# Petition for Writ of Certiorari — Arcadia v. Ohio Power Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1124%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1992 - **Citation:** 506 U.S. 981 ## Text O i) C aS = oz me es ‘ 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 =e ad 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) iv 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 Vv 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 vi 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). 2 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. 3 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 | 1 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). 5 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 7 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. ee 8 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 9 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. 10 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. 11 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 12 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- 13 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). 14 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. 15 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. 16 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 17 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 18 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 19 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. 20 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 21 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. 22 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"; © See Illinois Power Co., 52 FERC { 613162 (1990) (FERC has 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 23 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, 24 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; 25 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 la 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 Za 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. 3a 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- 4a 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). oO va 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. ee Ou 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 Ta 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: 8a 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, 9a 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 ‘ ' 2 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. (c) Other Measures of Comparability (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 suppl [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1124%3A1. Public record. Not legal advice.