Niagara Mohawk Power v. FERC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 10, 2006 Decided June 23, 2006

No. 04-1227

NIAGARA MOHAWK POWER CORPORATION,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

RELIANT ENERGY, INC., ET AL.,
INTERVENORS

Consolidated with
04-1229, 05-1033, 05-1043, 05-1044,
05-1046, 05-1047, 05-1144

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

Elias G. Farrah argued the cause for petitioners and
intervenors in support of petitioners. With him on the briefs
were Michael F. McBride, Rebecca J. Michael, Kenneth Jaffe,
Donald J. Stauber, Jennifer L. Key, Donald K. Dankner, and
 2

Raymond B. Wuslich. Robert V. Zener and Phyllis E. Lemell
entered appearances.

Diane T. Dean, Assistant Counsel, Public Service
Commission of New York, argued the cause and filed the briefs
for petitioner Public Service Commission of New York.

Robert H. Solomon, Solicitor, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief was John S. Moot, General Counsel.

Kenneth M. Simon argued the cause for Competitive
Generators in support of respondent. With him on the brief were
Michael J. Rustum, Robert C. Fallon, Deborah A. Carpentier,
David E. Blabey, Edgar K. Byham, David Blake Johnson, Steven
L. Miller, Steven A. Weiler, Kenneth Richard Carretta,
Randolph Q. McManus, and Betsy R. Carr. Melissa E. Maxwell
entered an appearance.

Arnold H. Quint was on the brief for intervenor New York
Independent System Operator, Inc.

Before: GRIFFITH, Circuit Judge, and EDWARDS and
SILBERMAN, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.

SILBERMAN, Senior Circuit Judge: New York electric
power utilities and the New York State Public Service
Commission petition for review of FERC orders approving and
enforcing a tariff filed by the New York Independent System
Operator (NYISO), the manager of New York’s electric power
transmission facilities. The tariff allows electricity generators
that provide power to the transmission grid to avoid
 3

transmission and local distribution charges for the power these
generators take from the grid for such purposes as heating, air
conditioning, lighting, and powering office equipment (called
“station power”), so long as the power the generators produce in
any month exceeds the power taken. Petitioners assert, inter
alia, that FERC’s approval of monthly netting for NYISO was
unlawful and unreasonable, and that the netting formula
imposed in the NYISO tariff should be supplanted with a
one-hour netting period. We deny the petition.

I

This case has its genesis in the unbundling of the New York
electric energy market. The provision of electric energy to end
users traditionally involves three components: electricity
generation; high voltage, long-distance power transmission
(transmission services); and finally lower voltage, local
distribution of electricity from the transmission facilities to end
users (distribution services). Prior to 1996, vertically integrated
utilities in New York owned facilities covering all three
components of this service. Subsequently, however, utilities
began divesting their generation facilities, and the vast majority
of electricity generation in the state of New York is now
performed by independent wholesale generators. While the
traditional utilities maintain ownership of the transmission and
local distribution facilities, New York state’s transmission grid
today is operated and controlled by the not-for-profit New York
Independent System Operator, or NYISO. Thus, as we
understand it, in the typical situation an independent wholesale
generator produces the electricity, it is transmitted across the
state over NYISO’s transmission facilities (or grid), and it is
then stepped-down and delivered to a retail user over a utility’s
local distribution lines.
 4

Jurisdiction over this sale and delivery of electricity is split
between the federal government and the states on the basis of
the type of service being provided and the nature of the energy
sale. Under section 201(b)(1) of the Federal Power Act, 16
U.S.C. § 824(b)(1), FERC has jurisdiction over both the
interstate transmission of electricity and the sale of electricity at
wholesale in interstate commerce. States retain jurisdiction over
retail sales of electricity and over local distribution facilities.
Thus transmission occurs pursuant to FERC-approved tariffs;
local distribution occurs under rates set by a state’s public
service commission.

