United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 10, 2000 Decided July 25, 2000
No. 99-1222
East Texas Electric Cooperative, Inc., et al.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Central Power and Light Company, et al.,
Intervenors
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
A. Hewitt Rose, III argued the cause for the petitioners.
David H. Coffman, Attorney, Federal Energy Regulatory
Commission, argued the cause for the respondent. John H.
Conway, Acting Solicitor, Federal Energy Regulatory Com-
mission, was on brief. Jay L. Witkin, Solicitor, and Susan J.
Court, Counsel, Federal Energy Regulatory Commission, en-
tered appearances.
Clark Evans Downs argued the cause for the Intervenors.
Martin V. Kirkwood was on brief.
Before: Edwards, Chief Judge, Henderson and Rogers,
Circuit Judges.
Opinion for the court filed by Circuit Judge Henderson.
Karen LeCraft Henderson, Circuit Judge: Petitioners
East Texas Electric Cooperative, Inc., Northeast Texas Elec-
tric Cooperative, Inc. and Tex-La Electric Cooperative of
Texas, Inc. (collectively, Texas Electric) seek review of three
orders of the Federal Energy Regulatory Commission
(FERC, Commission) ultimately approving the open access
transmission tariff the CSW Operating Companies (CSW)1
proposed for their provision of electric power to Texas Elec-
tric, inter alia. Texas Electric argues that the Commission,
in its Tariff Order, Central Power & Light Co., 81 F.E.R.C.
p 61,311 (1997), accepted certain rates included in CSW's
proposed rates but rejected and ordered modification of
another. CSW not only responded to the Commission's di-
rective regarding modification of the specified rate, they also
eliminated a different rate which, Texas Electric argues, had
been accepted and was therefore not supposed to be eliminat-
ed. The Commission accepted CSW's compliance filing in
relevant part in its Compliance Order, Central Power & Light
Co., 85 F.E.R.C. p 61,224 (1998), including the alleged rate
change resulting from the elimination of the rate earlier
accepted. Finally, in its Rehearing Order, Central Power &
Light Co., 87 F.E.R.C. p 61,073 (1999), the Commission reject-
ed Texas Electric's arguments and concluded CSW had com-
plied with the Tariff Order directives.
__________
1 The Central and South West Corporation, a registered public
utility holding company, is comprised of four operating companies
(CSW): Southwestern Electric Power Company; Public Service
Company of Oklahoma; Central Power and Light Company; and
West Texas Utilities Company. CSW filed a brief as intervenors in
support of the Commission.
Texas Electric argues, citing 16 U.S.C. s 824d, that CSW
failed to justify the rate change as the Federal Power Act
(Act) requires and that the Commission's acceptance, without
explanation, of CSW's compliance filing and its resulting
approval of CSW's elimination of the previously accepted
charge (thereby effecting a rate change) also failed to satisfy
the Commission's duty under the Administrative Procedure
Act, 5 U.S.C. s 706(2). Texas Electric further contends the
new rates unduly discriminate against it (and other CSW
customers) and that the Commission violated its duty under
the Act, 16 U.S.C. s 824e, to assure that rates are not unduly
discriminatory.
The Commission on the other hand claims it did not accept
the proposed rates in the Tariff Order and that nothing
therein prohibited CSW from eliminating the rate at issue.
Rather, the Commission claims that its Tariff Order makes
clear the decision was left to CSW's discretion. We defer to
FERC's interpretation of its Tariff Order as not limiting
CSW's revised transmission tariff. We conclude, however,
that the Tariff Order did not sufficiently notify Texas Electric
of CSW's discretion to modify the original proposal, particu-
larly in light of the Tariff Order's language approving the
rates at issue. Hence Texas Electric's failure to seek rehear-
ing does not bar it from raising this issue before us. More-
over, the Commission failed to explain why the revised tariff
was lawful, that is, just and reasonable. Given that the
revision at issue could not fairly have been anticipated by
Texas Electric, the Commission erred in summarily approv-
ing that part of the Compliance Tariff without explaining
whether the new rates were just and reasonable; accordingly,
we remand for FERC to make that determination.
