United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 3, 1999 Decided June 30, 2000
No. 97-1715
Transmission Access Policy Study Group, et al.
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Vermont Department of Public Service, et al.,
Intervenors
Consolidated with
98-1111, 98-1112, 98-1113, 98-1114, 98-1115, 98-1118,
98-1119, 98-1120, 98-1122, 98-1124, 98-1125, 98-1126,
98-1127, 98-1128, 98-1129, 98-1131, 98-1132, 98-1134,
98-1136, 98-1137, 98-1139, 98-1140, 98-1141, 98-1142,
98-1143, 98-1145, 98-1147, 98-1148, 98-1149, 98-1150,
98-1152, 98-1153, 98-1154, 98-1155, 98-1156, 98-1159,
98-1162, 98-1163, 98-1166, 98-1168, 98-1169, 98-1170,
98-1171, 98-1172, 98-1173, 98-1174, 98-1175, 98-1176,
98-1178,98-1180
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Sherilyn Peterson, John T. Miller, Jr., Robert C. McDiar-
mid, Stanley C. Fickle, Sara D. Schotland, Jeffrey L. Lands-
man, Lawrence G. Malone, Jeffery D. Watkiss, Richard M.
Lorenzo, Isaac D. Benkin, Wallace E. Brand, Daniel I.
Davidson, Cynthia S. Bogorad, Harvey L. Reiter and Ran-
dolph Lee Elliott argued the causes for petitioners. With
them on the briefs were William R. Maurer, Ben Finkel-
stein, David E. Pomper, Ronald N. Carroll, John Michael
Adragna, Sean T. Beeny, Wallace F. Tillman, Susan N.
Kelly, Craig W. Silverstein, A. Hewitt Rose, Bryan G. Tabler,
James D. Pembroke, David C. Vladeck, Robert F. Shapiro,
Lynn N. Hargis, Wallace L. Duncan, Richmond F. Allan,
Alan H. Richardson, Michael A. Mullett, C. Kirby Mullen,
Robert A. Jablon, Sara C. Weinberg, John F. Wickes, Jr.,
Todd A. Richardson, Brian A. Statz, John P. Cook, Charles
F. Wheatley, Jr., Christine C. Ryan, Robert S. Tongren,
Joseph P. Serio, Barry E. Cohen, Carrol S. Verosky, Jennifer
S. McGinnity, Jonathan D. Feinberg, Charles D. Gray, Rob-
ert Vandiver, Cynthia Miller, Helene S. Wallenstein, Wil-
liam H. Chambliss, C. Meade Browder, Jr., Mary W. Coch-
ran, Paul R. Hightower, Brad M. Purdy, Gisele L. Rankin,
Robert D. Cedarbaum, Edward H. Comer, Edward Berlin,
Robert V. Zener, Elizabeth W. Whittle, James H. McGrew,
Donald K. Dankner, Frederick J. Killion, Joseph L. Laksh-
manan, Stephen C. Palmer, Michael E. Ward, Steven J.
Ross, Marvin T. Griff and Thomas C. Trauger. Leja D.
Courter, Robert E. Glennon, Jr., Neil Butterklee, Zachary D.
Wilson, Sheila S. Hollis, Janice L. Lower and James B.
Ramsay entered appearances.
John H. Conway, Deputy Solicitor, Federal Energy Regu-
latory Commission, and Timm L. Abendroth and Larry D.
Gasteiger, Attorneys, argued the causes for respondent.
With them on the brief was Jay L. Witkin, Solicitor. Susan J.
Court, Special Counsel, and Edward S. Geldermann, Attor-
ney, entered appearances.
Edward Berlin argued the cause for intervenors. With
him on the briefs were J. Phillip Jordan, Robert V. Zener,
Edward H. Comer, William M. Lange, Deborah A. Moss,
James H. McGrew, Steven J. Ross, Elizabeth W. Whittle,
Richard M. Lorenzo, David M. Stahl, D. Cameron Findlay,
Peter Thornton, J. Phillip Jordan, Robert V. Zener, Robert C.
McDiarmid, Cynthia S. Bogorad, Ben Finkelstein, Peter J.
Hopkins, Margaret A. McGoldrick, Jeffery D. Watkiss, Ron-
ald N. Carroll, Sara D. Schotland, Alan H. Richardson,
Wallace L. Duncan, Richmond F. Allan, A. Hewitt Rose,
Wallace F. Tillman, Susan N. Kelly, John M. Adragna, Sean
T. Beeny and Randolph Lee Elliott. Edward J. Twomey,
Richard P. Bonnifield, Frederick H. Ritts, David L. Huard,
Dan H. McCrary, Mark A. Crosswhite, John N. Estes, III,
Kevin J. McIntyre, John S. Moot, Clark E. Downs, Martin V.
Kirkwood, Robert S. Waters, John T. Stough, Jr., Bruce L.
Richardson, Floyd L. Norton, IV, William S. Scherman,
Douglas F. John, Gary D. Bachman, Nicholas W. Fels,
Robert Weinberg, Robert A. Jablon, Peter G. Esposito, Chris-
tine C. Ryan, Sheila S. Hollis, Stephen L. Teichler, James K.
Mitchell, Gordon J. Smith, Edward J. Brady, Kevin F.
Duffy, Michael P. May, Barbara S. Brenner, Michael J.
Rustum, Sandra E. Rizzo, Kirk H. Betts, Pierre F. de Ravel
d'Esclapon, Glen L. Ortman and William D. DeGrandis
entered appearances.
Before: Sentelle, Randolph and Tatel, Circuit Judges.
Opinion for the Court filed Per Curiam1:
Table of Contents
I. Introduction 7
II. FERC's Authority to Require Open Access 11
A. Statutory Challenges: FPA ss 205 and
206 14
1. ss 205 and 206 and Otter Tail Power
Company 15
2. s 206(a) Procedural and Evidentiary
Requirements 18
3. Discriminatory Effect of Order 888 21
B. Constitutional Challenge: Fifth Amend-
ment Takings Clause 23
III. Federal versus State Jurisdiction over Trans-
mission Services 24
A. Bundled Retail Sales 26
B. Local Distribution Facilities 31
IV. Reciprocity 35
A. Indirect Regulation of Non-Jurisdictional
Utilities 36
B. Limitation on Reciprocity 37
V. Stranded Cost Recovery Provisions 39
A. Wholesale Stranded Costs 40
1. FERC's Authority to Provide for
Stranded Cost Recovery 44
a. Reasonable expectation of contin-
ued service 44
__________
1 Following our normal practice in complex cases, we shared the
writing of this opinion. Judge Sentelle wrote Section II, Section
III, and Section VII. Judge Randolph wrote Section IV, Section
VI, and Section VIII. Judge Tatel wrote Section I, Section V, and
Section IX.
b. Sections 206 and 212 of the FPA 46
c. Implications of Cajun 48
2. Natural Gas Precedent and Conform-
ance to Cost Causation Principles 49
a. Natural gas precedent: AGD, K
N Energy, and UDC 50
b. Conformance to cost causation
principles 54
3. FERC's Mobile-Sierra Findings 57
a. FERC's authority to make a ge-
neric public interest finding 59
b. FERC's stranded cost public in-
terest finding 61
c. FERC's public interest finding
regarding customers 62
4. Availability of Stranded Cost Recov-
ery to Nonjurisdictional Utilities
and G & T Cooperatives 63
5. Challenges to Technical Aspects of
Order 888's Stranded Cost Recov-
ery Provisions 65
a. POSCR's challenges to the
stranded cost formula 66
b. Inclusion of known and measura-
ble costs 68
c. Treatment of energy costs in the
market option 68
d. Rescission of notice of termi-
nation provision 70
e. Provision for benefits lost 71
B. Retail Stranded Costs 72
1. Stranded Costs Arising from Retail
Wheeling 72
a. FERC's jurisdiction over retail
stranded costs 73
b. FERC's refusal to assert jurisdict-
ion over all retail stranded
costs 76
2. Stranded Costs Relating to Retail-
Turned-Wholesale Customers 80
VI. Credits for Customer-Owned Facilities and
Behind-The-Meter Generation 85
.
VII. Liability, Interface Allocation, and Discount-
ing 90
A. Liability and Indemnification 90
B. Interface Allocation 94
C. Delivery-Point-Specific Discounting 96
VIII. Tariff Terms and Conditions 100
A. Headroom Allocation 100
B. Headroom Prioritization 101
C. Duplicative Charges 102
D. Multiple Control Areas 103
E. Right-of-First-Refusal 104
IX. National Environmental Policy Act and Regu-
latory Flexibility Act Compliance 105
A. NEPA Compliance 105
1. Adequacy of Base Case 105
2. Failure to Adopt Mitigation Measures 107
B. Regulatory Flexibility Act Compliance 108
----------
Following two notices of proposed rulemaking, the Federal
Energy Regulatory Commission issued Orders 888 and 889 on
April 24, 1996.2 Reflecting the Commission's effort to end
__________
2 Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recov-
ery of Stranded Costs by Public Utilities and Transmitting Utili-
ties, Order No. 888, FERC Stats. & Regs. p 31,036, 61 Fed. Reg.
21,540 (1996), clarified, 76 FERC p 61,009 and 76 FERC p 61,347
(1996) ("Order 888"), on reh'g, Order No. 888-A, FERC Stats. and
Regs. p 31,048, 62 Fed. Reg. 12,274, clarified, 79 FERC p 61,182
(1997), on reh'g, Order No. 888-B, 81 FERC p 61,248, 62 Fed. Reg.
64,688 (1997), on reh'g, Order No. 888-C, 82 FERC p 61,046 (1998);
discriminatory and anticompetitive practices in the national
electricity market and to ensure that electricity customers
pay the lowest prices possible, these orders represent, as the
Commission described in a later order not before us, "the
foundation necessary to develop competitive bulk power mar-
kets...." Regional Transmission Organizations, Order No.
2000, 65 Fed. Reg. 810, 812 (2000).
Open access is the essence of Orders 888 and 889. Under
these orders, utilities must now provide access to their trans-
mission lines to anyone purchasing or selling electricity in the
interstate market on the same terms and conditions as they
use their own lines. By requiring utilities to transmit com-
petitors' electricity, open access transmission is expected to
increase competition from alternative power suppliers, giving
consumers the benefit of a competitive market. Most funda-
mentally, FERC's open access policies, combined with paral-
lel action now occurring on the state level, are intended to
create a market in which customers may purchase power
from any of a number of suppliers. A municipality or factory
in Florida, for example, will no longer have to purchase power
from its local utility but instead may seek cheaper power
anywhere in the country. A customer in Vermont may
purchase electricity from an environmentally friendly power
producer in California or a cogeneration facility in Oklahoma.
All key players in the electricity market have challenged
various provisions of Orders 888 and 889. Their claims range
from the hypertechnical to arguments that FERC lacks au-
thority to order open access transmission at all. Finding few
defects in the orders, we uphold them in nearly all respects.
I. Introduction
Historically, vertically integrated utilities owned genera-
tion, transmission, and distribution facilities. They sold gen-
__________
Open Access Same-Time Information System and Standards of
Conduct, Order No. 889, FERC Stats. & Regs. p 31,035, 61 Fed.
Reg. 21,737 (1996) ("Order 889"), on reh'g, Order No. 889-A, FERC
Stats. & Regs. p 31,049, 62 Fed. Reg. 12,484 (1997), on reh'g, Order
No. 889-B, 81 FERC p 61,253 (1997).
eration, transmission, and distribution services as part of a
"bundled" package. Due to technological limitations on the
distance over which electricity could be transmitted, each
utility served only customers in a limited geographic area.
And because of their natural monopoly characteristics, utili-
ties have been heavily regulated at both the federal and state
levels.
Since enactment of the Federal Power Act in 1935, the
electricity industry has undergone significant change, both
economically and technologically. Economies of scale have
justified the construction of large (greater than 500 MW)
generation facilities, such as nuclear power plants. Techno-
logical advances in the 1970s and 1980s have permitted small
plants to operate efficiently as well. See Notice of Proposed
Rulemaking, Promoting Wholesale Competition Through
Open Access Non-discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utili-
ties and Transmitting Utilities, FERC Stats. & Regs.
p 32,514 at 33,059-60, 60 Fed. Reg. 17,662 (1995) ("Open
Access NOPR"). Technological improvements also made
feasible the transmission of electric power over long distances
at high voltages. See id. p 32,514 at 33,060. Alternative
power suppliers, such as cogenerators, small power produc-
ers, and independent power producers emerged in response
to these developments. Constructing and operating genera-
tion capacity at prices lower than the embedded generation
costs of traditional utilities, these alternative suppliers have
created a wholesale market for low-cost power.
The growth of this new wholesale market faced a serious
obstacle. "As entry into wholesale power generation markets
increased," FERC explained, "the ability of customers to gain
access to the transmission services necessary to reach com-
peting suppliers became increasingly important." Id. at
33,062. Yet the owners of transmission lines, the traditional
utilities that had built the high-cost generation capacity,
denied alternative producers access to their transmission
lines on competitive terms and conditions. FERC therefore
began requiring utilities to file open access transmission
tariffs that permitted other suppliers to transmit power over
their lines under certain circumstances, such as when a utility
sought authorization to merge with another utility or to sell
power at market-based rather than cost-based rates.
Then, in 1992, Congress enacted the Energy Policy Act,
which amended sections 211 and 212 of the FPA to authorize
FERC to order utilities to "wheel" power--i.e., transmit
power for wholesale sellers of power over the utilities' trans-
mission lines--on a case-by-case basis. Pub. L. No. 102-486,
106 Stat. 2776, 2915-16 (1992) (codified at 16 U.S.C. ss 824j-
k). FERC "aggressively implemented" amended sections 211
and 212 to " 'facilitate the development of competitively
priced generation supply options, and to ensure that whole-
sale purchasers of electric energy can reach alternative power
suppliers and vice versa.' " Open Access NOPR, p 32,514 at
33,064 (quoting Notice of Proposed Rulemaking, Recovery of
Stranded Costs by Public Utilities and Transmitting Utili-
ties, FERC Stats. & Regs. p 32,507 at 32,866, 59 Fed. Reg.
35,274 (1994) ("Stranded Cost NOPR")).
Despite these efforts, a persistent barrier to the develop-
ment of a competitive wholesale power sale market remained.
The Commission found that "utilities owning or controlling
transmission facilities possess substantial market power;
that, as profit maximizing firms, they have and will continue
to exercise that market power in order to maintain and
increase market share, and will thus deny their wholesale
customers access to competitively priced electric generation;
and that these unduly discriminatory practices will deny
consumers the substantial benefits of lower electricity prices."
Open Access NOPR, p 32,514 at 33,052. Power generators
not permitted to use utilities' transmission lines on reasonable
terms have no way to transmit their power to customers.
Invoking its authority under sections 205 and 206 of the
FPA to remedy unduly discriminatory or preferential rules,
regulations, practices, or contracts affecting public utility
rates for transmission in interstate commerce, 16 U.S.C.
ss 824d-e, and building on its experience in restructuring the
natural gas industry, see Associated Gas Distribs. v. FERC,
824 F.2d 981 (D.C. Cir. 1987), the Commission issued Orders
888 and 889 to "prevent this discrimination by requiring all
public utilities owning and/or controlling transmission facili-
ties to offer non-discriminatory open access transmission
service." Open Access NOPR, p 32,514 at 33,052. Orders
888 and 889 mandate what FERC terms "functional unbun-
dling," i.e., separating utilities' wholesale transmission func-
tions from their wholesale electricity merchant functions.
Specifically, the orders require utilities to (1) file open access
nondiscriminatory tariffs that contain the minimum terms and
conditions of nondiscriminatory services prescribed by FERC
through its pro forma tariff; (2) take transmission service for
their own new wholesale sales and purchases of electric
energy under the same terms and conditions as they offer
that service to others; (3) develop and maintain a same-time
information system that will give potential and existing trans-
mission users the same access to transmission information
that the utility enjoys (called the "Open Access Same-Time
Information System" or "OASIS"); and (4) state separate
rates for wholesale generation, transmission, and ancillary
services. See Order 888, p 31,036 at 31,635-36.
In requiring utilities to provide open access transmission,
FERC acknowledged the dramatic change the orders would
bring about, explaining that "[t]he most critical transition
issue that arises as a result of the Commission's actions in
this rulemaking is how to deal with the uneconomic sunk
costs that utilities prudently incurred under an industry
regime that rested on a regulatory framework and a set of
expectations that are being fundamentally altered." Order
888-A, p 31,048 at 30,346. Known as "stranded costs," these
"uneconomic sunk costs" are costs that utilities incurred not
only with regulatory approval, but with the expectation of
continuing to serve their current customers. These costs will
become "stranded" when customers take advantage of open
access transmission to purchase cheaper power from suppli-
ers other than their historic utilities. Order 888 affords
utilities an opportunity to recover stranded costs from their
wholesale requirements customers, but only from those cus-
tomers who use their utility's transmission service to pur-
chase power from new suppliers, and only if the utility can
prove that it had a reasonable expectation of continued ser-
vice to that customer.
After three rehearing orders, the Commission denied any
further rehearing. All petitions for review of Orders 888 and
889 were consolidated and transferred to this circuit. We
consider these petitions in this opinion. Section II considers
challenges to FERC's authority to require utilities to file
open access tariffs as a remedy for undue discrimination.
Section III evaluates FERC's conclusion that it lacked juris-
diction to order retail unbundling yet has jurisdiction over
transmission where state commissions have unbundled retail
sales. Section IV addresses FERC's authority to require
nonpublic utilities to provide reciprocal open access transmis-
sion service. Section V considers challenges to Order 888's
stranded cost recovery provisions. Section VI evaluates peti-
tioners' arguments relating to credits for customer-owned
facilities and behind-the-meter generation. Section VII ad-
dresses discounting, interface allocation, and liability. Sec-
tion VIII evaluates other arguments relating to the terms and
conditions of the pro forma tariff. Section IX assesses
FERC's compliance with the National Environmental Policy
Act and the Regulatory Flexibility Act.
In the end, we affirm the orders in all respects except two:
we remand for FERC to explain its treatment of energy costs
in the stranded cost market option (Section V.A.5.c) and to
provide a reasonable cap on contract extensions under exist-
ing customers' right-of-first-refusal (Section VIII.E).
II. FERC's Authority to Require Open Access
Although FERC asserts that "mounting claims of undue
discrimination in transmission access" prompted its move-
ment toward open access, the open access requirement of
Order 888 is premised not on individualized findings of dis-
crimination by specific transmission providers, but on
FERC's identification of a fundamental systemic problem in
the industry. Generally, those entities that own or control
interstate transmission facilities are vertically-integrated pub-
lic utilities that also generate and sell electricity. In its 1995
notice of proposed rulemaking, FERC observed that there
were at that time approximately 328 public utilities, market-
ers, and wholesale generation entities with transmission
needs, and that approximately 137 of those owned or con-
trolled the transmission facilities. See Open Access NOPR,
p 32,514 at 33,051. Entry into the transmission market is
difficult and restricted, so those utilities that already own
transmission facilities enjoy a natural monopoly over that
field. The transmission-owning utilities can use their position
to favor their own generated electricity and to exclude com-
petitors from the market, whether by denying transmission
access outright, or by providing transmission services to
competitors only at comparatively unfavorable rates, terms,
and conditions. Utilities that own or control transmission
facilities naturally wish to maximize profit. The transmis-
sion-owning utilities thus can be expected to act in their own
interest to maintain their monopoly and to use that position to
retain or expand the market share for their own generated
electricity, even if they do so at the expense of lower-cost
generation companies and consumers.
Even before Order 888, some transmission-owning utilities
voluntarily opened their transmission facilities to third party
suppliers and purchasers of electricity; and FPA s 211 ex-
plicitly gives FERC the authority to order involuntary wheel-
ing on a case-by-case basis. The Commission decided, howev-
er, that relying upon voluntary arrangements and s 211
orders would not remedy the fundamentally anti-competitive
structure of the transmission industry. Instead, the Commis-
sion concluded, such a piecemeal approach would result in an
inefficient "patchwork" of transmission systems nationwide.
"The ultimate loser in such a regime is the consumer." Open
Access NOPR, p 32,514 at 33,071.
As an alternative, the Commission interpreted the anti-
discrimination language of FPA ss 205 and 206, 16 U.S.C.
ss 824d, 824e (1994), as giving it the authority to impose open
access as a generic remedy for its findings of systemic anti-
competitive behavior. Invoking that broad authority, in Or-
der 888, FERC requires every transmission-owning public
utility within FERC's jurisdiction to file an Open Access
Transmission Tariff (OATT) containing minimum terms and
conditions for non-discriminatory service and to take trans-
mission service for their own wholesale sales and purchases of
electric energy under those filed OATTs. In other words,
this order requires the public utilities to provide the same
transmission services to anyone purchasing or selling whole-
sale power--other public utilities, federal power suppliers and
marketers, municipalities, cooperatives, independent power
producers, qualifying facilities, or power marketers--as they
provide to themselves. The Board of Water, Light and
Sinking Fund Commissioners of the City of Dalton (Dalton)
operates a municipally-owned utility system which provides
electric power to residential, commercial, and industrial con-
sumers in the city of Dalton, Georgia. Dalton obtains trans-
mission services from the Georgia Integrated Transmission
System (ITS), which it owns along with public utility Georgia
Power Company (GPC) and two other utilities that are not
subject to FERC's jurisdiction, and which GPC operates
according to the terms of various filed agreements. Puget
Sound Energy, Inc. (Puget) is a public utility in the Pacific
Northwest, where Bonneville Power Administration, which is
not a public utility subject to Order 888's requirements,3
__________
3 Bonneville Power Administration (BPA) "is a power marketing
agency in the Pacific Northwest that markets power from thirty
federal hydroelectric projects constructed and operated by the
Corps of Engineers and the Bureau of Reclamation." In re Bonne-
ville Power Administration, Power Sale and Transmission Rates,
54 F.E.R.C. p 62,143 (1991). In Order 888, FERC concluded that
BPA is not a public utility as defined by Federal Power Act (FPA)
s 201(e), and thus is not subject to Order 888's requirements.
Order 888, p 31,036 at 31,858. FERC admitted, however, to three
circumstances under which it might review BPA's transmission
access and pricing policies: (1) if BPA files an open access tariff for
review and confirmation under the Northwest Power Act and asks
FERC to find that the tariff meets FERC's open access policies;
(2) to the extent that BPA "is a transmitting utility subject to a
request for mandatory transmission services" under FPA s 211;
and (3) to the extent that BPA receives open access transmission
from a public utility and is thereby subject to the reciprocity
provision in that public utility's pro-forma tariff. Id.
dominates the electricity transmission market. These two
industry petitioners challenge the open access requirement of
Order 888 on various statutory, constitutional, and other
grounds.
Turning first to the FPA itself, Puget and Dalton argue
that ss 205 and 206 do not give the Commission the authority
to order open access as a generic remedy; and even if the
FPA does give the agency such authority, FERC has failed to
satisfy the statutory requirements for invoking it. Dalton
also argues that Order 888 itself violates the FPA by discrim-
inating against transmission facility owners who have invest-
ed in those assets. Shifting to constitutional concerns, Puget
and Dalton, along with amicus curiae Pacific Legal Founda-
tion, maintain that Order 888 violates the Takings Clause of
the Fifth Amendment. Finally, Dalton argues that the open
access requirements of the OATT interfere with the antitrust
conditions of outstanding nuclear licenses, and thus are un-
lawful. While we consider each of these challenges separate-
ly,4 we hold that Order 888's open access requirement is
authorized by and consistent with the FPA and the Takings
Clause. We conclude also that Dalton has not yet suffered
injury from the alleged conflict between open access and the
nuclear license antitrust conditions, and that its complaint on
that issue is therefore not yet ripe for judicial review.
A. Statutory Challenges: FPA ss 205 and 206
Section 205 of the FPA broadly precludes public utilities, in
any transmission or sale subject to FERC's jurisdiction, from
"mak[ing] or grant[ing] any undue preference or advantage to
__________
4 The Commission and various intervenors on its behalf argue
extensively against our jurisdiction over these issues on the grounds
that the petitioners failed, in various ways, adequately to raise their
concerns before the agency and to preserve the issues for judicial
review. Upon careful review of the record, we can safely conclude
without further elaboration that these jurisdictional arguments are
without merit, that the Commission has had ample notice and
opportunity to address all of the petitioners' various statutory,
constitutional, and other challenges to Order 888's open access
requirement, and that we have jurisdiction to consider these issues.
any person or subject[ing] any person to any undue prejudice
or disadvantage...." 16 U.S.C. s 824d(b). Section 206 of
the FPA further provides in relevant part that
[w]henever the Commission, after a hearing had upon its
own motion or upon complaint, shall find that any rate,
charge, or classification, demanded, observed, charged,
or collected by any public utility for any transmission or
sale subject to the jurisdiction of the Commission, or that
any rule, regulation, practice, or contract affecting such
rate, charge, or classification is unjust, unreasonable,
unduly discriminatory or preferential, the Commission
shall determine the just and reasonable rate, charge,
classification, rule, regulation, practice, or contract to be
thereafter observed and in force, and shall fix the same
by order.
