Petition for Writ of Certiorari — Town of Norwood v. Federal Energy Regulatory Commission

(1) aoe ee ee

ILED

Ne. O98 191 4 way 30 200

In The OFFICE OF THE CLERK

SUPREME COURT OF THE UNITED STATES

TOWN OF NORWOOD, MASSACHUSETTS

Petitioner,

VS.

FEDERAL ENERGY REGULATORY COMMISSION

Respondent,

NEW ENGLAND POWER COMPANY

Intervenor.

Petition For Writ Of Certiorari To The

United States Court of Appeals For The First Circuit

PETITION FOR WRIT OF CERTIORARI

Charles F. Wheatley, Jr.

Counsel of Record

Wheatley & Ranquist

34 Defense Street

Annapolis, MD 21401

(301) 261-8608

Kenneth M. Barna

Alan Posner

Rubin and Rudman

50 Rowes Wharf

Boston, MA 02110

(617) 330-7081

QUESTIONS PRESENTED

1. Whether the court of appeals erred in affirming

an order of the Federal Energy Regulatory Commission for the

imposition of a stranded cost charge relating to the Town of

Norwood which conflict with the FERC’s own Regulation

governing imposition of stranded costs issued under Order 888

and the Energy Policy Act of 1992 governing wholesale open

access and precluded the Town from being able to compete

with the New England Power Company (“NEP”) and its affiliate

large distribution companies.

2. Whether the court of appeals erred in affirming

the FERC’s order approving stranded cost charges relating to

Norwood, which exceeded FERC’s authority under the Federal

Power Act, precluding the Commission from awarding contract

damages, created uncertainty as to the jurisdiction of the courts

to award contract damages, and since not based on any review

or evaluation as to whether there had been any breach of

contract by NEP or Norwood, was arbitrary and capricious

under Section 5 of the Administrative Procedure Act.

3. Whether the court of appeals, in approving the

FERC’ s stranded cost order where the Power Contract between

Norwood and NEP required Norwood to pay only for power

delivered by NEP and did not include any authorization for

unilateral imposition of liquidated damages by NEP, is in

violation of this Court’s Mobile-Sierra doctrine precluding any

change by the Commission to agreed contract terms between

the parties without meeting a public interest burden of proof

which did not exist in the case.

4. Whether the court of appeals erred in affirming

a retroactive application of NEP’s stranded cost filing relating

to Norwood at FERC after Norwood had terminated its existing

li

contract, contrary to this Court’s decision in Arkansas-

Louisiana Gas Co. v. Hall, and where NEP did not comply with

the requirements of the FERC’s Regulations governing new rate

filings.

g. Whether the court of appeals erred in that part

of FERC’s order which refused to evaluate whether NEP’s

stranded cost filing relating to Norwood, which was twice as

high as NP’s agreed to CTC with its affiliates in competition

with Norwood, was unduly discriminatory, in violation of

Sections 212 and 205 of the Federal Power Act.

ili

RULE 14(1)(b) STATEMENT

The petitioner is the Town of Norwood, Massachusetts.

The Federal Energy Regulatory Commission is the respondent.

The New England Power Company is an intervenor in the court

of appeals below.

The case was consolidated at the court of appeals with

another case involving different issues brought by the Northeast

Center for Social Issue Studies, as petitioner and the Federal

Energy Regulatory Commission, as respondent, involving a

different part of the same orders of the Federal Energy

Regulatory Commission.

RULE 29.6 STATEMENT

Under Rule 29.6, the Town of Norwood believes that New

England Power Company, intervenor, is a corporation which is

a subsidiary of the New England Electric System which also

owns Massachusetts Electric Company and Narragansett

Electric Co.

iV

TABLE OF CONTENTS

Page No.

CRS L UGS PROS NLA, i

RULE 14(1 6) STATEMENT .............0..05.. iii

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STATUTES AND REGULATIONS INVOLVED ....... 2

STATEMENT OF THE CASE 2... ccc ccs cscs eias 2

kg ee ee 2

REASONS FOR GRANTING THE WRIT .......... 1]

I. The Court Of Appeals Erred In Not

- Complying With The Commission’s

Regulations Governing The Imposition

Of Stranded Costs, Upon Which Norwood

TABLE OF CONTENTS (CONT'D)

Relied, Which Raises A Major Uncertainty

As To The Administration Of Open Access

Se MN 8 eae Sica S Sie 13

Il. The Court of Appeals Decision Affirming

NEP’s CTC Is An Unlawful Award Of

Contract Damages Over Which The

Commission Has No Authority, And Will

Unduly Disrupt And Complicate The

Determination Of Breach Of Contract

Damages In The Courts Contrary To

This Court’s Montana-Dakota Utilities

i eg Ee OES he eae 17

Ill. The Court Of Appeals Erred In Not

Rejecting NEP’s Stranded Cost Filing

(CTC) Relating To Norwood As

Conflicting With This Court’s Long-

Established Mobile-Sierra Doctrine ........... 18

IV. NEP’s CTC Should Have Been Rejected

As An Unlawful Retroactive Rate Under

_ This Court’s Decision In Arkansas-Louisiana

Gas Co. v. Hall And For Failing To Meet

FERC Regulations For New Rate Filings ....... 21

vi

V. The Court of Appeals Erred in Sustaining

The FERC’s Orders Refusing to Address

The Merits of Holding a Hearing On Nor-

wood’s Claims that NEP’s CTC Relating

to Norwood and NEP’s Denial of Standard

Offer Wholesale Service Constituted

Undue Discrimination In Violation of Sec-

tions 212 and 205(b) of the Federal Power

OE Fh ie ok OCG ee eRe oe kas 24

Vii

TABLE OF AUTHORITIES

Page No.

JUDICIAL CASES:

Arkansas-Louisiana Gas Co v. Hall,

| ee 10, 21, 22

Atchinson, Topeka & Santa Fe Railway Co.

v. Wichita Board of Trade, 412 U.S.

