Allegheny Power v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 25, 2005 Decided February 7, 2006

No. 04-1340

ALLEGHENY POWER,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

ALLEGHENY ELECTRIC COOPERATIVE, INC.,
INTERVENOR

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

Leonard W. Belter argued the cause for petitioner. With
him on the briefs were Raymond B. Wuslich and Margaret H.
Claybour.

Beth G. Pacella, 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.

Robert Weinberg and Eli D. Eilbott were on the brief for
intervenor in support of respondent.
 2

Before: TATEL and GRIFFITH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

WILLIAMS, Senior Circuit Judge: This is a dispute between
a utility and the Federal Energy Regulatory Commission over
the rate for sending electricity over certain low-voltage facilities
not covered by the relevant Open Access Transmission Tariff.
We grant the utility’s petition in part and dismiss it in part.

* * *

Allegheny Energy, Inc., owns (1) Allegheny Energy Supply
Company, L.L.C., which owns and operates generation facilities,
and (2) several utilities, divided along state lines and collectively
doing business as Allegheny Power (“Allegheny”), which
deliver electric power. The Allegheny utility operating in
Pennsylvania is West Penn Power Company.

Allegheny Electric Cooperative, Inc. (“AEC”), is an
organization through which fourteen local distribution
cooperatives in Pennsylvania buy their electricity. It is a
wholesale customer of Allegheny. AEC receives electricity
from Allegheny at 18 delivery points, all West Penn facilities.

The case in essence starts with a contract that Allegheny
and AEC signed in 1994. One of the types of service provided
under the contract—and the only one that concerns us here—is
known as partial requirements service. Allegheny Power, 97
FERC ¶ 61,274, at 62,164 (2001) (“2001 Order”). In pricing
this service, Allegheny bundled the cost of generating the
 3

electricity with the cost of sending it to AEC. At the time, such
bundling was commonplace in contracts between vertically
integrated utilities and their customers. Midwest ISO
Transmission Owners v. FERC, 373 F.3d 1361, 1363-64 (D.C.
Cir. 2004).

In 1996, FERC concluded that this type of bundling allowed
vertically integrated utilities to discriminate in favor of their own
generators. To ensure open and equal access to the grid and
thereby foster competition in sale and generation of power, the
Commission in Order No. 888 required every utility transmitting
electric power in interstate commerce to adopt, for the sale of its
“transmission services,” a non-discriminatory schedule of terms
and conditions, with prices reflecting transmission costs
unbundled from generation costs. Such a schedule is known as
an Open Access Transmission Tariff (“OATT”). 18 C.F.R.
§ 35.28(c)(1); Promoting Wholesale Competition Through Open
Access Non-Discriminatory Transmission Services by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, Order No. 888, FERC Stats. & Regs.
Preambles ¶ 31,036, at 31,654, 61 Fed. Reg. 21,540, at 21,552
(1996) (“Order No. 888”).

Order No. 888 indisputably covers the service that
Allegheny provides to AEC. See Transmission Access Policy
Study Group v. FERC, 225 F.3d 667, 695-96 (D.C. Cir. 2000)
(construing Order No. 888 to cover, inter alia, any transfer of
electricity from a utility to a customer who then resells it,
regardless of the type of facilities involved), aff’d on other
grounds sub nom. New York v. FERC, 535 U.S. 1 (2002).

FERC policy requires that rates subject to Order No. 888 be
unbundled “at the earliest contractual opportunity,” which
includes the first time a contract becomes subject to extensions.
2001 Order, 97 FERC at 62,167. In Allegheny’s 1994 contract
 4

with AEC, the initial term was to expire on November 30, 2001,
and the contract was to be automatically renewed annually,
subject to “revised charges, terms, and conditions,” unless either
party terminated it on two years’ notice. Id. at 62,164. In the
months leading up to the initial term’s expiration, Allegheny
informed AEC that, for the one-year renewal period beginning
December 1, 2001, it would unbundle the generation and
transmission charges, the latter to be determined by an OATT
adopted by PJM Interconnection, L.L.C. (“PJM”). Id. at 62,165.
PJM is a regional transmission organization that operates the
transmission facilities of its member utilities (including
Allegheny) to ensure open access.1

