Ctrl VT Pub Svc Corp v. FERC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 2, 1999 Decided June 30, 2000

No. 98-1532

Central Vermont Public Service Corporation,
Petitioner

v.

Federal Energy Regulatory Commission,
Respondent

Vermont Department of Public Service,
Intervenor

On Petition for Review of Orders of the
Federal Energy Regulatory Commission

Carmen L. Gentile argued the cause for petitioner. With
him on the briefs were David E. Goroff and James H.
McGrew.

 Larry D. Gasteiger, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and John H. Conway,
Deputy Solicitor.

Before: Edwards, Chief Judge, Henderson and Tatel,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: For years Central Vermont Public
Service Corporation has sold electricity to its wholly owned
subsidiary, Connecticut Valley Electric Company, which has
resold the electricity to retail customers in New Hampshire.
After ordering Connecticut Valley to terminate its power
purchase agreement with Central Vermont, the New Hamp-
shire Public Utility Commission denied Connecticut Valley's
request to recover stranded costs from its own retail custom-
ers. Central Vermont then petitioned the Federal Energy
Regulatory Commission for approval of a transmission rate
surcharge that would permit Central Vermont to recover
stranded costs from Connecticut Valley's retail customers.
Finding the proposed surcharge inconsistent with its strand-
ed cost policy, FERC rejected the surcharge. Because we
find FERC's decision neither arbitrary nor capricious, we
deny the petition for review.

I

In order to stop utilities from discriminatorily denying
other power suppliers access to their transmission lines, the
Federal Energy Regulatory Commission, acting through what
is known as Order 888, required public utilities that own,
control, or operate transmission facilities to file open access
tariffs under which they agree to provide transmission service
according to certain minimum terms and conditions. See
Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public Utili-
ties; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, 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), modified, Order No.
888-A, FERC Stats. & Regs. p 31,048, 62 Fed. Reg. 12,274
(1997), order on reh'g, Order No. 888-B, 81 FERC p 61,248,
62 Fed. Reg. 64,688 (1997), order on reh'g, Order No. 888-C,
82 FERC p 61,046 (1998). Recognizing that utilities might
incur transition costs--so-called "stranded costs"--as a result
of former customers' new ability to reach alternate power
suppliers through FERC-mandated open access, as well as
through parallel actions on the state level, Order 888 provides
for both wholesale and retail stranded cost recovery.

Wholesale stranded costs result when wholesale utility
customers (customers who purchase power for resale) take
advantage of Order 888's open access requirement to pur-
chase power from another supplier using their former utility's
transmission lines. Under the pre-open access regulatory
regime, the Commission explained, utilities entered into long-
term contracts for the wholesale sale of power to require-
ments customers. Because wholesale customers had no
source of power supply other than their historic utility, these
contracts were normally extended at the end of their term.
Relying on the expectation of continued service to historic
customers, utilities invested money, built facilities, and en-
tered into long-term fuel purchase contracts. 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. 35274 (1994). These costs
will become "stranded" if, before utilities have recovered
them, their long-term requirements customers take advan-
tage of open access and cease purchasing the utilities' power.
Recognizing that FERC "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, Order 888 provides a mechanism for
utilities to recover stranded costs caused by the departure of
wholesale customers.

Retail stranded costs occur when retail customers take
advantage of state-ordered retail "wheeling" (i.e., state-
ordered transmission of power by utilities for other power
suppliers) to purchase power from suppliers other than their

historic utilities. Because these costs result from state regu-
lation, FERC agreed to consider utility proposals to recover
stranded costs from retail customers only if the appropriate
state regulatory commission lacks authority to do so under
state law. See Order 888, p 31,036 at 31,824-26.

In Transmission Access Policy Study Group v. FERC, No.
97-1715 (D.C. Cir. 2000), also issued today, we uphold Order
888's stranded cost policy in all respects relevant to this case.

In this case, Central Vermont seeks to use Order 888 to
recover stranded costs from the retail customers of its whole-
sale requirements customer, Connecticut Valley. A wholly
owned subsidiary of Central Vermont, Connecticut Valley
purchases power from Central Vermont pursuant to a whole-
sale requirements contract (the "RS-2 contract") and then
resells the power to retail customers in New Hampshire. As
part of state-wide electric utility restructuring, the New
Hampshire Public Utility Commission ("NHPUC") ordered
Connecticut Valley to terminate the RS-2 contract so that its
customers could take advantage of state-ordered retail wheel-
ing to reach other power suppliers. In response, Connecticut
Valley petitioned the NHPUC to recover its stranded costs
from its retail customers in New Hampshire. Concluding
that Connecticut Valley was in part responsible for these
costs because it had imprudently declined to terminate the
RS-2 contract when the retail restructuring program was
enacted into law in 1996, the NHPUC denied its request.

