Revision of Fuel Cost Adjustment Clause Regulation Relating to Fuel Purchases From Company-Owned or Controlled Source

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM93-24-000; Order No. 600]

Revision of Fuel Cost Adjustment Clause Regulation Relating to

Fuel Purchases From Company-Owned or Controlled Source

AGENCY: Federal Energy Regulatory Commission.

ACTION: Final Rule.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is

amending its regulations to state that where a regulatory body has

jurisdiction over the price of fuel purchased from a company-owned or

controlled source, and exercises that jurisdiction to approve such

price, the Commission will presume, subject to rebuttal, that the cost

of fuel so purchased is reasonable and includable in the fuel

adjustment clause.

EFFECTIVE DATE: This final rule is effective November 6, 1998.

FOR FURTHER INFORMATION CONTACT: Wayne W. Miller, Federal Energy

Regulatory Commission, Office of the General Counsel, 888 First Street,

N.E., Washington, D.C. 20426, (202) 208-0466.

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of

this document in the Federal Register, the Commission also provides all

interested persons an opportunity to inspect or copy the contents of

this document during normal business hours in the Public Reference Room

at 888 First Street, N.E., Room 2A, Washington, D.C. 20426.

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First Street, N.E., Washington, D.C. 20426.

Before Commissioners: James J. Hoecker, Chairman; Vicky A. Bailey,

William L. Massey, Linda Breathitt, and Curt Hebert, Jr.

I. Introduction

The Federal Energy Regulatory Commission (Commission) is amending

the second sentence of 18 CFR 35.14(a)(7) to make clear that where a

regulatory body has jurisdiction over the price of fuel purchased by a

utility from a company-owned or controlled source, and exercises that

jurisdiction to approve such price, the cost of fuel so purchased shall

be presumed, subject to rebuttal (rather than conclusively ``deemed''),

to be reasonable and includable in the fuel adjustment

clause.1

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\1\ This Final Rule addresses only the fuel adjustment clause

and fuel cost recovery through the fuel adjustment clause. It does

not address Commission review of fuel costs and fuel cost recovery

in base rates.

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II. Discussion

In the Notice of Proposed Rulemaking (NOPR), issued September 24,

1993,2 the Commission explained that 18 CFR 35.14(a)(7) has

been interpreted by the United States Court of Appeals for the District

of Columbia, in Ohio Power Company v. FERC, 954 F.2d 779 (D.C. Cir.),

cert. denied, 506 U.S. 981 (1992) (Ohio Power), to establish a

conclusive presumption that the price of fuel purchased from an

affiliate, subject to the jurisdiction of another regulatory body, is

just and reasonable. The Commission stated that the proposed revision

to Sec. 35.14(a)(7) was intended to provide that the Commission would

instead employ a rebuttable, rather than a conclusive, presumption, and

thus make clear that the Commission had no intention (through a

conclusive presumption of reasonableness) of abdicating its statutory

responsibility to independently review wholesale rates (including fuel

adjustment clauses) subject to its jurisdiction to ensure that they are

just and reasonable. The Commission explained, however, that the

proposed revision would not affect the other, independent basis of the

Ohio Power decision; i.e., when a public utility member of a registered

public utility holding company system buys fuel from an affiliate in

accordance with section 13(b) of the Public Utility Holding Company Act

of 1935 (PUHCA),3 the Commission may not deny recovery of

those costs in the utility's wholesale rates.

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\2\ Revision of Fuel Cost Adjustment Clause Regulation Relating

to Fuel Purchases From Company-Owned or Controlled Source, 58 FR

51259 (October 1, 1993), IV FERC Stats. & Regs. para. 32,502 (1993).

\3\ 15 U.S.C. 79m(b).

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The Commission received comments on the NOPR from the following:

Municipal Resale Service Customers of Ohio Power Company (Municipal

Customers); Coalition for Full Oversight and Regulation of Public

Utility Holding Companies and Affiliates (Coalition FOR PUHCA, or

Coalition); Florida Cities (including the Florida Municipal Power

Agency and the Cities of Alachua, Bartow, Havana, Mount Dora, Newberry,

Quincy, and Williston, Florida); Registered Systems (including American

Electric Power Service Company, GPU Service Corporation and New England

Power Company, each of which is associated with a registered public

utility holding company under PUHCA); Public Utilities Commission of

Ohio (Ohio Commission); Allegheny Power Service Corporation (Allegheny)