The PJM OATT specifies terms and conditions for the use
of all Allegheny transmission facilities with voltage of 138 kV
or greater. For Allegheny transmission facilities of lesser
voltage, the PJM OATT punts, stating simply that service “will
be provided at rates determined on a case-by-case basis.” See
Pennsylvania-New Jersey-Maryland Interconnection, 92 FERC
¶ 61,282, at 61,952 (2000) (approving this provision of the PJM
OATT); Pennsylvania-New Jersey-Maryland Interconnection,

1
Actually, Allegheny’s proposal was slightly more complex: the
charges were to be governed by PJM’s OATT only for the last eleven
months of the one-year extension period; for the first month, they were
to be governed by a different OATT devised by Allegheny itself. The
two OATTs were apparently identical in the aspect that matters for our
opinion, i.e., they both failed to specify rates for services below 138
kV. See Addendum to Agreement (Oct. 19, 2001) at 3-4 and
Attachment D (proposing a single rate for subtransmission facilities
throughout the one-year extension period, supporting the inference
that the facilities not covered by the PJM OATT were the same as
those not covered by the Allegheny OATT). Some of our references
below to the PJM OATT would be more accurate if we also mentioned
the parallel implications of the Allegheny OATT, but since it makes
no difference to the analysis, we shall omit such cumbersome details.
 5

81 FERC ¶ 61,257, at 62,251 (1997) (same). For purposes of
simplicity, we will refer to the facilities whose rates are
specified in the PJM OATT as “transmission facilities” and
those whose rates are determined case-by-case as
“subtransmission facilities.”

Thus—as a result of the unbundling mandated by Order No.
888, the Allegheny-AEC contract’s terms for its initial
expiration, and the provisions of the PJM OATT—the rate that
AEC would pay for use of Allegheny’s subtransmission facilities
during the one-year renewal period was to be determined on a
“case-by-case” basis. Shortly before the expiration of the initial
contract term, Allegheny filed a unilateral addendum stating
that, for the upcoming renewal period, it would assess AEC
“sub-transmission charges for service over facilities not covered
by the OATTs,” and would calculate these charges through the
method of “direct assignment.” 2001 Order, 97 FERC at
62,165; Addendum to Agreement (Oct. 19, 2001) at 3-4 and
Attachment D. Direct assignment was the method by which
Allegheny had calculated subtransmission charges for all the
settlement agreements that it had made with other wholesale
customers whose contracts expired in the years after Order No.
888. Brief on Exceptions of Allegheny Power at 6.

Direct assignment allocates the cost of specific facilities to
customers in proportion to their use of such facilities. Direct
Testimony of Menhorn, Exh. Allegheny-1, at 2-10. The
alternative is “rolled-in” pricing, under which every customer
pays the same unit rate, based on the costs of all facilities,
rolled-in together without differentiating on the basis of the role
played by particular facilities in providing service to particular
customers. Both methods are aimed at matching a user’s rates
with the costs incurred to provide the service it enjoys. Rolled-
in pricing is thought to make sense when the facilities are
integrated, i.e., when the service to each customer is most
 6

practicably seen as depending on the entirety of the facilities in
question. See generally Western Massachusetts Electric Co. v.
FERC, 165 F.3d 922, 927-28 (D.C. Cir. 1999); Maine Public
Service Co. v. FERC, 964 F.2d 5, 8 (D.C. Cir. 1992); Sierra
Pacific Power Co. v. FERC, 793 F.2d 1086, 1088 (9th Cir.
1986); Otter Tail Power Co., 12 FERC ¶ 61,169, at 61,420
(1980). To some extent, of course, the cost of information may
influence Commission judgment; even where facility usage may
be conceptually severable, the interdependency among the
facilities may be such that the calculations necessary for direct
assignment simply aren’t worth the effort.

In light of protests by AEC, the Commission conditionally
accepted Allegheny’s addendum for filing, suspended it for a
nominal period, pronounced it effective subject to refunds, and
encouraged the parties to settle. 2001 Order, 97 FERC at
62,167.

