United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 22, 2005 Decided June 14, 2005
No. 04-1116
FLORIDA MUNICIPAL POWER AGENCY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
FLORIDA POWER & LIGHT COMPANY,
INTERVENOR
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Robert A. Jablon argued the cause for petitioner. With him
on the briefs were Daniel I. Davidson and Peter J. Hopkins.
Judith A. Albert, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were Cynthia A. Marlette, General Counsel, and Dennis
Lane, Solicitor.
Clifford M. Naeve, Glen S. Bernstein, and Kathryn K. Baran
were on the brief for intervenor.
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Before: GINSBURG, Chief Judge, and EDWARDS and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge EDWARDS.
EDWARDS, Circuit Judge: Florida Municipal Power
Agency (“FMPA”), a public agency that sells electric power
supply for its member cities, petitions this court for review of
two Federal Energy Regulatory Commission (“FERC” or
“Commission”) decisions in which the Commission declined to
consider whether a network service provider can charge a
network customer full load ratio prices where it is physically
impossible for that provider to service the customer’s full load.
The case presents the latest chapter in an ongoing dispute
between petitioner FMPA and intervenor Florida Power and
Light Company (“Florida Power”) over the cost that Florida
Power may allocate to FMPA for network transmission service.
In the orders under review, the Commission declined to consider
the load ratio pricing issue on the ground that it had already
addressed FMPA’s argument in a final rule that sets out the
general parameters for network transmission service.
Counsel for FERC has conceded to the court that the final
rule upon which the Commission relied does not address the
specific issue of physical impossibility as it relates to load ratio
pricing. Moreover, it is clear that the final rule left open the
possibility of exceptions to the general load ratio pricing
scheme. FERC’s refusal to consider whether physical
incapacity provides a proper basis for an exception to full load
ratio pricing is therefore arbitrary and capricious. Accordingly,
we grant the petition for review and remand the case to FERC
for further consideration consistent with this opinion.
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I. BACKGROUND
A. Regulatory Framework
In order to facilitate competition in wholesale bulk power
and bring more efficient power to consumers, FERC issued
Order No. 888, requiring public utilities that own, control, or
operate transmission systems to have on file open access tariffs
that offer, inter alia, network transmission service. See
Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, 61 Fed. Reg. 21,540, 21,541 (May 10, 1996) (“Order
No. 888” or “Final Rule”), on reh’g, 62 Fed. Reg. 12,274 (Mar.
14, 1997) (“Order No. 888-A”), on reh’g, 62 Fed. Reg. 64,688
(Dec. 9, 1997), on reh’g, 82 F.E.R.C. ¶ 61,046 (Jan. 20, 1998),
aff’d Transmission Access Policy Study Group v. FERC, 225
F.3d 667 (D.C. Cir. 2000) (per curiam) (“TAPS”), aff’d sub nom.
New York v. FERC, 535 U.S. 1 (2002). “Network service allows
more flexibility” than point-to-point service, another form of
service offered under the pro forma tariff, “by allowing a
transmission customer to use the entire transmission network to
provide generation service for specified resources and specified
loads without having to pay multiple charges for each
resource-load pairing.” Order No. 888, 61 Fed. Reg. at 21,547
n.65. Network service permits a utility company using another
utility’s transmission system “to fully integrate load [i.e., the
aggregate demand for service on the system at any given time,]
and resources on an instantaneous basis in a manner similar to
the transmission owner’s integration of its own load and
resources.” Id. at 21,547. We recognized in TAPS that
“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.”
TAPS, 225 F.3d at 726.
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Order No. 888 endorsed the “load ratio allocation method
of pricing” for network service. This method allocates the costs
of network transmission based on the ratio of each customer’s
load to the entire load on the system. See Order No. 888, 61
Fed. Reg. at 21,599; Fla. Mun. Power Agency v. FERC, 315
F.3d 362, 363 (D.C. Cir. 2003), cert. denied, 540 U.S. 946
(2003). The Commission “recognize[d],” however, “that
alternative allocation proposals may have merit and welcome[d]
their submittal.” Order No. 888, 61 Fed. Reg. at 21,599. The
Order made it clear that such applications would “be evaluated
on a case-by-case basis and decided on their merits.” Id.
Order No. 888-A, which addressed petitions for clarification
and rehearing relating to the Final Rule, considered the concerns
of some transmission customers, including FMPA, that
“network customers should not be charged a network rate to use
their own transmission (or distribution) system to serve loads
that are located beyond the transmission owner’s system,” a
phenomenon known as load and generation “behind-the-meter.”