SS cee et ey 16

California v. FPC, 369 U.S. 482 (1962) .............. 2

Cities of Bethany, et al. v. FERC,

727 F.2d 1131 (D.C. Cir. 1984),

Gee GemteG, 460-U.S: 915 . os oS ko ik vad 26

Columbia Gas Transmission Corp. v. FERC,

eo) Fae 1ISs (DC. Ge. 19867) ............. 22

Distrigas of Massachusetts v. FERC,

FEF Oe ERD Ses Bas en ceca on 16

Electrical District No. 1 v. FERC,

774 F.2d 490 (D.C. Cir. 1985) ............... 22

FPC v. Sierra Pacific Power Corp.,

FPO UG, PAB ANE) Fe LS 3, 10, 17, 20

FPC v. Sunray DX Oil Co.,

WU PI oS Sine es 10, 22

TABLE OF AUTHORITIES (CONT’D)

Northeast Utilities Service Co. v. FERC,

See ieee oe 6s Fi eds 2

Otter Tail Power Co v. United States,

SD Sh ee oe he aes 2

Southern California Edison Co. v. FERC,

696 F.2d 43, 46-47 (D.C. Cir. 1982) .......... 24

Town of Concord v. FERC, 955 F.2d

Oe, Tu eee SOE AG RS GR 22

United Gas Pipe Line Co.

v. Mobile Gas Service Corp.,

345 UE. FR TINOee 6.6 RA 3, 10, 17, 20

ADMINISTRATIVE DECISIONS:

Consumer Power Co., 47 FERC 61,283

(1988), reh'g denied, 48 FERC

eae te Ce ak eA AAAS as 24

New England Power Company,

81 FERC 61,281, order denying

reh’g, 83 FERC 961,265 (19) ............... 14

Southern California Edison Co.,

GD Pees WOR CPD ein cei cinn cvewcs 3,9

ix

TABLE OF AUTHORITIES (CONT’D)

Page No.

STATUTES AND REGULATIONS:

Administrative Procedure Act,

5 th US rahe a Sear At eee 18

Federal Power Act, §201, 16 U.S.C. §824b ............ 3

Federal Power Act, §205,

i $711

Federal Power Act, §212, :

eee se 5,7, 11, 12

FERC Order No. 888, ef seg.

Promoting Wholesale Competition Through

Open Access Non-discriminatory Transmission

Services by Public Utilities; Recovery of

Stranded Costs by Public Utilities and

Transmitting Utilities, Order 888, 61 Fed. Reg.

21,540 (May 10, 1996) FERC Stats. & Regs.

{ 31,036 (1996), order on reh’g, Order No.

888-A. 62 Fed. Reg. 12,274 (March 14, 1997),

FERC Stats & Regs., J 31,048 (1997),

order on reh'g, Order No. 888-B, 81 FERC

61,248 (1997), order on reh’g, Order No.

888-C, 82 FERC { 61,046 (1998), petition for

review filed sub nom., Transmission Access

Policy Group v. FERC, Case Nos. 97-1715,

I eS passim

x

TABLE OF AUTHORITIES (CONT’D)

BES OO kc Eee 13, 14

CPR Ms. At oe ae

No.

In The

SUPREME COURT OF THE UNITED STATES

TOWN OF NORWOOD, MASSACHUSETTS

Petitioner,

VS.

FEDERAL ENERGY REGULATORY COMMISSION

Respondent,

NEW ENGLAND POWER COMPANY

Intervenor.

PETITION FOR WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the First Circuit, App.1a-27a is reported at 202 F.3d 392 (*

Cir. 2000). The order of the United States Court of Appeals for

the First Circuit denying the “petition for panel rehearing” by

the Town of Norwood was entered on March 1, 2000, App.

119.

The opinions of the Federal Energy Regulatory

Commission (App. 28a-1 19a) are reported at 81 FERC 961,281

(November 26, 1997); 82 FERC 961,179 (February 25, 1998);

83 FERC 961,174 (May 15, 1998); 83 FERC 961,265 (June 3,

1998); 83 FERC 961,275 (June 10, 1998); and 84 FERC

961,175 (August 5, 1998).

2

JURISDICTION

The judgment of the court of appeals was entered on

February 2, 2000. A petition for panel rehearing by Norwood

was denied on March 1, 2000. This Court’s jurisdiction is

invoked under 28 U.S. C. § 1254(1). The court of appeals had

jurisdiction to review orders of the Federal Energy Regulatory

Commission issued under the Federal Power Act under Section

313(b) of the Federal Power Act, 16 U.S.C. § 825/(b).

STATUTES AND REGULATIONS INVOLVED

The pertinent statutes for this petition for review are

Sections 205, 212, and 313(b) of the Federal Power Act, 16

U.S.C. § 824d, 824k and 825/(b) and Section 5 of the

Administrative Procedure Act, 5 U.S.C. § 706(2)(a), App. 7a.

The pertinent regulations are 18 C.F.R. § 35.26, and 18 C.F.R.

§ 35.13. Copies of these statutes and regulations are appended

to this brief, App. 119a-125a.

STATEMENT OF THE CASE

This petition involved three separate cases filed by NEP

in 1997-1998 at the FERC, which is vested with regulatory

jurisdiction under the Federal Power Act (“FPA”) over

wholesale sales of electric power in interstate commerce. '

, The FERC has no jurisdiction to adjudicate the

Federal Antitrust Laws. Otter Tail Power Co. v. United Sictes, 410 U.S.

366 (1973); California v. FPC, 369 U.S. 482 (1962); Northeast Utilities

Service Co. v. FERC, 993 F.2d 937, 947-948 (1948) (1 Cir. 1993).

(Footnote | continued on next page)

3

Prior to the events of this case, NEP was the largest

provider of low-cost requirements wholesale electric power in

New England, which then served its own large distribution

company affiliates, including Massachusetts Electric Company

(“Mass. Electric”) and Narragansett Electric Company

(“Narragansett”), constituting over 97 percent of its total sales,

at rates set by the FERC under the just and reasonable standard

of Sections 212 and 205 of the FPA, 16 U.S.C. §§ 824a and

824d, on a cost-of-service basis.

Norwood had gained access to this Tariff 1 service

pursuant to an antitrust Decree and Order of April 12, 1983 in

the Federal District Court, MA, and was receiving its

requirements wholesale power at the same cost-of-service

regulated rates as NEP provided to its own large affiliates,

Mass. Electric and Narragansett, who competed with Norwood

for customers in the same retail market areas.