Settlement negotiations failed to resolve all issues, and the
matter was assigned to an ALJ to determine, inter alia, whether
Allegheny’s calculation of the subtransmission rate was just and
reasonable. Allegheny Power, 103 FERC ¶ 63,001 (2003) (“ALJ
Decision”). AEC agreed with Allegheny that direct assignment
was the proper method but disagreed on how to apply it.
Commission staff, however, argued that the rate for
subtransmission service should be calculated via the rolled-in
method, Direct Testimony of Farrokhpay, Exh. Staff-3, at 11,
which the PJM OATT was (and is) using for service over
Allegheny’s transmission facilities. Thus, Staff was effectively
proposing that Allegheny charge AEC two distinct rolled-in
rates, one that reflected the cost of the transmission facilities,
and another that reflected the cost of the subtransmission
facilities. As FERC counsel noted at oral argument, use of two
such rolled-in rates is a novelty, occasioned (in part) by PJM’s
decision to specify a rate for Allegheny’s transmission facilities
 7

and to leave subtransmission to be priced case-by-case. Oral
Arg. Recording at 31:45-32:40, 33:20-33:45.

Agreeing with staff, the ALJ ordered Allegheny to calculate
the subtransmission charge to AEC by rolling in the costs of all
the West Penn subtransmission facilities. ALJ Decision, 103
FERC at PP 10-17, pp. 65,001-02. The case then went to the
full Commission, which affirmed the ALJ, Allegheny Power,
106 FERC ¶ 61,241 (2004) (“Opinion No. 469”), and later
denied Allegheny’s petition for rehearing, Allegheny Power, 108
FERC ¶ 61,151 (2004) (“Opinion No. 469-A”).

Allegheny petitions to vacate FERC’s roll-in order and to
remand with instructions to use direct assignment instead. AEC,
having abandoned its prior support for direct assignment,
intervenes in support of FERC.

* * *

To begin, we address the issues of standard of review and
burden of persuasion. Allegheny filed the addendum embodying
its proposed direct assignment rate under § 205 of the Federal
Power Act, 16 U.S.C. § 824d. Allegheny asserts (and no party
questions) that that proposal is governed by § 205(e), which
states that a utility seeking a rate increase bears “the burden of
proof to show that the increased rate . . . is just and reasonable.”
FPA § 205(e), 16 U.S.C. § 824d(e).

At the same time, Allegheny contends that insofar as the
Commission imposed its own preferred method (as distinct from
merely rejecting Allegheny’s proposal), § 206(b) of the Act, 16
U.S.C. § 824e(b), assigns the agency the burden of showing its
method to be just and reasonable. But § 206 applies only when
the Commission seeks to impose its own preferred rate in place
 8

of the “existing rate.” Midwest ISO, 373 F.3d at 1368. Here, the
rate at the time of filing was a charge that bundled generation,
transmission, and subtransmission—a charge rendered unlawful
by a prior FERC rulemaking and therefore off the table in this
adjudication. In Midwest ISO, where FERC (as here) made a
rate determination without there being an existing rate or
practice to fall back on, we reviewed the agency’s decision
under the arbitrary and capricious standard, 5 U.S.C.
§ 706(2)(A), and its factual findings under the substantial
evidence standard, 16 U.S.C. § 825l(b). Midwest ISO, 373 F.3d
at 1368. We shall apply the same standard here insofar as the
agency went beyond rejecting the utility’s method and imposed
its own. The arbitrary and capricious standard speaks, of course,
to the degree of deference that we owe the agency, not to burden
of proof or persuasion. As we shall see, however, the case
relating to FERC’s imposition of its rolled-in method can be
resolved without addressing issues of burden allocation.

* * *

Before reaching the merits of Allegheny’s claims we must
address the Commission’s arguments that Allegheny failed to
preserve its objections adequately. Both arguments turn on the
Act’s jurisdictional provision that the court may consider only
objections that “have been urged before the Commission in the
application for rehearing unless there is reasonable ground for
failure so to do.” § 313(b), 16 U.S.C. § 825l(b).

The ALJ, in rejecting Allegheny’s direct assignment
proposal and imposing staff’s recommended roll-in, gave four
reasons for his decision. The first was his conclusion that the
facilities at issue were integrated. ALJ Decision, 103 FERC at
PP 11-12, p. 65,002. The remaining three reasons all concerned
independent failings in Allegheny’s support for its direct
 9

assignment proposal—defects in its cost data and its
identification of facilities used by AEC. Id. at PP 10, 13, pp.
65,001-02.