(on behalf of Monongahela Power Company, Potomac Edison Company and

West Penn Power Company, wholly-owned subsidiaries of Allegheny Power

System, Inc., a registered public utility holding company under PUHCA);

the law firm of Paul, Hastings, Janofsky & Walker (Paul, Hastings);

Transok, Inc. (Transok) (a wholly-owned subsidiary of Central and South

West Corporation, a registered public utility holding company under

PUHCA); Wisconsin Wholesale Customers (Wisconsin Customers) (consisting

of Wisconsin Public Power Incorporated SYSTEM, Badger Power Marketing

Authority, 41 municipal electric systems and four rural electric

cooperatives); Edison Electric Institute (EEI); American Public Power

Association (APPA); West

[[Page 53806]]

Virginia Public Service Commission and the National Association of

Regulatory Utility Commissioners (NARUC).

While either supportive of or at least neutral concerning the

intention of this rulemaking, the commentors suggest various

modifications to the proposed rule. The suggested modifications

principally involve three concerns: (a) whether the relevant sentence

of Sec. 35.14(a)(7) should simply be eliminated altogether, rather than

revised to set forth a rebuttable presumption; (b) the meaning of the

term ``regulatory body;'' and (c) retroactivity.

A. Need for the Change in the Regulation

In light of Ohio Power, the Commission believes that it is

necessary to amend 18 CFR 35.14(a)(7) to clearly specify that when a

regulatory body has jurisdiction over the price of fuel purchased by a

utility from a company-owned or controlled source and exercises that

jurisdiction by approving such price, the cost shall be ``presumed,

subject to rebuttal'' (rather than conclusively ``deemed'') to be

reasonable and includable in the fuel adjustment clause. By amending

Sec. 35.14(a)(7) in this manner, the Commission is making clear that it

has no intention of abdicating its regulatory responsibilities under

sections 205 and 206 of the Federal Power Act (FPA), 16 U.S.C. 824d,

824e.

As the Commission previously stated in the NOPR:

[t]he Commission has an independent obligation under sections 205(a)

and 206(a) of the FPA to ensure that rates are ``just and

reasonable.'' This obligation requires the Commission to

independently review rates subject to its jurisdiction to ensure

that they are ``just and reasonable.'' While the Commission can give

deference to decisions of another regulatory body and still fulfill

its statutory obligation, it cannot in effect delegate its

jurisdictional responsibilities to others. In addition the

Commission must exercise greater regulatory scrutiny when affiliate

fuel costs are at issue; while there may be a presumption of

reasonableness as to costs incurred in arm's-length bargaining,

there is no such presumption of reasonableness as to affiliate costs

* * *. Thus, the Commission believes that Sec. 35.14(a)(7) should be

amended to provide that for affiliate transactions the presumption

of reasonableness provided for by the regulation is merely

rebuttable and is not conclusive.

Amending Sec. 35.14(a)(7) is also consistent with the

Commission's mandate under section 205(f) of the FPA to undertake

review of automatic adjustment clauses, including fuel cost

adjustment clauses, to ensure ``economical purchase and use of

fuel.'' Given an express Congressional mandate to ensure

``economical purchase and use of fuel,'' the Commission believes

Sec. 35.14(a)(7) should be amended to eliminate what otherwise would

be an absolute bar to Commission inquiry into affiliate fuel

prices.4

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\4\ NOPR, IV FERC Stats. & Regs. at 32,803-04 (citations and

footnotes omitted).

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B. Response to Comments: Whether the Presumption Should Be Eliminated

The Municipal Customers, the Coalition, the Wisconsin Customers and

NARUC request the Commission to eliminate any presumption of

reasonableness of the price of fuel purchased from company-owned or

controlled sources, even if that price has been previously reviewed and

approved by another regulatory body. 5 This can be done,

they argue, by eliminating entirely the relevant sentence of

Sec. 35.14(a)(7), rather than by revising it to provide for a

rebuttable presumption. By eliminating the relevant sentence, they

argue, this Commission would be able to exercise its full statutory

authority over affiliate fuel costs passed through wholesale fuel

adjustment clauses, while still continuing to take the relevant

decisions of other regulatory bodies into account on a case-by-case

basis.

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\5\ The Ohio Commission notes that the proposed rule does not

correct the essential jurisdictional problem created as the result

of Ohio Power, and urges the Commission to continue to direct its

efforts toward legislation required to solve this problem. See also

NOPR, IV FERC Stats. & Regs. at 32,803 n.1, 32,804 n.7.