On September 30, 1996, NEP voluntarily negotiated a

plan (from which Norwood was excluded) not required by

Federal law or regulations, to divest itself of its power supply

facilities,’ terminate the historic cost-of-service regulation by

(Footnote 1 cont’d)

The FERC also does not have exclusive jurisdiction over breach of

contract cases adjudicated in federal and state courts. FPC v. Sierra

Pacific Power Corp., 350 U.S. 348 (1956) and United Gas Pipe Line Co.

v. Mobile Gas Service Corp., 350 U.S. 332 (1956); Southern California

Edison Co., 85 FERC $61,023 (1998).

: Section 201 of the FPA provides that:

(Footnote 2 continued on next page)

4

the FERC over such power to NEP’s large distribution

company affiliates under NEP’s Tariff 1, and to obtain

unregulated market-based pricing. This plan was contingent on

NEP’s collection of up to $7.6 billion in stranded costs under

the FERC’s Order No. 888,° and the setting of agreed-to fixed

low “standard offer” prices to NEP’s affiliates for up to 12

years, designed to give its affiliates an anticompetitive

advantage to retain retail customers against other competitors

in New England during an initial four years, followed by a rapid

escalation of the fixed standard offer prices in the future, to

upwardly bias future market prices in New England.

In the first case before the FERC, NEP filed at the

FERC its divestiture agreement containing terms subjecting

Norwood to the payment of an unascertained portion of the

$7.6 billion in stranded costs. Norwood intervened objecting,

inter alia, that this was contrary to the express provision of the

Commission’s Regulations under Order 888, excluding

Norwood, as not being a transmission customer of NEP, from

(Footnote 2 cont'd)

The provisions of this subchapter shall apply to the

transmission of electric energy and interstate

commerce and to the sale of electric energy at

wholesale in interstate commerce. . .but [FERC] shall

not have jurisdiction, except as specifically provided . .

. over facilities used for the generation of electric

16 U.S.C. §824(0).

. Promoting Wholesale Competition Through Open

Access Nondiscriminatory Transmission Services By Public Utilities;

Recovery of Stranded Costs by Public Utilities and Transmitting

Utilities, FERC Regulations Preambles §31,036 (1991-1996); FERC

Regulations §13,976 (1997).

any stranded costs.

Norwood also voluntarily * presented expert testimony

demonstrating that the stranded costs were excessive, and did

not comply with Order 888, and that the standard offer fixed

prices were discriminatory against Nerwood in violation: of

Order 888 and Sections 212(a) and 205(b) of the FPA, 16

U.S.C. §§824k(a) and 824d(b), and, accordingly, requested a

hearing. The Commission did not consider Norwood’s claims

or evidence and denied any hearing in its brief letter order

approving the agreement, but required that it be amended to

preclude any applicability of the stranded costs to Norwood.

App. 36a; 81 FERC 961,281, 62,371 (1997).

In the second case, NEP filed under Section 203 of the

FPA for approval of its sale of limited facilities relating to its

regulated sale of all of its non-nuclear power generation

business to U.S. Generation Co. NE, a subsidiary of Pacific Gas

& Electric Co. (“USGen/PG&E”); for deregulated rates and

termination of Tariff 1 service to its affiliates; for fixed standard

offer wholesale prices for its affiliates; and for conversion of

Norwood’s prior cost-of-service rate under Tariff 1 to a fixed

rate contract over 20 percent higher than the wholesale rates

available to its affiliates.* Norwood again intervened raising

objections under Order 888 and the FPA and again voluntarily

presented expert testimony as to the discriminatory impact of

* No dates for submittal of such testimony were ever required

of any party, because NEP urged immediate approval of its “settlement.”

* Norwood’s frozen rate resulted in a rate twenty percent

higher than NEP’s affiliates; NEP low standard offer fixed rate to its

affiliates not available to Norwood, resulted in thirty percent higher

rates for Norwood; and NEP’s CTC on Norwood resulting in Norwood

paying forty percent higher rates.

6

NEP’s divestiture plan on Norwood.

The FERC, in an order issued February 25, 1998,

approved NEP’s termination of its cost-of-service Tariff 1

service to its affiliates, and the fixed prices for standard offer

wholesale power, admittedly not based on any regulated cost of

service, but accepted as “market base prices” without any

analysis or hearing of Norwood’s tendered expert evidence.

FERC granted NEP’s request that Norwood’s Power Contract

with NEP for regulated cost-of-service under Tariff 1 be

converted to a fixed price contract for the future and precluded

Norwood from the fixed below-market standard offer prices

available only to NEP’s affiliates. App. 85a; 83 FERC 961,275

(1998). This resulted in wholesale rates to Norwood 30 percent

higher than those charged by NEP to its affiliates, and

threatened the viability of Norwood’s municipal electric system.

Again, Norwood was denied any hearing or adjudication of the

merits of its objections to NEP’s divestiture plan.

Because of the adverse impacts of NEP’s actions on

Norwood and its duty to mitigate damages in its then pending

complaint for breach of the contract and violations of the

Federal antitrust laws (filed on April 14, 1997), Norwood

entered into a power contract with an alternate supplier at

market-based rates, which the FERC accepted on April 22,

1998 as Norwood’s new filed rates effective April 1, 1998,

which NEP never appealed. NEP, after Norwood had already

terminated its contract, made a third unilateral filing at FERC to

impose stranded cost payments (called “contract termination

charges” (“CTC”)) on Norwood which were twice as high as

the stranded cost charges NEP had agreed to with its affiliates

in the September 30, 1996 Agreement. NEP’s new CTC

relating to Norwood amounted to a charge to Norwood of $78

million for no power delivered by NEP over a ten-year period.

7

Norwood presented detailed expert testimony and

exhibits to the FERC in support of its objections to NEP’s -iling

for stranded costs against Norwood, showing that it would

result in Norwood paying over 40 percent higher wholesale

rates for electric power over those required by NEP from its

distribution company affiliates, Mass. Electric and Narragansett.

In orders issued May 15, 1998, and August 5, 1998, the FERC

approved NEP’s stranded cost filing applicable to Norwood

without any analysis or hearing of Norwood’s expert evidence

that it directly conflicted with the FERC’s regulations under

Order 888 and other long-standing FERC precedents, and that

it discriminated in violation of the FPA, Sections 212 and

205(b) against Norwood in favor of NEP’s affiliates. App.