The Commission affirmed the ALJ’s roll-in order “for the
reasons stated by the [ALJ],” and noted that, “as pointed out by
the [ALJ] . . . , Allegheny Power failed to provide adequate
justification for its proposed direct assignment.” Opinion No.
469, 106 FERC at P 17, p. 61,850. Although the rest of the
Commission’s discussion of the ratemaking method focused
exclusively on the issue of integration, it plainly adopted by
reference all four of the reasons articulated by the ALJ. This is
enough. Gannett Rochester Newspapers, a Division of Gannett
Co. v. NLRB, 988 F.2d 198, 204 (D.C. Cir. 1993); United Food
and Commercial Workers Int’l Union v. NLRB, 880 F.2d 1422,
1436 (D.C. Cir. 1989).

Allegheny, in its petition for rehearing, objected specifically
only to the integration finding, Request of Allegheny Power
Company for Rehearing at 1-7, but also purported to incorporate
by reference the entirety of its prior Brief on Exceptions, id. at 2.
Unfortunately for Allegheny, what is sauce for the agency isn’t
sauce for petitioner. Under § 313(b) an objection cannot be
preserved “indirectly,” Officer of the Consumers’ Counsel, State
of Ohio v. FERC, 914 F.2d 290, 295 (D.C. Cir. 1990)
(construing the identical provision of the Natural Gas Act, 15
U.S.C. § 717r(b)), but must be raised with “specificity,”
Wisconsin Power & Light Co. v. FERC, 363 F.3d 453, 460 (D.C.
Cir. 2004). Allegheny notes that, in Columbia Gas
Transmission Corp. v. FERC, 404 F.3d 459, 462 (D.C. Cir.
2005) (construing 15 U.S.C. § 717r(b)), “a terse request for
rehearing was adequate when the Commission itself offered only
a half-sentence explanation in its initial order and responded to
the objection on rehearing,” Reply Brief of Petitioner at 6. But
the objection in Columbia Gas was explicit and elicited a
 10

response from the Commission, 404 F.3d at 462, neither of
which can be said for Allegheny’s attempted incorporation by
reference. Allegheny therefore cannot now object to the other
three findings.

The question remains whether those three findings are
enough to support the Commission’s order. Surely they are as to
its rejection of Allegheny’s proposed direct assignment method,
as under § 205(e) Allegheny bears the burden of showing that
method to be just and reasonable. What of FERC’s decision that
Allegheny must instead conduct a roll-in of all West Penn
subtransmission facilities? Allegheny’s loss on the cost and
facility-identification issues would be fatal on the current record
if direct assignment and the West-Penn-wide roll-in were the
only two options. But that is not so here. In its petition for
rehearing, Allegheny offered a “third way,” calling for
adjustments in any rolled-in rate for AEC to remove the
allegedly distorting effect of costs and loads charged to other
subtransmission customers by direct assignment. See Request
of Allegheny Power Company for Rehearing at 7, Allegheny
Appendix (“A.A.”) at 693; see also Allegheny Brief on
Exceptions at 21-23, A.A. at 672-75; ALJ Hearing Tr. 1/28/03 at
395-99, A.A. at 573-76 (testimony of staff witness Farrokhpay
on examination by Allegheny). The ALJ’s findings on cost data
and identification of facilities do not necessarily explain the
Commission’s rejection of Allegheny’s proposal of an adjusted
roll-in.

The Commission acknowledged the proposal, Opinion No.
469-A, 108 FERC at P 20, p. 61,864, and specifically explained
its rejection of a related alternative argument (that the other
customers should have their rates converted to the rolled-in
method, rejected by FERC on the ground that their rates weren’t
before the Commission), id. at PP 35-37, 40, pp. 61,866-67. As
to the proposal itself, the Commission lumped it together with
 11

all of Allegheny’s objections (including its plea for direct
assignment), declared that “[a]ll of these objections . . . are
beside the point,” and rejected them all in blanket fashion,
relying upon Allegheny’s failure to substantiate its direct
assignment methodology and upon the “integration” findings
from its own previous order. Id. at PP 21-22, p. 61,865.
(Insofar as Allegheny may suggest that the Commission has
initiated a default rule in favor of roll-in, we are unconvinced, as
the cases cited by the Commission relied on findings of
integration. See id. & n.3.) Thus, the Commission’s response to
the adjusted roll-in proposal was so framed as to make that
response’s adequacy contingent on the factual support for, and
the reasonableness of, its integration findings.