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In this respect, the Municipal Customers also argue that it is not

clear when or to what the presumption of reasonableness attaches

because many state regulatory authorities have standards which differ

from this Commission's FPA standards. They maintain that elimination of

the presumption altogether would avoid litigation over when and to what

deference attaches.6 Additionally, according to NARUC, the

proposal would create a rebuttable presumption of reasonableness only

when a state commission has jurisdiction over and approves the price of

fuels sold by an affiliated supplier to a public utility. NARUC points

out, however, that state commissions do not exercise authority over a

fuel seller's prices, but, instead, regulate a fuel buyer's ability to

recover prudent expenditures, i.e., recovery of fuel costs. NARUC

states that while the recovery of a public utility buyer's costs in its

rates may be determined by reference to competitive prices available in

the marketplace, the affiliate seller's actual prices are not set by

the state commission.

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\6\ The Coalition also argues that to base a rebuttable

presumption on another agency's review, without independently

evaluating the quality of that review, is an abdication of this

Commission's authority.

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The Municipal Customers and the Coalition further argue that

amending Sec. 35.14(a)(7) to set forth a rebuttable presumption would

impose an unreasonable burden on the public utility's ratepayers who

seek to challenge that utility's rates. Because a utility may, for

example, request that its records be kept confidential,7 the

ratepayers may not be able to obtain access to information needed to

challenge the justness and reasonableness of affiliate fuel

costs.8 On the other hand, they argue, elimination of the

relevant sentence of Sec. 35.14(a)(7), and thus elimination of any

presumption, would place the burden of demonstrating justness and

reasonableness on the utility, ensuring comparable treatment between

the rates of utility subsidiaries of registered public utility holding

companies and the rates of all other utilities.

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\7\ 18 CFR 388.112.

\8\ The Municipal Customers and the Coalition submit that the

Commission's policy is to deny requests for hearing unless

complainants meet their initial burden of coming forward and

presenting evidence casting serious doubt as to the reasonableness

of the challenged costs, citing Municipal Resale Service Customers

v. Ohio Power Co., 63 FERC para. 61,336 at 63,201 (1993). The

Municipal Customers and the Coalition argue, however, that

complainants cannot meet this burden unless a hearing is first

ordered and discovery of the company's documents and data is

thereafter obtained. Thus, they contend, complainants are in a

``chicken and egg'' quandary, or a ``Catch-22'' situation, and have

no practical way to rebut the presumption.

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In this regard, the APPA further requests that this Commission make

FERC Form 580 (General Interrogatory on Fuel and Energy Purchase

Practices),9 and FERC Form 423 (Monthly Report of Cost and

Quality of Fuels for Electric Plants) 10 available to

[[Page 53807]]

the public in the absence of ``conclusive evidence'' that disclosure of

the information on those forms will damage the business interests of

the reporting utility. APPA argues that without the information in

these forms, the Commission's staff, as well as the general public, are

unable to rebut the presumption of reasonableness of fuel costs.

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\9\ The Public Utility Regulatory Policies Act of 1978 (PURPA),

16 U.S.C. 2601, et seq., amended section 205 of the FPA, 16 U.S.C.

824d, by adding subsection (f)(2), which requires the Commission to

review, at least once each two years, the practices of public

utilities using automatic adjustment clauses to ensure that each

such public utility makes efficient use of resources (including

fuel). 16 U.S.C. 824d(f)(2). In response, the Commission instituted

an investigation, in Docket No. IN79-6, of practices under automatic

adjustment clauses. See Investigation of Practices Under Automatic

Adjustment Clauses, 7 FERC para. 61,090 (1979); see also

Consolidated Edison Company of New York, 39 FERC para. 61,329

(1987); Kentucky Utilities Company, 29 FERC para. 61,159 at 61,338

(1984). Pursuant to this investigation, the Commission (through its

staff) has issued interrogatories on Form 580 and its predecessors

(Forms 560 and 565) every two years, beginning in 1979. The Form 580

interrogatories are currently mailed to the over 120 public

utilities with significant fuel trades and with wholesale rates that

may contain automatic adjustment clauses.

\10\ A separate form must be completed by every electric power

producer for each of its electric generating plants (including

leased plants) that has a rated steam-electric generating capacity

of 50 MW or greater. 18 CFR 141.61.