103a, 112a; 16 U.S.C. §§824k and 824d(b). App. 119a, 120a;

83 FERC 961,174 (1998); 84 FERC 961,175 (1999).

The court of appeals in its decision of February 2, 2000

affirmed the FERC’s orders. App. 9a; 202 F.3d, 392 et seg.

The court of appeals agreed with Norwood that the

Commission’s regulations governing the imposition of stranded

costs under Order 888 and the Energy Policy Act of 1992

governing wholesale open access, barred NEP from any

stranded cost, because Norwood, by virtue of its antitrust

litigation culminating in the 1983 Decree and Order, had already

obtained open access over Boston Edison’s transmission

system, and was not a transmission customer of NEP. The

regulations in Order 888 explicitly allowed stranded costs only

where a departing customer had previously taken transmission

service from the utility claiming stranded costs. This completely

distinguished Norwood from NEP’s affiliates, Mass. Electric

and Narragansett, which had been expressly structured through

corporation organization from the beginning to obtain their

transmission services from NEP, which would provide

wholesale transmission and power service to them solely under

8

FERC regulation to avoid any state regulation over such

services.

The court of appeals, however, ruled that, “while Order

No. 888 does not mandate the new tariff, neither does it forbid

it.” App. 10a; 202 F.3d at 399. The court did admit that both

it and FERC considered NEP’s CTC charge to be one “for

stranded cost recovery in the present case.” Jd. Neither the

court, nor FERC, identified the legal basis and rationale for such

a charge and why the express language of the Commission’s

regulations authorizing a stranded cost only under the terms of

that regulation did not bar such an alternate procedure.

The court also conceded that Norwood would not be

subject to the imposition of any stranded costs because the

regulations “excluded from stranded cost recovery those cases

where a requirements contract was entered into or extended

after July 11, 1994.” App. 10a; 202 F.3d at 399. Norwood had

entered such a contract revision with NEP after July 11, 1999,

_and NEP never sought to insert a clause authorizing it to charge

stranded costs. Admitting this to be true, the court continued

to uphold the Commission’s approval of the CTC to Norwood

on the ground that “the restrictions in Order No. 888 are no

more than conditions on stranded cost recovery under that

order and do not preclude the Commission from allowing tariffs

that permit somewhat similar recovery whenever a customer

departs an existing contractual application.” Jd.

The court of appeals next rejected Norwood’s claim that

NEP’s CTC relating to Norwood was an improper attempt by

FERC to adjudicate breach of contract damages which it had no

authority to do under the FPA, and improperly impinge on the

jurisdiction of the courts to determine such issues. The court of

appeals conceded that:

9

Admittedly, the stranded cost recovery in the

tariff is closely akin to contract damages, and

the commission in the past has declined to

adjudicate some contract disputes. E.g.,

Southern Cal. Edison Co., 85 FERC 961,023

(1998).

App. 11a; 202 F.3d at 400. The court admitted that

Here, the Commission has not interpreted

Norwood’s contract with New England Power

or determined whether Norwood has breached

the contract or has been freed from the contract

based on a breach by New England Power . . .

It merely upheld, on a generic basis, a

termination charge for those customers who are

bound by existing contracts but wish to avoid

their obligations.

Id.” But neither the court nor FERC explained how the

Commission could determine the appropriate level of damages

to be paid by either party without evaluating the issues as to

whether Norwood or NEP has breached the contract, and if so

what is the appropriate level of damages that a court would

adjudicate under such circumstances, and how, in the absence

of such an evaluation, its determination of a fixed payment by

Norwood of $78 million over ten years does not interfere with

the admitted jurisdiction of the courts to determine breach of

contract and damages therefor.

10

The court of appeals then ruled that this Court’s

decisions under the Mobile-Sierra doctrine ° “prevents FERC

from overriding a contract unless it finds that the contract is

contrary to the public interest.” Jd Despite the fact that

Norwood’s Power Contract with NEP expressly authorized

Norwood to pay NEP only for power delivered to it, required

service under Tariff 1, a cost-of-service rate, and precluded any

unilateral change by NEP under its tariff that conflicted with the

Contract, the court affirmed the FERC’s acceptance of NEP’s

stranded cost charge relating to Norwood.

The court of appeals ruled that NEP’s CTC against

Norwood did not violate the Mobile-Sierra doctrine, but simply

gave Norwood an option “to terminate earlier (at a specified

price)” .. . which “is certainly a detriment, but absent a showing

that its formula is any worse than contract damages, it merely

spells out what would have been the law’s remedy if Norwood

had no option but simply breached the existing contract.” Jd.

Nowhere did the Commission or the court demonstrate that the

CTC did not conflict with Norwood’s Power Contract under

the Mobile-Sierra test, or that it met the heightened public

interest test required for authorization of such a contract

change.

The court of appeals ruled that NEP’s filing of its

stranded cost charge after Norwood had g.ven it notice of

termination was not a retroactive ratemaking under this Court’s

precedents in Arkansas-Louisiana Gas Co. v. Hall, and Federal

Power Comm'n v. Sunray DX Oil Co.. The court reached this

result by ruling that the CTC is not collecting prior costs

allegedly incurred by NEP before its divestiture of its facilities,

¥ United Gas Pipe Line Co. v. Mobile Gas Serv. Corp.,

350 U.S. 332, 344 (1956); Federal Power Comm'n v. Sierra Pac. Power

Co., 350 U.S. 348, 354-55 (1956).

———— EEE

1]

but “would only govern Norwood as to its future purchases —

or failures to purchase ~ from New England Power.” App. 21a;

202 F.3d at 401.

Inconsistently, the court ruled that NEP was not

required to follow the Commission’s regulations relating to

rates to govern future charges because:

. . .The termination charge is not a new or

increased rate for supplying energy. It is a

_formula-driven charge to recover certain

projected losses to New England Power caused

by not supplying electricity after preparing to do

so, calculated based on rates already approved

by FERC [and that] the contract termination

charge in no way represents a rate increase for

Norwood.

Id.