16 U.S.C. s 824e(a). The statutory issues before us are
whether these provisions give FERC the authority to order
involuntary wheeling as a generic remedy, and if they do,
whether FERC satisfied the procedural and evidentiary re-
quirements imposed by these provisions.
1. ss 205 and 206 and Otter Tail Power Company
The Commission did not write on a blank slate when it
interpreted FPA ss 205 and 206 as giving it the authority to
order involuntary wheeling as a generic remedy for systemic
anti-competitive behavior. Puget and Dalton argue principal-
ly that the Supreme Court's decision in Otter Tail Power Co.
v. United States, 410 U.S. 366 (1973), controls the disposition
of this issue. Otter Tail was an antitrust case in which the
Supreme Court addressed whether the district court could
require Otter Tail Power Company to wheel power for its
competitors as a remedy for monopolistic practices. Con-
trary to the company's arguments, the Supreme Court con-
cluded that the district court's order did not impermissibly
conflict with the authority of the Federal Power Commission,
FERC's predecessor, because the agency did not have the
power itself to order involuntary wheeling under Part II of
the FPA, which includes ss 205 and 206. Puget and Dalton
cite various circuit court precedents, including one from this
circuit, as construing Otter Tail to prevent the Commission
from ordering involuntary wheeling as a generic remedy.
See, e.g., Florida Power & Light Co. v. FERC, 660 F.2d 668
(5th Cir. Unit B Nov. 1981); New York State Electric & Gas
Corp. v. FERC, 638 F.2d 388 (2d Cir. 1980); Richmond
Power & Light v. FERC, 574 F.2d 610 (D.C. Cir. 1978).
Finally, Puget and Dalton note that subsequent to Otter Tail,
Congress enacted FPA s 211, 16 U.S.C. s 824j, giving FERC
the authority to impose open access on a case-by-case basis to
remedy a broad range of problems. The petitioners argue
that, if FPA ss 205 and 206 authorize the Commission to
impose open access, and if Otter Tail does not prohibit such
action, then there was no reason for Congress to enact s 211.
In response, the Commission contends that we should not
read Otter Tail as limiting its authority under FPA s 206 to
remedy discriminatory behavior, since Otter Tail was an
antitrust case and not an undue discrimination case. The
Commission also maintains that the circuit court cases cited
by the petitioners are not on point and do not prohibit a
generic open access remedy. The Commission points instead
to our decision in Associated Gas Distributors v. FERC, 824
F.2d 981, 998 (D.C. Cir. 1987) (AGD), in which we upheld a
similar open access transportation requirement imposed by
FERC on natural gas transmission, as the controlling prece-
dent. Finally, FERC argues that Congress enacted FPA
s 211 to broaden its already existing authority to order
involuntary wheeling, as FPA ss 205 and 206 authorize such
action only as a remedy for undue discrimination.
We agree with FERC that our decision in AGD controls
the disposition of this issue. In AGD, we reviewed a FERC
order imposing open access conditions on pipelines transport-
ing natural gas. See 824 F.2d at 997-1001. Considering
arguments quite similar to those made by the petitioners
here, we concluded that Otter Tail does not constrain FERC
from mandating open access where it finds circumstances of
undue discrimination to exist. See id. at 998-99. Turning to
relevant circuit precedent, we construed Richmond Power &
Light as supporting only the proposition that a refusal to
provide transmission services to another utility was not per se
unduly discriminatory and we noted that the court in Florida
Power & Light expressly left open the question of whether
FERC could impose open access conditions as a remedy for
anti-competitive behavior. See id. at 999. Further, we point-
ed out that our reading of Richmond is consistent with other
precedent, specifically Central Iowa Power Coop. v. FERC,
606 F.2d 1156 (D.C. Cir. 1979), in which we upheld FERC's
use of its authority to prevent undue discrimination to condi-
tion its approval of a power-pooling agreement upon removal
of membership criteria which denied certain privileges to
some but not all participants. See AGD, 824 F.2d at 999.
Indeed, in AGD, we noted that open access relies upon the
very same principles that we upheld in Central Iowa. See id.
Although AGD addressed open access under the anti-
discrimination provisions of the Natural Gas Act (NGA) rath-
er than FPA ss 205 and 206, we have repeatedly recognized
the similarity of the two statutes and held that they should be
interpreted consistently. See Environmental Action v.
FERC, 996 F.2d 401, 410 (D.C. Cir. 1993); Tennessee Gas
Pipeline Co. v. FERC, 860 F.2d 446, 454 (D.C. Cir. 1988); see
also Arkansas La. Gas Co. v. Hall, 453 U.S. 571, 577 n.7
(1981). Thus, AGD counsels the conclusion that, while Otter
Tail may represent a general rule that FERC's authority to
order open access is limited, the FPA, like the NGA, makes
an exception to that rule where FERC finds undue discrimi-
nation.
Moreover, as in AGD, the deferential standard of Chevron
U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984), governs our review of FERC's interpretation of
FPA ss 205 and 206. See AGD, 824 F.2d at 1001. If we
agreed with Puget and Dalton that the Supreme Court's Otter
Tail opinion dictates a particular construction of ss 205 and
206, then the Commission's contrary interpretation would not
be entitled to Chevron deference. See Maislin Indus., U.S.,
Inc. v. Primary Steel, Inc., 497 U.S. 116, 131 (1990) ("Once
we have determined a statute's clear meaning, we adhere to
that determination under the doctrine of stare decisis, and we
judge an agency's later interpretation of the statute against
our prior determination of the statute's meaning."). But
having concluded that Otter Tail does not govern the disposi-
tion of this case, we are faced solely with considering the
validity of FERC's interpretation of the FPA, a statute that
the Commission administers. In AGD, we concluded that
FERC reasonably interpreted the NGA's ambiguous anti-
discrimination provisions as giving it broad authority to reme-
dy unduly discriminatory behavior through a generic open
access requirement. See AGD, 824 F.2d at 1001. Given the
FPA's similar language, we can only reach the same conclu-
sion with respect to Order 888. For all of these reasons, we
find that the Commission has the authority under FPA
ss 205 and 206 to require open access as a generic remedy to
prevent undue discrimination.
2. s 206(a) Procedural and Evidentiary Requirements
Puget and Dalton next argue that, even if FPA ss 205 and
206 authorize FERC to impose open access generically,
s 206(a) imposes certain procedural and evidentiary require-
ments for action which the Commission failed in two separate
but related ways to satisfy. First, the petitioners claim that
FPA s 206(a) requires substantial evidence of contemporane-
ous "unjust, unreasonable, unduly discriminatory or preferen-
tial" behavior before the Commission can act. The Commis-
sion made no finding of discrimination or monopoly control on
the part of Georgia Power Company or Puget. None of the
applications or complaints filed with the Commission accused
these petitioners of unduly discriminatory or anti-competitive
behavior. Instead, the Commission premised Order 888 on a
generic finding that public utility holders as a group have
sufficient monopoly power over the transmission of electricity
to engage in unduly discriminatory and anti-competitive prac-
tices, and that this condition will worsen in the future. To
support its finding, the Commission relied upon unsubstanti-
ated allegations of discriminatory conduct in public com-
ments, its own experience in reviewing applications and com-
plaints, and its own understanding of the incentives for
monopolists to behave discriminatorily.
Puget and Dalton additionally assert that FPA s 206(a)
requires that the requisite findings of undue discrimination be
made in the context of a hearing. Although they concede
that a rulemaking proceeding can satisfy the statute's hearing
requirement, Puget and Dalton maintain that the rulemaking
proceeding nevertheless must clearly identify the challenged
activities and actors, and give the accused actors the opportu-
nity to demonstrate that their activities were not unlawful.
The petitioners protest that the Commission's notice-and-
comment rulemaking process did not afford them such oppor-
tunity.
FERC claims the discretion under NLRB v. Bell Aerospace
Co., 416 U.S. 267, 293 (1974), to choose between rulemaking
and case-by-case adjudication; and FERC contends that its
generic rulemaking process fully satisfied the requirements of
FPA s 206(a). FERC concedes that it relied upon general
findings of systemic monopoly conditions and the resulting
potential for anti-competitive behavior, rather than evidence
of monopoly and undue discrimination on the part of individu-
al utilities. Citing our opinion in Wisconsin Gas Co. v.
FERC, 770 F.2d 1144, 1166 (D.C. Cir. 1985), however, FERC
maintains that such findings are sufficient to substantiate its
decision to impose the open access requirement. Finally,
FERC observes that we rejected these same arguments in
AGD. See 824 F.2d at 1008 (citing Wisconsin Gas, 770 F.2d
at 1165-68).
Again, we must agree with the Commission. In American
Public Gas Ass'n v. FPC, we held that the Commission could
exercise its authority under NGA s 5(a), the provision paral-
lel to FPA s 206, through rulemaking as well as adjudication.
See 567 F.2d 1016, 1064-67 (D.C. Cir. 1977); see also Wiscon-
sin Gas, 770 F.2d at 1153 (articulating the American Public
Gas holding). Congress subsequently ratified the American
Public Gas holding when it enacted the Department of Ener-
gy Organization Act, 42 U.S.C. s 7173(c) (1994). See Wiscon-
sin Gas, 770 F.2d at 1153 n.8 (acknowledging the Act). That
statute provides that "the establishment of rates and charges
under the Federal Power Act [16 U.S.C. 791a et seq.] or the
Natural Gas Act [15 U.S.C. 717 et seq.], may be conducted by
rulemaking procedures." 42 U.S.C. s 7173(c) (brackets in
original). By passing a statute adopting the holding of
American Public Gas, and explicitly applying that rule to the
FPA as well as the NGA, Congress signaled its intent that
the hearing requirements of NGA s 5(a) and FPA s 206(a)
be interpreted similarly.
Interpreting the hearing requirement of NGA s 5(a), we
have said that, while the Commission cannot rely solely on
"unsupported or abstract allegations," the agency is also not
required to make "specific findings," so long as the agency's
factual determinations are reasonable. See Wisconsin Gas,
770 F.2d at 1158. In AGD, we applied Wisconsin Gas in
holding that the Commission was not required to make
specific findings that individual rates charged by individual
pipelines were unlawful, or to offer empirical proof for all the
propositions upon which its order depended, before promul-
gating a generic rule to eliminate undue discrimination. See
AGD, 824 F.2d at 1008-09. Upon comparison of the order
considered in AGD with Order 888, if anything, FERC more
thoroughly documented the reasons for its actions in Order
888 than in the earlier natural gas order.
Puget claims that AGD and Wisconsin Gas are distinguish-
able, and that this case is governed by Electricity Consumers
Resource Council v. FERC, 747 F.2d 1511 (D.C. Cir. 1984), in
which we reversed FERC's adoption of a rate based on an
economic theory in the absence of a discussion of the practical
applications of that theory. See 747 F.2d at 1514. As the
AGD court recognized, however, the court in Electricity
Consumers was persuaded that the Commission had distorted
the economic theory it claimed to apply. See AGD, 824 F.2d
at 1008. Just as the pipelines in AGD did, Puget has failed to
articulate exactly how FERC has distorted the theories on
which it relies in Order 888. Additionally, the AGD court
rejected the idea that "Electricity Consumer's reference to
'economic theory' was intended to invalidate agency reliance
on generic factual predictions merely because they are typi-
cally studied in the field called economics." Id. Following
the rationale of Wisconsin Gas and AGD, we conclude that
FERC has satisfied the requirements for invoking its authori-
ty under FPA s 206(a).
3. Discriminatory Effect of Order 888
Dalton charges that, even if the FPA permits FERC to
impose involuntary wheeling generally, the open access re-
quirement of Order 888 causes rather than remedies discrimi-
nation, and therefore violates FPA s 206(a)'s express re-
quirement that FERC act against undue discrimination.
Specifically, Dalton and the other non-jurisdictional owners of
the Georgia ITS facilities invested millions of dollars in those
facilities in order to use the facilities each owns and receive
reciprocal open access transmission services from the other
owners. Under the Open Access Transmission Tariff
(OATT), other customers do not have to make such invest-
ments to use the Georgia ITS facilities. FERC responds
that Order 888 does not unduly discriminate between old and
new customers of integrated transmission systems like the
Georgia ITS; and that if Dalton has evidence that the tariff
results in undue discrimination in its individual circum-
stances, Dalton remains free to file a petition under FPA
s 206 for redress, and FERC will consider its claim.
FERC's conclusion that its open access requirement is not
unduly discriminatory is subject only to arbitrary and capri-
cious review. See 5 U.S.C. s 706(2)(A) (1994); Sithe/
Independence Power Partners, LP v. FERC, 165 F.3d 944,
948 (D.C. Cir. 1999); Union Pacific Fuels, Inc. v. FERC, 129
F.3d 157, 161 (D.C. Cir. 1997). We conclude that FERC has
adequately explained why its open access requirement is not
unduly discriminatory. Relying upon extensive commentary
as well as its own experiences, FERC concluded that, as a
general matter, transmission industry conditions were condu-
cive to discriminatory practices and anti-competitive behavior,
such that case-by-case adjudication could not adequately ad-
dress the problem. FERC also recognized that its generic
findings may have exceptions, and thus that Order 888 may in
individual circumstances have a different result than that
intended. Therefore, Order 888 does not preclude facilities
owners the opportunity to argue their particular circum-
stances in their OATT filings or, as with Dalton, in their own
petitions for relief under FPA s 206(a). Rather, Order 888
merely shifts from a regulatory norm in which a user of
transmission services must demonstrate to FERC an individ-
ualized need for open access to one in which a provider of
transmission services must present to FERC individualized
circumstances requiring relief from open access. As the
petitioners have a mechanism by which they can seek relief
for their particular concerns, we find nothing arbitrary or
capricious about FERC's conclusion that its approach to open
access is not unduly discriminatory.
In another stab at demonstrating the discriminatory effect
of Order 888's open access requirement, Dalton alerts us to
an agreement entered into between it and Georgia Power
Company (GPC) in partial implementation of antitrust condi-
tions contained in operating licenses issued by the Nuclear
Regulatory Commission for jointly owned nuclear facilities
connected to the Georgia ITS. Those antitrust conditions
require GPC to provide Dalton with transmission services
until the nuclear licenses expire, long after the ITS Agree-
ment terminates. Dalton alleges that limitations imposed by
Order 888 on Dalton's rights upon termination of the ITS
Agreement are inconsistent with GPC's obligations under the
nuclear licenses, and that the interference will result in
discrimination against Dalton. FERC maintains that it
agreed in addressing GPC's Order 888 compliance filing to
treat the ITS Agreements separately.
Ultimately, Dalton has offered no present injury from the
alleged conflict, so this issue is not ripe for review. Dalton
will only be injured if, upon termination of the ITS Agree-
ment, Order 888 interferes with Dalton's right to transmis-
sion services. Dalton's own argument suggests as much,
observing that FERC "left to GPC the decision whether it
'must, but cannot, comply with separate orders' of NRC and
FERC and whether it will present evidence of such conflict to
either Commission," and complaining that even if GPC does
act, "the orders under review provide no assurance that the
competitive transmission and other service rights provided by
the nuclear licenses will be respected under the OATT." Br.
of Petitioner Dalton at 23 (quoting Order 888-A, p 31,048 at
30,452). In short, GPC and FERC are still in the process of
determining whether the antitrust provisions even conflict
with Order 888, as well as how to deal with any such
inconsistency.5 Accordingly, this issue is not appropriate for
judicial review at this time.
B. Constitutional Challenge: Fifth Amendment Takings
Clause
Puget and amicus curiae Pacific Legal Foundation (Pacific)
contend that Order 888 violates the Takings Clause of the
Fifth Amendment. These petitioners maintain that Order
888's open access requirement engineers a "taking" in two
ways: First, that FERC's open access requirement effects a
regulatory taking by arbitrarily changing pricing methodolo-
gy in a way that excessively deprives transmission owners of
their investments in facilities; and, second, that the open
access requirement allows a physical invasion, a permanent
physical occupation, by taking away the transmission owners'
right to exclude competitors from their transmission proper-
ty. We cannot grant relief on either ground.
When the action of the federal government effects a "tak-
ing" for Fifth Amendment purposes, there is no inherent
constitutional defect, provided just compensation is available.
At bottom, both of the petitioners' Fifth Amendment claims
turn not on whether open access effects a taking, but whether
FERC's cost-based transmission pricing policies in the end
provide just compensation. The remedy of just compensation
is not within our jurisdiction but that of the United States
Court of Federal Claims, under the Tucker Act, 28 U.S.C.
s 1491. See Bell Atlantic Tel. Cos. v. Federal Communica-
tions Comm'n, 24 F.3d 1441, 1444 n.1 (D.C. Cir. 1994);
Railway Labor Executives' Ass'n v. United States, 987 F.2d
806, 815-16 (D.C. Cir. 1993).
We recognize that our jurisdiction to review an agency's
construction of a statute necessarily involves an exercise of
__________
5 GPC's management of the Georgia ITS is subject to the di-
rection of a committee that includes Dalton representatives.
the policy of avoiding constitutional issues where possible,
even though the issues may concern arguable takings amena-
ble to Tucker Act remedy, "when 'there is an identifiable
class of cases in which application of a statute will necessarily
constitute a taking.' " Bell Atlantic, 24 F.3d at 1445 (D.C.
Cir. 1994) (quoting United States v. Riverside Bayview
Homes, Inc., 474 U.S. 121, 128 n.5 (1985)). We need not
decide whether this case falls within that category, however,
because even if it did, any takings problem created by Order
888 does not raise such significant constitutional doubt as to
require us to construe the FPA to prohibit FERC from
ordering open access. If there is a taking, and a claim for
just compensation, then that is a Tucker Act matter to be
pursued in the Court of Federal Claims, and not before us.
III. Federal versus State Jurisdiction
over Transmission Services
Vertically integrated utilities use their own facilities to
generate, transmit, and distribute electricity to their custom-
ers. Traditionally, the customer paid one combined rate for
both the power and its delivery, thus the industry refers to
such sales as "bundled." To the extent that bundled sales are
made directly to the end user of the electricity, they are also
recognized as retail sales. Utilities may also sell the electrici-
ty they generate at wholesale to other utilities or other
resellers of power, which then resell that power to their own
customers. Thus, the same utility may use its facilities to
serve both retail and wholesale customers. Vertically inte-
grated utilities use their transmission facilities to move elec-
tricity over long distances, and use local distribution lines to
deliver the electricity to the end user.
Even before Congress enacted the FPA, the Supreme
Court held that states could not regulate wholesale sales of
electricity. See Public Utils. Comm'n of R.I. v. Attleboro
Steam & Elec. Co., 273 U.S. 83 (1927). A few years later in
1935, Congress included in the FPA a provision giving the
Federal Power Commission, FERC's predecessor agency, the
authority to regulate "the sale of [electric] energy at whole-
sale," as well as "the transmission of electric energy in
interstate commerce." FPA s 201(a), 16 U.S.C. s 824(a)
(1994). FERC also limited federal regulation "to those mat-
ters which are not subject to regulation by the States," id.,
and reserved to the states "jurisdiction ... over facilities
used for the generation of electric energy or over facilities
used in local distribution or only for the transmission of
electric energy in intrastate commerce...." FPA s 201(b),
16 U.S.C. s 824(b). Pursuant to these provisions, FERC has
regulated wholesale power sales and interstate transmissions,
and state agencies have retained jurisdiction over bundled
retail transactions, including service issues and the intrastate
sale and distribution of electricity through local distribution
facilities.
Initially, as most transactions involved either a wholesale or
a retail sale, and correspondingly transmission or local distri-
bution facilities, this regulatory division of labor was straight-
forward in application. Indeed, in 1935, when Congress
enacted the FPA, the networks of high-voltage, long-distance
transmission lines which today crisscross the United States
did not exist. Instead, vertically integrated utilities individu-
ally built facilities sufficient to meet the power needs of their
customers. Over time, however, the landscape of the electric
industry changed.
Utilities decided to cover demand spikes by sharing power,
rather than by building more generation capacity. The trans-
mission grid developed from these arrangements. Eventual-
ly, nonutility generators started producing electricity; and
power marketers began to buy and resell electricity to other
power marketers, utilities, or even directly to consumers.
These industry participants do not own transmission lines, so
they rely upon the utilities that own such facilities to provide
transmission services. In addition to their traditional bun-
dled sales activity, vertically integrated utilities started "un-
bundling" their own services and developing their own power
marketing units to buy and sell electricity at wholesale.
Some states even mandate unbundling of retail services. As
a result of these changes, facilities once used solely for local
distribution of bundled retail sales now engage regularly in
unbundled wholesale transmissions and retail delivery as well.
Thus, while the electricity world once neatly divided into
spheres of retail versus wholesale sales, and local distribution
versus transmission facilities, such is no longer the case.
In Order 888, FERC reinterpreted FPA s 201 to accom-
modate the new industry practices and conditions. FERC
left the regulation of bundled retail transmissions to the
states, concluding that "when transmission is sold at retail as
part and parcel of the delivered product called electric ener-
gy, the transaction is a sale of electric energy at retail."
Order 888, p 31,036 at 31,781. Nevertheless, FERC asserted
jurisdiction over all unbundled retail transmissions, and left
to the states only the sales portion of unbundled retail
transactions, on the ground that FPA s 201 gives it jurisdic-
tion without qualification over all transmission by public
utilities in interstate commerce. See id. Also, while ac-
knowledging that FPA s 201(b) explicitly places retail trans-
missions by "facilities used in local distribution" beyond the
Commission's jurisdiction, FERC adopted a seven factor jur-
isdictional test for determining which facilities fall within that
category, and claimed exclusive authority over those that do
not. See id. at 31,780, 31,784. In the present litigation, each
of these changes is challenged, with some petitioners claiming
that FERC went too far, and others contending that the
Commission did not go far enough in asserting jurisdiction.
A. Bundled Retail Sales
Several state regulatory commissions complain that FERC
exceeded the boundaries of its statutory authority by assert-
ing jurisdiction over unbundled retail transmissions. These
state petitioners argue that the plain meaning and history of
FPA s 201(a) gives FERC the authority to regulate only
transmissions of electricity consumed in a state other than
that in which the electricity was generated, if the transmis-
sion was not otherwise subject to state regulation. The
states historically have regulated retail transmissions as part
of bundled retail sales of electricity, while FERC has regulat-
ed wholesale transmissions; and the division of regulatory
jurisdiction should not change merely because those transac-
tions have now been unbundled into separate generation,
transmission, and sales components.
Two groups of transmission dependent utilities, TAPS and
TDU Systems, and the nation's largest power wholesaler,
Enron Power Marketing (collectively the "unbundling and
discounting" or "U&D" petitioners), both intervene on the
side of FERC with respect to the states' claim, and separate-
ly challenge FERC's interpretation of its jurisdiction on
different grounds. The U&D petitioners contend that FERC
impermissibly limited its jurisdiction by leaving the regulation
of bundled retail transmissions to the states. These parties
maintain that FERC has the authority to regulate both
bundled and unbundled retail transmissions, and that FERC
violates FPA s 206 by limiting the scope of Order 888 to the
latter. To establish that bulk transmission by utilities is
transmission in interstate commerce regardless of whether
the power is sold at wholesale or retail, the U&D petitioners
cite particularly FPC v. Florida Power & Light Co., 404 U.S.
453 (1972), and Jersey Central Power & Light Co. v. FPC, 319
U.S. 61 (1943), two of the cases relied upon by FERC in the
Notice of Proposed Rulemaking, p 32,514 at 33,135-42. As
further support that FERC's jurisdiction extends to all inter-
state transmissions, the U&D petitioners offer NGA prece-
dent recognizing FERC's authority over all interstate gas
transportation, if not the gas being transported. See, e.g.,
FPC v. Louisiana Power & Light Co., 406 U.S. 621, 636
(1972); United Distribution Cos. v. FERC, 88 F.3d 1105, 1153
(D.C. Cir. 1996) (UDC); Mississippi River Transmission
Corp. v. FERC, 969 F.2d 1215 (D.C. Cir. 1992). These
petitioners contend that excluding bundled retail transmis-
sions from the OATT will permit discrimination and give
owners a competitive advantage, contrary to the mandate of
FPA s 206(a) that FERC eliminate undue discrimination.
Accordingly, the U&D petitioners claim that FERC erred
when it declined to mandate functional unbundling for an
owner's transmissions to bundled retail customers of (1) its
own generated power or (2) power purchased at wholesale.
In response to these challenges, FERC maintains that the
plain meaning of FPA s 201 gives the Commission jurisdic-
tion over all interstate transmissions without qualification,
while at the same time limiting jurisdiction over sales to
wholesale sales. Relying particularly on Florida Power &
Light and Jersey Central Power & Light, FERC asserts
broad jurisdiction over all transmission activities in interstate
commerce. As for bundled retail sales, FERC's position is
that once the transmission service is bundled with generation
and local distribution, it becomes merely a component of the
retail sale itself, over which FERC has no jurisdiction.
