75 days of the

date of issuance of this Opinion and order. However, if

an application for rehearing is pending at the end of the

75-day period, the refunds shall be made, and the proce-

dures implemented, within 30 days of the date such

application is disposed of by the Commission.

(F) The May 15, 1986 motion of New England Power

Company to file an amicus curiae brief in this proceeding

is denied.

(G) Subdocket 000 of Docket Nos. ER82-553 and

ER82-554 are hereby terminated. New subdockets will

be assigned to Ohio Power’s compliance filings required

by this order.

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APPENDIX D

FEDERAL ENERGY REGULATORY COMMISSION

Commission Opinions, Orders and Notices

Docket Nos. ER82-553-002. ER82-553-003,

IE R82-554,002, and ER82-554-003

OHIO POWER COMPANY

Opinion No. 272-A; Opinion and Order Denying Requests

for Rehearing, and Denying Request for Stay

(Issued April 7, 1988)

Before Commissioners: Martha O. Hesse, Chairman;

Anthony G. Sousa, Charles G. Stalon, Charles A. Tra-

bandt and C. M. Naeve.

[Note: Opinion No. 272 on recovery of the cost of coal

purchased from an affiliate issued April 30, 1987, ap-

pears at 39 FERC P61,098. |

[Opinion No. 272-A Text]

On April 30, 1987, the Commission issued Opinion No.

272 in this proceeding.’ The Commission affirmed the

presiding administrative law judge’s conclusion in the

initial decision? that the Commission is not precluded by

either statute * or regulation ‘ from determining whether

1 Ohio Power Company, Opinion No. 272, 39 FERC P61,098

(1987).

2 Ohio Power Company, 25 FERC P63.060 (1983).

% Section 318 of the Federal Power Act, 16 U.S.C. § 825q (1982).

*18 C.F.R. § 35.41(a)(7) (1987).

56a

it is just and reasonable for Ohio Power Company (Ohio

Power) to recover the full costs of its purchase from the

Martinka mine from its wholesale rate payers, and that

Ohio Power’s affiliate coal costs are subject to the com-

parable market price test, adopted in Public Service Com-

pany of New Mexico, Opinion No. 133,° to determine the

reasonableness of those costs. The Commission, however,

reversed the initial decision by concluding that the costs

Ohio Power had recovered for its purchases of Martinka

coal were unreasonable when compared with the market

price for comparable coal. The Commission ordered Ohio

Power to refund amounts collected, as of the effective

dates of the rates in these proceedings, to the extent that

they reflect a price exceeding the market price for com-

parable coal.

Ohio Power has filed a request for rehearing. The

Utility argues that section 318 of the Federal Power Act

and section 35.14(a) (7) of our regulations preclude the

Commission from considering the reasonableness of Ohio

Power’s affiliate coal costs. Ohio Power also urges that

the Commission’s decision was not based on substantial

evidence. Ohio Power believes. the Commission should

have analyzed its coal purchases using a prudence stand-

ard which, it contends, would have resulted in the Com-

mission’s approving the utility’s affiliate coal costs. Ohio

Power further contends: that the comparable market

price test in this case is inconsistent with the standard

used in Tennessee Gas Pipeline Co.;* that the Commis-

sion should look at Ohio Power’s total coal proeurement

and utilization program; and that the record shows that

Ohio Power’s rates are relatively low. Therefore, the

Commission should allegedly not be concerned with the

reasonableness of Ohio Power’s coal costs because it is

517 FERC P61,123 (1981), reh’g denied, 18 FERC P61,036

(1982), aff'd, Public Service Company of New Mexico v. FERC,

832 F.2d 1201 (10th Cir. 1987).

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

57a

the rate and not isolated expense components that must

meet the “just and reasonable” test. Ohio Power urges

that the Commission should have not ordered refunds be-

cause the Commission adopted a novel interpretation of

its fuel adjustment clause regulation, extending the mar-

ket price test of Opinion No. 133 to a utility with above

market price coal costs, and because the Commission

waited more than three years to reverse the judge’s deci-

sion that Martinka coal costs were not unreasonable, Ohio

Power requests that if the Commission denies rehearing,

our refund order should be stayed pending judicial review.

Finally, Ohio Power argues that our order has the effect

of revising the company’s demand rates. The company

alleges this is impermissible since those rates were settled

earlier in this proceeding.

On June 1, 1987, the Municipal Wholesale Electric

Customers of Ohio. Power (Municipals) filed a request

for rehearing of Opinon No, 272. The Municipals claim

that the Commission should have ordered refunds for the

period 1980-1982 as well as from the effective date of

the rates, December 28 1982. [pn addition, they request

that the Commission clarify whether refunds are to be

base! on a market price determined with a 3.1% upward

adjustment.’

Discussion

The requests for rehearing raise no arguments which

warrant changing our decision in these proceedings. We

7 As indicated in Opinion No. 272, the 3.1% adjustment was made

to compensate for a potential error in the historical data, for pur-

poses of determining whether Martinka coal costs have been exces-

sive. This adjustment was made out of an abundance of caution in

assessing the reasonableness of Ohio Power's coal costs. However,

in ordering refunds, we directed the utility to caleulate refunds

using actual data from FERC Form 123 without making any

adjustment. 39 FERC at p. 61,289. No further clarification is

necessary.

58a

shall, however, address several points raised in the plead-

ings.

Ohio’ Power contends that we must conduct a “pru-

dence” analysis in order to assess the reasonableness of

its Martinka coal costs. The Commission has already

determined in Opinion No. 133 that, as a matter of

policy, affiliate coal purchases should be judged by a

market price standard, 17 FERC at p. 61,246, and our

decision has been affirmed on appeal. 832 F.2d at 1212-14.

The utility’s argument that we must conduct a “pru-

dence’ analysis in the circumstances of this case is with-

out merit.

Ohio Power also argues that our market price test is

inconsistent with that used by the Commission in Ten-

nessee Gas. In Tennessee Gas, we held that in determin-

ing the reasonableness of natural gas prices paid to affili-

ate producers by pipelines, it was appropriate to compare

the weighted average price of all affiliate natural gas with

prices paid to nonaffiliates by the pipeline and third

parties. In this case, we. have focused solely on the price

paid by Ohio Power for coal from the Martinka mine. The

decision in Tennessee Gas is inapposite to this case. As

Ohio Power admits in its request for rehearing, all pipe-

line natural gas is fungible, whereas all coal is not. In

addition, the question of, whether prices paid to affiliated

coal suppliers should be averaged, where more than one

affiliate relationship is questioned in a particular case,

is not present in this proceeding. In any event, Ohio

Power has not presented any evidence in support of a

determination of market price under the test used in

Tennessee Gas, and, thus, failed, even under that stand-

ard, to dispel the doubts raised by Staff’s evidence as to

the reasonableness of the price paid by it for coal from

the Martinka mine.

Ohio Power’s argument that we erred by revising its

demand rates is also misplaced. In approving an earlier

settlement in this proceeding, we stated that it would

59a

become effective December 28, 1982, not subject to refund

as to any issue except to the extent an adjustment is

required as a result of the Commission’s determination of

the captive coal issue. 23 FERC P61,236 (1983). Be-

cause the value of Martinka coal as ‘aleulated under the

market price test affects the amount of fuel stock and

working cash included in rate base which, in turn, affects

the level of Ohio Power’s unit demand charge, our re-

quirement that Ohio Power revise its demand char

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