The court of appeals affirmed FERC’s orders imposing

a CTC on Norwood which its experts had demonstrated was

twice as high as the CTC set by NEP for its own affiliates in

competition with Norwood, and which denied Norwood any of

the below market standard offer service for wholesale power as

not constituting undue discrimination under Section 212 of the

FPA, as amended by the Energy Policy Act of 1992 and Section

205(b) of the FPA, 16 U.S.C. §§ 824k(a), 824d(b). The court

ruled that such an undue preference was permissible where NEP

had settled on its rates with its affiliates, by disregarding the

holdings of the applicable cases that, only where an

administrative hearing had been granted to the contesting party

with an opportunity to litigate the proper rate, is such treatment

permissible. In all three of the cases below, Norwood had

12

timely requested a hearing and had voluntarily filed affidavits of

expert witnesses (despite no hearing procedures having been set

at any time for such testimony) demonstrating genuine issues of

fact as to the discriminatory treatment provided NEP’s affiliates

vis a vis Norwood. ’

The court of appeals ruled that Norwood’s exclusion

from equal wholesale rates based on equal CTC payments and

equal access to standard offer service was justified because,

under Massachusetts law, “NEP has no obligation to offer retail

standard offer rates as a backup for its retail customers.” App.

18a; 202 F.3d at 403. This, however, was shown by

Norwood’s expert evidence to be irrelevant, where the issue is

one of nondiscriminatory wholesale power rates subject to the

exclusive jurisdiction of FERC under Sections 212 and 205(b)

of the FPA, 16 U.S.C. §§ 824k(a) and 824d.

The court of appeals admitted that Norwood had duly

requested a hearing with respect to the unilateral imposition by

NEP of its CTC charge on Norwood, which Norwood’s

experts’ affidavits demonstrated was twice as high as the CTC

to which NEP and its affiliates had agreed. The Commission

itself had made no attempt to evaluate Norwood’s affidavits to

resolve the disputed issues of fact involved, and never ordered

any discovery or hearing procedures under the FPA.

Norwood’s claim that this violated its rights under the FPA was

rejected by the court of appeals which acted as though

” The court of appeals’ reference to one interim ruling by an

administrative law judge in the first proceeding, App. 16a; 202 F.3d at

402 is not in point. There, the judge had set no schedule for presenting

prepared testimony, and his ruling was clearly mooted by subsequent

events where Norwood, based on new contracts entered by NEP with

USGen NE, appropriately filed expert testimony and exhibits supporting

its position under the FERC’s rules, which was accepted by FERC.

> 13

Norwood had had a full hearing and adjudication of the matter.

Since Norwood’s experts had delineated the substance of the

Claims, the issue was whether those disputed issues of fact

required an adjudication on the merits by the Commission,

which the court admits Norwood never received. Id at 404.

REASONS FOR GRANTING THE WRIT

L The Court Of Appeals Erred In Not

Requiring FERC To Comply With Its

Own Regulations Governing The Imposition

Of Stranded Costs, Upon Which Norwood

Relied, Which Raises A Major Uncertainty

As To The Administration Of Open Access

Under Order 888

The Commission’s regulations relating to stranded costs

are clear and unambiguous:

Section 35.26 Recovery of Stranded Costs

By Public Utilities And Transmitting

Utilities

L Purpose. --

on 2 NE lic util ‘ting util sf

in order to recover stranded costs.

I. _ Definitions. -

Wholesale stranded costs means any legitimate,

prudent and verifiable cost incurred by a public

utility or a transmitting utility to provide service

(i) A wholesale requirements customer that

subsequently becomes, in whole or in part, an

n whol ission rvi

lic utili itti

ity

18 C.F.R. § 35.26; emphasis added.

NEP’s stranded cost filing relating to Norwood should

have been rejected because it did not meet this requirement.

Norwood has not been and will not subsequently become, in

whole or in part, “an unbundled wholesale transmission service

company” of NEP. The Decree and Order of the U.S. District

Court issued April 12, 1983, supra 3, expressly approved a

Settlement Agreement specifying that Norwood was a

“transmission customer” of Boston Edison Company and would

remain such a transmission customer responsible to pay

Edison’s transmission rates for the future.

Both the court of appeals and the FERC conceded that

the Commission’s regulations do not allow any stranded costs

to be applied to Norwood. App. 8a-10a; 202 F.3d at 399. The

Commission, in Order 888, expressly rejected any application of

stranded costs in a situation like Norwood’s:

. . .We will retain the definition of “wholesale

stranded costs” proposed in the Supplemental

Stranded Cost NOPR. We believe it would be

inappropriate to expand the definition to include

the situation where a wholesale requirements

customer (or a_ retail-turned-wholesale

customer) ceases to purchase power from a

utility without using the transmission services of

15

that utility. Any costs that the utility might

incur as a result of the requirements customer in

this scenario would be outside the scope of this

Rule... .

Order 888, FERC Regulations Preambles $31,036 at 31, 849

(1991-1996). See also, Order 888-A, FERC Regulations

- Preambles 931,048 at 30,348 (1997).

The court of appeals decision that the restrictions in the

regulations “are no more than conditions on stranded cost

recovery under that order . . .” (App. 10a-11a; 202 F.3d at 399)

flies in the face of the plain language of the regulation that “this

section establishes the standards that a public utility or

transmitting utility must satisfy in order to recover stranded

costs.” The Commission has no other regulation governing the

collection of stranded costs other than Order 888 relating to

that subject. Furthermore, the court of appeals admits that the

CTC filing by NEP against Norwood in this case is “for

recovery in r ...” Id; emphasis

added. Similarly, the Commission in its orders approving a

CTC for NEP’s affiliates, Mass. Electric and Narragansett

(which, unlike Norwood, are transmission customers of NEP)

involve the imposition of stranded costs under Order 888. New

England Power Co., App. 28a; 81 FERC 961,281, 62,371;

order denying rehearing, App. 34a; 83 FERC 961,265, 62,104

(“. . . the Settlement Agreements would amend Mass. Electric’s

and Narragansett’s service agreements under Tariff 1 to...

require the affiliated customers to pay NEPCO what is know as

a Contract Termination Charge (CTC) which is designed to

recover stranded costs associated with, inter alia, NEPCO’s

investment in generating assets, contractual commitments for

purchase power and fuel transportation, deferred costs and

other regulatory assets, plus a return on unrecovered costs.”));

emphasis added. NEP’s filing of its CTC as to Norwood also

16

stated it was designed to allow “NEP’s recovery of any stranded

costs consistent with the contract modifications.”