FERC maintains that natural gas jurisprudence is inapplica-
ble because the language of the NGA and FPA differ on this
issue, and the natural gas cases turned on the existence of a
regulatory gap that does not exist in the electricity field.
FERC also asserts that its interpretation of the FPA's juris-
dictional grant is entitled to deference under Chevron U.S.A.
Inc. v. Natural Resources Defense Council, 467 U.S. 837
(1984).
Both FPA s 201(a) and (b) clearly and unambiguously
confer upon FERC jurisdiction over the "transmission of
electric energy in interstate commerce." FPA s 201(c) fur-
ther provides that "electric energy shall be held to be trans-
mitted in interstate commerce if transmitted from a State and
consumed at any point outside thereof." 16 U.S.C. s 824(c).
In both Florida Power & Light and Jersey Central Power &
Light, the Supreme Court considered whether certain indirect
transmissions of electrical power across state lines represent-
ed transmissions in interstate commerce.
Jersey Central Power & Light involved the transmission of
energy generated by Jersey Central in New Jersey. Jersey
Central transmitted electricity to the New Jersey transmis-
sion facilities of another company, Public Service, which then
transmitted the power first to another of its New Jersey
facilities, and then on to a facility owned by yet a third
company and located in the middle of a body of water
separating New Jersey from Staten Island, New York. The
third company in the chain then transmitted the energy first
to its own facilities in New York, then finally and ultimately
to consumers in New York. Jersey Central's own transmis-
sion facilities were located solely in New Jersey, and as were
the facilities used by Public Service to receive the transmis-
sions from Jersey Central.
The Supreme Court recognized that Jersey Central had no
control over the transmissions' destination once the electricity
was delivered to Public Service, see Jersey Central, 319 U.S.
at 65, and that the total flow of electricity from Jersey
Central to New York was small. See id. at 66. Nevertheless,
because some electricity generated by Jersey Central in New
Jersey was consumed in New York, the Court upheld
FERC's jurisdiction under FPA s 201 over Jersey Central's
transmission facilities as utilized for transmissions in inter-
state commerce. See id. at 67. The Court said that, under
FPA s 201(a) and (b), FERC's power extends over all facili-
ties "which transmit energy actually moving in interstate
commerce." Id. at 72. The Court emphasized, however, that
"mere connection" of one utility's transmission facilities to
those of another transmitting in interstate commerce was
insufficient for jurisdiction under FPA s 201. Id.
The Court revisited the issue in Florida Power & Light,
which involved certain Florida and Georgia utilities who
voluntarily connected their transmission facilities to coordi-
nate their activities and exchange power as required to meet
temporary needs. Like Jersey Central, FP&L's transmission
facilities were confined to Florida, and none of FP&L's
transmission lines directly connected with those of out-of-
state companies. Nevertheless, because FP&L was a mem-
ber of a group of interconnected utilities, its transmission
lines connected with those of other Florida utilities; and the
lines of one of those other utilities, Florida Power Corp.,
interconnected just short of Florida's northern border with
those of Georgia Power Co. Records indicated that power
transfers between FP&L and Florida Power coincided with
transfers between Florida Power and Georgia Power.
In Jersey Central, logs of the relevant companies demon-
strated at least a dozen occasions when facilities in New York
drew power from certain lines at times when Jersey Central
was the only supplier of electricity to those lines. See
Florida Power & Light, 404 U.S. at 459. By way of contrast,
there was no similar evidence that power generated by FP&L
specifically passed through Florida Power to Georgia Power,
with Florida Power serving as a mere conduit. See id. At
best, company records demonstrated instances when trans-
fers between FP&L and Florida Power occurred at or about
the same time as transfers between Florida Power and
Georgia Power. See id. at 457.
Instead, the Court considered two theories by which
FP&L's power could be deemed transmitted across state
lines. The first posited a cause and effect relationship by
which every flick of a light switch would cause every genera-
tor on a multi-state interconnected system to produce some
quantity of additional electricity to maintain the system's
balance, and thus to transmit electric energy throughout the
system and across state lines. The second theory suggested
that where the transmission lines of two utilities interconnect,
their energy commingles, such that inevitably some energy
transmitted by FP&L to Florida Power was then transmitted
to Georgia Power and across state lines.
Despite its statement in Jersey Central that "mere connec-
tion determines nothing," 319 U.S. at 72, the Court relied on
the second of these theories to conclude that FP&L's facilities
were transmitting energy in interstate commerce, and left
open the possible validity of the cause and effect theory. See
404 U.S. at 462-63. Writing in dissent, Justice Douglas
characterized the Court's opinion as "mean[ing] that every
privately owned interconnected facility in the United States
... is within the [Federal Power Commission's] jurisdiction,"
such that otherwise local utilities would now be subject to the
mandates of the federal bureaucracy. Id. at 471 (Douglas, J.,
dissenting).
The Supreme Court has interpreted the language in FPA
s 201 regarding FERC's jurisdiction over transmissions in
interstate commerce. We are bound by the High Court's
dictates to conclude that the FPA gives FERC the authority
to regulate the transmissions at issue here, whether retail or
wholesale. Even if the Court had not so spoken, however,
and even if we independently concluded that the statute's text
was less than clear, it is the law of this circuit that the
deferential standard of Chevron U.S.A. Inc. v. Natural Re-
sources Defense Council, 467 U.S. 837 (1984), applies to an
agency's interpretation of its own statutory jurisdiction. See
Oklahoma Natural Gas Co. v. FERC, 28 F.3d 1281, 1283-84
(D.C. Cir. 1994). As guided by Chevron, unless Congress has
directly spoken to the contrary, or FERC has unreasonably
or impermissibly interpreted the statute, we must defer to
the Commission's construction of ambiguous provisions of the
FPA. See Chevron, 467 U.S. at 842-43. In this age of
interconnected transmission grids, and given the accompany-
ing technological complexities, we would be hard pressed to
conclude that FERC's interpretation of s 201(c) as giving it
jurisdiction over both wholesale and retail transmissions is
unreasonable or impermissible.
Nevertheless, we are not persuaded that this conclusion
requires FERC to mandate unbundling and assert jurisdic-
tion over all retail transmissions. Just as FPA s 201 gives
FERC jurisdiction over transmissions in interstate commerce
and sales at wholesale, the statute also clearly contemplates
state jurisdiction over local distribution facilities and retail
sales. The statute is much less clear about exactly where the
lines between those activities are to be drawn. A regulator
could reasonably construe transmissions bundled with genera-
tion and delivery services and sold to a consumer for a single
charge as either transmission services in interstate commerce
or as an integral component of a retail sale. Yet FERC has
jurisdiction over one, while the states have jurisdiction over
the other. FERC's decision to characterize bundled trans-
missions as part of retail sales subject to state jurisdiction
therefore represents a statutorily permissible policy choice to
which we must also defer under Chevron. Accordingly, we
affirm FERC's decisions in Order 888 to assert jurisdiction
over unbundled retail transmissions while leaving regulation
of bundled retail transmissions to the states.
B. Local Distribution Facilities
FPA s 201(b) explicitly excludes from FERC jurisdiction
"facilities used in local distribution or only for the transmis-
sion of electric energy in intrastate commerce." 16 U.S.C.
s 824(b)(1). Historically, wholesale sales have not for the
most part involved local distribution facilities. FERC claims
that increased unbundling gives resellers the opportunity to
reconfigure the wholesale sales so that they might now occur
on those facilities which traditionally have been treated as
local distribution facilities. Moreover, FERC's assertion of
jurisdiction over the transmission component of unbundled
retail sales blurred the line between local distribution facili-
ties and facilities used for transmission in interstate com-
merce.
In Order 888, FERC claimed exclusive authority over the
regulation of facilities which sell and transmit electricity at
wholesale to customers who will resell the electricity to end
users. With respect to unbundled retail sales, FERC ac-
knowledged that transmissions by "facilities used in local
distribution" are beyond the Commission's jurisdiction, while
facilities engaged in interstate transmission are subject to
FERC jurisdiction under FPA s 201(a). Thus FERC
adopted a seven factor jurisdictional test to identify whether a
facility is a local distribution facility subject to state jurisdic-
tion or a facility engaged in interstate transmission subject to
FERC jurisdiction.6 In short, under Order 888, when a
__________
6 The Commission's seven factor test involves evaluating on a
case-by-case basis whether the activities of the facilities in question
correspond with seven specific indicators of local distribution:
(1) Local distribution facilities are normally in close proximity
to retail customers.
(2) Local distribution facilities are primarily radial in charac-
ter.
(3) Power flows into local distribution systems; it rarely, if
ever, flows out.
(4) When power enters a local distribution system, it is not
reconsigned or transported on to some other market.
(5) Power entering a local distribution system is consumed in a
comparatively restricted geographical area.
(6) Meters are based at the transmission/local distribution
public utility is engaged in wholesale transmission, FERC has
jurisdiction regardless of the nature of the facility; but when
the public utility is engaged in unbundled retail transmission,
the facts and circumstances will determine whether the facili-
ties are subject to FERC or state jurisdiction.
The state petitioners argue that FERC's dual approach
radically expands its jurisdiction and violates Congress' ex-
plicit directive in FPA s 201(b) that regulation of local distri-
bution facilities be left to the states. The states contend that
Congress clearly intended to preserve state jurisdiction over
local distribution facilities, regardless of whether the energy
comes from out of state or the sale is a wholesale sale. The
states maintain that, by claiming jurisdiction over any facility
transporting energy for resale, regardless of whether the
facility might otherwise be a local distribution facility under
the seven factor test, FERC has adopted the circular reason-
ing that wholesale sales do not occur on local distribution
facilities, so any facility that engages in wholesale activities is
not a local distribution facility. The states contend further
that FERC offers no reasoned analysis of why local distribu-
tion should be defined differently for wholesale versus retail
sales. The states finally charge that, under Order 888, nearly
identical facilities would be under federal jurisdiction and
state jurisdiction for different customers receiving indistin-
guishable service. Such a situation, they contend, will only
encourage energy marketers to choose their regulator by
using middlemen to shift the point at which title to the power
transfers, and thus undermine the jurisdictional certainty that
Order 888 states is necessary for competition.
FERC responds that it is not asserting jurisdiction over
local distribution facilities, but asserts that when a public
utility delivers unbundled energy at wholesale to a supplier
for the purpose of resale to an end user, FPA s 201 gives
FERC unqualified authority to assert jurisdiction over the
facility used to effect that transaction. When the public
utility is engaged in unbundled retail transmission, however,
__________
interface to measure flows into the local distribution system.
(7) Local distribution systems will be of reduced voltage.
Order 888, p 31,036 at 31,981.
the circumstances of a specific case will determine whether
the facilities used are subject to FERC or state jurisdiction.
The arguments by the states do no more than raise policy
concerns which are for FERC and not the court. See Arent
v. Shalala, 70 F.3d 610 (D.C. Cir. 1995).
Intervening again on FERC's behalf on this issue, the
U&D petitioners add that FERC's use of different tests is
appropriate given the differences in the two separate jurisdic-
tional grants of FPA s 201. The intervenors argue that,
given the statute's clear grant to FERC of jurisdiction over
all aspects of wholesale sales, FERC is fully justified in
employing a functional test to identify wholesale transmis-
sions. In contrast, because FERC's jurisdiction over retail
sales is limited to transmissions in interstate commerce, the
seven factor test is more appropriate.
We agree that FERC's dual approach to assessing its
jurisdiction stems from the fact that FPA s 201 contains
more than one jurisdictional grant. FPA s 201(b) denies
FERC jurisdiction over local distribution facilities "except as
specifically provided in this subchapter and subchapter III."
16 U.S.C. s 824(b)(1) (emphasis added). FPA s 201(a)
makes clear that all aspects of wholesale sales are subject to
federal regulation, regardless of the facilities used. FERC's
assertion of jurisdiction over all wholesale transmissions,
regardless of the nature of the facility, is clearly within the
scope of its statutory authority. Moreover, various cases
support the proposition that FERC regulates all aspects of
wholesale transactions. See, e.g., Duke Power Co. v. FPC,
401 F.2d 930, 935-36 (D.C. Cir. 1968) (noting that the FPC
regulates public utility facilities used in wholesale transmis-
sions or sales in interstate commerce); Arkansas Power &
Light Co. v. FPC, 368 F.2d 376, 383 (8th Cir. 1966) (stating
that the functional use of the transmission lines--wholesale
versus retail--controls); Wisconsin-Michigan Power Co. v.
FPC, 197 F.2d 472, 477 (7th Cir. 1952) (finding that transmis-
sion facilities used at wholesale are not "local distribution
facilities").
The seven factor test applies only to unbundled retail sales,
where FERC seeks to regulate pursuant to the separate
grant of jurisdictional authority over transmissions in inter-
state commerce. In this context, the definition of "facilities
used in local distribution" becomes relevant. The statute
does not define "facilities used in local distribution," but
instead leaves that task to FERC. As Chevron counsels us,
FERC's interpretation of undefined and ambiguous statutory
terms is entitled to deference. See Chevron, 467 U.S. at 842-
43.
FERC has adopted a multi-factor test to determine the
nature of transmission facilities. In a footnote, Order 888
says that distribution-only facilities which sell only at retail
will still be considered local distribution facilities. See Order
888, p 31,036 at 31,981 n.99. This is consistent with the fact
that states historically have regulated bundled retail sales to
end users. However, Order 888 implicitly recognizes the
current reality that many primarily retail utilities engage in
both local distribution and interstate transmissions, and seeks
through the seven factors to discern each facility's primary
function. We cannot agree with the state petitioners that this
approach is unreasonable or otherwise impermissible.
IV. Reciprocity
Section 6 of the Tariff contains a reciprocity provision
resting on the principle that any public utility offering "non-
discriminatory open access transmission for the benefit of
customers should be able to obtain the same non-
discriminatory access in return." Order 888, p 31,036 at
31,760. Non-public utilities--those outside the Commission's
jurisdiction because, for instance, they are state-owned, see 16
U.S.C. s 824(f)--would otherwise not have to offer open-
access. Under the Tariff, a public utility does not have to
offer them access unless they reciprocate. In order to avoid
controversies between public and non-public utilities regard-
ing reciprocal service, the Commission adopted a voluntary
"safe harbor" provision pursuant to which non-public utilities
could submit a transmission tariff to the Commission for a
determination whether it satisfied the reciprocity condition.
If it did, the public utility would have to offer service; if it did
not, the public utility could refuse service (although it had the
option of waiving the reciprocity condition, as did the Com-
mission itself).
A. Indirect Regulation of Non-Jurisdictional Utilities
Nebraska Public Power District (NPPD), a state entity,
provides electrical generation, transmission and distribution
service to wholesale and retail customers throughout Nebras-
ka.7 It claims that the Commission, through the reciprocity
provision, has reached beyond its statutory authority and is
illegally attempting to regulate entities, including NPPD, over
which the Commission has no jurisdiction, in violation of the
Federal Power Act and the Tenth Amendment to the Consti-
tution. NPPD admits that pursuant to Nebraska law, all
state power districts are obligated to provide open access
transmission service. They have been doing so for years.
This is doubtless why, after Order No. 888 issued, another
Nebraska public power district so easily obtained a safe
harbor declaration. See Omaha Pub. Power Dist., 81
F.E.R.C. p 61,054 (1997). In light of this, the Commission
argues--and we agree--that NPPD's petition is unripe.
Since NPPD already offers open access transmission, it is far
from certain that the reciprocity provision will have any effect
on it.8 It certainly has not demonstrated any particular
hardship that it would suffer if we refused to engage in pre-
enforcement judicial review. See AT&T Corp. v. Iowa Utils.
Bd., 525 U.S. 366, 386 (1999). From all that appears, no
public utility has refused, or even threatened to refuse, to
give NPPD access to its transmission system in the wake of
__________
7 "Nebraska is unique among the States in the Union in that all
generation, transmission and distribution service is provided by
public entities, municipalities and cooperatives whose governing
boards are responsible to, and serve at the voting pleasure of, the
rate-payers they serve." NPPD Brief at 2.
8 The Commission made clear that existing contracts will not be
affected. See Order 888-A, p 31,048 at 30,181.
Order No. 888.9 Given the fact that public utilities may waive
the reciprocity provision anyway, and that NPPD has the
same option of obtaining a safe harbor as did the Omaha
Public Power District, we are not persuaded that the provi-
sion is currently altering NPPD's conduct of its affairs or that
withholding judicial review will cause it any hardship whatev-
er. "Unlike the drug manufacturers in Abbott Laboratories
[v. Gardner, 387 U.S. 136 (1967)], but like the cosmetics
companies in Toilet Goods Ass'n v. Gardner, 387 U.S." 158,
164 (1967), NPPD need not change its "behavior or risk costly
sanctions." Clean Air Implementation Project v. EPA, 150
F.3d 1200, 1205 (D.C. Cir. 1998). Furthermore, exactly how
the Commission will fill in the contours of the reciprocity
provision remains to be seen. That it may defer to state
commissions, as it indicated in Houston Lighting & Power
Co., 81 F.E.R.C. p 61,015 (1997), order on reh'g, 83 F.E.R.C.
p 61,181 (1998), affects NPPD's contention that the Commis-
sion is seeking to bring about nationwide uniformity by
forcing non-public utilities to comply with its "detailed man-
dates." NPPD Brief at 5. We therefore believe the issues
raised would benefit from a more concrete setting in which
NPPD can demonstrate exactly how the reciprocity provision
has affected its primary conduct. See Clean Air Implemen-
tation Project, 150 F.3d at 1204. For all these reasons,
NPPD's challenge to the reciprocity provision is not ripe for
judicial review.
B. Limitation on Reciprocity
The Investor Owned Utilities (IOUs) challenge the follow-
ing limitation on reciprocity: non-public utilities owe recipro-
cal open access only to the public utility from which they take
open access service--not to all utilities. See IOU Brief at 40-
44; IOU Reply Brief at 18-20. These petitioners argue that
the Commission has left open the door for non-public utilities
__________
9 For this reason we find unpersuasive NPPD's claim that the
Tariff's reciprocity provision places it at a disadvantage in negotia-
tions because a public utility may simply refuse to provide service
without any fear of a Commission enforcement action. See NPPD
Reply Brief at 4-5.
to discriminate against all other utilities and that it has done
so solely because of tax considerations that no longer apply.
We agree with Commission counsel that tax considerations
were not the only basis on which the Commission's limitation
rested. The Commission stated that "the reciprocity require-
ment strikes an appropriate balance by limiting its application
to circumstances in which the non-public utility seeks to take
advantage of open access on a public utility's system." Order
888, p 31,036 at 31,762. The Commission also explained that
it "do[es] not have the authority to require non-public utilities
to make their systems generally available." Id. at 31,761.
The Commission stated also that it did not want broad open
access reciprocity to jeopardize the tax-exempt financing non-
public utilities enjoy,10 that the IRS was then reexamining the
question, id. at 31,762, and that if the tax issue is favorably
resolved, it will reconsider the matter. Order 888-A,
p 31,048 at 30,287. The IRS has now acted. See Temporary
Regulations s 1.141-7T(f), in 63 Fed. Reg. 3256 (1998). The
IOUs argue that we must therefore remand for reconsidera-
tion. See IOU Brief at 44 (citing Panhandle Eastern Pipe-
line v. FERC, 890 F.2d 435, 439 (D.C. Cir. 1989); National
Fuel Gas Supply Corp. v. FERC, 899 F.2d 1244, 1249-50
(D.C. Cir. 1990); Ciba-Geigy v. EPA, 46 F.3d 1208 (D.C. Cir.
1995)).
We think not. So far as we know, the IRS has not finalized
its temporary and proposed regulations. The IRS acknowl-
edges that its temporary regulations "raise[ ] a number of
complex technical issues" many of which "may need to be
addressed legislatively" and it anticipates that the finalization
process will take three years to accomplish. 63 Fed. Reg. at
3258-59. Second, as the Commission indicates, the possible
tax consequences of requiring open access from non-
jurisdictional utilities was its secondary concern. The Com-
mission's greater concern was its lack of jurisdiction to do
what the IOUs ask. And lastly the Commission should be
__________
10 See 26 U.S.C. ss 141, 142 (permitting "private activity" bonds
and "local furnishing" bonds, respectively).
taken at its word that it will reconsider the scope of reciproci-
ty when and if the temporary tax regulations are finalized.
V. Stranded Cost Recovery Provisions
Ordering open access transmission, Order 888-A explains
that "[t]he most critical transition issue that arises as a result
of the Commission's actions in this rulemaking is how to deal
with the uneconomic sunk costs that utilities prudently in-
curred under an industry regime that rested on a regulatory
framework and a set of expectations that are being funda-
mentally altered." Order 888-A, p 31,048 at 30,346. "If a
former wholesale requirements customer or a former retail
customer uses the new open access to reach a new supplier,"
FERC said, "we believe that the utility is entitled to recover
legitimate, prudent and verifiable costs that it incurred under
the prior regulatory regime...." Order 888, p 31,036 at
31,789.
According to FERC, these "stranded" costs consist pre-
dominantly of costs of building generation capacity, which
utilities incurred with the expectation that they would use the
additional capacity to serve existing customers. See Notice of
Proposed Rulemaking, Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities, FERC Stats. & Regs.
p 32,507 at 32,863-64, 59 Fed. Reg. 35,274 (1994) ("Stranded
Cost NOPR"). Because of the increased competition in the
generation market that will result from open access, this
capacity may become underutilized or uneconomical, i.e.,
"stranded." Stranded costs also include nonrecurring costs
approved by regulators that, in order to avoid rate increases,
were recovered over a period of years instead of at the time
the expenditures were made. Known as "regulatory assets,"
these costs include deferred income taxes, deferred pension
and other employee benefit and retirement costs, research
and development, extraordinary property losses, and the
phase-in of new plant costs. Nuclear decommissioning costs
and costs to buy out high-priced fuel and power contracts
may also become stranded as a result of open access.
Exercising its exclusive jurisdiction over wholesale power
sales, FERC through Order 888 gave utilities the opportunity
to recover their stranded costs from former wholesale cus-
tomers who take advantage of open access transmission to
purchase power from other suppliers. Order 888, p 31,036 at
31,810. With respect to stranded costs resulting from state-
ordered retail wheeling, Order 888 provides that FERC will
consider stranded cost claims only when state regulatory
agencies lack authority to do so. Id. at 31,824-25. Order 888
also designated FERC as the primary forum for stranded
cost claims stemming from what are known as new municipal-
izations and municipal annexations. See Order 888-A,
p 31,048 at 30,404; Order 888-B, 81 FERC at 62,104.
Stranded costs in these situations result from retail (as
opposed to wholesale) power sales.
Petitioners challenge nearly every aspect of FERC's
stranded cost policy as set forth in Order 888, from the
mechanics of calculating customers' stranded cost obligations
to whether FERC has authority to address stranded costs at
all. We begin with those challenges that relate to the recov-
ery of wholesale stranded costs (Section V.A), then turn to
challenges to Order 888's treatment of retail stranded costs
(Section V.B). We affirm FERC's stranded cost policy in all
respects, except we vacate that portion of the orders dealing
with the treatment of energy costs in the market option and
remand to FERC for further explanation. See Section
V.A.5.c.
A. Wholesale Stranded Costs
In requiring nondiscriminatory open access transmission as
a remedy for undue discrimination, FERC recognized that it
"cannot change the rules of the game without providing a
mechanism for recovery of the costs caused by such
regulatory-mandated change." Order 888-A, p 31,048 at
30,346. Under the pre-open access regulatory regime, utili-
ties entered into long-term contracts to make wholesale pow-
er sales to municipal, cooperative, and investor-owned utili-
ties. See Stranded Cost NOPR, p 32,507 at 32,862. Because
these customers had no source of power supply other than
their historic utility, these contracts were typically extended
at the end of their term. This produced an implicit obligation
by the utilities to continue satisfying their customers' power
needs, as well as a reciprocal expectation by customers of
continued service. See id. at 32,863-64. To satisfy expected
customer demand, utilities invested money, built facilities, and
entered into long-term fuel or power contracts, relying on the
"regulatory compact" under which utility shareholders accept-
ed lower rates of return on their investment in exchange for
the certainty of regulated rates and resulting ability to recov-
er prudently incurred costs. See Notice of Proposed Rule-
making, Promoting Wholesale Competition Through Open
Access Non-discriminatory Transmission Services by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, FERC Stats. & Regs. p 32,514 at
33,049, 60 Fed. Reg. 17,662 (1995).
Order 888 fundamentally undermines utilities' expectation
of continued service and cost recovery. A utility's require-
ments customers may now use the utility's open access trans-
mission service to purchase power from other suppliers at the
end of their contract terms. If customers leave before paying
their share of costs the historic utility incurred on their
behalf, the utility will be left with stranded costs, which it will
either absorb or shift to remaining customers.