Central Vermont then filed with FERC a notice of cancella-
tion of the RS-2 contract. Claiming that cancellation of the
contract would produce $44.9 million of stranded costs, and
relying on Order 888, Central Vermont sought to recover
those costs through a surcharge to the transmission rate
charged to customers who use Central Vermont's transmis-
sion system to deliver power to customers in Connecticut
Valley's service area. In other words, the surcharge collected
by Central Vermont would be paid by Connecticut Valley's
retail customers and the entities transmitting power to them.
Central Vermont explained: "In this way, the stranded costs
would be paid by the same persons who caused the cost

stranding to occur by displacing, through use of Central
Vermont's transmission system, Central Vermont power with
power acquired from a different supplier."

Without holding a hearing, FERC rejected Central Ver-
mont's proposed transmission surcharge, explaining that Or-
der 888 permits utilities to recover stranded costs only from
wholesale customers--in this case Connecticut Valley--not
from retail customers of their wholesale customers. Central
Vermont Public Service Corp., 81 FERC p 61,336 at 62,541-
42 (1997). FERC recommended that Central Vermont seek
recovery of its stranded costs directly from Connecticut Val-
ley through an exit fee amendment to the RS-2 contract. See
id. at 62,542. Although Central Vermont followed that advice
and filed a proposed exit fee amendment--a hearing on that
proposal is pending, see Central Vermont Public Service
Corp., 82 FERC p 61,237 (1998)--it also sought rehearing,
claiming that an exit fee would be unsatisfactory and chal-
lenging FERC's rejection of its surcharge proposal. See
Central Vermont Public Service Corp., 84 FERC p 61,295
(1998). In the alternative, asserting that FERC's rejection of
the surcharge rendered its transmission rates confiscatory, it
argued that FERC should have either treated its surcharge
proposal as a section 205 rate increase filing or waived its
stranded cost regulations altogether. FERC rejected Cen-
tral Vermont's challenges, finding the last two unripe in light
of the pendency of Central Vermont's exit fee proposal. See
id.

Central Vermont now petitions for review. It argues that
its transmission surcharge proposal fits within three situa-
tions in which FERC agreed to consider proposals for strand-
ed cost recovery on a case-by-case basis. First, it claims that
its proposal is analogous to the "retail-turned-wholesale" sce-
nario, in which Order 888 permits utilities to recover stranded
costs from newly formed municipalities who serve the utili-
ties' former retail customers. See Order 888, p 31,036 at
31,818. Second, asserting that the RS-2 contract contains a
reserve equalization formula, Central Vermont argues that
FERC should have permitted it to recover stranded costs
pursuant to Order 888's provisions concerning situations

where costs are shifted across state lines. See id. at 31,826.
Finally, it invokes Order 888's provisions for the recovery of
stranded costs that result from restructuring, see id. at
31,845-46; according to Central Vermont, it is voluntarily
restructuring in response to NHPUC-ordered retail wheeling.
Central Vermont also claims that FERC's refusal to treat its
filing as a section 205 rate increase filing or to waive its
regulations was arbitrary and capricious.

II

We review FERC's orders under the APA's familiar arbi-
trary 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). Of particular importance to this case,
we "afford substantial deference to the Commission's inter-
pretations of its own regulations, deferring to the agency
unless its interpretation is plainly erroneous or inconsistent
with the regulation." Bluestone Energy Design, Inc. v.
FERC, 74 F.3d 1288, 1292 (D.C. Cir. 1996) (internal quotation
marks omitted).

At oral argument, counsel for Central Vermont emphasized
that Central Vermont relies not on Order 888's implementing
regulations, see 18 C.F.R. s 35.26, but rather on Order 888
itself, which identifies certain situations not covered by the
regulations in which FERC will consider proposals for
stranded cost recovery on a case-by-case basis. This was a
wise strategy, for Central Vermont's transmission surcharge
proposal does not conform to the Order 888 regulations,
which authorize recovery of stranded costs from wholesale
requirements customers (in this case, Connecticut Valley), not
those customers' retail customers. The regulations provide
that FERC will consider proposals for recovery of stranded
costs from a utility's retail customers, but only when the state
regulatory commission lacks authority to do so. See id.
s 35.26(d)(1). Not only does the NHPUC have authority to
address stranded costs (and did in fact do so), but the retail
customers from whom Central Vermont seeks recovery are
not its customers--they're Connecticut Valley's.