There remains a final hurdle for Allegheny on this point—
its failure to raise the adjusted roll-in issue in its briefs before
this court. But as FERC, in rejecting the adjusted roll-in on
rehearing, implicitly relied solely on the integration findings,
and as Allegheny before us plainly put FERC on notice to
defend those findings, we see no unfairness to FERC in our
addressing them, even though the route has proven circuitous.

The Commission makes a second waiver argument—
namely that Allegheny’s petition for rehearing failed to question
what the Commission says was a finding in Opinion No. 469
that the Allegheny subtransmission facilities serving AEC are
integrated with Allegheny’s larger network of transmission
facilities. Instead, says the Commission, the petition for
rehearing attacked a non-existent Commission theory—that the
facilities in question were operated as “a single integrated
subtransmission network.” Br. for Respondent at 16.

The difficulty with this argument is that it invokes a
Commission finding in Opinion No. 469 that either didn’t exist,
or existed only in such obscurity as to be undetectable by a
 12

reasonable litigant. Opinion No. 469, in a section titled
“Commission Finding,” explicitly directed that the
“subtransmission service charges to AEC should be calculated
based on the system-wide average costs of Allegheny Power’s
subtransmission facilities.” Opinion No. 469, 106 FERC at P 17,
p. 61,850. In the same section it states that “we find that the
facilities used by Allegheny Power to serve AEC are part of an
integrated subtransmission/distribution network.” Id. Although
the term “distribution” is not entirely precise, it certainly refers
to lower-voltage facilities of some kind, not transmission
facilities. What is more, the “Commission Finding” says
nothing about transmission facilities. Admittedly, a more
peripheral section of Opinion No. 469—the summary of ALJ
findings—is somewhat ambiguous. Id. at P 4, p. 61,848 (stating
that the ALJ found that the facilities at issue “constitute part of
Allegheny Power’s total integrated network” and referring to the
“integrated subtransmission/distribution network serving
Allegheny Power’s entire system”). But such ambiguity cannot
override the clear language of the “Commission Finding.”
Besides, the ALJ decision to which the summary refers is quite
clear that the facilities at issue “are part of an integrated
subtransmission/distribution network.” ALJ Decision, 103
FERC at P 11, p. 65,002.

FERC counsel responds that, even if the Commission did
invoke an integrated subtransmission/distribution network in
Opinion No. 469 and introduced the theory of integration with
the larger transmission network only in Opinion No. 469-A,
Allegheny is barred by its failure to file a second petition for
rehearing to contest the new rationale. Oral Arg. Recording at
23:25-23:55. This argument relies upon Town of Norwood,
Massachusetts v. FERC, 906 F.2d 772, 775 (D.C. Cir. 1990), in
which we held that § 313(b) requires “an application for
rehearing of an order on rehearing when the later order modifies
the results of the earlier one in a significant way, raising
 13

objections to the rehearing order that are substantially different
from those raised against the original one.” But Norwood
requires a second petition only when the result is different; a
petitioner need not file a second petition “when the outcome had
not been changed but the Commission had ‘supplie[d] a new
improved rationale.’” California Department of Water
Resources v. FERC, 306 F.3d 1121, 1126 (D.C. Cir. 2002)
(quoting Southern Natural Gas Co. v. FERC, 877 F.2d 1066,
1073 (D.C. Cir. 1989)); see also Norwood, 906 F.2d at 775
(“[T]he Federal Power Act does not require an endless cycle of
rehearing applications.”). The rule is thus analogous to the
circumstances under which an appellee must file a cross-appeal.
See, e.g., Freeman v. B&B Associates, 790 F.2d 145, 151 (D.C.
Cir. 1986) (“Only when an appellee attempts to overturn or
modify a district court’s judgment must the appellee file a cross-
appeal.”). Here, the rationale changed, but the result—a roll-in
of all West Penn subtransmission facilities—remained the same.

Thus none of the Commission’s waiver arguments insulates
from review its rejection of Allegheny’s argument that any
rolled-in rates must be adjusted. As the Commission gave no
explicit explanation for that rejection and implicitly relied only
on its integration finding, its order can survive only if its
integration finding is itself neither arbitrary nor capricious.