Unless utilities are able to recover stranded costs, FERC
reasoned, their ability to compete and attract investor capital
in a deregulated market may be seriously impaired. FERC
therefore decided that it had to "address recovery of the
transition costs of moving from a monopoly-regulated regime
to one in which all sellers can compete on a fair basis and in
which electricity is more competitively priced." Order 888,
p 31,036 at 31,635. In reaching this conclusion, FERC relied
on its experience in restructuring the natural gas industry,
where this court faulted it for failing to provide transitional
mechanisms such as stranded cost recovery. FERC ex-
plained: "We have learned from our experience in the natural
gas area the importance of addressing competitive transition
issues early and with as much certainty to market partici-
pants as possible." Id.
In shaping its stranded cost recovery mechanism, FERC
had to balance two competing interests: speeding the transi-
tion to competition versus protecting utilities that had in-
curred costs with the expectation that their customers would
remain and eventually pay those costs through electricity
rates. Allowing recovery of stranded costs, FERC acknowl-
edged, would delay full realization of the benefits of open
access--lower electricity rates--because customers facing
stranded cost liability might continue purchasing power from
their historic utility even though competitors are selling
power at lower rates. See Order 888-A, p 31,048 at 30,355.
Indeed, a customer would only switch suppliers if the compet-
itor offered a rate less than the historic utility's rate plus the
customer's stranded cost liability. But given the highly regu-
lated nature of the electricity industry, in which utilities
incurred costs with the expectation of recouping them, FERC
concluded that the delay was a necessary component of its
open access program. See id. Mindful of its ultimate goal of
converting the electricity industry into a competitive market,
however, FERC fashioned the stranded cost recovery provi-
sions to be transitional, allowing utilities to recover stranded
costs only in connection with wholesale requirements con-
tracts entered into on or before July 11, 1994 (the date of the
stranded cost notice of proposed rulemaking). See 18 C.F.R.
s 35.26(b)(8), 35.26(c)(1)(v)-(vi).
As to precisely who should pay for stranded costs, utilities
and customers not surprisingly had dramatically different
positions. Customers argued that utilities should absorb
most, if not all, stranded costs. Utilities (and their investors)
argued that customers should pay.
Facing an enormously difficult task in balancing these
sharply conflicting positions, FERC crafted a rule that re-
quires customers to pay stranded costs but only in certain
circumstances. Most important, in order to recover stranded
costs from a customer, the historic utility must prove that it
had a reasonable expectation of continued service to that
particular customer for a certain number of years beyond the
end of the contract term; a utility unable to prove such an
expectation may not recover stranded costs under Order 888.
See 18 C.F.R. s 35.26(c)(2)(i). Moreover, a utility able to
demonstrate a reasonable expectation of continued service
may recover stranded costs only if its wholesale customer
actually takes advantage of the utility's open access tariff to
obtain access to a new generation supplier at the end of its
contract term (i.e., the former customer continues to use the
historic utility's transmission service but no longer purchases
power from it). See 18 C.F.R. s 35.26(b)(1)(i). Through
these two limitations, FERC balanced the interests of utilities
and customers by allowing utilities to recover their stranded
costs only if they can demonstrate a reasonable expectation of
continued service and requiring customers to pay those costs
only if they take advantage of their historic utility's open
access transmission to reach cheaper sources of power. And
of course, no customer will have to pay stranded costs at all if
it continues purchasing power from its historic utility
throughout the period during which the utility has a reason-
able expectation of continued service--precisely what the
customer would have done in the absence of Order 888's open
access requirement.
Under Order 888, stranded costs are calculated on a "reve-
nues lost" basis. A departing customer's stranded cost obli-
gation equals the estimated revenue it would have paid had it
continued to purchase power from the historic utility minus
the current market value of the power it would have pur-
chased, calculated over the period the utility is determined to
have a reasonable expectation of continued service to that
customer. See 18 C.F.R. s 35.26(c)(2)(iii). In other words,
the stranded cost formula is not tied to particular stranded
assets or contractual commitments, but rather awards utilities
the difference between the pre-open access cost-based rate
and the post-open access market rate. Once a customer's
stranded cost liability is calculated, it may pay through a
lump-sum payment, installment payments, or a surcharge to
the transmission rate charged by the historic utility. See
Order 888, p 31,036 at 31,799.
Before turning to petitioners' arguments, we emphasize
what should be obvious from the foregoing summary of Order
888: Order 888 awards stranded costs to no one. It does
nothing more than establish a mechanism by which utilities
may seek to recover stranded costs. To recover stranded
costs, a utility must demonstrate its continued expectation of
service at an evidentiary hearing. The customer may appear
at that hearing and, through evidentiary submissions of its
own, attempt to demonstrate that the utility had no such
expectation. Only after such a hearing may FERC decide
whether a utility can recover stranded costs and, if so, how
much.
Petitioners mount many challenges to Order 888's stranded
cost recovery provisions. For purposes of analysis, we group
these challenges into five categories: (1) challenges to
FERC's authority to provide for stranded cost recovery
(section V.A.1); (2) claims that Order 888 conflicts with cost
causation principles and case law developed under the Natu-
ral Gas Act (section V.A.2); (3) challenges to FERC's Mobile-
Sierra findings (section V.A.3); (4) claims that FERC arbi-
trarily and capriciously failed to provide for stranded cost
recovery by certain entities, such as transmission dependent
utilities and generation and transmission cooperatives (section
V.A.4); and (5) challenges to various technical aspects of
Order 888's stranded cost recovery provisions (section V.A.5).
1. FERC's Authority to Provide for Stranded Cost Recovery
A group called Petitioners Opposing Stranded Cost Recov-
ery ("POSCR") advances three challenges to FERC's authori-
ty to provide for stranded cost recovery: (1) as a factual
matter, utilities could never have had a reasonable expecta-
tion of continued service to wholesale customers beyond the
contract term; (2) sections 206 and 212 of the Federal Power
Act ("FPA") forbid stranded cost recovery; and (3) our
decision in Cajun Elec. Power Coop., Inc. v. FERC, 28 F.3d
173 (D.C. Cir. 1994), holds that stranded cost recovery is
anticompetitive. We consider each argument in turn.
a. Reasonable expectation of continued service
To recover stranded costs relating to a specific departing
wholesale requirements customer, a utility must show that it
had a reasonable expectation of service to that customer
beyond the term of its existing contract. See 18 C.F.R.
s 35.26(c)(2)(i). Pointing out that contracts define the extent
of the parties' obligations and that customers have long
exercised their rights to purchase power from other suppliers
at the end of their contract terms, POSCR contends that
utilities could never have had an expectation of service be-
yond their contract terms. In considering this argument it is
important to remember that Order 888 does not itself award
stranded costs; it merely establishes a procedure by which
utilities may petition FERC in individual proceedings to
recover stranded costs from a specific customer based on a
specific evidentiary showing. Utilities failing to show an
expectation of continued service will be unable to recover
stranded costs. POSCR's challenge thus amounts to a claim
that no utility could ever, under any circumstances, have had
a reasonable expectation to serve a wholesale customer be-
yond the term of its contract. We review this claim under
the APA's familiar arbitrary and capricious standard. See 5
U.S.C. s 706(2)(A); Williams Field Services Group, Inc. v.
FERC, 194 F.3d 110, 115 (D.C. Cir. 1999).
Responding to this same challenge in Order 888-A, FERC
explained that utilities historically had an implicit obligation
to serve customers beyond the contract term for a simple
reason: Customers had no means of reaching alternative
suppliers. See Order 888-A, p 31,048 at 30,354. As part of
that obligation to serve, FERC found, a local utility "had a
concomitant obligation to plan to supply [its] customers'
continuing needs, and planned its system taking account of
the wholesale load. In many cases the wholesale customers
participated by supplying load forecasts." Id. In making
capital decisions and predicting future demand, utilities fre-
quently consulted with their wholesale requirements custom-
ers. For these reasons, FERC concluded, utilities may have
a reasonable expectation of continued service to particular
customers. See id. at 30,354-55.
Not only is FERC's judgment about utilities' reasonable
expectations precisely the type of policy assessment to which
we owe great deference, but POSCR points to nothing sug-
gesting that FERC's reasoning is arbitrary and capricious.
In fact, POSCR's argument completely ignores the highly
regulated nature of the electricity industry prior to Order
888. Unlike competitive markets, where buyers may freely
purchase from many sellers, the monopolistic character of the
electricity industry, combined with the congressionally im-
posed regulatory structure, left requirements customers high-
ly dependent on a single supplier--their historic utility. In-
deed, as intervenors point out, utilities were even unable to
choose not to renew an expiring wholesale requirements
contract without first notifying FERC. See 18 C.F.R. s 35.15
(1995) (repealed by Order 888). Although it may well be
true, as POSCR argues, that some wholesale customers have
long been able to purchase unbundled transmission service,
we think such evidence is best reserved for individual pro-
ceedings, where a departing customer can attempt to refute
the utility's claim that it had an expectation of continued
service.
b. Sections 206 and 212 of the FPA
Section 206(a) of the FPA gives FERC authority to "deter-
mine the just and reasonable rate, charge, classification, rule,
regulation, practice, or contract to be thereafter observed and
in force" if it finds that any existing arrangement "is unjust,
unreasonable, unduly discriminatory or preferential." 16
U.S.C. s 824e(a). Relying on section 206(a) as the basis for
Order 888, FERC found that utilities had used their monopo-
ly transmission power to discriminate against potential com-
petitors and that such practices would increase as competitive
pressures in the industry increased. Order 888, p 31,036 at
31,676, 31,682.
POSCR contends that Order 888's stranded cost recovery
provisions themselves violate FERC's own construction of
section 206, the construction FERC relied on as the basis for
the open access rule. According to POSCR, "[t]he stranded
cost rule perpetuates the very 'discrimination' FERC found
unlawful, and subjects the same victims--customers held
hostage to uneconomic electric generation by transmission
monopolists--to continued abuse."
In challenging FERC's policy decision to provide for
stranded cost recovery, POSCR conflates the violation
(FERC's generic determination that utilities' practice of pro-
hibiting access to their transmission lines on reasonable terms
was unduly discriminatory) with the remedy (FERC's more
limited finding that recovery of stranded costs in particular
circumstances would not be unduly discriminatory). FERC
has not, as POSCR contends, given "unduly discriminatory"
different meanings; rather, it has applied the term in differ-
ent contexts.
POSCR's argument thus boils down to a challenge to
FERC's conclusion that the stranded cost recovery pre-
scribed in Order 888 is not unduly discriminatory, a challenge
meriting arbitrary and capricious review. Viewed through
this lens, we think FERC more than adequately explained
why it concluded that stranded cost recovery is not unduly
discriminatory--stranded cost recovery, FERC said, is transi-
tional only, follows cost causation principles, and requires
utilities to prove that they had a reasonable expectation of
continued service. FERC faced an enormously difficult task.
It had to balance the transition to competitive markets
against the need to maintain the competitiveness of utilities
that had incurred costs based on a reasonable expectation
that they would recoup them. We find nothing either arbi-
trary or capricious in how FERC struck this balance.
POSCR next contends that stranded cost recovery violates
section 212 of the FPA, which governs the rates for transmis-
sion ordered by FERC pursuant to section 211. 16 U.S.C.
ss 824j-k. Because FERC-jurisdictional utilities are no long-
er subject to sections 211 and 212, this argument relates only
to those situations in which FERC orders nonjurisdictional
transmitting utilities to wheel under section 211 and these
utilities then seek to recover stranded costs in their transmis-
sion rates. See 18 C.F.R. s 35.26(c)(1)(vi)-(vii). Section 212
allows FERC to order "rates, charges, terms, and conditions
which permit the recovery by [a transmitting] utility of all the
costs incurred in connection with the transmission services
and necessary associated services, including, but not limited
to, an appropriate share, if any, of legitimate, verifiable and
economic costs, including taking into account any benefits to
the transmission system of providing the transmission ser-
vice, and the costs of any enlargement of transmission facili-
ties." 16 U.S.C. s 824k(a). Contending that "economic
costs" cannot be read to include payment of stranded costs,
which by definition relate to generation (not transmission)
services, POSCR reads section 212 to preclude stranded cost
recovery.
Straightforward application of the Chevron doctrine demon-
strates the lack of merit in this argument. See Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984). Because Congress has not "directly spoken to the
precise question at issue"--do "economic costs" include
stranded costs?--and because nothing in the statute pre-
cludes recovering through transmission rates costs that were
traditionally recovered through generation rates, the term
"economic costs" is ambiguous. Id. at 842.
Proceeding to Chevron's second step, we ask whether
FERC has reasonably interpreted the term "economic costs."
See id. at 843. We have no doubt that it has. As FERC
explained, but for section 211 wheeling orders, there would be
no stranded costs. Stranded costs, according to FERC, are
therefore economic costs of section 211 wheeling. See Order
888-A, p 31,048 at 30,390. POSCR offers nothing to under-
mine this eminently reasonable interpretation of the statute.
c. Implications of Cajun
Next, POSCR contends that our decision in Cajun Elec.
Power Coop., Inc. v. FERC, 28 F.3d 173 (D.C. Cir. 1994),
condemns stranded cost recovery as anticompetitive. A pre-
Order 888 decision, Cajun reviewed two tariffs allowing a
utility, Entergy Corporation, to sell power at market rates,
and a third tariff providing for open access to Entergy's
transmission services at cost-based rates. The third tariff
gave Entergy an opportunity to recover stranded costs from
customers who no longer purchase power from Entergy but
use its transmission lines to reach other suppliers--exactly
the circumstances in which Order 888 provides for stranded
cost recovery. Under the tariff, the stranded cost charge was
included in Entergy's transmission rate. See id. at 175-77.
Characterizing the stranded cost provision as a "tying
arrangement" under antitrust law, Cajun explained that un-
der the tariff, Entergy could charge a former customer for
the cost of generation services when the customer wished to
purchase only transmission services; because Entergy has a
monopoly over transmission, customers would have no choice
but to pay costs relating to generation they no longer wanted
from Entergy. Id. at 177-78. Thus, because "Entergy could
use its monopoly over transmission services to eliminate
competition in the market for generation services," the net
effect of the tariffs may be anticompetitive. Id. at 176.
Of significance to this case, however, we did not strike
down the tariffs. Instead, we remanded the case for FERC
to determine "how much competition in fact is dampened" by
the stranded cost provision. Id. at 178. Thus, contrary to
POSCR's suggestion, Cajun does not represent a blanket
condemnation of stranded cost recovery; rather, recognizing
that such recovery could be anticompetitive, Cajun directed
FERC to evaluate and justify the potential anticompetitive
impact. This is precisely what FERC has done in Order 888.
It expressly considered the anticompetitive effects of strand-
ed cost recovery. See Order 888-A, p 31,048 at 30,372-74.
Then, stressing the transitional nature of the recovery and
the fact that recovery was compelled by the open access
requirement, which utilities could not have anticipated, FERC
concluded that the limited anticompetitive effects of stranded
cost recovery were both a necessary and acceptable conse-
quence of the transition to competition. See id. Not only
has POSCR offered no evidence that would lead us to ques-
tion FERC's conclusion, but such judgments about anticom-
petitive effects are "the kind of reasonable agency prediction
about the future impact of its own regulatory policies to which
we ordinarily defer." Louisiana Energy and Power Auth. v.
FERC, 141 F.3d 364, 370 (D.C. Cir. 1998).
2. Natural Gas Precedent and Conformance to Cost Causa-
tion Principles
Having rejected POSCR's arguments that FERC lacks
authority to authorize stranded cost recovery, we turn to its
argument that FERC has failed adequately to explain why
Order 888 requires departing customers to pay one-hundred
percent of stranded costs. In support of this argument,
POSCR claims that our decisions reviewing FERC's restruc-
turing of the natural gas industry require cost sharing; it also
argues that Order 888's stranded cost recovery conflicts with
the cost causation principles that traditionally govern alloca-
tion of costs.
a. Natural gas precedent: AGD, K N Energy, and UDC
In introducing competition into the electricity industry,
FERC has taken essentially the same path that it took in
restructuring the natural gas industry, although what FERC
has done in a single order in the electricity industry (Order
888) it did in a series of orders in the natural gas industry.
Because POSCR relies so heavily on FERC's natural gas
orders and our decisions reviewing them, we begin by sum-
marizing them in some detail.
Finding practices in the natural gas industry "unduly dis-
criminatory" in violation of the Natural Gas Act, FERC
began by issuing Order 436, which "unbundled" pipeline
transportation and merchant functions. Regulation of Natu-
ral Gas Pipelines After Partial Wellhead Decontrol, Order
No. 436, FERC Stats. & Regs. p 30,665, 50 Fed. Reg. 42,408
(1985) (rehearing orders omitted). At the time of Order 436,
pipelines were facing enormous liabilities under long-term
"take-or-pay" contracts. Entered into when gas prices were
expected to rise, these contracts obligated pipelines to pur-
chase minimum quantities of gas from wellhead producers at
fixed prices that turned out to be well in excess of market
prices. See Associated Gas Distributors v. FERC, 824 F.2d
981, 1021 (D.C. Cir. 1987) ("AGD"). Although FERC esti-
mated take-or-pay liabilities at billions of dollars, and al-
though Order 436 would exacerbate the take-or-pay problem
by providing incentives to pipeline customers to purchase gas
from cheaper suppliers, FERC declined to take any action
with respect to the contracts. In AGD, we found that
FERC's decision to do nothing failed to meet the require-
ments of reasoned decisionmaking, citing FERC's "seeming
blindness to the possible impact of Order No. 436 on take-or-
pay liability" and permanent market distortions that may
result from FERC's inaction. Id. at 1021-23, 1025. Specifi-
cally, we noted, in words echoed by FERC years later in
Order 888, that consumers who purchased from the "least
nimble" local distribution companies would "be stuck with the
burden of the overpriced gas." Id. at 1023.
In response to AGD, FERC issued Order 500. Regulation
of Natural Gas Pipelines After Partial Wellhead Decontrol,
Order No. 500, FERC Stats. & Regs. p 30,761, 52 Fed. Reg.
30,334 (1987) (rehearing orders omitted). Recognizing that
no one segment of the gas industry was wholly responsible
for the take-or-pay problem, Order 500 allowed pipelines to
recover take-or-pay costs through "equitable sharing." Pipe-
lines that willingly absorbed twenty-five to fifty percent of
their costs could require sales customers to match that
amount through a fixed charge. Pipelines could recover any
balance through commodity rates or volumetric surcharges,
borne by both sales and transportation customers. For an
overview of these components of Order 500, see K N Energy,
Inc. v. FERC, 968 F.2d 1295, 1297-98 (D.C. Cir. 1992). We
sustained this approach in K N Energy, holding that even
though Order 500 replaced traditional "cost causation" princi-
ples with cost spreading and value-of-service concepts, it did
not violate Natural Gas Act section 4's requirement that rates
be just and reasonable. Id. at 1301-02. Citing statements in
AGD that "all actors in the natural gas industry" are "candi-
dates" for absorbing take-or-pay liability, we relied on "the
unusual circumstances surrounding the take-or-pay problem,
and the limited nature--both in time and scope--of the
Commission's departure from the cost-causation principle."
Id. at 1301.
Concluding that Order 436 had been only partially success-
ful in introducing competition into the natural gas industry,
FERC issued its third major restructuring order, Order 636.
Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regula-
tion of Natural Gas Pipelines After Partial Wellhead Decon-
trol, Order No. 636, FERC Stats. & Regs. p 30,939, 57 Fed.
Reg. 13,267 (1992) (rehearing orders omitted). That order
imposed mandatory unbundling of sales and transportation
services and allowed sales customers to reduce the amount of
gas they had to purchase pursuant to existing contracts.
When customers took advantage of this option and purchased
gas from sources other than the pipelines, the pipelines were
once again left with substantial take-or-pay liabilities. Label-
ing the costs of reducing these liabilities gas supply realign-
ment or GSR costs, Order 636 authorized pipelines to bill
current transportation customers for one-hundred percent of
their GSR costs by charging either a negotiated exit fee or
reservation fee surcharge. Order 636 also authorized pipe-
lines to recover all stranded costs in rate filings. In the
natural gas industry, stranded costs represented the costs of
pipeline assets (such as storage facilities) used to provide
bundled sales services that were not directly assignable to
transportation customers. For an overview of these compo-
nents of Order 636, see United Distribution Cos. v. FERC, 88
F.3d 1105, 1125-27, 1176-78 (D.C. Cir. 1996) ("UDC").
In UDC, we affirmed FERC's determination that pipelines
could recover all stranded costs through filed rates, so long as
FERC "adequately balanced the interests of investors and
ratepayers." Id. at 1180. Reaffirming the appropriateness
of the cost spreading and value-of-service principles approved
in K N Energy, we found that FERC's allocation of GSR
costs to pipeline transportation customers, as opposed to the
pipelines themselves, properly applied those principles. Id.
at 1182. Although recognizing that GSR costs stemmed from
pipeline sales customers, not transportation customers, we
found that FERC appropriately imposed the costs on trans-
portation customers because these customers benefitted from
the availability of lower-priced transportation and also be-
cause FERC could not spread costs to the pre-Order 636
sales customers since those customers no longer purchased
gas from the pipelines. Id. at 1185-86. We remanded for
FERC to explain more fully why pipelines should not have to
pay some of the costs, noting an inconsistency in the Commis-
sion's analysis: While FERC applied cost spreading princi-
ples to justify imposing costs on transportation customers, it
invoked cost causation principles in concluding that pipelines
should not have to pay any of these costs. Id. at 1188-89.
We explicitly stated, however, that we were not saying that
"it is impossible, or even improbable, that the Commission on
remand can establish a convincing rationale for exempting the
pipelines." Id. at 1189.
POSCR reads this history to require FERC to order cost
sharing, but it ignores Order 888's explanation of the differ-
ence between natural gas restructuring and the situation in
the electricity industry. Most fundamentally, Order 888 ex-
plains, stranded cost recovery in the electricity industry
conforms to cost causation principles, which normally govern
the allocation of costs and require customers to pay the costs
they caused. See Order 888, p 31,036 at 31,798. Cost causa-
tion principles could not be applied in natural gas restructur-
ing, Order 888 explains, because many customers had already
begun purchasing gas from other suppliers before FERC had
addressed the take-or-pay problem on remand from AGD,
and because the filed rate doctrine prohibits assessing
charges against former customers. Id. at 31,800-01. Order
888 also explains that unlike stranded costs in the electricity
industry, the take-or-pay liabilities in the gas industry were
extraordinary. The billions of dollars of take-or-pay liabilities
resulted not from Order 636, but from earlier regulatory
policies that had encouraged pipelines to enter into long-term,
fixed-price gas purchase contracts, combined with declining
gas prices that made those contracts uneconomical. See
Order 888-A, p 31,048 at 30,380. Under all of these circum-
stances, "[t]o have allocated these costs solely to any one
segment of the industry would have imposed a crushing new
burden on that segment." Id. at 30,380-81.
Stranded costs in the electricity industry, Order 888 ex-
plains, are quite different. Resulting directly from Order
888, they represent "ordinary costs that have always been,
and are currently, included in the utility's rates for electric
generation approved by the Commission." Id. at 30,382.
Moreover, wholesale customers may avoid stranded cost lia-
bility by continuing to purchase power from their historic
utility, precisely what they probably would have done in the
absence of Order 888. In other words, in contrast to the
natural gas industry, where customers would have faced
enormous new burdens had FERC forced them to pay take-
or-pay costs, customers in the electricity industry face no new
burdens; instead, Order 888 requires them to pay nothing
more than costs they would have had to pay in the absence of
Order 888. In the electricity industry, the only effect of
stranded cost recovery is delayed realization of the full bene-
fits of a competitive market.
In light of these differences between the natural gas and
electricity industries and FERC's exhaustive treatment of the
natural gas restructuring in Order 888, POSCR's contention
that FERC has failed "to offer a coherent rationale, rising to
the level of reasoned decisionmaking" for not imposing cost
sharing is wholly without merit. Equally without merit is
POSCR's assertion that UDC "teaches that, where customers
and utilities benefit from an open access rule/order that leads
to early contract termination and where anticompetitive con-
duct by utilities has given rise to the need for the open access
order, utilities must share transition costs." POSCR ignores
three important points. First, FERC, not this court, deter-
mined that cost sharing was appropriate with respect to take-
or-pay liabilities. UDC merely affirmed FERC's decision.
Second, K N Energy recognized that cost sharing in the
natural gas industry was a departure from the cost causation
principles that normally apply, a departure justified by ex-
traordinary circumstances in the natural gas industry. K N
Energy, 968 F.2d at 1301-02. And finally, as to stranded
costs that more closely resemble those at issue in this case--
for example, pipeline assets that would no longer be fully
employed when customers took advantage of unbundling to
purchase gas from alternative suppliers--FERC ordered, and
UDC affirmed, that pipelines recover one-hundred percent of
those costs.
b. Conformance to cost causation principles
Having established that the natural gas cases impose no
obligation on FERC to order cost sharing, we next consider
POSCR's argument that the inclusion of stranded costs in
transmission rates does not conform to cost causation princi-
ples. This is so, POSCR asserts, because Order 888's strand-
ed cost provisions require customers to pay through transmis-
sion rates for costs the utility previously incurred to provide
generation services.