 Central Vermont's attempts to fit its transmission sur-
charge proposal into Order 888 rest on a misunderstanding of
the order. Take, for example, Central Vermont's effort to
analogize its plight to situations where a municipality con-
demns a utility's distribution plant, becomes a wholesale
customer of the utility, and utilizes open access transmission
to purchase power on the competitive market. In that sce-
nario, known as retail-turned-wholesale, FERC reasoned that
the municipality, as a new wholesale customer, stands in the
shoes of former retail customers for purposes of obtaining
transmission access and new power supplies. Because of this
direct link between former retail customers and the munici-
pality, FERC agreed to consider utility proposals for recov-
ery of stranded costs from the municipality itself. Order
888-A, p 31,048 at 30,408-10.

According to Central Vermont, Connecticut Valley's former
retail customers, like newly created municipalities, are not
technically former wholesale customers, but are using Central
Vermont's transmission system to supply the very loads for
which Central Vermont incurred the now-stranded costs.
That analogy doesn't work. In the retail-turned-wholesale
situation, retail customers were former customers of the
utility seeking recovery. Here, the retail customers from
whom Central Vermont seeks recovery are former customers
of Connecticut Valley. Under the retail-turned-wholesale
analogy, Connecticut Valley, not Central Vermont, would be
seeking recovery from these customers. Moreover, because
Connecticut Valley's customers remain retail customers, the
proper forum for stranded cost recovery is, as Connecitcut
Valley seems to have recognized, the NHPUC, not FERC.
Not until the NHPUC denied Connecticut Valley's original
request for stranded cost recovery did Central Vermont turn
to FERC.

Equally unsuccessful is Central Vermont's effort to fit itself
into Order 888's stranded cost provisions for multi-state and
restructuring situations. Its arguments amount to little more
than attempts to fit square pegs into round holes, for in
neither circumstance did FERC agree to consider proposals

to recover stranded costs from retail customers of a utility's
wholesale customer.

We begin with the multi-state exception. Concerned that
the "denial of retail stranded cost recovery by a state regula-
tory authority could, through operation of the reserve equali-
zation formula in a Commission-jurisdictional intra-system
agreement, inappropriately shift the disallowed costs to affili-
ated operating companies in other states," FERC agreed to
consider stranded cost recovery in such situations on a case-
by-case basis. Order 888, p 31,036 at 31,826. Claiming that
its RS-2 contract with Connecticut Valley contains just such a
"reserve equalization formula," Central Vermont argues that
its inability to recover stranded costs from Connecticut Val-
ley's New Hampshire retail customers will, through the for-
mula's operation, shift costs to its Vermont customers.
FERC rejected this claim, concluding that the RS-2 contract
in fact contains no reserve equalization formula.

At oral argument, the parties continued to disagree about
whether the RS-2 contract actually contains a reserve equali-
zation formula. Insisting that it does, counsel for Central
Vermont pointed us to the contract's "capacity charge formu-
la." Counsel for FERC told us that the capacity charge
formula is not the same as a reserve equalization formula; to
illustrate his point, he simply referred us to an inter-system
agreement (not in the record of this proceeding) that he says
contains such a formula.

Fortunately, we can decide this case without resolving this
debate, for even if the RS-2 contract contains a reserve
equalization formula, FERC did not err in concluding that
Central Vermont's surcharge proposal did not fit within the
multi-state exception. Order 888's sole method for avoiding
the automatic shifting of costs across state lines is a contract
amendment. See Order 888, p 31,036 at 31,826; Order 888-A,
p 31,048 at 30,420. See also Central Vermont, 84 FERC at
62,371 ("[T]he remedy for preventing automatic shifting of
retail stranded costs was to amend the jurisdictional contract
on file with the Commission."). Central Vermont seeks not to

amend the RS-2 contract, but rather to recover stranded
costs from its customer's customers.

For its final effort to fit its surcharge proposal into Order
888, Central Vermont relies on provisions permitting recovery
of stranded costs resulting from voluntary restructuring.
Order 888 said little more than this about voluntary restruc-
turing:

[T]he functional unbundling of wholesale services does not
require corporate unbundling (such as disposition of assets
to a non-affiliate, or establishing a separate corporate affili-
ate to manage a utility's transmission assets). At the same
time, we indicated that some utilities may ultimately choose
some form of corporate unbundling. We reaffirm in this
Final Rule that we are willing to consider case-specific
proposals for dealing with stranded costs in the context of
any restructuring proceedings that may be instituted by
individual utilities.

Order 888, p 31,036 at 31,845-46 (footnote omitted).