Furthermore, the court of appeals agreed that Norwood,

- even ifit were a transmission customer of NEP, would not have

been subject to the imposition of any stranded costs under the

Commission’s regulations because the Power Contract between

NEP and Norwood was extensively amended after July 11,

1994 and, at that time, NEP never inserted any condition for the

collection of stranded costs, as required by the Commission’s

regulations. App. 10a-11a; 202 F.3d at 399. Here again, the

court construed the Commission’s regulations only as relating

to “stranded cost recovery under that order [Order 888].” Jd.

But nowhere does the court cite any other rule,

regulation or legal authority authorizing the Commission to

impose stranded costs under any conditions, much less the facts

of the present case. In this regard, there is no precedent,

regulation or law in support of such a charge and, therefore, it

is unclear how the charge’s lawfulness can be sustained. See,

e.g, Atchinson, Topeka & Santa Fe Railway Co. v. Wichita

Board of Trade, 412 U.S. 800, 806 (1973); Distrigas of

Massachusetts Corp. v. FERC, 773 F.2d 1208, 1210-11 (1* Cir.

1984).

_ Thecourt of appeals decision raises great uncertainty as

to what constitutes stranded costs governing the actions of

parties under the open access regime ordered under Order 888.

The court’s ruling that the Commission’s stranded cost

Regulations in Section 35.26 which “establishes the standards

that a public utility or transmitting utility must satisfy in order

to recover stranded costs” do not apply raises a great cloud of

uncertainty over this key matter which will impair decisions

relating to open access. Review of these matters warrants

granting the writ.

17

Il. The Court of Appeals Decision Affirming

NEP’s CTC Is An Unlawful Award Of

Contract Damages Over Which FERC

Has No Authority, And Will Unduly

Disrupt And Complicate The Determina-

tion Of Breach Of Contract Damages

In The Courts

The court of appeals held that issues of breach of

contract and the damages therefor have been confirmed in this

case to be within the jurisdiction of the courts. App 11a; 202

F.3d at 400. However, the court’s inconsistent approval of

NEP’s CTC relating to Norwood establishes an irreconcilable

conflict with the jurisdiction of those courts to adjudicate the

cases before them.

The court appears to agree that FERC has no legal

authority to determine damages for a breach of contract.

Nothing in the FPA grants any such authority to the

Commission and its exercise would be inconsistent with the

principles of the Mobile-Sierra doctrine, infra at 18-21,

requiring that the contract agreement between the parties is

binding on the Commission in the absence of some overriding

public interest showing, which admittedly FERC has not done

in the present case.

The problem arises because the CTC is essentially

indistinguishable from contract damages. Since the court

concedes that NEP’s CTC relating to Norwood has the

appearance of contract damages, this poses the issue as to

whether it governs the courts in resolving the breach of contract

issues within their sole jurisdiction. If so, the CTC clearly

exceeds FERC’s jurisdiction under the FPA. If it does not bind

the courts, as the court of appeals opinion appears to infer, this

important issue of which jurisdiction has controlling power to

18

adjudicate contract damages which need to be resolved in the

interest of determining the proper jurisdiction of the courts vis

a vis FERC.

In raising, but not resolving this issue, the court of

appeals has demonstrated a fatal deficiency in the Commission’s

order approving NEP’s CTC relating to Norwood. The court

holds that FERC: |

... has not interpreted Norwood’s contract with

New England Power or determined whether

Norwood has breached the contract or has been

freed from the contract based on a breach by

New England Power.

App. 11a; 202 F.3d at 400. Without such a determination, the

setting of amounts to be paid under the contract by the CTC

exceeds the Commission’s authority under Sections 205 or 212

of the FPA because it does not meet the requirements of

Section 5 of the Administrative Procedure Act precluding

arbitrary and capricious adjudication. App. 125a; 5 U.S.C.

§706(2)(A).

The CTC cannot be based on reasoned decisionmaking

when the FERC admitted it has made no review or analysis of

the contract issues relating to the contract involved.

Ii The Court Of Appeals Erred In Not

Rejecting NEP’s Stranded Cost Filing

(CTC) Relating To Norwood As

Conflicting With This Court’s Long-

Established Mobile-Sierra Doctri

The FERC, in its order of February 25, 1998, App. 44a;

82 FERC 961,179, 61,660 (1998) approved NEP’s divestiture

\

19

to USGen/PG&E ofits jurisdictional power facilities (which did

not include its generator), and its termination of Tariff 1 service

to its distribution affiliates * and, at NEP’s request, converted

Norwood’s service under its Power Contract from a cost-of-

service based rate to fixed-rate contract. NEP subsequently

filed its stranded cost CTC relating to Norwood, which the

Commission approved in an order issued May 15, 1998. App.

103a; 83 FERC 961,174, (1998). Both of these orders

conflicted with the Power Contract between Norwood and NEP

approved by the antitrust Decree and Order of April 12, 1983.

Article 1 of the Power Contract provided that: “Under

the terms and conditions specified in this Contract, NEP agrees

to provide all-requirements electric service to Norwood under

NEP’s FERC Tariff. .. .” That tariff was specifically defined in

Articles II(c) and [XB of the Power Contract as those terms of

“the FERC Electric Tariff, Original Volume No. 1 of New

England Power Company, filed with FERC, not in conflict with

any terms of the Power Contract.” The meaning of that tariff,

as filed with the FERC and in effect from the date of the

contract up until FERC’s approval of NEP’s divestiture and

termination of Tariff 1 service to its affiliates in its order of

February 25, 1998, was that it was a cost-of-service regulated

rate. The Commission’s action in that order to convert

Norwood from a cost-of-service based rate to a fixed price rate

Clearly conflicted with the plain language of the Power

Contract. In addition, NEP’s subsequent filing of a stranded

cost CTC designed to require Norwood to make payments for

NEP to up to $78 million, even though NEP stopped providing

all-requirements electric service to Norwood under NEP’s

FERC tariff, also conflicted with the 1983 Power Contract.

. NEP’s affiliates, including Mass. Electric and

Narragansett, took 97 percent of NEP’s Tariff 1 service.