As an initial matter, we note that payment through trans-
mission rates is only one of three ways that a departing
customer may pay its stranded cost obligation; the customer
also has the option of making a lump-sum payment or install-
ment payments. Thus POSCR's challenge seems aimed only
at the method of payment, not at the fact that payment is
required. But even viewing POSCR's challenge more broad-
ly, as a claim that stranded cost recovery no matter what the
method of payment violates cost causation principles, we
think it lacks merit.
We have explained the cost causation principle as follows:
"Simply put, it has been traditionally required that all ap-
proved rates reflect to some degree the costs actually caused
by the customer who must pay them." K N Energy, 968 F.2d
at 1300. Given this definition, we are puzzled by POSCR's
claim that because inclusion of stranded costs in transmission
rates requires customers to pay currently for costs incurred
in the past, it violates cost causation principles. To some
degree, all utility rates reflect past costs; utilities typically
expend funds today (for example, constructing generation
facilities), fully expecting to recover those costs through
future rates. In fact, current rates often include past costs
that utilities deferred in order to avoid rate increases. Cost
causation requires not that costs be incurred at the same time
they are included in rates, but that the rates "reflect to some
degree the costs actually caused by the customer who must
pay them." Id.
In fashioning Order 888's stranded cost recovery provi-
sions, FERC went to great lengths to ensure that customers
would be responsible for only those costs they caused.
[T]he Rule is consistent with the traditional cost causa-
tion principle because it recognizes the link between the
incurrence of the stranded costs and the decision of a
particular generation customer to use open-access trans-
mission on the utility's system to leave the utility's
generation system and shop for power, and bases the
utility's ability to recover stranded costs on its ability to
demonstrate that it incurred costs with the reasonable
expectation that the customer would remain on its gener-
ation system beyond the term of the contract.
Order 888-A, p 31,048 at 30,382.
We cannot see how including stranded costs in transmission
rates instead of lump sum payments changes this analysis.
To the extent POSCR is arguing that including in a transmis-
sion rate costs incurred to provide generation services vio-
lates cost causation principles, we reiterate that stranded
costs are not costs of providing the physical transmission
services but, as Order 888-A explains, they are utilities' cost
of open access transmission. See Order 888-A, p 31,048 at
30,389 & n.634. More generally, given the fundamental
changes wrought by Order 888 and the unprecedented oppor-
tunity for customers to purchase power from alternative
suppliers, we are quite comfortable deferring to FERC's
judgment that stranded cost recovery--through transmission
rates or otherwise--conforms to cost causation principles. In
fact, FERC may have violated cost causation principles had it
failed to assign stranded costs to customers who caused them.
POSCR next argues that Order 888 is unduly discriminato-
ry because including stranded costs in transmission rates
forces transmission customers who previously used a utility's
generation capacity to pay higher costs than new transmis-
sion customers. Disagreeing, FERC determined that requir-
ing customers receiving similar services to pay different rates
is necessitated by Order 888's open access requirement. See
Order 888-A, p 31,048 at 30,388-90. Cf. AGD, 824 F.2d at
1009 ("[T]he mere fact of a rate disparity is not enough to
constitute unlawful discrimination.") (internal quotation
marks omitted). Moreover, FERC concluded, the application
of cost causation principles justifies this different treatment.
See Order 888-A, p 31,048 at 30,379, 30,388-90. Seeing noth-
ing unreasonable (let alone arbitrary or capricious) in
FERC's policy judgment, we reject POSCR's challenge.
Nor do we agree with POSCR's argument that stranded
cost recovery violates the filed rate doctrine, which "forbids a
regulated entity to charge rates for its services other than
those properly filed with the appropriate federal regulatory
authority." Western Resources, Inc. v. FERC, 72 F.3d 147,
149 (D.C. Cir. 1995). In Western Resources, we held that
FERC's assignment to current customers of costs relating to
take-or-pay liabilities did not violate the filed rate doctrine.
Recognizing that "a central purpose of the doctrine is to
enable purchasers to know in advance the consequences of
the purchasing decisions they make," we determined that the
doctrine was satisfied where customers received "adequate
notice of a rate in advance of the service to which it relates."
Id. at 149-50 (internal quotation marks omitted). Order 888's
stranded cost policy satisfies this requirement because cus-
tomers electing to purchase power generation from a source
other than the transmitting utility from which they had
purchased power in the past will be aware of the costs when
making that decision.
3. FERC's Mobile-Sierra Findings
Under the Supreme Court's Mobile-Sierra doctrine, where
parties have negotiated a contract that sets firm prices or
dictates a specific method of computing charges and includes
a clause denying either party the right to change such prices
or charges unilaterally, "FERC may abrogate or modify the
contract only if the public interest so requires." Texaco, Inc.
v. FERC, 148 F.3d 1091, 1095 (D.C. Cir. 1998); see also FPC
v. Sierra Pacific Power Co., 350 U.S. 348, 353-55 (1956);
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S.
332, 344-45 (1956). We have recognized that "the 'public
interest' that permits FERC to modify private contracts is
different from and more exacting than the 'public interest'
that FERC seeks to serve when it promulgates its rules."
Texaco, 148 F.3d at 1097.
FERC usually makes Mobile-Sierra determinations on a
case-by-case basis. A party seeking to modify a contract
containing a Mobile-Sierra clause petitions FERC. That
party bears the burden of convincing FERC that the modifi-
cation is in the public interest.
Order 888 departs from this normal case-by-case practice
by making two generic public interest findings, one focused
on utilities, the other on customers. These generic findings
relieve utilities and customers of the burden of demonstrating
in individual proceedings that the proposed modifications are
in the public interest. As to utilities, Order 888 ruled that it
was in the public interest to allow them to add stranded cost
amendments to their contracts if they could demonstrate, in
accordance with Order 888, that they had a reasonable expec-
tation of continued service. See Order 888-A, p 31,048 at
30,394-95. This finding rested on two considerations: that
the burden of unrecoverable stranded costs could impair
utilities' access to capital markets, which could in turn precip-
itate the departure of other customers, thus worsening the
utilities' financial condition and threatening its ability to
provide reliable service; and that allowing customers to leave
a utility without paying their share of costs would shift those
costs to other customers who lack alternative power sources.
See Order 888, p 31,036 at 31,811. For its second generic
finding, FERC concluded that it was in the public interest to
allow customers to modify their wholesale requirements con-
tracts in any way upon a showing that the terms are no
longer just and reasonable. See Order 888-A, p 31,048 at
30,189. Observing that the contracts in question "were en-
tered into during an era in which transmission providers
exercised monopoly control over access to their transmission
facilities," FERC based this finding on the unequal bargain-
ing power between utilities and customers. Id. at 30,193.
Because "[m]any of these contracts were the result of uneven
bargaining power between customers and monopolist trans-
mission providers," FERC reasoned, "the unprecedented
competitive changes that have occurred (and are continuing to
occur) in the industry may render their contracts to be no
longer in the public interest or just and reasonable." Id.
Challenging the first finding, POSCR argues that FERC
lacks authority to make a generic public interest finding that
allows for contract modification in an entire class of cases.
POSCR insists that FERC can only proceed on a case-by-
case basis, determining in each case whether a particular
contract modification is in the public interest. Even if FERC
has authority to make generic findings, POSCR goes on to
argue, FERC's Order 888 finding is unsupported by substan-
tial evidence. The investor owned utilities ("IOUs") challenge
the second finding, arguing that allowing customers to seek
modification of all contract terms, while limiting utilities to
stranded cost provisions, fails adequately to balance compet-
ing interests.
a. FERC's authority to make a generic public interest find-
ing
POSCR correctly observes that FERC has pointed to no
case in which a court affirmed a generic Mobile-Sierra find-
ing. At the same time, POSCR has cited no case prohibiting
FERC from making a generic finding, nor have we found one.
In the absence of definitive authority in either direction, and
given the unique circumstances of this case and our tradition-
al deference to FERC's expertise, we find no fault with
FERC's generic determination.
The Mobile-Sierra doctrine "represents the Supreme
Court's attempt to strike a balance between private contrac-
tual rights and the regulatory power to modify contracts
when necessary to protect the public interest." Northeast
Utilities Serv. Co. v. FERC, 55 F.3d 686, 689 (1st Cir. 1995).
In Mobile, the Supreme Court recognized that intervening
circumstances may create a situation in which contractual
terms and conditions that were just and reasonable at the
time the contract was executed are no longer just and reason-
able. 350 U.S. at 344-45. But concluding that a utility is not
typically "entitled to be relieved of its improvident bargain,"
the Sierra Court required that FERC's predecessor, the
Federal Power Commission, show more than that the con-
tract was unjust and unreasonable--the Commission had to
find that contract modification was in the public interest. 350
U.S. at 355.
In most cases, intervening circumstances are unique to the
relationship between contracting parties. See, e.g., Northeast
Utilities, 55 F.3d 686 (affirming FERC's modification to the
rate schedule of a contract as a condition for approval of a
merger between two parties to the contract). But where
intervening circumstances--in this instance, FERC-mandated
open access transmission--affect an entire class of contracts
in an identical manner, we find nothing in the Mobile-Sierra
doctrine to prohibit FERC from responding with a public
interest finding applicable to all contracts of that class.
Moreover, in providing for stranded cost recovery, FERC has
not relieved utilities of "improvident bargains," the concern of
the Sierra Court; rather, it has recognized that open access
affects all utilities in the same manner, namely, leaving them
vulnerable to potentially unrecoverable stranded costs. In
fact, to deny FERC authority to make generic findings in
such a case would simply impose on it and the parties the
repetitive burden of proving the public interest in each and
every case.
In sustaining FERC's generic finding, we are influenced by
the fact that before recovering stranded costs, a utility must
prove that it had a reasonable expectation of continued ser-
vice to a particular customer. As the IOUs invervening on
behalf of FERC explain, the need to make this showing adds
a particularized element to FERC's generic public interest
finding. Viewed this way, Order 888's generic finding is more
precisely stated as follows: It is in the public interest to allow
utilities to recover stranded costs if they can prove that they
had a reasonable expectation of continued service to particu-
lar customers. If a utility can demonstrate that it had a
reasonable expectation of continued service to a particular
customer, and incurred costs based on that expectation, then
it would be against the public interest to require other
customers or shareholders to bear those costs. As Order 888
explains, "the case-by-case findings that some commenters
seek will, in effect, be made when the Commission determines
whether to approve a proposed stranded cost amendment to a
particular contract." Order 888, p 31,036 at 31,813.
We stress that generic Mobile-Sierra findings are appro-
priate only in rare circumstances. Order 888 is just such a
circumstance. It fundamentally changes the regulatory envi-
ronment in which utilities operate, introducing meaningful
competition into an industry that since its inception has been
highly regulated and affecting all utilities in a similar way.
b. FERC's stranded cost public interest finding
Having concluded that the Mobile-Sierra doctrine permits
a generic finding in this case, we turn to POSCR's claim that
the finding was unsupported by substantial evidence.
POSCR faults FERC for failing to adduce evidence to sup-
port its conclusion that denying stranded cost recovery would
put particular utilities in financial peril. POSCR also thinks
that the impact on customers of failing to provide for strand-
ed cost recovery is insufficient to support a public interest
finding.
With respect to POSCR's first point, it is certainly true
that Sierra identified impairment of "the financial ability of
the public utility to continue its service" as one factor sup-
porting a public interest finding. Sierra, 350 U.S. at 355.
Relying on this, POSCR challenges FERC's public interest
finding on the ground that the record contains no individual
assessments of the financial condition of public utilities.
Although public interest findings made on a case-by-case
basis necessarily evaluate the harm to the particular utility
seeking modification, that is not true where, as here, FERC
implements a generic change in the industry. Just as that
change can support a generic public interest finding, that
generic finding can be supported by generic industry-wide
evidence. FERC has produced such evidence. The record
contains estimates of stranded costs amounting to $200 billion
or more. See Stranded Cost NOPR, p 32,507 at 32,866. It
also includes comments from representatives of the financial
community stating that "the prospect of not recovering
stranded costs could erode a utility's ability to attract capi-
tal."
POSCR points out that eighty-five to ninety percent of the
estimated $200 billion of stranded costs relates to retail sales,
not wholesale sales. True enough, but we find no basis for
questioning FERC's conclusion that unrecovered stranded
costs of even ten percent of $200 billion--the low end of the
wholesale stranded cost estimate--could have serious conse-
quences for utilities. See Order 888, p 31,036 at 31,790. In
any event, if POSCR turns out to be correct about the
absence of a wholesale stranded cost problem, few utilities
will avail themselves of Order 888's stranded cost recovery
provisions.
POSCR's second argument focuses on FERC's finding that
"if some customers are permitted to leave their suppliers
without paying for stranded costs, this may cause an exces-
sive burden on the remaining customers who, for whatever
reason, cannot leave and therefore may have to bear those
costs." Order 888, p 31,036 at 31,811. POSCR does not
agree with FERC that the failure to recover stranded costs
will create an "undue burden" on remaining customers. But
disagreeing with FERC is not enough. To prevail in this
court, POSCR must demonstrate that FERC's prediction that
failure to recover stranded costs will create an undue burden
on remaining customers is unsupported by substantial evi-
dence, see 16 U.S.C. s 825l(b), which is another way of saying
it is arbitrary and capricious. See Michigan Consolidated
Gas Co. v. FERC, 883 F.2d 117, 124 (D.C. Cir. 1989) ("[M]ak-
ing ... predictions is clearly within the Commission's exper-
tise and will be upheld if rationally based on record evi-
dence.") (internal quotation marks omitted). This POSCR
has failed to do.
c. FERC's public interest finding regarding customers
The IOUs mount two challenges to FERC's second public
interest finding--that it was in the public interest to allow
customers to seek modification of their wholesale require-
ments contracts. Unlike POSCR, the IOUs make no claim
that the finding lacks substantial evidence; rather, they
contend that FERC's decision to allow customers to seek
modification of all contract terms, while limiting utilities to
adding stranded cost provisions, fails to balance FERC's
competing concerns: respecting existing contractual commit-
ments and accelerating the transition to competition. They
also complain that FERC has failed adequately to explain
why affording customers this broad ability to modify their
contracts is in the public interest.
FERC gave two justifications for affording customers a
broader opportunity than utilities to modify their contracts,
both of which seem perfectly rational to us. First, Order
888-A explains, "these contracts were entered into during an
era in which transmission providers exercised monopoly con-
trol over access to their transmission facilities." Order
888-A, p 31,048 at 30,193. Also, the "unprecedented competi-
tive changes.... may affect whether such contracts continue
to be just and reasonable or not unduly discriminatory both
as to the direct customers of the contracts, as well as to
indirect, third-party consumers...." Id. at 30,193-94. In
fact, Order 888 rests on the very premise that by denying
competitors access to their transmission lines, utilities en-
gaged in undue discrimination. Confined to purchasing pow-
er from their local utilities, customers suffered from this lack
of access. In the natural gas restructuring, we affirmed
FERC's decision to allow customers to seek to modify their
sales contracts because those contracts "necessarily reflect
the pipelines' monopoly power." AGD, 824 F.2d at 1017.
The same reasons call for affirming FERC's decision here.
In addition, as FERC has explained, the harm to third parties
(i.e., customers of the wholesale requirements customers) that
may result from adherence to uneconomical contracts further
justifies its conclusion. See Order 888-A, p 31,048 at 30,194.
Remedying potential unfairness to utilities by allowing them
to seek stranded cost recovery if a customer shortens the
term of a contract, FERC struck a balance between custom-
ers and utilities that can hardly be characterized as arbitrary
or capricious.
4. Availability of Stranded Cost Recovery to Nonjurisdic-
tional Utilities and G&T Cooperatives
Section 201 of the FPA gives FERC jurisdiction over
"public utilities" but not over federal and state utilities. 16
U.S.C. s 824. Although FERC required utilities not subject
to its jurisdiction ("nonjurisdictional utilities") to provide re-
ciprocal open access transmission when they use a jurisdic-
tional utility's open access tariff, it declined to provide a
mechanism for them to recover stranded costs. Explaining
that it promulgated its reciprocity provision pursuant to
fairness concerns, not statutory authority, FERC reasoned
that it lacked jurisdiction to provide stranded cost recovery
for nonjurisdictional utilities. See Order 888-A, p 31,048 at
30,364. FERC recommended that these utilities include
stranded cost provisions in their open access tariffs; those
tariffs would be reviewed not by FERC but by the appropri-
ate regulatory authority. See id.
Dairyland petitioners contend that FERC acted arbitrarily
and capriciously in denying nonjurisdictional utilities stranded
cost recovery, arguing that the same "fairness" concerns
invoked by FERC to require reciprocal open access transmis-
sion require the award of stranded costs. To be sure, FERC
may have had authority to include stranded cost recovery as a
provision of Dairyland's open access tariff. But Dairyland
has offered no reason for thinking that FERC's refusal to do
so was arbitrary and capricious. Given the limited scope of
FERC's stranded cost provisions, its lack of jurisdiction over
entities like Dairyland, and the ability of nonjurisdictional
utilities to include stranded cost provisions in their open
access tariffs, we see no reason to question FERC's judgment
on this issue.
The same is true with respect to the transmission-
dependent utilities ("TDUs"). Like the Dairyland petitioners,
they claim that FERC acted arbitrarily and capriciously by
failing to provide a mechanism for them to recover stranded
costs. Owning few or no transmission facilities, TDUs serve
their loads using other utilities' transmission systems. Not
only are TDUs nonjurisdictional utilities, but, as Order 888-A
explains, open access does not cause their costs to become
stranded--their customers have always had an option to use
other utilities' transmission services to purchase power. See
Order 888-A, p 31,048 at 30,365.
Dairyland also contends that FERC acted arbitrarily and
capriciously when it declined to treat a generation and trans-
mission ("G&T") cooperative and its member distribution
cooperatives as a single economic unit for stranded cost
purposes. G&T cooperatives provide bundled wholesale pow-
er to their member distribution cooperatives, who in turn sell
the power to the members' retail customers. Observing that
cooperatives, unlike traditional utilities, are not vertically
integrated but instead function as single economic units,
Dairyland claims that G&T cooperatives have reasonable
expectations of continued service to retail customers of their
member cooperatives that differ substantially from the expec-
tations public utilities have with respect to retail customers of
their wholesale customers. This difference, Dairyland ar-
gues, requires FERC to allow G&T cooperatives to recover
stranded costs from their member cooperatives' customers.
Rejecting Dairyland's petition for rehearing on this point,
FERC noted that treating a G&T cooperative and its mem-
bers as a single economic unit for purposes of stranded cost
recovery would conflict with its treatment of these same
cooperatives as distinct entities in its reciprocity provisions.
Order 888-A, p 31,048 at 30,366. There, FERC agreed with
Dairyland's proposal that if a G&T cooperative seeks open
access transmission from a public utility, "then only the G&T
cooperative, and not its member distribution cooperatives,
would be required to offer [reciprocal] transmission service."
Order 888, p 31,036 at 31,763. Moreover, FERC reasoned,
recovering from a retail customer of a member cooperative is,
in effect, recovering from an indirect customer, a situation
that FERC declined to include in its stranded cost rule. See
Order 888-A, p 31,048 at 30,366.
It is true that FERC could have treated G&T cooperatives
and their members as single economic units for stranded cost
purposes. But FERC's explanation of why it chose not to do
so, particularly the fact that G&T cooperatives and their
members were treated as distinct entities for reciprocity
purposes, is entirely reasonable.
5. Challenges to Technical Aspects of Order 888's Stranded
Cost Recovery Provisions
Several petitioners mount challenges to various technical
aspects of the stranded cost recovery provisions. Before
addressing these challenges, we emphasize the very limited
scope of our review. For us to undo what FERC has done,
petitioners must persuade us that FERC's actions were arbi-
trary or capricious. "Highly deferential," the arbitrary and
capricious standard "presumes the validity of agency action."
National Mining Ass'n v. Mine Safety and Health Admin.,
116 F.3d 520, 536 (1997). Where, as here, the issue before us
"requires a high level of technical expertise, we must defer to
the informed discretion of the responsible federal agencies."
Marsh v. Oregon Natural Resources Council, 490 U.S. 360,
377 (1989) (internal quotation marks omitted). It is not
enough for petitioners to convince us of the reasonableness of
their views, see UDC, 88 F.3d at 1169 ("The existence of a
second reasonable course of action does not invalidate an
agency's determination."); those arguments should be pre-
sented to FERC, whose commissioners are appointed by the
President and confirmed by the Senate with the expectation
that they, not Article III courts, will make policy judgments.
To prevail in this court, petitioners must demonstrate that
FERC's policy judgments are arbitrary or capricious, a heavy
burden indeed. See National Treasury Employees Union v.
Hefler, 53 F.3d 1289, 1292 (D.C. Cir. 1995) ("The 'scope of
review under the "arbitrary and capricious" standard is nar-
row and a court is not to substitute its judgment for that of
the agency.' ") (quoting Motor Vehicles Mfrs. Ass'n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). With this
very deferential scope of review in mind, we turn to petition-
ers' arguments.
a. POSCR's challenges to the stranded cost formula
Reasoning that it would be burdensome to identify each
and every asset that would become underutilized as a result
of Order 888, FERC adopted a "revenues lost" formula to
determine a departing customer's stranded cost obligation.
Order 888, p 31,036 at 31,839. For each year a utility can
prove that it had a reasonable expectation of continued ser-
vice to a particular customer, the formula calculates the
customer's stranded cost obligation by subtracting the com-
petitive market value of the power the customer would have
purchased from the utility (as estimated by the utility) from
the amount the customer would have paid had it remained a
generation customer of the utility (based on FERC-approved
rates that the customer paid the prior three years). Id. at
31,839-40.
POSCR claims that this formula gives utilities no incentive
to mitigate their stranded costs. Not so. The formula
automatically provides such an incentive by subtracting from
utilities' recovery the market price of the power--utilities
that fail to sell the power at market prices will not recover
their full costs. POSCR also claims that the formula fails
accurately to measure stranded costs because it is based on
an estimate of those costs at one point in time. Responding,
FERC explained why it rejected a "true-up" provision that
would have made adjustments to the amount the customer
owed to reflect market conditions over the reasonable expec-
tation period. According to FERC, such an approach would
have created enormous uncertainty, outweighing any poten-
tial increase in accuracy. See Order 888-A, p 31,048 at
30,427-28. POSCR has offered no basis for us to question
this reasoning.
POSCR's claim that the formula gives utilities an incentive
to minimize their estimate of the market value of the power
the customer would have purchased is similarly groundless.
To avoid precisely this result, Order 888 gives customers an
option to either market or broker the capacity and associated
energy they would have purchased from their historic utility,
effectively reducing their stranded cost obligations by the
difference between the actual market value of the power and
the utility's estimate of the market value. See Order 888,
p 31,036 at 31,844. Order 888 also gives customers an option
to substitute the price of power under the customer's contract
with a new supplier for the utility's estimate of the market
value. See id.
One final point. Throughout its brief and at oral argument,
POSCR consistently referred to stranded costs as "impru-
dently incurred costs." Although it never developed this
argument, we think it worth noting that all costs included in
customers' stranded cost obligations are based on FERC-
approved rates and were included in utility rate bases as
assignable to particular customers. To us, this means that
these costs are legitimate, prudent, and verifiable.
b. Inclusion of known and measurable costs
The IOUs take issue with Order 888's stranded cost recov-
ery formula because the estimate of the price the customer
would have paid for the power is based on rates for the prior
three years; according to the IOUs, this approach fails to
consider known and measurable costs resulting from regula-
tory mandates that may have been deferred pursuant to filed
rate schedules and FERC-approved settlements. The costs
they cite include deferred costs of generation that have
already been approved for inclusion in the rate base, costs
relating to approved qualifying facility contracts, and govern-
ment-imposed costs such as deferred taxes and nuclear de-
commissioning.
Although it is true that the revenue calculation measures
only current rates and not deferred costs, Order 888 allows
customers and utilities to file for a change in the rates before
the customer's requirements contract terminates; in such
cases, FERC will calculate the customer's stranded cost
obligation based on those new rates. See Order 888-A,
p 31,048 at 30,427. While seeking to avoid detailed listings of
specific costs that may become stranded, FERC has ade-
quately preserved utilities' ability to include known, measura-
ble costs in revenue estimates through a ratemaking proceed-
ing.
c. Treatment of energy costs in the market option
The IOUs challenge FERC's treatment of energy costs in
the market option. To mitigate utilities' incentives to mini-
mize their estimates of the market value of the power (the
competitive market value estimate or "CMVE"), Order 888
affords customers an option to buy the power stranded by
their departure from the utility and resell it. Order 888,
p 31,036 at 31,844. Customers would purchase generation
capacity at the utility's estimated market value of the capacity
and associated energy at average system variable cost. Id. at
31,845. Thus if a customer believes that a utility is underesti-
mating the price at which it could sell the power, the custom-
er can buy the power and then resell it. While customers
exercising this option would still have to pay their stranded
cost obligation as calculated under the formula, they would
effectively offset the obligation by keeping the profit on the
resale of the power. Id. at 31,845 n.879.
The IOUs contend that allowing customers to pay average
variable cost for the associated energy is inconsistent with
Order 888's definition of the CMVE, which equals the market
value of both the generation capacity and associated energy.