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Similarly, if the Commission decides to adopt a rebuttable

presumption, the Municipal Customers request that in addition the

Commission also revise the fourth sentence of Sec. 35.14(a)(7). The

Municipal Customers request that the Commission require the filing of

all contracts, terms, conditions, and procedures (and all amendments)

relating to the purchase of fuel from company-owned or controlled

sources, whether or not the prices are subject to the jurisdiction of

another regulatory body. This revision, the Municipal Customers argue,

will allow ratepayers access to contracts where prices are subject to

regulatory authority (and thus to a presumption of reasonableness) so

that the ratepayers can have an opportunity to rebut the

presumption.11

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\11\ The fourth sentence now reads as follows: With respect to

the price of fuel purchases from company-owned or controlled sources

pursuant to contracts which are not subject to regulatory authority,

the utility company shall file such contracts and amendments thereto

with the Commission for its acceptance at the time it files its fuel

clause or modification thereof. (emphasis added)

The Municipal Customers propose the following modification: With

respect to the price of fuel purchases from company-owned or

controlled sources pursuant to contracts or other terms, conditions,

and procedures, whether subject to another regulatory authority or

not, the utility company shall file such contracts, terms,

conditions, procedures and amendments thereto with the Commission at

the time it files its fuel clause (or within 30 days of the

effective date of this regulation if the fuel clause is already on

file) or modifications thereof. (emphasis added)

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The Florida Cities argue that the Commission should clearly state

that the proposed revision represents a clarification that this

Commission will not conclusively presume reasonable affiliate fuel

costs subject to state jurisdiction.12 Similarly, the

Wisconsin Customers argue that the rule as currently drafted could be

read to limit this Commission's ability to review costs related to

wholesale sales when a regulatory body dealing with retail jurisdiction

has approved the fuel purchases at issue.

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\12\ The Florida Cities point to an ``Order on Motion of Florida

Cities to Compel Production of Certain Coal-Related Data,'' issued

July 16, 1993 in Florida Power Corporation, Docket Nos. ER93-299-000

and EL93-18-000. The presiding administrative law judge rejected

Florida Power Corporation's (Florida Power) argument that,

consistent with Ohio Power, Sec. 35.14(a)(7) should be construed as

conclusively foreclosing this Commission from deciding for itself

the prudence and reasonableness of the cost of fuel purchased from

Florida Power's affiliates since the Florida Public Service

Commission (Florida Commission) had ruled on those issues. The judge

found that if Sec. 35.14(a)(7) is construed, as claimed by Florida

Power, as conclusively foreclosing this Commission from ruling on

the justness and reasonableness of costs associated with the

utility's fuel purchases from affiliates, it would ``stand the FPA

on its head.'' The judge found that, under Florida Power's

construction of Sec. 35.14(a)(7), this Commission would have

unlawfully delegated to the state commission, and thus abdicated,

its statutory responsibility under the FPA. The judge thus limited

the application of Ohio Power's interpretation of Sec. 35.14(a)(7)

to situations involving FERC/SEC jurisdiction only. He stated the

following, at page 7 of the order:

Given the SEC's independent statutory authority under PUHCA to

set inter-affiliate fuel sales prices for all purposes it would be

lawful if that authority was recognized by FERC in 35.14(a)(7).

However, this is not the case if the section were applied to the

[Florida Commission] since that agency lacks any federal statutory

authority over affiliate fuel sales prices and at most it has

Florida State authority over such prices for retail rate setting

purposes only.

It would be anomalous if the section were applied to foreclose

FERC determination of the reasonableness and prudence of affiliate

fuel purchases. Such transactions are not arms length and are more

suspect than fuel purchases from non-affiliates. Yet section

35.14(a)(7), on its face applies to affiliate but not to non-

affiliate fuel purchases. We should not extend that anomalism by

interpreting 35.14(a)(7) in the manner sought by Florida Power.

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Commission Ruling

We decline to eliminate the presumption. The Commission's intent in

this proceeding was to address Ohio Power's reading of Sec. 35.14(a)(7)

as creating a conclusive presumption. The revision adopted here

accomplishes that--creating a rebuttable presumption when another

regulatory body both has and exercises its jurisdiction to approve the

price of affiliate fuel.

