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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2000
- **Citation:** 531 U.S. 818

## Text

(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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RUE 6A ATA ERR 2
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 | :

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386018_0792%3A1. Public record. Not legal advice.