See id. at 31,839 (defining CMVE as "the utility's estimate of
the average annual revenues ... that it can receive by selling
the released capacity and associated energy, based on a
market analysis performed by the utility"). Customers could
receive a windfall, the IOUs claim, by exercising the market
option--although they will pay average variable cost for the
associated energy, they will be able to resell it at the presum-
ably higher market price. At the same time, utilities will be
unable to recover the full market value of the power because
they will be forced to sell the associated energy at cost.
Responding to this argument in Order 888-A, FERC of-
fered two justifications for allowing customers to purchase
the associated energy at average variable cost. First, be-
cause the capacity being marketed would not generally be
associated with a single asset, customers exercising this op-
tion are purchasing a "slice of the system" and thus should
pay average variable cost. Second, customers should be able
to purchase energy at the price they currently pay, typically
average variable cost. See Order 888-A, p 31,048 at 30,433.
But neither explanation responds to the IOUs' argument that
defining CMVE as the market price of both the capacity and
associated energy is inconsistent with allowing customers
exercising the market option to purchase associated energy at
average variable cost. In its brief in this court, FERC
continues to misapprehend the IOUs' argument, largely reit-
erating the same arguments and failing to address the incon-
sistency.
The market option's stated intention is to reduce a utility's
incentive to understate the CMVE. See Order 888, p 31,036
at 31,842. If it did understate the CMVE, then customers
could buy the power from the utility and resell it, keeping the
difference. But FERC's policy of allowing customers to
purchase the associated energy at cost gives customers an
incentive to exercise the market option even when a utility
has appropriately estimated CMVE because they can buy the
energy at cost and resell it at the presumably higher market
price. FERC's failure to explain whether it intended this
result and if so, the justification for permitting customers to
receive a windfall while undercompensating utilities consti-
tutes a failure of reasoned decisionmaking. See AGD, 824
F.2d at 1030 ("We do not require that FERC reach any
particular conclusion; we merely mandate that it reach its
conclusion by reasoned decisionmaking."). We therefore va-
cate this portion of the orders and remand the issue to FERC
for further consideration.
d. Rescission of notice of termination provision
Until FERC issued Orders 888 and 889, it had required
parties to power sales contracts to notify it sixty days prior to
cancellation of a contract or termination of a contract by its
own terms. See 18 C.F.R. s 35.15 (repealed by Order 888).
Orders 888 and 889 eliminate the requirement that parties
notify FERC in advance when a contract terminates by its
own terms, but only with respect to contracts executed after
July 9, 1996; in other cases of contract cancellation or
termination, parties must still notify FERC in advance. See
18 C.F.R. s 35.15 (1999). TDU petitioners claim that in
rescinding the notice requirement, FERC ignored the fact
that utilities still have substantial market power. That some
utilities retain market power in generation, however, does not
undermine Orders 888 and 889. Through these orders,
FERC sought to move the electricity industry toward compe-
tition; by providing an open access mechanism through which
buyers may purchase power from suppliers other than trans-
mitting utilities, FERC substantially reduced utilities' market
power. Eliminating the notice requirement furthered that
policy. Moreover, customers who believe termination of their
contracts is unjust can seek relief from FERC pursuant to
section 206 of the FPA. See Order 888-A, p 31,048 at 30,393.
e. Provision for benefits lost
The TDU petitioners claim that FERC acted arbitrarily
and capriciously by failing to provide a mechanism for cus-
tomers purchasing power at below-market rates to preserve
those rates at the termination of their contract with their
historic utility. Just as utilities may have expectations of
continued service to particular customers, the TDU petition-
ers contend, customers may have reasonable expectations of
continuing to receive wholesale requirements service from
their historic utility at cost-based rates. Order 888-A says
that the Commission does "not have a sufficient basis on
which to make generic findings that customers under such
contracts may be entitled to extend a contract at the existing
rate." Order 888-A, p 31,048 at 30,393 (emphasis removed).
Moreover, the order explains, "the consequences of custom-
ers' expectations as a general matter would not have the
potential to shift significant costs to other customers," where-
as utilities' failure to recover stranded costs could potentially
shift the costs to other customers. Id.
We think that FERC has adequately explained why it
chose not to provide for benefits-lost recovery in Order 888.
Most important, FERC has not foreclosed customers in this
situation from seeking relief: As Order 888-A explains, a
customer may "exercise its procedural rights under section
206 to show that the contract should be extended at the
existing contract rate, or [ ] make such a showing in the
context of a utility's proposed termination of a contract
pursuant to the section 35.15 notice of termination (approval)
requirement." Id. (footnote omitted). Given that agencies
"enjoy[ ] broad discretion in determining how best to handle
related, yet discrete, issues in terms of procedures ... and
priorities," we think FERC's refusal to promulgate a generic
rule on this issue was entirely reasonable. Mobil Oil Explo-
ration & Producing Southeast, Inc. v. United Distrib. Cos.,
498 U.S. 211, 230 (1990).
B. Retail Stranded Costs
Recognizing state agency authority to address stranded
costs that relate to retail power sales, Order 888 limits
FERC's role as a forum for the recovery of these costs to two
situations: when customers take advantage of state-ordered
wheeling to reach new power suppliers and when former
retail customers become wholesale customers through what is
known as municipalization or municipal annexation. See Or-
der 888-A, p 31,048 at 30,402, 30,410. In the former scenario,
FERC will consider proposals for the recovery of stranded
costs only when the appropriate state regulatory commission
lacks authority to do so; in the latter situation, FERC will
serve as the primary forum for resolution of stranded cost
claims.
1. Stranded Costs Arising from Retail Wheeling
Stranded costs may result from state unbundling of retail
sales, where retail customers take advantage of state-ordered
retail wheeling to reach new generation suppliers. See Order
888, p 31,036 at 31,819. Observing that both FERC and the
states have authority to address these stranded costs, Order
888 explains that:
[B]ecause it is a state decision to permit or require the
retail wheeling that causes retail stranded costs to occur,
we will leave it to state regulatory authorities to deal
with any stranded costs occasioned by retail wheeling.
The only circumstance in which we will entertain re-
quests to recover stranded costs caused by retail wheel-
ing is when the state regulatory authority does not have
authority under state law to address stranded costs when
the retail wheeling is required.
Order 888, p 31,036 at 31,824-25 (footnote omitted). FERC
will provide for recovery of those stranded costs through the
transmission rate the former supplying utility charges the
departing customer. Order 888-A, p 31,048 at 30,410. (As
discussed in Section III supra, FERC has jurisdiction over
the transmission component of unbundled retail sales.) In
evaluating claims for stranded cost recovery, FERC will use
the same standards as it applies with respect to wholesale
stranded costs (i.e., it will require utilities to demonstrate a
reasonable expectation of continued service). See Order 888,
p 31,036 at 31,819 n.722.
Two sets of petitioners challenge FERC's retail stranded
cost recovery provisions from opposite sides. The States and
POSCR contend that FERC exceeded its jurisdiction by
asserting rate authority over retail stranded costs. The
IOUs argue that FERC abdicated its statutory authority by
failing to agree to consider all proposals for recovery of
stranded costs that arise from retail wheeling. Because we
think FERC has appropriately exercised its jurisdiction, we
reject both claims.
a. FERC's jurisdiction over retail stranded costs
The States' and POSCR's arguments boil down to the
following: Because retail stranded costs relate primarily to
facilities used for retail generation, and because section 201(b)
of the FPA explicitly excludes these facilities from FERC's
jurisdiction, FERC may not provide for recovery of these
costs in FERC-jurisdictional rates. Unbundling electricity
sales, they argue, cannot alter the jurisdictional status of
these costs.
As an initial matter, we agree with FERC that petitioners
confuse costs and rates. Rates are jurisdictional; costs are
not. As Order 888-A explains:
[T]here are rarely separate retail and wholesale generat-
ing facilities. Retail customers and wholesale require-
ments customers get energy from the same facilities,
each buying a "slice of the system." Typically all gener-
ating assets go into both the retail and the wholesale rate
bases for determining retail and wholesale rates. Rates
are determined by allocating the total generating costs
among customer classes. The parties confuse the issue
before us to the extent they suggest that state commis-
sions, not this Commission, have "jurisdiction" over cer-
tain "costs." Neither the state commissions nor this
Commission has exclusive jurisdiction over "costs."
Each regulatory authority has jurisdiction to determine
"rates" for services subject to its jurisdiction and, in
determining rates, may take into account all of the costs
incurred by the utility.
Order 888-A, p 31,048 at 30,414. In other words, as FERC
explained in its brief, "regulatory authorities do not carve out
so-called 'wholesale costs' that only FERC can take into
account in determining rates subject to its jurisdiction or so-
called 'retail costs' that only a state commission can take into
account in determining rates subject to state jurisdiction."
Instead, "[u]nder historical cost-of-service ratemaking, each
regulatory authority, in exercising its respective ratemaking
jurisdiction, reviews the total costs incurred by a utility to
provide service and makes its separate and independent
determination of what costs may be recovered through rates
within its jurisdiction." Order 888-A, p 31,048 at 30,414.
Thus, while petitioners correctly point out that section
201(b) of the FPA denies FERC jurisdiction over "facilities
used for the generation of electric energy," that provision
does not necessarily prevent FERC from including costs
relating to generating facilities in transmission rates, over
which FERC indisputably has jurisdiction. 16 U.S.C.
s 824(b). This is so because this part of section 201(b) is
modified by the phrase "except as specifically provided in this
subchapter and subchapter III of this chapter." Id. Given
that section 201(a) grants FERC jurisdiction over "the trans-
mission of electric energy in interstate commerce" and, there-
fore, over transmission rates, 16 U.S.C. s 824(a), FERC may
exercise jurisdiction over generation facilities to the extent
necessary to regulate interstate transmission.
This is exactly the construction that we gave section 201(b)
in Mississippi Industries v. FERC, 808 F.2d 1525, 1543-45
(D.C. Cir. 1987) (subsequent history omitted). There, peti-
tioners challenged FERC's authority to reallocate costs relat-
ing to generation facilities among utilities that were parties to
a power sales agreement. Justifying its authority to reallo-
cate such costs, FERC relied on its "undisputed jurisdiction
over interstate sales of electric energy at wholesale." Id. at
1543. We agreed: "[A]lthough allocating cost does, to some
extent, result in the 'regulation of matters relating to genera-
tion,' such regulation is valid under the FPA when it is the
byproduct of a legitimate exercise of FERC's power to regu-
late wholesale rates." Id. In reaching this conclusion, we
rejected petitioners' argument that "the statutory prohibition
of federal regulation of [generation] facilities in section 201(b)
becomes meaningless if FERC is permitted to allocate the
costs of a plant," given FERC's undisputed responsibility to
regulate the wholesale sale of power. Id. at 1543-44. Under
Mississippi Industries, then, FERC may regulate costs relat-
ing to generation facilities if such regulation "is the byproduct
of a legitimate exercise of FERC's power to" regulate inter-
state transmission. Id. at 1543. Because FERC indisputably
has jurisdiction over transmission rates, Mississippi Indus-
tries also disposes of petitioners' argument that FERC's
retail stranded cost recovery provisions run afoul of section
201(a) of the FPA, which provides that "Federal regulation
[shall] extend only to those matters which are not subject to
regulation by the States." 16 U.S.C. s 824(a).
Attempting to distinguish Mississippi Industries, petition-
ers point out that the case "involved authority to allocate
generation costs to a wholesale sales rate (which may, of
course, include generation costs)." True, but Mississippi
Industries provides clear authority for the proposition that
there is no per se jurisdictional bar to FERC's including
generation costs in jurisdictional rates, whether wholesale
sales rates or transmission rates. Thus narrowed, the ques-
tion before us is this: Is inclusion of stranded costs relating
to generation facilities in transmission rates the byproduct of
a legitimate exercise of FERC's authority over transmission
rates? In most cases the answer would be no, but given the
highly unusual circumstances of this case, we think the an-
swer is yes. Just as FERC may include generation-related
wholesale stranded costs in transmission rates (see Section
V.A.1.b), it may include generation-related retail stranded
costs in transmission rates. That retail stranded costs were
originally reflected in state-jurisdictional retail sales rates
does not change the analysis, for in both cases the stranded
costs can be viewed as "costs" of providing transmission
services: "While such costs are not a cost of operating the
physical transmission system, nevertheless, they are an eco-
nomic cost incurred as a result of being required to provide
retail transmission." Order 888-A, p 31,048 at 30,414 n.708.
While we agree that generation-related retail costs are not
typically "costs" relating to transmission services, the funda-
mental changes wrought by state-ordered retail wheeling, as
well as the narrow circumstances in which FERC will consid-
er stranded cost recovery claims, justify the conclusion that
these costs are costs of providing transmission service.
Petitioners claim that by agreeing to consider retail strand-
ed cost recovery claims, FERC has unduly interfered with
state legislative processes and decisions. We disagree.
FERC has limited its "interference" to instances where state
commissions have no authority even to address stranded cost
recovery claims. Describing its role as limited to "fill[ing]
any regulatory gap," FERC made it clear that it will deny
consideration to any utility seeking stranded cost recovery "if
a state regulatory authority with authority to address retail
wheeling stranded costs has in fact addressed such costs,
regardless of whether the state regulatory authority has
allowed full recovery, partial recovery, or no recovery." Or-
der 888-A, p 31,048 at 30,415. Under these circumstances, it
can hardly be said that FERC has usurped state authority.
b. FERC's refusal to assert jurisdiction over all retail
stranded costs
Contending that FERC did not go far enough, the IOUs
challenge the agency's refusal to consider claims for stranded
costs resulting from state-ordered retail wheeling unless the
relevant state regulatory commission lacks authority to ad-
dress such claims. They claim that FERC should have
agreed to consider proposals for retail stranded cost recovery
whether or not the state commission had authority to address
the claim, and even whether or not a state commission with
such authority had already addressed the claim. In support
of their position, the IOUs advance three related arguments.
They allege first that by concluding that it had jurisdiction
over retail stranded costs but declining to exercise it, FERC
abdicated its legal authority. Second, they say, FERC violat-
ed its statutory obligation to ensure just and reasonable
rates. And finally, they contend that FERC erred in con-
cluding that stranded costs resulting from retail wheeling lack
a direct nexus to the open access transmission ordered in
Order 888.
With respect to their first argument, the IOUs claim that
once FERC determined that it had jurisdiction over retail
stranded costs, the agency had to exercise that jurisdiction.
In making this argument, the IOUs make the same mistake
POSCR made: They confuse FERC jurisdiction over costs
with its jurisdiction over rates. FERC has not "concluded
that it shares jurisdiction over retail stranded costs with the
states," as the IOUs assert. As we explained above, "costs"
are not jurisdictional. The FPA speaks not in terms of
"costs," but in terms of "rates," requiring FERC to ensure
that rates are just, reasonable, and not unduly discriminatory.
FERC indisputably has jurisdiction over interstate transmis-
sion rates. In essence, then, the IOUs claim that FERC has
no discretion to leave retail stranded cost recovery to state
authorities.
We review claims that an agency lacks discretion to follow
(or decline to follow) a certain course of action by examining
the agency's governing statute as well as its own regulations.
See, e.g., National Wildlife Federation v. Browner, 127 F.3d
1126, 1130 (D.C. Cir. 1997) (concluding that agency regula-
tions do not require EPA to review and approve or disap-
prove a state's decision to maintain existing water quality
standards); NRDC v. EPA, 25 F.3d 1063, 1069-70 (D.C. Cir.
1994) (holding that neither the governing statute nor relevant
regulations impose a mandatory duty on EPA to list all
wastes that exhibit a hazardous characteristic; statute gives
EPA "substantial room to exercise its expertise in determin-
ing the appropriate grounds for listing"). The IOUs have
failed to point to any statutory provision that robs FERC of
discretion to decide, as a matter of policy, that state regulato-
ry commissions should serve as the primary forum for retail
stranded cost recovery. Our own examination of the FPA
reveals no such provision either. Sections of the statute
giving FERC jurisdiction over transmission in interstate com-
merce, 16 U.S.C. s 824(a), and requiring FERC to ensure
that rates are just and reasonable, 16 U.S.C. s 824d(a), do
not alone create a mandatory duty to consider proposals for
retail stranded cost recovery.
The two Supreme Court cases the IOUs rely on provide no
support for their position, for in both cases the agencies,
unlike FERC in this case, failed to comply with a specific
statutory mandate. In MCI v. AT&T, 512 U.S. 218 (1994),
the Supreme Court held that the FCC could not exempt
certain communication common carriers from filing a tariff;
the statute specified that all carriers must file tariffs. Simi-
larly, in FPC v. Texaco, Inc., 417 U.S. 380 (1974), the Su-
preme Court determined that the FPC could not exempt
certain producers from the statute's requirement that rates
be just and reasonable. Under these cases, FERC would
abdicate its statutory obligations if it, for example, exempted
certain utilities from the requirement that rates be just and
reasonable (as in Texaco), or if it refused to review transmis-
sion rate filings altogether. These cases do not hold that in
carrying out its statutory obligations, FERC has no discretion
to determine as a matter of policy that states are better
positioned to address costs originally included in retail rate
bases. What the IOUs suggest--that because FERC has
authority to address retail stranded costs through transmis-
sion rates, it must exercise that authority--is simply not the
law.
As an alternative to their legal argument, the IOUs claim
that FERC acted arbitrarily and capriciously in determining
that just and reasonable transmission rates include retail
stranded cost recovery in some circumstances but not in
others. Their argument goes like this: Section 201(b)(1) of
the FPA gives FERC exclusive jurisdiction over transmission
of electric energy in interstate commerce. Under section 205,
FERC must set just and reasonable rates. In addition,
sections 205 and 206 prohibit undue discrimination. Thus,
the IOUs argue, "[b]y approving different transmission rates,
some including stranded cost recovery (e.g., municipalization),
and others without (e.g., retail wheeling or bypass), FERC is
sanctioning arbitrary and capricious differences in violation of
the FPA."
In making this argument, the IOUs ignore the wide discre-
tion the FPA affords FERC to determine what constitute
"just and reasonable rates" and "undue discrimination," as
well as the unusual circumstances created by an industry
change as fundamental as Order 888's open access require-
ment. Just because some transmission rates include retail
stranded costs while others do not does not alone make Order
888 arbitrary and capricious; rather, petitioners must show
that there is no reason for the difference. Cf. AGD, 824 F.2d
at 1009 ("[T]he mere fact of a rate disparity is not enough to
constitute unlawful discrimination.") (internal quotation
marks omitted). We think FERC has provided a convincing
explanation for the difference. "Recovery of this type of cost
through a transmission rate is obviously not the norm,"
explains Order 888-A, "but is necessitated by the need to deal
with the transition costs associated with this Rule." Order
888-A, p 31,048 at 30,418. Only in situations where state
regulatory commissions lack authority to award stranded
costs will FERC include these costs in transmission rates.
Otherwise, customers would be able to avoid their stranded
cost obligations, leaving utility shareholders or remaining
customers to bear the costs.
The IOUs' reliance on the natural gas restructuring cases
is misplaced. Setting aside the extraordinary nature of take-
or-pay liabilities as compared to the stranded costs at issue
here, AGD required only that FERC address the take-or-pay
liabilities that the pipelines had incurred. See AGD, 824 F.2d
at 1030 ("We do not require that FERC reach any particular
conclusion; we merely mandate that it reach its conclusion by
reasoned decisionmaking."). That is exactly what Order 888
does with respect to stranded costs. While FERC has not
agreed to serve as the forum for recovery of these costs in all
situations, neither the FPA nor the natural gas cases requires
it to do so. By ensuring that utilities have a forum in which
to bring claims for retail stranded cost recovery, FERC has
done just what AGD requires.
Nor do we find merit in the IOUs' argument that FERC
erred in concluding that stranded costs resulting from retail
wheeling lack a direct nexus to the open access transmission
mandated by Order 888. FERC's decision that state regula-
tory commissions should address retail stranded costs rested
on its conclusion that state-ordered wheeling, not FERC-
mandated open access transmission, causes those costs to
become stranded. See Order 888-A, p 31,048 at 30,410.
Recognizing a "limited" nexus between retail stranded costs
and FERC-mandated open access stemming from FERC's
jurisdiction over transmission rates and the resulting authori-
ty to award stranded costs, FERC nonetheless found no
causal nexus between stranded costs and FERC-ordered
transmission. Id. at 30,419. The lack of a direct causal
nexus differentiates retail stranded costs from retail-turned-
wholesale stranded costs (see infra Section V.B.2).
Taking issue with this reasoning, the IOUs contend that
FERC ignored "the central role played by the federal govern-
ment" in shaping the electric energy industry. Because retail
wheeling, according to the IOUs, is "a direct result of a
federally created system of increased competition," FERC
must take responsibility for all retail stranded costs.
Nowhere does FERC contest the nexus between state-
ordered wheeling and Order 888's open access requirement.
But the existence of a nexus does not require FERC to
address retail stranded costs in light of the fact that in most
instances state regulatory commissions will have authority to
do so. Indeed, because the costs were originally included in
retail rate bases, state agencies are better positioned to
consider them. Given that it is state-ordered wheeling that
most directly causes retail costs to become stranded, we find
no reason to disturb FERC's judgment.
2. Stranded Costs Relating to Retail-Turned-Wholesale
Customers
FERC concluded that open access transmission may en-
courage what is known as "municipalization," where a town
condemns a utility's distribution plant, becomes a wholesale
customer of the utility, and utilizes open access transmission
to purchase power on the competitive market. Concluding
that costs incurred to serve former retail customers may
become stranded due to the municipality's (the new wholesal-
er's) utilization of open access transmission, FERC decided to
serve as the primary forum for resolution of stranded costs
claims relating to new municipalizations. See Order 888-A,
p 31,048 at 30,402. FERC also decided to serve as the
primary forum "in a discrete set of municipal annexation
cases"--i.e., cases involving "existing municipal utilities that
annex retail customer service territories and, through the
availability of Commission-required transmission access, use
the transmission system of the annexed customers' former
supplier to access new suppliers to serve the annexed load."
Order 888-B, p 61,248 at 62,102. In such cases, FERC will
determine on a case-by-case basis whether there exists the
requisite nexus between municipal annexation and open ac-
cess transmission. Recognizing that state regulatory authori-
ties may be the first to address claims for stranded cost
recovery in the retail-turned-wholesale scenario (FERC's la-
bel for new municipalizations and municipal annexations),
FERC stated that it "will take into account state findings on
cost determinations ... and will give great weight in [its]
proceedings to a state's view of what might be recoverable."
Id. at 62,105 (internal quotation marks omitted).
This issue provoked the only dissents to Order 888. Al-
though neither dissenting commissioner disputed FERC's
jurisdiction to allow recovery of these stranded costs, both
faulted FERC for second-guessing state authorities regarding
stranded costs. They thought that FERC should have acted
as the forum for adjudicating these stranded cost issues only
when state authorities failed to act altogether. See Order
888, p 31,036 at 31,904-07 (Commissioner Hoecker concurring
in part and dissenting in part); id. at 31,907 (Commissioner
Massey dissenting in part).
Unlike the dissenters, both the States and POSCR chal-
lenge FERC's assertion of jurisdiction. According to the
States, FERC usurped their role as protectors of retail
customers by potentially undermining their rate treatment of
retail costs. POSCR makes three arguments. Advancing
claims similar to its arguments about stranded costs resulting
from state-ordered retail wheeling (see Section V.B.1.a su-
pra), POSCR first contends, relying again on section 201(b),
that FERC lacks jurisdiction to award retail stranded costs in
the retail-turned-wholesale scenario. Second, it claims,
FERC failed to weigh properly the adverse effects of Order
888 on franchise competition between utilities and municipali-
ties. Finally, relying on the Hoecker and Massey dissents,
POSCR argues that FERC acted arbitrarily and capriciously
by declaring itself to be the primary forum for retail-turned-
wholesale stranded cost claims. For their part, the IOUs
fault FERC's failure to consider claims for recovery in the so-
called "bypass" scenario. We address these arguments in
turn.
The States begin their argument by asserting that "[w]hen
retail utility customers leave the utility's system because of
municipalization, the costs stranded by the customers' migra-
tion normally are not allocable ... to whatever wholesale
utility service might be sold to the city for resale." While
this may have been true in the past, the States' argument
ignores FERC's conclusion that it is open access transmission
that makes municipalization feasible. Because FERC has
determined that it will consider proposals for stranded cost
recovery only when there is a direct nexus between munici-
palization and open access transmission, we see no basis for
the States' claim that FERC will "override Congress's in-
struction that the states be permitted to protect retail cus-
tomers."