20

Norwood’s new FERC-ordered fixed-rate is

indistinguishable from the fixed-rate contracts held by this Court

to preclude any unilateral charge filed by the utility under the

FPA during their term. Federal Power Comm'n v. Sierra Pac.

Power Co., 350 U.S. 348, 355 (1956); United Gas Pipeline Co.

v. Mobile Gas Serv. Corp., 350 U.S. 322 (1956). The court of

appeals below agreed that these cases establishing the Sierra-

Mobile doctrine “prevents FERC from overriding a contract

unless it finds that the contract is contrary to the public

interest”, and that “the addition of the express option to

terminate earlier (at a specified price) can be viewed as

modifying the contract.” App. 12a; 202 F.3d at 400. However,

the court erroneously declined to apply the Sierra-Mobile

doctrine on the ground that the CTC was, in essence, only

applying a liquidated damage clause to the contract:

. . . The termination charge is certainly a

detriment but, absent a showing that its formula

is any worse than contract damages, it merely

spells out what would have been the law’s

remedy if Norwood had no option but simply

breached the existing contract.

Id. :

But this turns the Sierra-Mobile doctrine upside down.

The Power Contract contained no authorization for Norwood

to make any payments to NEP when NEP was not delivering

power, and included no liquidated damages clause that would

apply in the event either party breached the contract. The court

improperly authorizes NEP to unilaterally insert such a clause

that conflicts with the Power Contract authorizing only payment

for actual power service delivered by NEP. This is confirmed

by Article IXB of the Power Contract stating that, “in the event

of any conflict between the provisions of this Contract and the

21

provisions of NEP’s FERC Tariff, the provisions of this

Contract shall control.”

Thus, the court of appeals’ decision that NEP can

unilaterally add a provision to the contract that, “merely spells

out what would have been the law’s remedy if Norwood had no

option but simply breached the contract”(i.e., the imposition of

a liquidated damages clause), since contrary to the language of

the Contract requiring Norwood to only pay for power service

provided by NEP, wholly misapplies this Court’s Mobile-Sierra

doctrine.

IV. NEP’s CTC Should Have Been Rejected

As An Unlawful Retroactive Rate Under

This Court’s Decision In Arkansas-Louisiana

Gas Co. v. Hall And For Failing To Meet

FERC Regulations For New Rate Filings

NEP’s stranded cost filing violates the filed rate doctrine

because it changed NEP’s Tariff 1 retroactively after

Norwood’s service ended. After NEP’s divestiture, termination

of Tariff 1 service to its affiliates, and conversion of Norwood’s

cost of service rate to a fixed price rate approved by the

Commission’s order of February 25, 1998, Norwood notified

NEP on March 3, 1998 that it was shifting to a new power

supplier effective April 1, 1998. Norwood’s new contract with

Northeast Utilities was filed with the FERC and unconditionally

approved by it on April 22, 1998. This became the new filed

rate for Norwood. NEP never requested rehearing or contested

this order.

This Court in Arkansas-Louisiana Gas Co. v. Hall, 453

U.S. 571, 578 (1981) held that: “. .. The Commission may not

impose a retroactive rate alteration and, in particular, may not

22

order reparations, see, e.g., FPC v. Sunray DX Oil Co., 391

U.S. 9, 24 (1968). . .” This rule has been followed by a number

of circuits. Columbia Gas Transmission Corp. v. FERC, 831

F.2d 1135, 1140 (D.C. Cir. 1987); Electrical District No. 1 v.

FERC, 774 F.2d 490, 493 (D.C. Cir. 1985) (“The wholesale

purchasers of electricity cannot plan their activities unless they

know the cost of what they are receiving, . . . Providing the

necessary predictability is the whole purpose of the well-

established “filed rate” doctrine which forbids a regulated utility

to charge rates for its services other than those properly filed

with the appropriate regulatory authority”); Zown of Concord

v. FERC, 955 F.2d 67, 71 (D.C. Cir. 1991).

The court of appeals below improperly sought to

distinguish these precedents on the ground that the “tariff

change gives Norwood an option it did not have before to

cancel future purchases on short notice by paying a termination

charge — hardly a retroactive increase in charges for past

purchases,” App. 13a; 202 F.3d at 400-401 (emphasis in

original), but this directly conflicts with the timing of NEP’s

CTC filing. This is completely inaccurate as Norwood had

departed NEP with FERC’s approval given on April 22, 1998,

long before FERC’s approval of NEP’s CTC given on May 15,

1998. Thus, Norwood had no option available to it at the time

the new contract was entered into with Northeast Utilities. In

addition, NEP and the court characterized NEP’s CTC as a

“stranded cost recovery in the tariff.” ° Hence, the CTC, in fact,

seeks to charge Norwood for prior costs incurred by NEP

which it now alleges have been stranded. These costs are not

new costs for the future but old prior costs which have not been

collected. This was also admitted by the court below when it

described NEP’s CTC:

° App. lla; 202 F.3d at 400; see also, supra, at 15.

23

.. . It is a formula-driven charge to recover

certain projected losses to New England Power

caused by not supplying electricity and

App. 13a; 202 F.3d at 401 (emphasis added). Thus, the facts

are clear that NEP’s CTC filing seeks to recover prior incurred

costs by NEP which that company claims it incurred because of

its own voluntary and unrequested decision to depart from the

electric generation business, *° which it had not legally been

authorized to collect up to the point of its departure from the

business.

Since NEP’s rates on file at the time Norwood entered

its new service agreement on March 4, 1998 did not provide

Norwood the legal notice necessary under the filed rate doctrine

to the effect that Norwood would be subject to those charges,

the court of appeals erred in accepting NEP’s proposed

amendment which violated the filed rate doctrine and the ban

against retroactive changes in the rates on file with the

Commission.

Conversely, ifthe court ofappeals was somehow correct

that the CTC was a “future” rate applicable to Norwood, the

court then erred in not requiring NEP to follow the FERC’s

regulations governing any new rates under Sections 212 or 205

of the FPA in 18 C.F.R. § 35.13.

NEP’s CTC sought to impose on Norwood a flat charge

of $7,388,083 per year, or a total of over $78 million for power

not delivered.

© See fn.2, supra at 3-4.