Order No. 888-A, 62 Fed. Reg. at 12,322. FERC’s analysis
drew at length from the “Complaint Case,” in which FMPA
sought to have the Commission direct Florida Power to provide
network transmission service to FMPA and its members. After
granting FMPA’s request for the service, FERC largely adopted
Florida Power’s proposed cost- allocation method, under which
the costs of Florida Power’s transmission system would be
shared based on the “relative native loads that receive network
service,” see Fla. Mun. Power Agency, 67 F.E.R.C. ¶ 61,167, at
61,477-78, 61,481 (May 11, 1994) (“FMPA I”), reh’g granted
in part, 74 F.E.R.C. ¶ 61,006 (Jan. 5, 1996) (“FMPA II”), reh’g
denied, 96 F.E.R.C. ¶ 61,130 (July 26, 2001), aff’d on other
grounds, 315 F.3d 362, the load ratio pricing method
subsequently adopted in Order No. 888 and clarified in Order
No. 888-A. Order No. 888-A echoed and amplified FMPA I and
FMPA II, explaining that a customer may exclude “the entirety
of a discrete load” from its network load (and obtain
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point-to-point service as necessary for that load), but it cannot
exclude merely part of that discrete load, even if that part is
served by behind-the-meter generation. Order No. 888-A, 62
Fed. Reg. at 12,323.
B. Prior Proceedings in the Present Case
In 1993, Florida Power filed an “extensive and
comprehensive rate filing designed to overhaul [Florida
Power’s] existing tariff structure.” Fla. Power & Light Co., 64
F.E.R.C. ¶ 61,361, at 63,480 (Sept. 24, 1993). This rate filing
marked the beginning of the “Rate Case,” a FERC proceeding
that is docketed separately from the Complaint Case. Numerous
parties, including FMPA (as a member of “Florida Cities”)
intervened in the Rate Case. The Commission accepted and
suspended Florida Power’s rate filing and set most issues for
hearing before an Administrative Law Judge (“ALJ”), who
subsequently issued a lengthy initial decision on December 13,
1995. See Fla. Power & Light Co., 73 F.E.R.C. ¶ 63,018 (Dec.
13, 1995).
On April 17, 2000, Florida Power filed a settlement
agreement that proposed to resolve issues pertaining to its
cost-of-service, with the exception of three “FMPA Reserved
Issues.” The settlement was approved in Florida Power & Light
Co., 92 F.E.R.C. ¶ 61,241 (Sept. 18, 2000). One of the reserved
issues was “treatment of behind-the-meter generation and
associated load.” Fla. Power & Light Co., Settlement
Agreement at 6, reprinted in Joint Appendix (“J.A.”) 55, 57. On
June 30, 2003, FMPA filed a motion requesting that FERC
direct it and Florida Power to file further pleadings on the
reserved issues.
The challenged portions of the decisions under review relate
to the Commission’s disposition of the behind-the-meter
generation and associated load reserved issue. The Commission
declined to consider the issue on the ground that FMPA had
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raised its present concerns in the Order Nos. 888 and 888-A
proceedings and the issue of load ratio pricing for network
service had been resolved by FERC in those orders. See Fla.
Power & Light Co., 105 F.E.R.C. ¶ 61,287, at 62,409-10 (Dec.
16, 2003).
FMPA “accept[ed] that network transmission pricing
allocations . . . should be based upon . . . customers’ full load,”
but sought rehearing on “a very discrete aspect” of the load ratio
pricing issue – i.e., “whether FMPA should be charged by
[Florida Power] for network transmission integration service to
serve load where [Florida Power] cannot provide the service
because of physical transmission limitations.” FMPA Req. for
Reh’g at 4, reprinted in J.A. 262, 265 (emphasis omitted).
FMPA’s principal argument was that it cannot be charged for
service that Florida Power cannot provide because of physical
transmission limitations. FMPA contended that such charges
would be inconsistent with the Administrative Procedure Act, 5
U.S.C. § 706(2)(A) (2000), and the Federal Power Act, 16
U.S.C. §§ 824d-824e (2000). To highlight its concerns, FMPA
cited its member city, Key West, which sits approximately 120
miles from Florida Power’s interconnection point. The
intervening transmission system that connects Key West to
Florida Power does not have the physical capacity to serve Key
West’s full peak load. According to FMPA, it is therefore
physically impossible for Florida Power to provide network
service for the entirety of that load. See Req. for Reh’g at 5-7,
J.A. 266-68.
The Commission denied the request for rehearing, stating:
We disagree with FMPA’s premise that the transmission
pricing guidance contained in Order Nos. 888 and 888-A is
only generic in nature and did not address the application of
load ratio pricing to the circumstances raised here by
FMPA; Order No. 888-A clearly addressed the
circumstances cited by FMPA and states that the “bottom
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line is that all potential transmission customers, including
those with generation behind the meter, must choose
between network integration transmission service or
point-to-point transmission service. Each of these services
has its own advantages and risks.”