Citing New Hampshire's restructuring of the retail electric-
ity market and its own "inevitable" need to divest generation
assets, Central Vermont claims that FERC should have ap-
proved its surcharge proposal as arising in connection with a
voluntary restructuring. FERC refused to do so, finding that
Central Vermont had not demonstrated that it was pursuing
corporate unbundling of the type contemplated by Order 888.
Participation in state-wide restructuring, FERC reasoned,
was insufficient to constitute a "voluntary restructuring."
See Central Vermont, 84 FERC at 62,372. Indeed, in the
only two proceedings cited by the parties in which FERC has
set hearings to consider stranded cost proposals in the re-
structuring context, utilities had proposed to sell off specific
assets and to modify their contracts with wholesale require-
ments customers. See Montaup Electric Co., 79 FERC
p 61,386 (1997); New England Power Co., 78 FERC p 61,080
(1997). Central Vermont has said only that it will "inevita-
bly" divest assets. More fundamentally, the stranded cost
proposals at issue in the two cited cases required recovery
from wholesale customers, not from retail customers of

wholesale customers. Were we to accept Central Vermont's
claim, then every utility denied stranded cost recovery in
connection with state-ordered restructuring could seek relief
from FERC. Yet Order 888 emphatically and repeatedly
states that "[t]he only circumstance in which we will entertain
requests to recover stranded costs caused by retail wheeling
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 31,825 (footnote
omitted).

To sum up, we see no basis for questioning FERC's
rejection of Central Vermont's surcharge proposal, much less
for finding the agency's action arbitrary or capricious. As we
read the record in this case, Central Vermont simply did not
like the consequence of Order 888's deference to state agen-
cies--the NHPUC's denial of Connecticut Valley's retail
stranded cost recovery proposal--and now seeks from FERC
what the state agency denied. Nothing in Order 888 permits
such an end run around FERC's decision to defer to state
agencies' assessments of retail stranded cost recovery. Or-
der 888 allows Central Vermont to recover stranded costs
only from a wholesale requirements customer--here, its whol-
ly owned subsidiary Connecticut Valley--just the course it is
now pursuing in another proceeding.

III

This brings us finally to Central Vermont's alternative
claim that without stranded cost recovery, its current trans-
mission rates are confiscatory and that FERC should there-
fore have either treated its transmission surcharge filing as a
section 205 rate increase filing or waived its stranded cost
regulations and approved the proposed surcharge. Citing the
pendency of the exit fee amendment hearing, FERC rejected
both claims. See Central Vermont, 84 FERC at 62,369 & n.7.

FERC now contends that Central Vermont's claims are
unripe, relying on the familiar two-part test of ripeness:
courts must "evaluate both the fitness of the issues for
judicial decision and the hardship to the parties of withhold-

ing court consideration." Abbott Laboratories v. Gardner,
387 U.S. 136, 149 (1967). "A claim is not ripe for adjudica-
tion," the Supreme Court recently explained, "if it rests upon
contingent future events that may not occur as anticipated, or
indeed may not occur at all." Texas v. United States, 523
U.S. 296, 118 S. Ct. 1257, 1259 (1998) (internal quotation
marks and citations omitted). Central Vermont's challenge to
FERC's refusal to treat its filing as a section 205 rate
increase filing or to waive its regulations depends on no
future events, contingent or otherwise. To resolve its chal-
lenge, we need only examine the record before us and assess
FERC's rationale. To be sure, FERC's own decision may
have rested in part on the existence of contingent events--
namely, the resolution of the pending exit fee amendment
proposal--but that does not make Central Vermont's chal-
lenge unripe in this court.

On the merits, we can easily dispose of Central Vermont's
arguments. We see no basis for questioning FERC's judg-
ment that whether and to what extent to permit Central
Vermont to increase its rates in a section 205 proceeding
depend on the outcome of the exit fee proposal. After all, if
Central Vermont recovers its full stranded costs through the
exit fee, it will have no need to increase its rates. Moreover,
FERC made its decision "without prejudice to Central Ver-
mont making a filing in the future seeking recovery of non-
open-access-related costs." Central Vermont, 84 FERC at
62,369 n.8. If Central Vermont is unhappy with the outcome
of the exit fee hearing, it may renew its claim.

We have the same reaction to Central Vermont's argument
that FERC should have waived the Order 888 regulations.
Given the possibility that Central Vermont may recover its
full stranded costs through an exit fee--a method perfectly
consistent with the regulations--FERC's refusal to waive its
regulations is hardly arbitrary or capricious.

IV

The petition for review is denied.

So ordered.