24

The Commission’s regulations in 18 C.F.R . §35.13(a)

require “every public utility shall file the information required by

this section . . . at the time it files . . . all or part of a rate

schedule t to supersede, supplement or otherwise change the

rovisions of hedule fil h i

§35.1”(emphasis added) This requires a detailed cost-of-

service analysis of the new changed rate, which admittedly,

NEP never filed. Under established Commission precedents,

the failure to comply with the requirements of §35.13 of the

Commission’s regulations should have been summarily rejected

by the Commission. Southern California Edison Co. v. FERC,

686 F.2d 43, 46-47 (D.C. Cir. 1982); Consumer Power Co., 47

FERC 161,283 (1988), reh ’g denied, 48 FERC 61,113 (1989).

V. The Court Of Appeals Erred In Sustaining

The FERC’s Orders Refusing To Address

The Merits Of Holding A Hearing On

Norwood’s Claims That NEP’s CTC

Relating To Norwood And NEP’s Denial

Of Standard Offer Wholesale Service

Constituted Undue Discrimination

In Violation Of Sections 212 and 205(b)

Of The FPA

Both the FERC and the court of appeals conceded that

NEP’s CTC relating to Norwood was twice as high as the CTC

NEP had agreed to enter with its distribution company affiliates,

Mass. Electric and Narragansett. App. 15a; 202 F.3d at 401-

402. Norwood timely filed affidavits by expert witnesses in the

” The court’s reference in a footnote to 18 C.F.R.

§35. se -nuhaast pra ma eseec alta 095 96>

requirements.

25

FERC proceedings establishing these facts, but the matters were

never discussed on the merits by the Commission in its orders

below and the FERC denied any hearing on the issues.

In the first case before the Commission, Norwood

presented evidence through its expert, Robert G. Towers, that

the stranded cost charges under the CTC agreed to by NEP

with its affiliates, Mass. Electric and Narragansett, would result

in the payment of stranded costs of $1.626 billion in excess of

those authorized by the Commission under Order 888.

Norwood also submitted the affidavit of Dr. John W. Wilson

concluding that the agreement between NEP and USGen to fix

prices at which USGen would sell back wholesale electric

power to NEP’s affiliates, would escalate by 60 percent over

the seven year period 1998 to 2004 and would distort the

competitive market prices. This would directly harm Norwood

and would “effectively foreclose Norwood from potential

competitive wholesale power market and destroy Norwood’s

ability to provide its own retail customers with alternative,

competitive supply options.” The Commission refused to hold

a hearing in either case (dealing with NEP’s divestiture filing

under Section 203 of the FPA), despite extensive affidavits

presented by Norwood.

In the third case before the Commission dealing with

NEP’s CTC filing relating to Norwood, the Commission again

accepted NEP’s filing without suspension or hearing, and

2 The court of appeals cite to a ruling by the administrative

law judge in the first of the three dockets before FERC (ER97-678-000)

is completely irrelevant because it was in the early stage of the

proceeding and Norwood legally submitted affidavits based on the

subsequent contract entered by NEP with USGen transferring the

standard offer service to that company, which were accepted by the

Commission. App. 29a, 30a-3la; 81 FERC 961,281, 62,371 (1997).

26

offered no analysis of Norwood’s expert affidavits which

established that the CTC to Norwood was twice as high, nor did

it offer analysis on the issue of discrimination extensively argued

by Norwood in its pleadings. The Commission made no

evaluation of the matter on the merits other than to state that,

“unlike the CTC approved in the tariff amendment, the CTC’s

approved in the settlement proceeding was a product of

negotiated settlement,” citing Cities of Bethany, et al. v. FERC,

727 F.2d 1131 (D.C. Cir. 1984), cert. denied 469 U.S. 915. The

court of appeals affirmed this as a basis for FERC’s refusal to

even discuss or consider the discrimination claims raised by

Norwood in its affidavits. However, Cities of Bethany does not

justify the FERC’s conduct as sustained by the court of appeals

in the present case for a number of reasons.

First, the FERC allowed contesting parties a hearing

before a presiding administrative law judge in which all of the

parties participated and the full merits of all of the factual issues

were fairly investigated. 727 F.2d at 1134-5.

Second, Norwood here has alleged anticompetitive

effects based on having a CTC twice as high as NEP’s CTC to

its affiliates, as well as denial of standard offer service. The

court in Cities of Bethany agreed that such allegations would

require the Commission to consider such claims. 727 F.2d at

1140-1141.

In the present case, Norwood did allege and present

expert affidavits to the FERC that the difference in the CTC

charge by Norwood in relationship to its much lower CTC

charges to its affiliates, and the below market standard offer

fixed prices Cenied to Norwood, are designed to give NEP’s

affiliates a competitive advantage over Norwood in a retail

market in which both Norwood and NEP’s affiliates compete

for retail customers.

27

Thus, Norwood properly presented its material issues of

fact through expert affidavits to the FERC which did not rule

that those issues were not presented, but deemed them

irrelevant.

Since the court below now agrees that the evidence is

relevant, App. 16a; 202 F.3d at 402, the proper remedy is a

remand to require FERC to address those factual issues under

the anti-discrimination sections of the FPA.

Under long-standing FERC practice and procedure, the

raising of issues of material fact is alone sufficient to require

FERC to undertake procedures for their adjudication. Here,

Norwood did more, by voluntarily submitting expert affidavits

establishing the genuine issues of fact. The Commission never

stated that Norwood had not raised disputed genuine issues of

material fact on the present issues, but simply ruled that those

facts were irrelevant based on its rulings. The court of appeals

has ruled that the discrimination issues are relevant. The FERC

has never considered these matters on their merits, ordered any

paper hearing proceedings or any proceeding, nor did it

consider on their merits these factual contentions, which it

summarily dismissed. The court of appeals improperly treated

the matter as though those full hearings had taken place.

28

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

Charles F. Wheatley, Jr.

Counsel of Record for Petitioner

Wheatley & Ranquist

34 Defense Street

Annapolis, MD 21401

(301) 261-8608

(301) 261-8699

Kenneth M. Barna

Alan K. Posner

Rubin and Rudman

50 Rowes Wharf

Boston, MA 02110

May 30, 2000

Pen Mo

Pai | :