This is not to suggest that we are either abdicating our

responsibility or doing more than we are permitted. While we will

retain a presumption, it will apply only when another regulatory body

has jurisdiction and exercises that jurisdiction by approving the price

of the affiliate fuel, and even in that circumstance it will be

rebuttable; the reasonableness, and thus the recovery in Commission-

jurisdictional rates, of affiliate fuel costs will ultimately be for

the Commission to determine.13

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\13\ The FPA requires this Commission, not other regulatory

bodies such as state commissions, to determine the justness and

reasonableness of wholesale rates. This Commission will not and,

indeed, cannot tie itself to state determinations involving retail

rates, but must independently determine the justness and

reasonableness of wholesale rates. As we stated in Southern

California Edison Co., Opinion No. 361, 55 FERC para. 61,074 at

61,223, reh'g denied, Opinion No. 361-A, 56 FERC para. 61,117

(1991), petition for review denied, City of Vernon v. FERC, 983 F.2d

1089 (D.C. Cir. 1993), ``the Commission must fulfill its statutory

responsibilities and cannot defer to the actions of a state

regulatory agency. Even where the wholesale customer agrees for

wholesale ratemaking purposes to abide by the decision of a state

ratemaking authority, this Commission has an independent

responsibility to review such an agreement.''

Accord, Bangor Hydro-Electric Co., 35 FERC para. 61,200 at

61,473 (1986) (in refusing to bind itself to state treatment of

Seabrook-related abandonment charges, the Commission stated: ``this

Commission cannot simply rely on the state commission's evaluation .

. . ; rather, we must make our own, independent evaluation.'');

Union Electric Co., 36 FERC para. 61,234 at 61,573 (1986) (prudence

disallowances by, inter alia, three state commissions do not support

a finding that wholesale rates that include contested costs were

substantially excessive and warranted a five-month suspension; the

Commission stated: ``[a]s to the decisions of the State commissions,

while they may bring into question the prudence of [a utility's]

expenditures, they are not controlling upon this Commission for

suspension or other purposes.''). Cf. Alabama Power Co. v. FERC, 993

F.2d 1557, 1564 (D.C. Cir. 1993) (``We know of no doctrine that

requires the Commission, in determining a just and reasonable rate

for an off-system sale, to give dispositive weight to the fact that

a state commission has assumed, for purposes of establishing native

load rates, that the off-system rate would be higher. In other

contexts, the Commission has not done so, and we see no reason why

it should here'').

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Likewise, we are not doing more than we are permitted to do. The

D.C. Circuit's alternate ground for its decision in Ohio Power--that

this Commission is barred, in the case of affiliate fuel purchases

among the members of registered public utility holding company systems

(where, under PUHCA, the SEC is authorized to review the prices of such

purchases), from either altering the affiliate fuel price or from

disallowing full recovery of the affiliate fuel price in Commission-

jurisdictional rates--remains. That alternative ground continues to bar

Commission review of both the reasonableness of registered public

utility holding company affiliate fuel costs, and of the recovery of

such costs in Commission-jurisdictional rates.

The relevant sentence of Sec. 35.14(a)(7) refers to the price of

affiliate fuel being subject to the jurisdiction of a regulatory body,

and that sentence as amended here also refers to the price of affiliate

fuel being approved by such a body. NARUC, however, notes that the

states normally do not possess jurisdiction to regulate the price of

affiliate fuel, i.e., the price charged by the fuel supplier (as

opposed to rate recovery of the costs of affiliate fuel). NARUC then

questions the precise reach of that sentence in Sec. 35.14(a)(7) and of

the presumption found there. Section 35.14(a)(7) has always drawn an

express distinction between the price charged for affiliate fuel by the

affiliate fuel supplier, and the cost of that affiliate fuel incurred

by

[[Page 53808]]

the public utility buyer and passed through to ratepayers. Thus, the

second sentence has always provided that only when the ``price'' of

affiliate fuel is subject to the jurisdiction of a regulatory body,

``such cost'' was deemed to be reasonable and includable in the fuel

adjustment clause.14 This distinction pre-dated Ohio Power,

and the Commission has not proposed to change it, and is not changing

it, here.

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\14\ See 954 F.2d at 783 (``adopt[ing] Judge Mikva's approach''