***

We therefore at last reach the merits of the Commission’s
treatment of integration. We find it to be arbitrary and
capricious and not supported by substantial evidence.

As noted above, FERC mandated a rolled-in rate for
Allegheny’s subtransmission facilities separate and distinct from
the PJM OATT’s rolled-in rate for Allegheny’s transmission
 14

facilities. It did so for the stated reason that all the facilities—
both transmission and subtransmission—are integrated, i.e., act
together as a single piece of equipment. Opinion No. 469-A, 108
FERC at P 22, p. 61,865. Several aspects of this decision are
unexplained.

First, the Commission shifted without a word from a theory
of integration among subtransmission facilities to integration
between facilities for subtransmission and transmission. Given
that the evidence before the ALJ addressed the first and not the
second (so far as appears), this left gaps either of data or analysis
or both (matters to which we return below). At the very least, it
appeared inconsistent with the Commission’s decision in PP&L,
88 FERC ¶ 61,235 (1999), reh’g denied 95 FERC ¶ 61,160
(2001), which appeared to present a parallel issue. A utility
whose transmission rates were also determined by the PJM
OATT sought an outcome similar to the one FERC mandated
here: it wanted a separate rolled-in rate for low-voltage facilities
to be charged to those of its wholesale customers who took
delivery from those facilities. FERC rejected the request in
terms that appeared to treat integration among the
subtransmission facilities as a prerequisite. PP&L had
“provided no support for its assertions that the low voltage
facilities operate as an integrated system and that the use of the
rolled-in rate methodology is thus the proper basis for rates for
transmission service over these facilities.” 88 FERC at 61,770.

By the same token, if the record in fact showed integration
between the subtransmission and transmission facilities—that
they act together as a single piece of equipment—the precedent
invoked by FERC suggests that the solution is a rolled-in rate
encompassing both high-voltage and low-voltage facilities, not a
separate roll-in of low-voltage facilities only. The aggregated
subtransmission-transmission rate, in any event, was the solution
in all cases invoked on this point by the Commission and AEC:
 15

Maine Public Service Co., 964 F.2d at 8-9; Niagara Mohawk
Power Corp., 42 FERC ¶ 61,143, at 61,532-33 (1988); Kansas
Gas & Electric Co., 39 FERC ¶ 63,013, at 65,053-55 (1987),
aff’d in relevant part, 49 FERC ¶ 61,295, at 62,117 (1989);
reh’g granted in part, 52 FERC ¶ 61,301 (1990); Utah Power &
Light Co., 24 FERC ¶ 63,108, at 65,176-79 (1983), aff’d, 27
FERC ¶ 61,258, at 61,486-87 (1984), reh’g denied, 28 FERC
¶ 61,088, at 61,165-67 (1984), aff’d sub nom. Sierra Pacific, 793
F.2d at 1087-90; Potomac Edison Co., 20 FERC ¶ 63,060, at
65,257-59 (1982), aff’d in relevant part, 23 FERC ¶ 61,106, at
61,255-56 (1983); Minnesota Power & Light Co., 16 FERC
¶ 63,012, at 65,069-80 (1981) (because the record showed no
integration between subtransmission and transmission facilities,
it did not support petitioner’s request for aggregating the cost of
the two sets of facilities), aff’d in relevant part, 21 FERC
¶ 61,233, at 61,519 (1982); see also Oral Arg. Recording at
33:30-33:40 (statement of FERC counsel that this is the “first
time the Commission had before it a case-by-case situation
where we have a roll-in of the low-voltage transmission rates,
and yes this is different”); Reply Brief of Allegheny Power
(before ALJ) at 6.

In short, the Commission appears hitherto to have applied
the following matching principles: (1) If subtransmission and
transmission facilities are integrated with each other, a single
rate rolling them both together is appropriate. (2) If
subtransmission facilities are integrated with each other, a
separate rolled-in rate for subtransmission facilities is
appropriate. As noted, in PP&L the Commission said the factual
predicate for application of Rule #2 was not shown. 88 FERC at
61,770. In Puget Sound Energy, Inc., 98 FERC ¶ 61,168 (2002),
it approved separate roll-ins for high-voltage and low-voltage
facilities, but simply on the ground that the new arrangement did
not entail a rate increase for any customer, id. at 61,622. The
Commission apparently hasn’t developed a rule specific to the
 16

case where subtransmission facilities are integrated with each
other and with transmission facilities. Given the Commission’s
scuttling away from its earlier supposition that the
subtransmission facilities were integrated with each other, it
appears to be asserting the finding required for Rule #1 and yet
to have adopted the rate indicated by Rule #2.