I.
The CSW System operates in two power districts: the
Southwest Power Pool (SPP) and the Electric Reliability
Council of Texas (ERCOT). Of the four operating companies
in the CSW System, two are entirely within SPP and the
other two are entirely within ERCOT.2 CSW's facilities are
interconnected, however, forming a single, integrated system.
In 1996 FERC addressed the rate systems of public utili-
ties, like those comprising CSW, who are members of regis-
tered public utilities holding companies. In Order No. 888
(filed May 10, 1996), Promoting Wholesale Competition
Through Open Access Non-discriminatory Transmission
Services by Public Utilities, FERC Stats. & Regs. p 31,035,
61 Fed. Reg. 21,540 (1996), codified as revised at 18 C.F.R.
Pts. 35 & 385 (1999),3 which resulted from a rule-making
proceeding designed to remedy undue discrimination in the
transmission of electric power, FERC required all such utili-
ties to file a tariff permitting transmission service across the
holding company's entire system at a single price. See
Transmission Access Policy Study Group, 2000 WL 762706,
at *3, *5 (D.C. Cir. June 30, 2000); see also Tariff Order, 81
F.E.R.C. at 62,430 (discussing Order No. 888). Thus, individ-
ual member utilities within a holding company could no longer
charge separate, "pancaked" rates4 for what is a single trans-
__________
2 ERCOT operates entirely in Texas and, to a large extent, is
governed by the Public Utility Commission of Texas. Although the
ERCOT companies became subject to FERC jurisdiction as a result
of their interconnection with the SPP companies, FERC commonly
defers to the Texas transmission ratemaking methodologies within
ERCOT. See Brief of Commission at 7; Brief of Petitioners at 5.
3 For the revisions and clarifications of Order No. 888, see 76
F.E.R.C. p 61,009 (1996), 76 F.E.R.C. p 61,347 (1996), and 79
F.E.R.C. p 61,182 (1997), on reh'g, Order No. 888-A, FERC Stats.
& Regs. p 31,048, 62 Fed. Reg. 12,274 (1997), on reh'g, Order No.
888-B, 81 F.E.R.C. p 61,248, 62 Fed. Reg. 64,688 (1997), on reh'g,
Order No. 888-C, 82 F.E.R.C. p 61,046 (1998), aff'd in part and
remanded sub nom. Transmission Access Policy Study Group v.
FERC, 2000 WL 762706 (D.C. Cir. June 30, 2000).
4 A "pancaked" rate is equal to the sum of the rates for a single
transmission of two or more utilities within a holding company's
system. In other words, the customer must pay each utility's
separate charge for a single transmission: here, the customer would
pay both SPP and ERCOT rates for a transmission through their
mission over the holding company's system. Id. at 62,432.
Instead, the utilities must provide the transmission under a
single rate, resulting in a de facto reduction of the overall
charge. FERC addressed the CSW System specifically, di-
recting the utilities therein to file "a system tariff that will
provide comparable service to all wholesale users on the CSW
System, regardless of whether they take transmission service
wholly within ERCOT or the SPP, or take transmission
service between the reliability councils over the North and
East Interconnections." Order No. 888, 61 Fed. Reg. at
21,595. Furthermore, FERC noted that "[i]t may be appro-
priate to have different rates for transmission service wholly
within ERCOT or the SPP, and for service between [them]."
Id. at 21,595 n.422.
CSW filed a proposed transmission tariff that provided
separate rates for wholly intra-ERCOT service and wholly
intra-SPP service but did not provide a single CSW System-
wide rate for transmissions through both ERCOT and SPP.
Thus, customers requiring service traversing the SPP-
ERCOT boundary would pay pancaked rates. In its Tariff
Order the Commission analyzed CSW's separate rates for the
two service areas (ERCOT and SPP) and determined that the
rate structures were reasonable.