that ``[u]nder the regulation, because the prices of Ohio Power's

fuel from its affiliate are subject to the jurisdiction of the SEC,

such costs must be conclusively presumed reasonable,'' and

``agree[ing] with Judge Mikva that `section 35.14(a)(7) establishes

as a policy matter, that if another regulatory body has already

passed on the fuel price, then FERC will abide by that

determination' ''); accord, id. at 784 (``By precluding FERC from

declaring a SEC-approved price unreasonable, our interpretation of

Sec. 35.14(a)(7) provides Ohio Power with some succor . . . .''),

786 (``[W]e hold that 18 CFR Sec. 35.14(a)(7) prevents FERC from

finding the coal price approved by the SEC not includable in

determining Ohio Power's wholesale rate.''); see also Fuel

Adjustment Clauses in Wholesale Rate Schedule, 52 FPC 1304, 1306

(1974) (in explanatory discussion of text of Sec. 35.14(a)(7),

Commission distinguished between price paid to a fuel supplier and

costs incurred by a utility buyer); Wholesale Rate Schedules Fuel

Adjustment Clause, 39 FR 28,910, 28,911 (1974) (in Notice of

Proposed Rulemaking, in discussing proposed text of what would

become Sec. 35.14(a)(7), Commission drew distinction between prices

charged on the one hand and costs incurred and recovered in rates on

the other hand).

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Several of the commentors object to the continued use of a

presumption because complaining parties will not have access to the

data necessary to challenge the utility's recovery in rates of the

price of affiliate fuel, and utilities may, in fact, invoke claims of

privilege to keep this data confidential.15 Put simply, our

past experience suggests that there does not seem to have been any

unreasonable barriers to complainants making a sufficient showing to

justify an investigation before Ohio Power, and we are not aware of any

reason why that may have changed since Ohio Power. 16

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\15\ On November 24, 1993, in Treatment of Responses to FERC

Form No. 580 Interrogatories, 58 FR 63312 (Dec. 1, 1993), IV FERC

Stats. & Regs., Proposed Regulations para. 32,503 (1993), the

Commission issued a Notice of Proposed Rulemaking in which it

proposed to amend its regulations to codify an existing requirement

that each public utility with a steam-electric generating station of

50 megawatts or more file responses to FERC Form 580

interrogatories, and explicitly disqualifying these responses to

Form 580 interrogatories from claims of privilege under 18 CFR

388.112. The Commission also proposed to make public past responses

to Form 580 interrogatories. That Notice is pending.

\16\ E.g., Kentucky Utilities Company, 29 FERC para. 61,159

(1984) (order on complaint instituting investigation regarding fuel

costs). While this particular case involved non-affiliate fuel

costs, we are not aware of any reason why access to the relevant

information would be any more or less difficult in the case of

affiliate fuel costs.

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C. Response to Comments: The Meaning of the Term ``Regulatory Body''

Allegheny, EEI, the Registered Systems, Paul, Janofsky and Transok

contend that the Commission's use of the term ``regulatory body'' in

the NOPR and the proposed revision is confusing, since that term can be

construed to apply to the SEC as well as to state commissions. They

request that, to eliminate confusion and avoid litigation, the

Commission expressly acknowledge in the text of Sec. 35.14(a)(7) that

it has no authority to review affiliate fuel prices for registered

public utility holding company systems.17

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\17\ The Municipal Customers, the Coalition and NARUC also argue

that it is unclear what is meant by the term ``approve'' as it

applies to SEC determinations, since the SEC currently conducts no

review of individual affiliate fuel contracts and makes no findings

regarding the reasonableness of affiliate fuel prices.

Given the alternate ground for decision in Ohio Power, discussed

above, the issue of whether the SEC has ``approved'' affiliate fuel

prices within the meaning of Sec. 35.14(a)(7) as amended here is

presently moot. As to whether other regulatory bodies may have

``approved'' such prices, that is a matter best left to

determination on a case-by-case basis.

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Commission Ruling

The term ``regulatory body'' appears in the current

Sec. 35.14(a)(7), and we did not propose any change to it. We thus

decline to modify the proposed rule in the manner requested by these

commentors. We also believe that at this time there is no reason to

distinguish expressly among various regulatory bodies in the text of

the regulation. Our silence, however, should not be construed to imply

a failure on our part to follow the alternate ground for decision in

Ohio Power, discussed above--i.e., that in instances involving a

conflict between this Commission and the SEC over affiliate fuel prices

for registered public utility holding company systems under Ohio Power,

the SEC ruling controls.18

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\18\ See, e.g., Municipal Resale Service Customers v. Ohio Power

Company, 62 FERC para. 61,207, reh'g denied, 64 FERC para. 61,034

(1993), petition for review denied, Municipal Resale Serv. Customers

v. FERC, 43 F.3d 1046 (6th Cir. 1995) (declining to order an

investigation of affiliate fuel prices for registered public utility

holding company as a consequence of Ohio Power).