As we suggested earlier, there seem to be gaps either in the
data before the Commission or in the necessary analysis. In part
this arises from its shift from an idea of integrated
subtransmission facilities to the broader integration claim. As
noted above, FERC originally stated—in the ALJ decision and
in Opinion No. 469—that the subtransmission facilities were
integrated among themselves. It then concluded—when denying
rehearing in Opinion No. 469-A—that those facilities were
integrated with the transmission facilities. The evidence
marshaled in the ALJ decision and in Opinion No. 469 was, not
surprisingly, aimed at proving the staff’s contention and the
agency’s conclusions in those decisions, i.e., the first proposition
and not the second. Opinion No. 469, closely following the
ALJ, focused on nine of the 18 interconnection points between
Allegheny and AEC, and invoked five defining elements of
integration:

Trial Staff states that 9 of the 18 Allegheny Power
interconnection points with AEC are normally served in
network configurations and that the integrated nature of
Allegheny Power’s facilities are based on the following: (1)
the facilities are looped, not radial; (2) energy does not flow
in just one direction over these Allegheny Power facilities;
(3) Allegheny Power serves not only AEC but also its own
customers over these facilities; (4) the looped configuration
enables Allegheny Power to provide support and added
reliability to the other looped lines; and (5) an outage on
any one of these facilities affects the power flows on other
 17

facilities.

Opinion No. 469, 106 FERC at P 17, p. 61,850. Putting aside
for a moment the nine interconnection points not covered by this
finding, the integration here appears to be only what the
Commission was then claiming—integration among
subtransmission facilities. This certainly appears to be the focus
of the direct testimony of the staff engineering expert—which
the Commission decisions track very closely. Direct Testimony
of Farrokhpay, Exh. Staff-3, at 1-18, esp. 7-12.2 But when the
agency in its denial of rehearing switched to the broader
integration theory, it largely repeated the same evidence as
before, neither adding new evidence nor explaining why the old
evidence supported the new conclusion. Opinion No. 469-A,
108 FERC at P 22, p. 61,865. While at least one FERC
precedent suggests that integration of subtransmission facilities
with each other is relevant to their integration with the
transmission grid, Utah Power, 28 FERC at 61,166, here the
Commission did not articulate such a proposition, much less
establish its logical role.

The second problem relates to how the Commission fills the
gap left by the recognition that the finding on the five integration
factors covered only nine of the 18 interconnection points. By
way of background we observe that these five factors were
articulated—with similar wording and in the same sequence—in
Mansfield Municipal Electric Department v. New England
Power Co., 97 FERC ¶ 61,134, at 61,613-14 (2001). In
Northeast Texas Electric Cooperative, Inc., 108 FERC ¶ 61,084,
at P 51, p. 61,434 (2004), the Commission crowned them the

2
The expert did mention the transmission system in his oral
testimony, but he said only that some subtransmission facilities were
“connected” to the grid, ALJ Hearing Tr. 1/28/03 at 379. As FERC
counsel admits, connection does not necessarily mean integration.
 18

“five-factor Mansfield Test,” and appeared to rule that a
negative showing on all five factors constituted “‘exceptional
circumstances’ that merit[] direct assignment.” (FERC didn’t
cite Mansfield in any of its decisions here or in its brief.) For the
remaining nine points, Opinion No. 469—again following the
ALJ—simply stated that those points, “while radially connected
to Allegheny Power, are typically backed up by an Allegheny
Power network of 25 kV lines.” Opinion No. 469, 106 FERC at
P 17, p. 61,850.3 It is not clear whether “back-up” is
synonymous with one of the five Mansfield factors (e.g., an
indicator that the facilities provide “support and added
reliability”) or whether it is a distinct factor that the Commission
means to add to the test. It is also unclear how the Commission
defines back-up on the facts of this case. Its entire treatment of
the concept consists of the sentence quoted above.