Assessing different rates for service in the different
regions is reasonable.... [I]t is appropriate to allow
CSW to adopt the Texas Commission's regional network
pricing structure for services wholly in ERCOT. As a
corollary, it is also reasonable for CSW to assess a single
postage stamp rate for service wholly within SPP.
Tariff Order, 81 F.E.R.C. at 62,432-33. The Commission,
however, then rejected the pancaked rates for service tra-
versing both areas. See id. at 62,433. It "require[d] CSW to
revise its tariff to propose a single rate for use of the entire
CSW system" and added that, "[w]hile CSW may continue to
propose multiple charges, their total sum may not exceed
__________
separate service areas but within the CSW System. See Brief of
Commission at 11.
CSW's average system cost." Id. In closing the Commission
further described its action:
The Commission orders:
(A) CSW is hereby directed to make the changes
discussed in the body of this order within 30 days of the
date of this order.
(B) The proposed CSW Tariff is hereby accepted for
filing, as modified as directed in Ordering Paragraph (A)
above, effective January 1, 1997....
Id. at 62,440.
CSW filed a Compliance Tariff proposing a single four-
company, system-wide rate applicable both to customers
served by transmissions through ERCOT and SPP and to
customers accessing only SPP service.5 The tariff also set a
rate applicable to customers using only ERCOT but eliminat-
ed the comparable rate for "SPP-only" customers it had
originally proposed. Texas Electric protested the Compli-
ance Tariff's elimination of the intra-SPP rate. It argued
that the Tariff Order had approved the intra-SPP rate and,
therefore, CSW must justify elimination of the rate as the Act
requires. In addition, Texas Electric argued that the intra-
SPP rate was necessary to prevent undue discrimination in
light of the intra-ERCOT rate which remained in effect and
was less expensive than the system-wide rate to which
SPP-only customers had become subject. In the Compliance
Order the Commission focused on whether CSW had com-
plied with the Tariff Order. The Commission found that it
had: "In the [Tariff Order], we directed [CSW] to submit a
single, system-wide rate, and they have done so." Compli-
ance Order, 85 F.E.R.C. at 61,924. Accordingly, the Commis-
sion approved elimination of the intra-SPP rate.
Texas Electric requested rehearing challenging FERC's
approval of the elimination of the intra-SPP rate in the
__________
5 Although Texas Electric requested rehearing on "the Com-
mission's approval of direct assignment of the costs of transmission
facility upgrades," Joint Appendix 42, it did not challenge the
system-wide rates or CSW's authority to establish multiple charges.
Compliance Tariff. It argued that elimination of the rate was
not consistent with the Tariff Order and lacked adequate
justification by CSW and adequate consideration by the Com-
mission. In the Rehearing Order, the Commission again
rejected Texas Electric's challenges because it found CSW
had complied with its directive in the Tariff Order (that is, to
propose a single rate for use of the entire CSW system) when
it eliminated the intra-SPP rate in favor of a single-system
rate. See Rehearing Order, 87 F.E.R.C. at 61,300. The
Commission added that, if Texas Electric wished to challenge
the directive, it could have done so on rehearing of the Tariff
Order but not on rehearing of the Compliance Order. See id.
II.
"As a general matter, we will uphold FERC's factual
findings if supported by substantial evidence and will endorse
its orders so long as they are based on reasoned decision
making." Texaco, Inc. v. FERC, 148 F.3d 1091, 1095 (D.C.
Cir. 1999) (citing Koch Gateway Pipeline Co. v. FERC, 136
F.3d 810, 814 (D.C. Cir. 1998)). And if FERC interprets its
own orders reasonably, we will sustain its interpretations.
See Natural Gas Clearinghouse v. FERC, 108 F.3d 397, 399
(D.C. Cir. 1997).