The answer to POSCR's first argument--that section
201(b) precludes FERC from awarding stranded costs in the
retail-turned-wholesale context--appears in our discussion of
FERC's jurisdiction to address retail stranded costs resulting
from state-ordered retail wheeling. See Section V.B.1.a su-
pra. Because a town becomes a wholesale customer of the
historic supplying utility when it municipalizes, FERC's ex-
clusive jurisdiction over all aspects of wholesale sales gives
FERC all the authority it needs to include generation-related
costs in rates, including even costs originally incurred to
provide retail service. We find no reason to question FERC's
decision to allocate stranded costs caused by retail-turned-
wholesale customers to the cost of providing wholesale service
subject to its jurisdiction. As in the retail wheeling context,
these stranded costs are properly viewed as "costs" of the
former supplying utility's provision of open access transmis-
sion service. With respect to new municipalizations, the
retail-turned-wholesale customer is able to reach a new gen-
eration supplier only because of open access transmission.
And with respect to municipal annexations, FERC will re-
quire utilities to demonstrate a nexus between the annexation
and open access transmission.
POSCR's second argument relates to what is known as
"franchise competition." According to POSCR, franchise
competition occurs "when a privately-owned utility is threat-
ened by the prospect that a municipality may exercise powers
of eminent domain to take over the utility's operations."
POSCR argues that stranded cost recovery could impede
franchise competition, which it says FERC has always en-
couraged. Although this might well be true, the possibility
that potential stranded cost liability could deter municipalities
from taking advantage of open access does not undermine
Order 888. As Order 888-A explains, "the purpose of the
stranded cost policy is neither to encourage nor to discourage
municipalization, but rather to facilitate a fair transition to
competition and to ensure stability in the industry during that
transition." Order 888-A, p 31,048 at 30,405.
We turn finally to POSCR's claim that FERC acted arbi-
trarily and capriciously by declaring itself the primary forum
for recovery of retail-turned-wholesale stranded costs. As-
serting that FERC's action implicitly undermines state deci-
sionmaking and encourages forum shopping, POSCR claims
that Order 888's treatment of the retail-turned-wholesale
scenario contravenes agency precedent and conflicts with the
agency's decision to leave to the states the consideration of
those stranded costs resulting from state-ordered wheeling.
While FERC did leave resolution of claims for wholesale-
turned-retail stranded costs to the states in United Illumi-
nating Co., 63 FERC p 61,212 (1993), a pre-Order 888 case
addressing a particular utility's application for stranded cost
recovery, Order 888-A explains that, after reanalyzing the
stranded cost problem, FERC concluded that "where such
costs are stranded as a direct result of Commission-mandated
wholesale transmission access, these costs should be viewed
as costs of the transition to competitive wholesale bulk power
markets and this Commission should be the primary forum
for addressing their recovery." Order 888-A, p 31,048 at
30,407. In our view, this explanation adequately distin-
guishes between recovery of stranded costs from retail cus-
tomers and recovery from retail-turned-wholesale customers.
In the former situation customers remain retail customers
subject to state jurisdiction; in the latter situation, customers
become wholesale customers subject to FERC's exclusive
jurisdiction. This very different result justifies FERC's dif-
ferent treatment of the two situations.
The IOUs argue that FERC should have provided for
stranded cost recovery from a retail-turned-wholesale custom-
er who ceases to purchase power from a utility but does not
use that utility's transmission service to reach another power
supplier--the so-called "bypass" scenario. This argument
requires little discussion. In declining to provide a mecha-
nism for the recovery of bypass stranded costs, FERC ex-
plained that "Order No. 888 does not by its terms bar the
recovery of costs that do not result from the use of Commis-
sion-required transmission access. Utilities may, as before,
seek recovery of such non-open-access-related costs on a
case-by-case basis in individual rate proceedings. The Com-
mission will not prejudge those issues here." Id. at 30,409.
Given FERC's discretion to proceed through adjudication
rather than by generic rule, see SEC v. Chenery Corp., 332
U.S. 194, 201-03 (1947), the IOUs' challenge is without merit.
* * *
As evidenced by the numerous petitions for review, FERC
faced an enormously difficult task in fashioning a stranded
cost recovery mechanism that fairly compensates utilities for
past investments while transitioning the electricity industry
to competition. FERC has done an admirable job. Produc-
ing a comprehensive, evenhanded record and carefully consid-
ering all commenters' claims, it adopted a stranded cost
recovery policy that accomplishes its stated objectives, com-
plies with the FPA, conforms to our case law, and reasonably
accommodates all competing interests. No doubt, there were
alternative approaches to stranded cost recovery--petitioners
have pointed to several. No doubt some aspects of Order 888
could have been better supported. But given the extremely
technical nature of these issues, as well as our highly deferen-
tial standard of review, we find no basis for questioning
FERC's approach. Although Order 888 may be character-
ized in many ways, it can hardly be said to be either arbitrary
or capricious.
VI. Credits for Customer-Owned Facilities
and Behind-The-Meter Generation
The Commission's Open Access Tariff requires that public
utilities--or "transmission providers"--offer "network inte-
gration transmission service." This requirement is one of the
key elements in the Commission's attempt to "remove impedi-
ments to competition in the wholesale bulk power market-
place," Order 888, p 31,036 at 31,634. Network service allows
a customer--for instance, a municipal utility--to use a trans-
mission system in a manner comparable to the way the
transmission provider utilizes its system to move power from
its generators to its native load customers.11 See Order 888,
__________
11 "Load" may be defined as "[t]he total demand for service on a
utility system at any given time." Public Utilities Reports Glos-
sary for Utility Management 84 (1992); see also Carl Pechman,
Regulating Power: the Economics of Electricity in the Informa-
tion Age 11 (1993). The Tariff defines "native load customers" as
the "wholesale and retail power customers of the Transmission
Provider on whose behalf the Transmission Provider, by statute,
franchise, regulatory requirement, or contract, has undertaken an
obligation to construct and operate the Transmission Provider's
p 31,036 at 31,736; id. at 31,751; Order 888-A, p 31,048 at
30,260 n.247; id. at 30,325.12 With network service, resources
located throughout the system serve loads dispersed through-
out the system. For this, the transmission provider incorpo-
rates the network customer's resources and loads (projected
over a minimum ten-year period) into its own long term
planning. Because network service ultimately provides the
customer with the same full system ability for transmitting
power as the transmission owner, the Commission required
that costs be allocated on the basis of a ratio of the network
customer's load to the transmission provider's entire load on
its transmission system. A group of petitioners, led by
Florida Municipal Power Agency (FMPA), challenge the
Commission's use of this "load-ratio pricing."
The FMPA petitioners do not object to load-ratio pricing as
such. In fact they think it "is a good method to allocate the
costs of a transmission network among network owners or
users," Brief of Credits for Customer-Owned Facilities, etc.,
at 3-4 ("Credits Brief"). Their principal complaint, repeated
many times and in many ways throughout their briefs, stems
from their view that as a practical matter the Commission
required that the network customer's total load be used in
calculating the ratio,13 even though some customers "sell
power from local, 'behind the meter' generation and transmis-
sion, or ... obtain power from more than one transmission
system...." Id. at 8.14 The FMPA petitioners say this
__________
system to meet the reliable electric needs of such customers."
Order 888-A, p 31,048 at 30,508.
12 Public utilities must also offer point-to-point service, that is,
transmission service reserved and/or scheduled between specified
points of receipt and delivery. Order 888-A, p 31,048 at 30,508.
13 The Commission did not actually require a customer to desig-
nate its total load to obtain network service: a customer may
exclude all--not merely part--of its load at a discrete delivery
point. See Order 888-A, p 31,048 at 30,256-62.
14 "Behind the meter generation [and transmission] means gener-
ation [or transmission] located on the customer's side of the point of
delivery." Order 888-A, p 31,048 at 30,254 n.230.
allows "transmission providers to charge wholesale customers
for network transmission that they do not want, need or use
to provide electric power service to their customers." Id. at
18.
The Commission provided some relief in response to these
complaints, but not enough to satisfy the FMPA petitioners.
"Because of the diverse concerns raised by the commenters,"
the Commission wrote in the preamble to Order No. 888, "we
are unable to resolve on the basis of this record the extent to
which, or under what circumstances, cost credits related to
customer-owned facilities would be appropriate under an
open-access transmission tariff." Order 888, p 31,036 at
31,742. Rather, this will be done on a case-by-case basis.
The Commission warned, however, that mere interconnection
between a customer's facilities and the transmission provid-
er's facilities will not be sufficient to warrant a cost credit.
Relying on Florida Municipal Power Agency v. Florida
Power & Light Co., 67 F.E.R.C. p 61,167 (1994) (FMPA I),
modified, 74 F.E.R.C. p 61,006 (1996) (FMPA II), the Com-
mission required the customer to demonstrate that its "trans-
mission facilities are integrated with the transmission system
of the transmission provider" and "provide additional benefits
to the transmission grid in terms of capability and reliability,
and [are] relied upon for the coordinated operation of the
grid." Order 888, p 31,036 at 31,742; Order 888-A, p 31,048
at 30,271. The Commission did, however, guarantee credits
for new, integrated transmission facilities built by a customer
if jointly planned with the transmission provider.
We detect nothing in the arguments of the FMPA petition-
ers to warrant setting aside this aspect of the Commission's
rule. It is true that as the owners of generation and trans-
mission facilities, any one of these petitioners can satisfy
some of its needs. But network service, as the Commission
defined it, means that network customers can call upon the
transmission provider to supply not just some, but all of their
load at any given moment, when for instance they experience
blackouts or brownouts. The Commission decided that if a
customer does not desire such full network service for its
entire load, it may exclude loads at discrete delivery points
and purchase point-to-point service instead. What it cannot
do is split loads at delivery points. The FMPA petitioners
object to the Commission's refusal to allow a split system, but
their objection is not well-taken. They ignore the technical
problems with a split system, stemming partly from the
manner in which electrons flow and the impossibility of
isolating loads from the transmission provider's system. See
FPC v. Florida Power & Light, 404 U.S. 453 (1972). Fur-
thermore, "such a split system creates the potential for a
customer to 'game the system' thereby evading some or all of
its load-ratio cost responsibility for network services." Order
888-A, p 31,048 at 30,259.15 The FMPA petitioners label this
prospect a "fiction," but offer neither evidence nor reasoning
to counter the Commission's expert judgment.16
As to credits, these petitioners maintain that if the Com-
mission is going to use total "load-ratio pricing with Network
Load defined as total customer load, simultaneous credits are
required." Credits Brief at 41. What they mean by credits
is reduced prices for any and all behind-the-meter facilities
they own. The Commission's rejection of this blanket ap-
proach is well-supported. Credit may be given, but not
automatically. The question can only be determined on a
case-by-case basis because it depends on whether the custom-
er's facilities are truly integrated with the transmission sys-
tem, rather than merely interconnected. Only if they are
__________
15 Load-ratio cost responsibility is based on the customer's contri-
bution to the transmission system peak each month. With a split
system a customer could, at the time of the monthly system peak,
increase its behind-the-meter generation in order to decrease its
load-ratio cost responsibility, while making significant use of the
transmission system throughout the rest of the month. See Order
888-A, p 31,048 at 30,259 & nn.244 & 245.
16 Petitioners claim that Florida Power Co., 81 F.E. R. C. p 61,247
(1997), decided after Order No. 888, shows that it is not "necessary
for customers to purchase amounts of network transmission equal
to their entire load behind a delivery point." Credits Brief at 30.
It shows no such thing. The case involved not network integration
transmission service, but a sort of hybrid service called "network
contract demand transmission service."
integrated will the transmission system benefit and only then,
the Commission decided, should credits--which shift the costs
of the customer's facilities to the transmission provider's
customers--be allowed. Order 888-A, p 31,048 at 30,271.
Petitioners call the Commission's rule in this regard "an
unexplained and inexplicable retreat from FMPA v. FPL."
Credits Brief at 42. It is nothing of the sort. The Commis-
sion made this abundantly clear. In FMPA I the Commis-
sion said that "if [a customer] has transmission facilities that
will operate as part of the integrated transmission system, a
credit would be reasonable." 67 F.E.R.C. at 61,482 n.76.
And in FMPA II the Commission said that mere interconnec-
tion does not equal integration and that integration must be
determined case by case. 74 F.E.R.C. at 61,010. This is
completely consistent with the Commission's resolution of the
credits issue in the proceedings before us.
The FMPA petitioners' next objection deals with new cus-
tomer facilities--that is, those built after network service
begins under the Tariff. The Commission determined that
"the Network customer shall receive a credit where such
facilities are jointly planned and installed in coordination with
the Transmission Provider." Order 888-A, p 31,048 at
30,534. Petitioners begin by reading this as some sort of
"limitation," they expand it into a "condition precedent for
customers to receive credit for new facilities," and they end
by treating it as a bar to "credits for new customer-facilities
unless they are jointly planned," Credits Brief at 43, 44, 45.
Commission counsel rightly points out that petitioners have
completely misread the rule: "simply put, the Rule does not
speak to the situation of new facilities built outside a joint
planning effort." Commission Brief at 104. The Commission
did determine that a joint planning mandate was "beyond the
scope of this proceeding," Order 888-A, p 1,048 at 30,311.
Using their mistaken premise, petitioners insist that the
Commission acted arbitrarily in this regard, giving transmis-
sion providers the power to block all customer credits for new
facilities. See Credits Brief at 45. Since their premise is
mistaken, their conclusion must be rejected. The balance of
the FMPA petitioners' arguments have been considered and
rejected.
VII. Liability, Interface Allocation, and Discounting
As part of Order 888, FERC adopted a pro forma Open
Access Transmission Tariff (OATT), containing minimum
terms and conditions for non-discriminatory service, which
every transmission-owning public utility must file with the
Commission and by which it must abide in providing trans-
mission services to itself and others. Various petitioners
have challenged isolated provisions of the OATT--specifically
the provisions governing liability and indemnification, inter-
face allocation, and delivery-point specific discounting. We
reject each of these challenges.
A. Liability and Indemnification
Prior to unbundling, retail tariffs were primarily a matter
for state regulation, and most states had approved tariff
provisions permitting utilities to limit their liability for service
interruptions to instances of gross negligence or willful mis-
conduct. Courts upheld these limitations on the public policy
grounds that they balanced lower rates for all customers
against the burden of limited recovery for some, and that the
technological complexity of modern utility systems and result-
ing potential for service failures unrelated to human errors
justified liability limitations. In the past, FERC also has
allowed electric utility tariffs to explicitly limit a utility's
liability for service interruptions to instances of gross negli-
gence or willful misconduct.
One of the pro forma tariffs included in the Notice of
Proposed Rulemaking contained a provision explicitly limiting
the liability of transmission providers to circumstances of
gross negligence or intentional wrongdoing. See Open Access
NOPR, p 32,514 at App. C s 15.0. Section 10.2 of the OATT
requires the transmission customer to "at all times indemnify,
defend, and save the Transmission Provider harmless from,
any and all damages ... except in cases of negligence or
intentional wrongdoing by the Transmission Provider." Or-
der 888, p 31,036 at 31,936-37 (emphasis added). In Order
888, FERC justified the change with a single statement: "We
find that this new indemnification provision would be too
strict if it required customers to indemnify transmission
providers even in cases where the transmission provider is
negligent." Order 888, p 31,036 at 31,765.
The investor owned utility petitioners (IOUs) challenge the
OATT's indemnification provision on the ground that FERC
adopted the lesser ordinary negligence standard in Order 888
without first notifying interested parties that it was contem-
plating such a major policy change. The IOUs claim that the
change in the provision's language represents a significant
shift in indemnification policy, in that it leaves transmission
providers open to claims of ordinary negligence for the first
time. The courts consistently have relied upon explicit tariff
provisions to enforce the gross negligence standard for liabili-
ty, see, e.g., Southwestern Bell Tel. Co. v. Rucker, 537 S.W.2d
326, 330-32, 334 (Tex. App. 1976); and if the tariffs do not
explicitly limit liability for ordinary negligence, the IOUs
claim, the courts will assess such matters differently. Be-
cause FERC's notice was not clear that the liability standard
was a subject or issue of the rulemaking, the IOUs claim that
FERC denied their right to comment on the change. See,
e.g., AFL-CIO v. Donovan, 757 F.2d 330 (D.C. Cir. 1985);
McLouth Steel Prods. Corp. v. Thomas, 838 F.2d 1317 (D.C.
Cir. 1988). Citing principally our opinion in Air Transport
Association of America v. DOT, 900 F.2d 369, 379 (D.C. Cir.
1990), the IOUs contend that the fact that they were able to
raise their concerns in their petition for rehearing is not a
substitute for pre-issuance notice and comment.17
FERC responds by denying that the indemnification provi-
sion adopts a particular liability standard at all. FERC
claims that it has merely distinguished liability from indemni-
fication, and that the change to the pro forma tariff does not
establish a new, simple negligence standard of liability for
transmission providers. Citing its own statements in Order
__________
17 We recognize that Air Transport has been vacated. See Air
Transport Association of America v. DOT, 933 F.2d 1043 (1991)
(per curiam).
888-A, FERC asserts that the tariff's indemnification provi-
sion should not be construed as preempting state liability
standards. See Order 888-B, p 61,248 at 62,080-81. FERC
maintains that, since the change to the indemnification provi-
sion does not represent a substantive alteration in policy or
the standards governing legal liability, the Commission was
not obligated to notify interested parties and seek comment.
FERC accuses the petitioners of wanting FERC to impose a
federal gross negligence liability standard, which FERC con-
tends that it properly declined to do pursuant to United Gas
Pipe Line Co. v. FERC, 824 F.2d 417 (5th Cir. 1987) (reject-
ing the need for a federal liability standard for pipelines).
The IOUs charged that FERC has deleted a limitation of
liability to gross negligence from the existing background of
utilities liability law and has done so without substantial
evidence and without exercising reasoned decision making.
See Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 338
(D.C. Cir. 1985) (the Commission's decision must be sup-
ported by substantial evidence and be the result of reasoned
decision making). The Commission denies that it has estab-
lished a standard of liability nearly so sweeping as the IOUs
fear. We agree with FERC's reading of the rule. While the
petitioners argue that the rule works a "dramatic change"
regarding the liability of electric utilities by imposing an
ordinary negligence rather than a gross negligence standard
that previously prevailed, in fact, the rule does not establish a
new simple negligence standard of liability for transmission
providers. While we read FERC's interpretation of its own
rule deferentially, see Jersey Shore Broad. Corp. v. FERC, 37
F.3d 1531, 1536 (D.C. Cir. 1994), by any standard, its con-
struction is correct in the present controversy. In the
preamble to the regulations before us, FERC plainly de-
scribes the disputed provision as an "indemnification" provi-
sion, and recites reasoning supporting the particular indemni-
fication provision it adopted. "[T]his new indemnification
provision would be too strict if it required customers to
indemnify transmission providers even in cases where the
transmission provider is negligent." Order 888, p 31,036 at
31,765. In the preamble to Order 888-A, in a section con-
cededly headed "Liability and Indemnification" (emphasis
added), FERC explains the later version of the relevant
provisions in terms consistent with the Order 888 preamble.
See generally Order 888-A, p 31,048 at 30,299-302. Finally,
in Order 888-B, FERC summarizes its reasoning for its
indemnification and liability decisions, again both adequately
and in ways not amounting to the adoption of the universal
standard as asserted by the IOUs. See generally Order
888-B, p 61,248 at 62,079-81. In short, FERC's rule does not
work so sweeping a change in the legal landscape as the IOUs
assert, and FERC has exercised reasoned decisionmaking in
support of such pronouncements as it has made.
Insofar as the IOUs challenge the adequacy of FERC's
notice in the NOPR that it was contemplating a change in the
indemnification and liability provisions of pro forma tariffs,
that challenge also fails. It is well established that a final
rule need not be identical to the original proposed rule. See,
e.g., AFL-CIO v. Donovan, 757 F.2d at 338; Trans-Pacific
Freight Conference v. Federal Maritime Comm'n, 650 F.2d
1235, 1249 (D.C. Cir. 1980). Were the change between the
proposed and final rule an important one, we would have to
ask whether the final rule is a logical outgrowth of the
proposed one. See, e.g., National Mining Ass'n v. Mine
Safety & Health Admin., 116 F.3d 520, 531 (D.C. Cir. 1997).
Not all changes are sufficiently important to warrant such
scrutiny and concern, however. "An agency, after all, must
be free to adopt a final rule not described exactly in the
[notice of proposed rulemaking] where the difference is suffi-
ciently minor, or agencies could not change a rule in response
to valid comments without beginning the rulemaking anew."
National Cable Television Ass'n v. FCC, 747 F.2d 1503, 1507
(D.C. Cir. 1984).
We agree with FERC that its indemnification provision
does not preclude the states from shielding utilities from
liability for ordinary negligence. States did so before,
through both their regulatory commissions and their courts;
and they remain free to do so under Order 888. The deletion
of the gross negligence language from the pro forma tariff's
indemnification provision does not significantly change the
petitioners' legal position. Therefore, contrary to the IOUs'
challenge, the deviation of the final rule from the proposed
one is not a major one; and FERC's failure to notify interest-
ed parties that it was considering the change does not render
the provision arbitrary or capricious under the APA. Accord-
ingly, we affirm this portion of the pro forma tariff.
B. Interface Allocation
The IOUs also challenge FERC's treatment of interface
allocation as unsupported by the record and contrary to
reasoned decision making. Section 30.8 of the pro forma
tariff addresses how much of a transmission provider's inter-
face capacity a network customer can use. See Order 888,
p 31,036 at 31,954-55. Interface capacity represents the ca-
pability of a transmission facility to transfer power between
two utilities. Section 30.8 permits a network customer to use
a transmission provider's capacity to the extent of the net-
work customer's total load without limitation.
In the rulemaking process, several parties argued that a
fair method of interface allocation would be the use of a load
ratio, under which the transmission provider and each net-
work customer would be allocated a share of each specific
interface based upon their respective loads. Nevertheless, in
Order 888, FERC ruled that network customers could use
any of the transmission providers' interfaces to import up to
their full load on a first-come, first-served basis. The IOUs
maintain that this ruling does not promote an equitable
allocation of a transmission provider's interfaces.
The IOUs also note that, responding to the IOUs petition
for rehearing on this issue in Order 888-A, FERC merely
referenced Florida Municipal Power Agency v. Florida Pow-
er & Light Co., 74 F.E.R.C. p 61,006 (1996) (hereinafter
FMPA II), to support its conclusion, without addressing
either the comments or the rehearing petitions. FERC
meanwhile maintains it found the load ratio share method
advocated by some transmission owners to be unreasonable
for the same reasons discussed at length in FMPA II.
Intervenors add that the IOUs' challenge of the aggregate,
first-come, first-served approach adopted by FERC as inequi-
table merely reflects a disagreement with FERC's policy
choice.
Whether to adopt a load ratio share approach or an aggre-
gate, first-come, first-served approach to capacity allocation is
a matter of policy. Again, the IOUs have not challenged
FERC's legal authority to select a particular interface alloca-
tion method, but rather whether FERC's choice was based
upon reasoned decision making. Accordingly, we evaluate
FERC's treatment of interface capacity allocation under the
APA's arbitrary and capricious standard. See 5 U.S.C.
s 706(2)(A) (1994).
FERC's analysis of the issue in the present rulemaking
consists solely of a reference to and quotation from its earlier
decision in FMPA II. See Order 888-A, p 31,048 at 30,304-
05. That proceeding involved an application by Florida Mu-
nicipal Power Agency for open access to Florida Power &
Light Company's transmission facilities pursuant to FPA
ss 211 and 212. See FMPA II, 74 F.E.R.C. p 61,006 at
61,004; see also Florida Mun. Power Agency v. Florida
Power & Light Co., 67 F.E.R.C. p 61,167 (1994) (hereinafter
FMPA I). In FMPA I and FMPA II, FERC justified its
choice of policies as follows:
[T]here are no restrictions on the use of other parts of
the transmission system. If the interfaces are con-
strained, Florida Power and FMPA should simply redis-
patch and share the redispatch costs and, ultimately,
Florida Power will build new facilities when needed.
The interfaces are just another part of the transmission
grid, and Florida Power must plan and operate the grid,
including the interfaces, to meet the combined needs of
Florida Power and FMPA on an equal basis. When
there are conflicting needs to use the same interface
capacity, the parties have already agreed that the com-
bined Florida Power and FMPA systems will be redis-
patched and the costs shared. When the grid, including
interfaces, needs to be expanded, Florida Power will
undertake the expansion on behalf of the combined sys-
tem.
FMPA II, 74 F.E.R.C. p 61,006 at 61,018 (quoting FMPA I,
67 F.E.R.C. p 61,167 at 61,484). While FERC's recognition of
the petitioners' concerns was certainly cursory, and its lan-
guage in FMPA II is slightly oblique, FERC has adequately
demonstrated that it gave full consideration before rejecting
load ratio share in favor of aggregate, first-come, first-served
capacity allocation. Accordingly, we uphold FERC's ruling
on the interface capacity allocation issue.
C. Delivery-Point-Specific Discounting
Two groups of transmission dependent utilities, TAPS and
TDU Systems, and the nation's largest power wholesaler,
Enron Power Marketing (collectively the U&D petitioners),
challenge FERC's decision to permit delivery-point-specific
discounting. Electric utilities often offer both firm and non-
firm service. Firm service permits customers to demand
transmission at any time, while non-firm service permits the
utility to cut service when there is not enough excess capaci-
ty.