This cursory treatment might be permissible if prior FERC
cases revealed a clear and consistent policy on how back-up is
defined and how it contributes to integration and justifies roll-in.
But the cases reveal no such policy. Perhaps most important,
they are inconsistent as to whether the back-up required to show
integration refers to back-up capability that is used with some
level of frequency or that merely has the potential for use. The
distinction is plainly important for this case, as FERC counsel

3
The quoted sentence is obviously drawn from Direct Testimony
of Farrokhpay, Exh. Staff-3, at 11. Farrokhpay later said the modifier
“25 kV” should be corrected to read “subtransmission,” ALJ Hearing
Tr. 1/23/03 at 367, and thus to extend his claim to facilities in north-
central and south-central Pennsylvania (which are 12.5 kV, 46 kV,
etc.), rather than limit it to western Pennsylvania, where the 25 kV
facilities are located. System Map; Legend for AEC Interconnection
Points, Exh. Staff-14. Thus Farrokhpay’s sentence, though obscure
for the reasons stated in the text, is more supportive of the
Commission than the Commission noticed.
 19

acknowledged that there was “no evidence about how often it
[i.e., utilization of back-up] happens.” Oral Arg. Recording at
28:05-28:10; see also Direct Testimony of Farrokhpay, Exh.
Staff-3, at 10-11; ALJ Hearing Tr. 1/23/03 at 375.

In general, the Commission appears to have regarded
potential back-up as insufficient. In Minnesota Power, 21 FERC
at 61,519, the Commission adopted the decision of the ALJ, 16
FERC ¶ 63,012, who, in turn, although recognizing that certain
facilities could back up others if certain switches normally kept
open were closed (switch closure enables power transmission),
id. at 65,071, ruled that the choice of ratemaking method should
be premised on “the common, prevailing situation, not on what
physically could take place,” id. at 65,071-72 (emphasis added).
And in Niagara Mohawk, 42 FERC at 61,533, the Commission
shunned reliance on mere potential. Responding to an argument
that staff had demonstrated that certain subtransmission lines
were “only theoretically capable of providing” additional
reliability, it insisted that the evidence showed support “‘on an
everyday basis.’” Id. (citation omitted).

Qualifying this is a FERC decision of considerable
ambiguity. In Utah Power, 28 FERC at 61,166, the Commission
suggested that Minnesota Power’s focus on the “common,
prevailing situation” did not apply to a case where integration
was clearly demonstrated by other evidence; but it is unclear
why the matter would be of any consequence at all in such a
case. The Ninth Circuit, affirming Utah Power, in dictum
quoted with approval a passage from the intervenor’s brief to the
effect that parallel paths establish integration even where
connection between the two is interrupted by an open switch.
Sierra Pacific, 793 F.2d at 1088. Of course the Ninth Circuit
doesn’t establish FERC policy.

In the present case, FERC counsel, when pressed at oral
 20

argument to articulate a standard, stated that the “mere
potentiality” for back-up was sufficient for roll-in. Oral Arg.
Recording at 30:10-30:20. To distinguish Minnesota Power,
counsel emphasized, Oral Arg. Recording at 34:20-36:15, that
the outcome there rested partly on the fact that closing the
switches for the sake of back-up could have damaged the
facilities, 16 FERC at 65,072, suggesting that Minnesota Power
stands for a very narrow “damage” exception to the supposed
rule that potential back-up suffices for roll-in. But counsel has
pointed to nothing said by FERC itself establishing such a
concept. SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).

The above discussion would be inaccurate if it conveyed the
impression that the actual/potential distinction is the only aspect
of “back-up” that is obscure to this court. The discussion does,
however, pinpoint what appears the most critical uncertainty in
the Commission’s handling of the matter. On remand we
assume that the Commission will address the parties’
contentions with enough clarity for any later reviewing court to
comprehend its position.

* * *

We dismiss Allegheny’s petition insofar as it challenges
FERC’s rejection of direct assignment. We vacate FERC’s
order of a West-Penn-wide roll-in and remand for the
Commission to consider whether or not an adjusted roll-in is
appropriate (and such additional alternatives as it may deem
appropriate to consider).

So ordered.