Arguing that the Tariff Order left CSW free to eliminate
the multiple charges they had proposed, FERC relies on the
permissive "may" in the statement that "CSW may continue
to propose multiple charges," Tariff Order, 81 F.E.R.C. at
62,433 (emphasis added). Although FERC precedent gener-
ally confines the scope of modifications in compliance filings
to the Commission's particular directives, see Entergy Power
Mktg. Corp., 75 F.E.R.C. p 61,282 at 61,903 (1996); Southern
Co. Servs., 63 F.E.R.C. p 61,217 at 62,595-96 (1993), here the
Commission specifically left to CSW the decision whether to
"continue to propose multiple charges." 81 F.E.R.C. at
62,433. Thus, CSW's subsequent elimination of the intra-SPP
rate was contemplated and in fact authorized, albeit not
ordered, in the Tariff Order. FERC points to specific lan-
guage supporting its interpretation of its Tariff Order as non-
prescriptive with regard to proposing multiple charges, see
Brief of Commission at 21,6 and, finding FERC's interpreta-
tion of its own order reasonable, we must sustain it against
Texas Electric's challenge. See Natural Gas Clearinghouse,
108 F.3d at 399.
Nevertheless the Tariff Order did not provide sufficient
notice to Texas Electric that CSW could eliminate the ap-
proved intra-SPP rate. See McElroy Elecs. Corp. v. FCC,
990 F.2d 1351, 1358 (D.C. Cir. 1993) ("[W]e look not at the
reasonableness of the Commission's intended interpretation,
but at the clarity with which the agency made that intent
known."). Much of the Tariff Order indicated acceptance of
CSW's proposed tariff, including the declarations in the intro-
ductory paragraph: "In this order, the Commission directs
modifications to and accepts for filing, as modified, a joint
system-wide open access transmission tariff." Tariff Order,
81 F.E.R.C. at 62,430 (emphasis added). In the Commission's
concluding list of orders, it also accepted the tariff for filing
conditioned on the modifications CSW were directed to make.7
See id. at 62,440. The Commission approved the separate
intra-SPP and intra-ERCOT rates so long as their sum did
not exceed CSW's average system cost. See id. at 62,432-33.
In fact, FERC deemed the methodology used to determine
separate rates "appropriate" and "reasonable." Id. at 62,433.
One reasonable interpretation of the phrase granting CSW
discretion is an indication of FERC policy toward future rate
__________
6 In brief the Commission argued:
As for any requirement that [CSW] must retain their intra-
SPP rates, the Tariff Order spoke to that as well. The Tariff
Order specifically stated that "[w]hile CSW may continue to
propose multiple charges, their total sum may not exceed
CSW's average system cost." By using the permissive "may,"
FERC made clear that [CSW] had the discretion to keep or
eliminate multiple charges including the SPP-only rates.
Brief of Commission at 21 (citations omitted) (emphasis in original).
7 As noted earlier, proposed tariff modifications are ordinarily
limited to what the Commission directs but the Commission did not
direct CSW to eliminate the intra-SPP rate.
changes, as "may continue" implies future action. This inter-
pretation is all the more reasonable if, given FERC's discus-
sion in approving the separate, regional rates, the reader
interpreted the order as accepting the proposed rates that
were not subject to the directed modification. On the whole
it was not unreasonable for Texas Electric to have overlooked
or misread the permissive language of the Tariff Order so as
to relieve it of the obligation to petition for clarification or
rehearing. It is for this reason we disagree with the Com-
mission's statement in the Rehearing Order that Texas Elec-
tric failed to preserve its challenge (thus precluding our
exercise of jurisdiction) because it did not raise the objection
in its petition for rehearing of the Tariff Order.
The judicial review portion of the Act provides that "[n]o
objection to the order of the Commission shall be considered
by the court unless such objection shall have been urged
before the Commission in the application for rehearing unless
there is reasonable ground for failure so to do." 16 U.S.C.
s 825l(b). We have consistently rejected agency efforts to
bind parties "by what the agency intended, but failed to
communicate." McElroy Elecs. Corp. v. FCC, 990 F.2d 1351
(D.C. Cir. 1993). Rather, an agency order must provide
reasonable notice of its import:
The policy requiring timely filing of motions for reconsid-
eration is one of fairness to [FERC8] and to parties
affected by its order; only a perversion of that policy
could be used to cut off the rights of a party that filed its
application in good faith, as soon as it could reasonably
have become aware of the import of an [FERC] order.