Fla. Power & Light Co., 106 F.E.R.C. ¶ 61,204, at 61,696-97
(Mar. 3, 2004) (quoting Order No. 888-A, 62 Fed. Reg. at
12,323).
Notwithstanding FERC’s decision suggesting otherwise, it
is undisputed here that Order No. 888-A did not address whether
physical impossibility warrants an exception to the general rule
against permitting partial load ratio pricing for network
customers. FMPA petitions this court for review of that discrete
issue.
II. ANALYSIS
We review FERC’s orders under the arbitrary and
capricious standard and uphold the Commission’s factual
findings if supported by substantial evidence. See Fla. Mun.
Power Agency v. FERC, 315 F.3d at 365. We “may uphold
agency orders based only on reasoning that is fairly stated by the
agency in the order under review, see SEC v. Chenery Corp.,
318 U.S. 80, 88 (1943); ‘post hoc rationalizations by agency
counsel will not suffice,’ Western Union Corp. v. FCC, 856 F.2d
315, 318 (D.C. Cir. 1988).” Williams Gas Processing - Gulf
Coast Co., L.P. v. FERC, 373 F.3d 1335, 1345 (D.C. Cir. 2004).
Applying this standard, we hold that FERC’s refusal to consider
whether physical incapacity provides a proper basis for an
exception to full load ratio pricing does not withstand review.
FERC refused to address the discrete issue of physical
impossibility, highlighted in FMPA’s request for rehearing, see
FMPA Req. for Reh’g at 4-5, J.A. 265-66, on the ground that
“Order No. 888-A clearly addressed the circumstances cited by
FMPA.” Florida Power, 106 F.E.R.C. at 61,696-97. Because
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the record clearly shows that FERC has not specifically
addressed the issue of physical impossibility, the agency’s
rationale is unreasonable. To be sure, FERC considered myriad
permutations of the behind-the-meter generation issue in Order
No. 888-A. As counsel for FERC acknowledged at the oral
argument, however, FERC has never expressly addressed
FMPA’s request for an impossibility exception. See Recording
of Oral Argument at 45:15-:30.
Order No. 888, moreover, explicitly left open the possibility
of such exceptions by stating that FERC would continue to
consider alternative proposals for allocating the cost of network
integration and would evaluate those alternatives on the merits
on a case-by-case basis. See Order No. 888, 61 Fed. Reg. at
21,599. And this court contemplated the availability of such
exceptions in affirming the Final Rule. See TAPS, 225 F.3d at
689 (“FERC . . . recognized that its generic findings may have
exceptions, and thus that Order 888 may in individual
circumstances have a different result than that intended.”).
Petitioner seeks such an exception – alternative cost
allocation in the case of physical incapacity. A petitioner
seeking review of an agency’s failure to grant a waiver of a
general rule must show that the agency acted arbitrarily by
failing to give “meaningful consideration” to the application for
waiver. United Gas Pipe Line Co. v. FERC, 707 F.2d 1507,
1511 (D.C. Cir. 1983). FMPA has easily met this standard of
review in this case, because it is undisputed that the Commission
declined to address FMPA’s request for an impossibility
exception. See Gas Transmission Northwest Corp. v. FERC,
363 F.3d 500, 503 (D.C. Cir. 2004) (“Stating that [something]
is an existing requirement does not answer [the] argument that
this is one of those circumstances in which it should be
waived.”).
Simply put, FERC has failed to explain why network
customers should be charged by the transmission provider for
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network service that the provider is physically constrained from
offering and, relatedly, why physical impossibility should not be
recognized as an exception to the general rule against permitting
partial load ratio pricing for network customers. We therefore
remand this discrete issue to the Commission. We emphasize,
however, the narrow contours of our ruling: FMPA has
conceded that it must pay for full capacity regardless of whether
it intends to use that full capacity. See Pet’r Br. at 11-12, 23;
Recording of Oral Argument at 12:53-13:21. Because we find
that FERC erred in failing to consider the appropriateness of an
exception to Order No. 888’s general provisions, we do not
reach FMPA’s statutory argument, i.e., that such a charge for
service that cannot be provided is not just and reasonable under
the Federal Power Act, 16 U.S.C. §§ 824d-824e. In granting the
petition for review, moreover, we do not define physical
impossibility or consider whether the record in this case presents
such incapacity. If these questions are pertinent at this juncture,
we leave them to the Commission to consider in the first
instance.
III. CONCLUSION
We hereby grant the petition for review and remand the
case for further proceedings consistent with this opinion.
So ordered.