In Order 888, FERC allowed transmission providers to
offer discounted rates for non-firm service only if they gave
the same discounted rate to all customers for the same
transmission path and on all other unconstrained transmis-
sion paths. See Order 888, p 31,036 at 31,743-44. FERC
also required that the discounts be posted in advance so that
all customers could have equal opportunity to take advantage
of the discounted rate. See id. at 31,744. In Order 888-A,
FERC narrowed the requirement, so that a transmission
provider offering a discount on a particular path need only
provide the same discount to all other unconstrained paths
that go to the same delivery point on the provider's system.
See Order 888-A, p 31,048 at 30,275-76. FERC also said that
a transmission provider should discount only if necessary to
increase throughput on its system. See id. at 30,274.
The U&D petitioners contend that delivery-point-specific
discounting results in higher transmission rates for trans-
mission dependent utilities (TDUs), who rely on point-to-
point service rather than network service for their transmis-
sions. Delivery-point-specific discounting permits transmis-
sion facility owners to select the delivery points for which
they will discount firm and non-firm service. The U&D
petitioners argue that this discounting method allows trans-
mission facility owners to discriminate by denying discounts
to the delivery points used by the TDUs, thereby raising the
transmission costs of these competitors, and in turn decreas-
ing competition at both retail and wholesale.
Additionally, because of the subordination and interrupti-
bility of non-firm service, the U&D petitioners claim that
FERC's longstanding pricing policies utilized discounting as
the mechanism for ensuring that non-firm service was priced
below firm service. The notice of proposed rulemaking em-
phasized FERC's reliance on non-discriminatory discounting
to achieve higher firm service rates than non-firm rates, so
that non-firm rates would reflect the interruptibility of
transmission services and be economically efficient. The pe-
titioners argue that FERC's decision in Order 888 to deny
discounting of non-firm rates unless firm rates are also dis-
counted an unexplained reversal of that longstanding pricing
policy. By adopting a delivery-point-specific discounting
rule, the petitioners claim that FERC subjects TDUs to firm
rates for all non-firm service. As a result, the petitioners
contend, the price that TDUs have to pay for non-firm
service does not reflect the interruptibility of that service.
The petitioners maintain that this aspect of FERC's order
itself represents undue discrimination, and that FERC failed
to explain why it rejected a compromise position which
would restrict opportunities for discrimination and address
concerns that the new rules discourage discounting.
FERC notes that it discussed the discounting issue in
Orders No. 888, 888-A, and 888-B. See Order 888, p 31,036 at
31,743-44; Order 888-A, p 31,048 at 30,272-76; Order 888-B,
p 61,248 at 62,072-75. FERC accuses the petitioners of
wanting the Commission to require transmission providers to
discount all non-firm services below firm rates regardless of
the facts of the particular case. FERC asserts that it did not
seek to discourage discounting, but was concerned that if it
required discounting on all unconstrained paths as a condition
for offering discounts, transmission providers would be dis-
couraged from offering any discounts at all. Fewer discounts
could lead to decreased use of transmission services, and
therefore a decline in overall transmission revenues, and a
corresponding increase in transmission rates to enable trans-
mission providers to recover their costs. FERC maintains
that the petitioners, like everyone else, retain the opportunity
to compete with the transmission provider for power sales to
the same delivery point at the same discounted rate. FERC
argues that its orders are consistent with its established
pricing policy of permitting flexibility to reflect interruptibili-
ty and efficient use of the transmission system, subject to the
firm price cap. In most cases, FERC expects that non-firm
transmission rates will be priced below the firm rate.
Although the petitioners hint at a statutory claim by alleg-
ing that FERC's orders result in undue discrimination and
higher rates in violation of the FPA's statutory mandate, the
petitioners generally confine themselves to arguing that
FERC's decisions to permit delivery-point-specific discount-
ing and non-firm rates equal to firm rates represent unex-
plained departures from established policy. We therefore
analyze this issue under the arbitrary and capricious standard
of the APA. See 5 U.S.C. s 706(2)(A).
With respect to non-firm versus firm rates, the cases cited
by the petitioners as demonstrating a previously established
discounting policy actually establish that FERC addresses
this issue on a case-by-case basis. For example, in Kentucky
Utilities Co., 15 F.E.R.C. p 61,002 (1981), FERC said that the
utility could not allocate capacity costs to non-firm transmis-
sion service since such service did not factor into the utility's
capacity decisions. In contrast, in Central Maine Power Co.,
60 F.E.R.C. p 61,285 (1992), while FERC noted that non-firm
service generally warrants a rate lower than firm service,
FERC also upheld the utility's decision not to offer non-firm
rate discounts on several contracts. Indeed, the petitioners
acknowledge that FERC's pre-Order 888 Transmission Pric-
ing Policy Statement, 59 Fed. Reg. 55,031 (1994), does not
expressly require non-firm rates to be priced below firm rates
in all cases. See Br. of U&D Petitioners at 24 n.30.
The petitioners cite American Electric Power Service
Corp., 82 F.E.R.C. p 61,090 (1998), for the proposition that,
after adopting delivery-point-specific discounting, FERC has
refused to consider whether non-firm rates should be lower
than firm rates; but in that case, FERC did consider that
issue, found the rates in question to be nondiscriminatory,
and refused only to consider the petitioners' generic chal-
lenges to its broader policy of flexibility. Additionally, the
petitioners charge that FERC's acceptance of firm rates for
non-firm service conflicts with this court's decision in Fort
Pierce Utilities Authority v. FERC, 730 F.2d 778, 788-89
(D.C. Cir. 1984); but in that case, this court merely noted
that FERC had failed to reconcile its decision to allocate
capacity costs to non-firm transmission service with its previ-
ous refusal to do so in Kentucky Utilities, and remanded for
further consideration. In short, FERC does not appear to
have changed its overall pricing policy at all, except to fine
tune its guidance as to when discounting might be considered
discriminatory.
Which brings us to whether delivery-point-specific dis-
counting in fact discriminates against the TDUs. Essentially,
FERC and the petitioners offer conflicting discounting theo-
ries, both of which seem plausible. In its request for rehear-
ing, TAPS observed that, by allowing transmission providers
to select which delivery points merit discounts, FERC per-
mits the providers to select for discounting those delivery
points which serve their affiliates, and not to select the
similarly situated delivery points which serve the TDUs. On
rehearing, FERC quite logically maintained that requiring
transmission providers to apply discounts to all unconstrained
transmission paths could discourage discounting generally,
resulting in higher rates for all. See Order 888-A, p 31,048 at
30,275. FERC subsequently asserted that requiring trans-
mission providers to offer the same discount for the same
time period on all unconstrained paths that go to the same
delivery point will achieve sufficient comparability. See Or-
der 888-B, p 61,248 at 62,075. FERC noted that it will be
able to monitor the discounting behavior of transmission
providers for discrimination through the data posted on OA-
SIS. See id.
The record reflects that FERC considered fully all of the
arguments, and concluded that delivery-point-specific dis-
counting best accomplished comparability while encouraging
discounting. Thus, the discounting policies outlined in Orders
888, 888-A, and 888-B are not arbitrary or capricious. We
therefore affirm FERC's resolution of this issue.
VIII. Tariff Terms and Conditions
A. Headroom Allocation
Firm point-to-point service, as distinguished from network
service, is transmission service reserved and/or scheduled
between specified points of receipt and delivery. See Order
888-A, p 31,048 at 30,508. Point-to-point customers may not
need all the service for which they contracted. The Commis-
sion decided that they may, without extra charge, use their
excess capacity to make firm sales between the receipt and
delivery points specified in their agreement. Section 22.1 of
the Tariff gives them another option for dealing with this
"headroom." The point-to-point customer may, without
charge, have the public utility provide transmission on a non-
firm basis over receipt and delivery points other than those
specified in the service agreement (so-called "secondary"
points).
Network customers describing themselves as Transmission
Dependent Utilities (TDUs) contend that the flexibility given
to point-to-point customers to sell their unused capacity
should also be given to them. Three transmission providers18
--the CPL petitioners--want restrictions placed on point-to-
_____________
18 Carolina Power & Light Company (CPL), Florida Power &
Light Company and Niagara Mohawk Power Corporation.
point customers in order to avoid putting the customers at a
competitive advantage. The Commission refused to adopt
these proposals for reasons we believe are sound.
As to transmission providers, the Commission noted that if
they want to make off-system sales they too must take point-
to-point service; in doing so they gain the same flexibility as
regular point-to-point customers. See Order 888, p 31,036 at
31,751. For network customers, the Commission stated that
they "are not obligated to take network transmission service"
and if they "want to take advantage of the as-available, non-
firm service over secondary points of receipt and delivery
through the point-to-point service, they may elect to take firm
point-to-point transmission service in lieu of the network
service." Order 888-A, p 31,048 at 30,253. The Commission
properly insisted on maintaining its basic distinctions between
network service and point-to-point service. Unlike a point-to-
point customer, a network customer's rights are defined in
terms of capacity needed, and thus "vary as the customer's
load varies," rendering them not sufficiently definite and
defined to be "reassignable in the secondary market." Id. at
30,223. At least one of the TDUs agreed with the Commis-
sion "that, because there is no fixed capacity reservation for
network customers, allowing them unrestricted use of capaci-
ty to make off-system sales without additional charge would
give such customers a competitive advantage over [point-to-
point] customers." Terms and Conditions Brief at 11.19
B. Headroom Prioritization
Some petitioners complain that secondary non-firm point-
to-point customers should not have been placed in a status
below non-firm point-to-point customers and that the Com-
_______________
19 These petitioners add that the Vermont Department of Public
Service (VDPS) offered a solution to the problem but the Commis-
sion overlooked it. Terms and Conditions Brief at 12. This is not
correct. The Commission did consider the Vermont proposal, find-
ing it to be an "artifice derived from the load ratio share calcula-
tion," a "formula [that] does not result in a reassignable capacity
right." Order 888-A, p 31,048 at 30,223. mission offered no explanation for its doing so. See Terms
and Conditions Brief at 14-17. The Commission did explain
itself. Firm point-to-point customers are permitted to desig-
nate secondary receipt and delivery points at no extra charge
and therefore "are properly accorded a lower priority than
stand alone, non-firm transmission." Order 888-A, p 31,048
at 30,281. Furthermore, the Commission promised to reeval-
uate its approach in response to any "future transmission rate
proposal that is based on the concept of tradable capacity
rights," but it was moving cautiously because in the electric
utility industry (unlike the natural gas industry) such "trading
rights simply do not exist at this time." Id.
C. Duplicative Charges
The TDU petitioners argue that the new rules cause them
to be double-charged in certain transactions. They first
object to the Commission's decision that in power exchanges
(flows in one direction for a time and then flows in the
opposite direction) each party must reserve and pay for
transmission along the same path. See Terms and Conditions
Brief at 18. The Commission's response was that traditional-
ly and "from the transmitting utility's planning and reserva-
tion perspective," the power exchange consists of two one-way
transmission services. Commission Brief at 115. Petitioners
offer no legal basis for us to prefer their treatment to that of
the agency and so we will not disturb the Commission's
approach.
Petitioners' second objection is that the Tariff double
counts network load served by two separate energy suppliers
because, "[i]f two separate suppliers purchase network ser-
vice to supply a portion of the load for a particular customer,
the entire load of the customer is included in calculating the
reservation charges paid by both supplying network custom-
ers, unless each load portion is isolated electrically from the
other." Terms and Conditions Brief at 21. We confess to
some difficulty in comprehending petitioners' complaint. It
seems perfectly reasonable to answer, as the Commission's
counsel does, that "there is no rational basis for both the
network transmission customer and its power marketer sup-
plier to designate the same load under the Tariff." Commis-
sion Brief at 115. The power supplier itself may, the Com-
mission pointed out, purchase network service; we cannot see
why both the power supplier and the power buyer would
purchase such service when a purchase by either would
suffice. Petitioners seem to concede that in some instances
the double-counting problem could be avoided in this manner,
yet they think that in some other, ill-defined circumstance it
could not. This rulemaking set forth the standard tariff
terms. If petitioners, or any one of them, have some unique
circumstances warranting an adjustment, there will be time
enough for them to seek relief from the Commission.
D. Multiple Control Areas
Network customers may wish to serve loads in two or more
control areas. Some commenters were concerned that such
customers would have to pay a network transmission rate to
two or more transmission providers based on the customer's
total load. See supra Section VI (credits for customers).
The Commission had several responses. First, the risk could
be avoided or alleviated by the customer's purchasing point-
to-point service, or a combination of network and point-to-
point service at discrete delivery points (thereby reducing its
load ratio). Or the customer could purchase network service
alone in each transmission provider's control area. See Order
888-B, p 61,248 at 62,096 n.157. If the customer insists on
foregoing the last option, it can hardly expect that the
additional service it is demanding--the moving of power from
one transmission provider's system to another system--
should be free of charge. As the Commission put it:
Because the additional transmission service to non-
designated network load outside of the transmission pro-
vider's control area is a service for which the transmis-
sion provider must separately plan and operate its sys-
tem beyond what is required to provide service to the
customer's designated network load [within the control
area], it is appropriate to have an additional charge
associated with the additional [point-to-point] service.
Order 888-A, p 31,048 at 30,255, quoted in Order 888-B, 81
F.E.R.C. p 61,248 at 62,096. This is consistent with the
handling of an analogous situation involving separate trans-
mission systems in the past. See Fort Pierce Utils. Auth. v.
FERC, 730 F.2d 778, 781-85 (D.C. Cir. 1984).20
E. Right-of-First-Refusal
In order to preserve the certainty and continuity of trans-
mission service, the Commission granted existing customers a
right-of-first-refusal (ROFR) upon the expiration of firm con-
tracts exceeding one year provided that the existing customer
agreed to match the contract price and term of any party
competing for that service. See Order 888, p 31,036 at 31,665.
The Commission did not set an upper limit on the terms that
a competing party could offer, but chose instead to allow the
market to determine rates and terms. Petitioners argue that
the Commission's failure to establish an upper limit should be
set aside and remanded for further consideration. The Com-
mission conceded error on this point at oral argument in light
of United Gas Distribution Cos. v FERC, 88 F.3d 1105, 1138-
40 (D.C. Cir. 1996). We therefore remand this matter to the
Commission so that it may provide a reasonable cap on
contract extensions.21
________________
20 Petitioners claim that the Commission failed to consider a
particular proposal related to this subject. See Terms and Condi-
tions Brief at 33. It is unnecessary to describe the proposal. All
that need be said is that the Commission rejected a nearly identical
proposal and gave its reasons for doing so. See Order 888-B,
p 61,248 at 62,096.
21 The TDU petitioners stated in their reply brief that Commis-
sion counsel's explanation of s 13.2 of the Tariff, as amended in
Order No. 888-A and as interpreted in Madison Gas & Electric Co.,
82 F.E.R.C. p 61,099 at 61,372 (1998), to apply only to short term
customers satisfies their objection. See Terms and Conditions
Reply Brief at 25. The remaining arguments of these petitioners
not discussed in this part or in part V have been considered and
rejected. IX. National Environmental Policy Act and
Regulatory Flexibility Act Compliance
A. NEPA Compliance
One investor-owned utility, Public Service Electric & Gas
Company ("PSE&G"), claims that FERC failed to comply
with the National Environmental Policy Act ("NEPA"), 42
U.S.C. ss 4321 et seq. It argues first that the base case
FERC adopted to evaluate the effects of open access trans-
mission was unreasonable because it "defined away" the
effects of open access. Second, it argues, FERC acted
arbitrarily and capriciously by failing to undertake measures
to mitigate the environmental impact of Order 888.
1. Adequacy of Base Case
NEPA requires federal agencies contemplating a major
action "significantly affecting the quality of the human envi-
ronment" to prepare a thorough analysis of the action's
environmental impact. 42 U.S.C. s 4332(C). The statute
requires that environmental impact studies include "a detailed
statement ... [of] alternatives to the proposed action." Id.
s 4332(C)(iii).
In its environmental impact study prepared in connection
with Order 888, FERC identified as the base case alternative
a scenario that "maintain[s] the status quo." FERC Final
Environmental Impact Statement, Promoting Wholesale
Competition through Open Access Non-discriminatory
Transmission Services by Public Utilities and Recovery of
Stranded Costs by Public Utilities and Transmitting Utili-
ties at 2-1 (Apr. 1996) ("FEIS"). Under that scenario, FERC
would continue on a case-by-case basis to (1) condition ap-
proval of mergers and applications for sales at market rates
on the filing of open access tariffs and (2) approve open
access wheeling orders under section 211 of the FPA. Id.
Several commenters (including EPA) argued that FERC
should adopt as its base case an alternative that freezes the
status quo, i.e., assumes that no further open access transmis-
sion of any kind occurs and that efficiency in the industry
remains unchanged. See id. at 6-1. Characterizing this
"frozen efficiency" case as unreasonable, FERC declined to
adopt it as the base case. See id. at 6-9-6-14. It neverthe-
less conducted sensitivity analyses comparing emissions un-
der the frozen efficiency case with those under its base case.
This comparison revealed "modest" reductions in emissions
under the frozen efficiency case in certain circumstances. Id.
at 6-4. When market conditions favor coal versus natural
gas, NOx emissions under the base case are higher than
under the frozen efficiency case by two percent in 2000, three
percent in 2005, and five percent in 2010. Id. at 6-15. But
when market conditions favor gas, the base case produces
more favorable environmental benefits for all three years.
Id. at 6-17.
We evaluate agency compliance with NEPA under a rule of
reason standard. "[A]s long as the agency's decision is 'fully
informed' and 'well-considered,' it is entitled to judicial defer-
ence and a reviewing court should not substitute its own
policy judgment." Natural Resources Defense Council, Inc.
v. Hodel, 865 F.2d 288, 294 (D.C. Cir. 1988) (quoting North
Slope Borough v. Andrus, 642 F.2d 589, 599 (D.C. Cir. 1980)).
PSE&G argues that FERC, in adopting its base case,
"defined away" the impact of open access by comparing the
environmental effects that would result from immediate im-
plementation through Order 888 to those that would result
from gradual implementation. Calling FERC's evaluation of
the frozen efficiency case "cursory," PSE&G contends that
the proper no action base case is not to implement open
access at all.
Given the terms of NEPA and our highly deferential
review, we think FERC's FEIS complied with the statute.
For one thing, NEPA does not require that a certain alterna-
tive be adopted as the base case. Rather, NEPA requires
that agencies include in their FEIS analysis of "alternatives
to the proposed action." 42 U.S.C. s 4332(C)(iii). Thus
there is no merit to the contention that NEPA requires
FERC to adopt the frozen efficiency case as the base case.
We agree with PSE&G that one of the alternatives NEPA
requires FERC to consider is the alternative of no action.
But based on our own examination of the FEIS, we think that
FERC devoted sufficient attention to evaluating the frozen
efficiency case (what PSE&G calls the no action alternative)
to satisfy NEPA's requirements. In conducting sensitivity
analyses to its base case, FERC identified the changes in
both NOx and CO2 emissions that the frozen efficiency case
would produce. Given that FERC's comparison of the frozen
efficiency case to its base case yielded little difference, the
agency had no reason to conduct further analysis. By rigor-
ously examining the frozen efficiency case, even though it
believed the case to be unreasonable, FERC ensured that its
decision was "fully informed" and "well-considered." Hodel,
865 F.2d at 294.
2. Failure to Adopt Mitigation Measures
PSE&G argues that FERC acted arbitrarily and capri-
ciously by failing to adopt measures to mitigate the expected
harmful environmental effects of Order 888. Noting that an
agency must consider mitigation if the proposed action would
result in adverse environmental impacts, FERC considered
but ultimately rejected any mitigation measures. See FEIS
s 7. In reaching this conclusion, FERC relied on (1) the fact
that any mitigation measures it might undertake are unwar-
ranted in view of Order 888's small impact (especially given
that its effects are as likely to be beneficial as harmful) and
(2) its lack of expertise in atmospheric chemistry, together
with the fact that any impact of open access would be
"dwarfed by the far larger existing ozone and NOx emission
issues" currently being dealt with by EPA under its Clean
Air Act authority. FEIS at 7-47-7-48.
The heart of PSE&G's challenge is this: downwind utilities,
which are subject to NOx reduction requirements, will face
increased compliance costs due to the purported increase in
emission levels resulting from Order 888; by comparison,
upwind utilities that generate the pollution but are not sub-
ject to NOx reduction requirements will experience no in-
creased costs. PSE&G insists that FERC remedy this "un-
due preference" for upwind utilities.
Given that FERC has identified only small increases in
emissions resulting from open access transmission--indeed,
under some circumstances, the Commission predicted small
decreases--we think it was entirely reasonable for FERC to
decline to adopt mitigation measures to address a problem
that it believed might not even develop. Not relying solely
on Order 888's relatively insignificant environmental impact,
however, FERC comprehensively analyzed proposed mitiga-
tion measures, explaining why it declined to require any. In
light of this thorough analysis, we think FERC's conclusion--
that NOx emission increases resulting from Order 888, if any,
are best addressed by EPA and the states through a compre-
hensive emissions control program--is hardly arbitrary or
capricious. We therefore have no need to resolve the parties'
debate about FERC's legal authority to order environmental
mitigation.
PSE&G also argues that FERC employed unreasonable
assumptions in the FEIS and ignored its own data showing
adverse environmental impacts. In our view, these argu-
ments amount to an effort by PSE&G to substitute its own
analysis for FERC's. To prevail in this court, it must demon-
strate that FERC's analysis is arbitrary and capricious, a
showing it has fallen far short of making.
B. Regulatory Flexibility Act Compliance
The Regulatory Flexibility Act requires agencies to conduct
a regulatory flexibility analysis for any final rule. The Act
exempts agencies from this requirement if they certify that
"the rule will not, if promulgated, have a significant economic
impact on a substantial number of small entities." 5 U.S.C.
s 605(a)-(b). Invoking this exemption, FERC certified that
both Order 888 (open access) and Order 889 (OASIS and
standard of conduct rules) would have no such impact. Order
888, p 31,036 at 31,896; Order 889, p 31,035 at 31,628.
The TDU petitioners claim that FERC failed adequately to
consider the impact of Orders 888 and 889 on nonjurisdiction-
al entities that may have to provide open access transmission
and file open access tariffs under the orders' reciprocity
provisions. In contrast to jurisdictional utilities, several non-
jurisdictional utilities are classified as small entities. Accord-
ing to TDU petitioners, the orders impose a significant eco-
nomic burden on them, requiring compliance activities as well
as alterations to their operations.
Although the RFA's judicial review provision was amended
in 1996, see Small Business Regulatory Enforcement Fairness
Act, Pub. L. No. 104-121, tit. II, 110 Stat. 857 (1996), the
TDU petitioners and FERC agree that the pre-amendment
version of the RFA applies in this case. Under that version,
our review is quite narrow. Section 611(b) provided that
"[a]ny regulatory flexibility analysis ... and the compliance
or noncompliance of the agency with the provisions of this
chapter shall not be subject to judicial review. When an
action for judicial review of a rule is instituted, any regulatory
flexibility analysis for such rule shall constitute part of the
whole record of agency action in connection with the review."
5 U.S.C. s 611(b) (1994). We have interpreted this language
to mean that " 'a reviewing court should consider the regula-
tory flexibility analysis as part of its overall judgment wheth-
er a rule is reasonable and may, in an appropriate case, strike
down a rule because of a defect in the flexibility analysis.'
We emphasize[ ], however, that 'a major error in the regulato-
ry flexibility analysis may be, but does not have to be,
grounds for overturning a rule.' " Mid-Tex Elec. Co-op, Inc.
v. FERC, 773 F.2d 327, 340-41 (D.C. Cir. 1985) (quoting
Small Refiner Lead Phase-Down Task Force v. EPA, 705
F.2d 506, 537-39 (D.C. Cir. 1983)).
In this case, FERC explained that Orders 888 and 889,
considered in their entirety, do not have a "significant" im-
pact on a "substantial" number of small entities. According
to FERC, the orders will affect nonjurisdictional utilities only
in the limited situation where they take advantage of a
jurisdictional utility's open access transmission tariff. Given
our highly deferential standard of review, and given the fact
that petitioners have offered nothing other than their own
views to the contrary, we have no basis for questioning
FERC's judgment.
FERC, moreover, was not insensitive to the potential im-
pact of Order 888 on small nonjurisdictional entities. Order
888 contains a waiver provision allowing these entities to seek
an exemption from compliance with the reciprocity conditions.
See 18 C.F.R. s 35.28(e)(2) (allowing nonjurisdictional utilities
to file a request for waiver "for good cause shown"). As of
March 1997, FERC had granted waivers to thirty-six small
entities. See Order 888-A, p 31,049 at 30,578.
Most important in view of our standard of review, nothing
in petitioners' arguments causes us to question the reason-
ableness of the reciprocity provisions themselves. See Mid-
Tex, 773 F.2d at 340-41. We therefore affirm FERC's RFA
certification.
Conclusion
In summary, we affirm Orders 888 and 889 in all respects
except as specifically provided above.