Endorsement of the position that the [FERC] takes
would permit an administrative agency to enter an am-
biguous or obscure order, wilfully or otherwise, wait out
the required time, then enter an "explanatory" order that
__________
8 Instead of referring to FERC, the opinion refers to "FPC,"
the former Federal Power Commission and the predecessor of
FERC. See, e.g., Elizabethtown Gas Co. v. FERC, 575 F.2d 885,
886 (D.C. Cir. 1978).
would extinguish the review rights of parties prejudicial-
ly affected.
Sam Rayburn Dam Elec. Coop. v. Federal Power Comm'n,
515 F.2d 998, 1007 (D.C. Cir. 1975). As earlier discussed, it
was not clear that the Commission could allow elimination of
the intra-SPP rate (absent statutorily mandated procedures)
until it did so in the Compliance Order. Texas Electric's
challenge made in its request for rehearing of the Compliance
Order, therefore, was not untimely. See MCI Telecomms.
Corp. v. FCC, 765 F.2d 1186, 1190-91 (D.C. Cir. 1985) (be-
cause implication of policy did not follow from earlier order,
request for rehearing of subsequent order enunciating policy
was timely); Sam Rayburn Dam, 515 F.2d at 1007-08 (not
clear until further clarification order that purchaser of elec-
tric power was "aggrieved" so application for rehearing was
timely filed); see also RCA Global Communications, Inc. v.
FCC, 758 F.2d 722, 730-31 (D.C. Cir. 1985) ("We simply
cannot agree that a fair reading of the Prescription Order ...
permits the conclusion that [petitioner] did know or should
have known that the Commission had confronted, much less
resolved, the issue [petitioner] now petitions us to review.");
cf. ANR Pipeline Co. v. FERC, 988 F.2d 1229, 1230 (D.C. Cir.
1993) ("[W]e believe that an ordinary reader familiar with the
industry background would have recognized a very substan-
tial likelihood that the order meant what the Commission
ultimately said it meant.").
Having concluded that Texas Electric's challenge to the
Compliance Order was timely, we look at its merits. The
Commission's summary approval of the Compliance Tariff
cannot be regarded as a finding that a modification beyond
the modifications directed, that is, the new rate to which
SPP-only customers were subjected, was just and reason-
able.9 Ultimately, the Commission failed to offer anything
__________
9 While it might be argued that the mere reference to the Tariff
Order was sufficient to establish that the rates accepted in the
Compliance Order were reasonable because no multiple rates would
be summed and yield a rate exceeding CSW's average system cost
from which the court can "discern a reasoned path ... to the
decision [the Commission] reached." K N Energy, Inc. v.
FERC, 968 F.2d 1295, 1303-04 (D.C. Cir. 1992). Accordingly,
we conclude the Commission's approval of the rates proposed
in the Compliance Tariff was arbitrary and capricious and
remand for reconsideration. See AT&T v. FCC, 974 F.2d
1351, 1355 (D.C. Cir. 1992) ("We conclude that the Reconsid-
eration Order is arbitrary and capricious for want of an
adequate explanation and remand it for further consider-
ation.").
For the foregoing reasons, we remand to FERC for further
proceedings consistent with this opinion.
So ordered.
__________
in violation of the condition the Commission had set, see Tariff
Order, 81 F.E.R.C. at 62,433, nonetheless we cannot agree that the
Commission determined the rates reflected in the Compliance Tariff
were just. For example, the Commission did not respond to Texas
Electric's challenge that the elimination of the separate, intra-SPP
rate constituted undue discrimination in light of the continued
existence of a separate, intra-ERCOT rate.