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D. Response to Comments: Retroactivity Concerns

The Florida Cities observe that Ohio Power unsettled the otherwise

settled law that affiliate fuel purchases subject to state jurisdiction

were also subject to this Commission's review for wholesale rate

purposes. The Florida Cities argue that the Commission should provide

for retroactive application of the proposed revision, or at least its

application to pending and future cases involving past fuel clause

collections, to ensure that the Commission's responsibilities are not

abandoned with regard to past fuel adjustment clause collections. If

the Commission decides not to make the proposed rule retroactive, the

Florida Cities request that the Commission steer clear of prejudging

the issue of the applicability of Ohio Power to affiliate fuel

transactions that have been subject to state retail ratemaking

jurisdiction. Instead, the Florida Cities argue, this issue should be

addressed when it is squarely presented to the Commission in a pending

case.19

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\19\ The Florida Cities argue that such an issue was pending in

Florida Power Corporation, Docket Nos. ER93-299-000 and EL93-18-000.

See supra n.11. This Commission, by letter-order issued March 30,

1994 in Florida Power Corporation, 66 FERC para. 61,365 (1994),

approved a settlement agreement filed by the parties and terminated

these dockets.

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The Registered Systems request that if the Commission, as the

result of new legislation, ultimately is afforded jurisdiction over the

type of transaction at issue in Ohio Power, it should only apply the

proposed revision of Sec. 35.14(a)(7) to affiliate fuel contracts

entered into after both the conferral of jurisdiction on this

Commission through new legislation and the effective date of this rule.

The Registered Systems explain that prior investments by registered

public utility holding company systems in affiliate fuel operations

were based on the SEC's findings that the fuel supply arrangements were

in the public interest. Moreover, they argue, since 1974, the

registered public utility holding company systems made these

investments knowing that this Commission's regulation ensured the

inclusion in the utility's wholesale fuel adjustment clause of the

prices paid pursuant to SEC approval; the Registered Systems object to

retroactive application of a rule change that would result in cost-

trapping. Further, the Registered Systems argue, considerations of

fairness preclude altering profoundly the rules upon which investors

relied when they financed the previously-approved

arrangements.20

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\20\ The Registered Systems also note that all of their

affiliate fuel supply arrangements were in place well before the

Commission announced its preference for a market-based rate recovery

standard in Public Service Co. of New Mexico, Opinion No. 133, 17

FERC para. 61,123 (1981), order on reh'g, Opinion No. 133-A, 18 FERC

para. 61,036 (1982), aff'd, 832 F.2d 1201 (10th Cir. 1987).

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Commission Ruling

As to challenges to affiliate fuel prices recovered in rates after

the effective date of this rule change (and which are not subject to

the alternate ground for

[[Page 53809]]

decision in Ohio Power, discussed above), we will apply this rule

change; our responsibility under the FPA to ensure that wholesale rates

are just and reasonable, as discussed at length above, permits us to do

nothing less. As to challenges to affiliate fuel prices recovered

through the fuel adjustment clause prior to the effective date of this

rule change (and which are not subject to the alternate ground for

decision in Ohio Power, discussed above), we believe that whether we

should apply this rule change or not is best decided in each individual

case in which the issue arises rather than generically in the

abstract.21

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\21\ The fuel adjustment clause allows public utilities to pass

through to their ratepayers increases or decreases in the cost of

their fuel, without having to make separate filings to reflect each

change in fuel cost, and without having to obtain prior Commission

review of each change in fuel cost. Missouri Public Service Company,

Opinion No. 327, 48 FERC para. 61,011 at 61,078 (1989); Fuel

Adjustment Clauses in Wholesale Rate Schedules, 52 FPC 1304, 1305-06

(1974); see also Public Service Co. of New Hampshire v. FERC, 600

F.2d 944, 947, 952 (D.C. Cir.), cert denied, 444 U.S. 990 (1979).

Consequently, the Commission has sanctioned after-the-fact review

and refunds in later proceedings. See, e.g., Central Vermont Public

Service Corporation, 44 FERC para. 61,127 at 62,027 (1988); Alamito

Co., 33 FERC para. 61,286 at 61,574 (1985); see also Louisiana Power

& Light Company, Opinion No. 366, 57 FERC para. 61,101 at 61,388-89

(1991). Without later review and the ability to order refunds,

overcharges collected through the fuel adjustment clause would be

exempt from all scrutiny and refunds. See Kansas Municipal and

Cooperative Electric Systems, 16 FERC para. 61,227 at 61,488, reh'g

denied, 17 FERC para. 61,141 (1981).

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Finally, we do not believe that it is appropriate for the

Commission, at this time, to address in the abstract the Registered

Systems' concern regarding retroactivity in the event future

legislation gives this Commission, rather than the SEC, authority to

determine the reasonableness of the recovery in rates of affiliate fuel

costs for registered public utility holding company systems.

III. Environmental Statement

Commission regulations require that an environmental assessment or

an environmental impact statement be prepared for any Commission action

that may have a significant adverse effect on the human

environment.22 The Commission has categorically excluded

certain actions from this requirement as not having a significant

effect on the human environment.23 No environmental

consideration is necessary for the promulgation of a rule that involves

electric rate filings that public utilities submit under sections 205

and 206 of the FPA and the establishment of just and reasonable rates.

24 Because this final rule involves such filings submitted

under sections 205 and 206 of the FPA and the establishment of just and

reasonable rates, no environmental consideration is necessary.

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\22\ Regulations Implementing the National Environmental Policy

Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs., Regulations

Preambles 1986-90 para. 30,783 (1987).

\23\ 18 CFR 380.4.

\24\ 18 CFR 380.4(15).

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IV. Regulatory Flexibility Act Certification

The Regulatory Flexibility Act (RFA) 25 requires

rulemakings to either contain a description and analysis of the impact

the rule will have on small entities or to certify that the rule will

not have a substantial economic impact on a substantial number of small

entities. Because most of the entities that would be required to comply

with this rule are large public utilities that do not fall within the

RFA's definition of small entities, 26 the Commission

certifies that this rule will not have a ``significant impact on a

substantial number of small entities.''

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\25\ 5 U.S.C. 601-12.

\26\ 5 U.S.C. 601(3) (citing section 3 of the Small Business

Act, 15 U.S.C. 632). Section 3 of the Small Business Act defines a

small business concern as a business that is independently owned and

operated and that is not dominant in its field of operation. 15

U.S.C. 632(a).

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V. Information Collection Statement and Public Reporting Burden

The Office of Management and Budget (OMB) regulations in 5 CFR

1320.11 require that OMB approve certain information collection

requirements imposed by an agency. This rule neither contains new

information collection requirements nor significantly modifies any

existing information collection requirements in Part 35; 27

therefore, it is not subject to OMB approval. However, the Commission

will submit a copy of this rule to OMB for information purposes only.

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\27\ These requirements were previously submitted to OMB and

assigned control number 1902-0096.

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Interested persons may send comments regarding collections of

information to the Federal Energy Regulatory Commission, 888 First

Street, N.E., Washington, D.C. 20426 [Attention: Michael Miller, (202)

208-1415]; and to the Office of Information and Regulatory Affairs of

the Office of Management and Budget (OMB) [Attention : Desk Officer for

the Federal Energy Regulatory Commission]. Telephone: (202) 395-3087.

FAX: (202) 395-7285.

VI. Effective Date and Congressional Notification

This Final Rule will take effect on November 6, 1998. The

Commission has determined, with the concurrence of the Administrator of

the Office of Information and Regulatory Affairs of the Office of

Management and Budget, that this rule is not a ``major rule'' within

the meaning of section 351 of the Small Business Regulatory Enforcement

Fairness Act of 1996.28 The Commission will submit the rule

to both houses of Congress and the Comptroller General prior to its

publication in the Federal Register.

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\28\ 5 U.S.C. 804(2).

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List of Subjects in 18 CFR Part 35

Electric power rates, Electric utilities, Electricity, Reporting

and recordkeeping requirements.

By the Commission.

David P. Boergers,

Secretary.

In consideration of the foregoing, the Commission amends part 35,

chapter I, title 18, Code of Federal Regulations, as set forth below.

PART 35--FILING OF RATE SCHEDULES

1. The authority citation for part 35 continues to read as follows:

Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42

U.S.C. 7101-7352.

2. Section 35.14 is amended by revising the second sentence of

paragraph (a)(7) to read as follows:

Sec. 35.14 Fuel cost and purchased economic power adjustment clauses.

(a) * * *

(7) * * * Where the utility purchases fuel from a company-owned or

controlled source, the price of which is subject to the jurisdiction of

a regulatory body, and where the price of such fuel has been approved

by that regulatory body, such costs shall be presumed, subject to

rebuttal, to be reasonable and includable in the adjustment clause. * *

*

* * * * *

[FR Doc. 98-26888 Filed 10-6-98; 8:45 am]

BILLING CODE 6717-01-P