The actual unbundling of the New York electric energy
market after 1996 was made possible by FERC’s Order 888,1
which required, among other things, the functional unbundling
of wholesale generation and transmission services. Under the
order, integrated utilities were required to file with FERC open
access non-discriminatory transmission tariffs, which applied to
both transmission services offered to third-party generators and
to the utility’s own electricity transmissions. The order also
encouraged the creation of independent system operators, such
as NYISO, to ensure competitive pricing of transmission
services and further reduce utilities’ market power.

1
Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public Utilities, Order
No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036, 61 Fed. Reg. 21,540,
clarified, 76 F.E.R.C. ¶ 61,009, and 76 F.E.R.C. ¶ 61,347 (1996), on
reh’g, Order No. 888-A, F.E.R.C. Stats. & Regs. ¶ 31,048, 62 Fed.
Reg. 12,274, clarified, 79 F.E.R.C. ¶ 61,182, on reh’g, Order No.
888-B, 81 F.E.R.C. ¶ 61,248, 62 Fed. Reg. 64,688 (1997), on reh’g,
Order No. 888-C, 82 F.E.R.C. ¶ 61,046 (1998), aff’d sub nom.
Transmission Access Policy Study Group v. FERC, 225 F.3d 667
(D.C. Cir. 2000), aff’d sub nom. New York v. FERC, 535 U.S. 1
(2002).
 5

In addition to addressing open access, Order 888 reaffirmed
states’ jurisdiction over local distribution services. Order 888
stated that even when FERC’s test for identifying local
distribution facilities concluded that no such facilities were
utilized in a given transaction, states still had authority over the
service of delivering electric energy to end users. This
determination was crucial, as it directly affected utilities’ ability
to assess end users for “stranded costs.” These are costs, such
as those associated with long-term contractual commitments or
large capital expenditures, that utilities had incurred with the
expectation that the industry would remain bundled and that
have now become “stranded” with the utilities. By establishing
that states have jurisdiction over local delivery services and not
just local distribution facilities, Order 888 allows utilities to
assess stranded costs on all retail users. This prevents large
industrial customers, for example, from avoiding stranded costs
assessments by connecting their plants directly to transmission
facilities and stepping down the voltage of the power
themselves. See, e.g., Detroit Edison Co. v. FERC, 334 F.3d 48,
51 (D.C. Cir. 2003). Order 888 therefore allows states to
“assign stranded costs and benefits based on usage (kWh),
demand (kW), or any combination or method they find
appropriate.”

With this statutory and regulatory background in mind, we
turn to the subject matter of this consolidated petition – the
treatment of station power in New York. FERC describes
station power as the electricity used at a generating facility’s site
to power things such as heating, air conditioning, lighting, and
office equipment. When a generator is operational, it might well
be capable of redirecting some of its outbound generated
electricity to its station power needs, thus “self-supplying” its
station power “behind the meter.” Certain generators, however,
are physically incapable of supplying their station power behind
the meter – for example, if produced power goes out to the grid
 6

on one set of power lines, and the facility’s offices and electrical
equipment are connected to a separate set of lines coming in
from the grid. And even for those capable of self-supplying
behind the meter, there may be periods when a generator is non-
operational or only partially operational and thus incapable of
meeting its station power demand. In such instances, generators
– who at least in this case, as we understand it, are connected
directly to transmission facilities – must look to the grid for their
station power supply.

In a series of orders that preceded those here on review,
FERC addressed the treatment of station power in the
Pennsylvania-New Jersey-Maryland (PJM) electricity market.2
The independent operator of that system’s grid filed with FERC
an amendment to its open-access transmission tariff proposing
that generators be able to net, on an hourly basis, the station
power pulled off the grid as “negative generation” against
energy supplied to the grid during that hour. So a generator that
pulled station power off the grid for fifty minutes of an hour, for
example, but then supplied well in excess of that amount during
the final ten minutes, would be deemed to have supplied the
netted amount to the grid and consumed nothing. Over
objections that the provision of station power to a generator
constituted retail sales outside FERC’s jurisdiction, FERC
approved the hourly netting and held that when a generator is
net positive over the period, no sale has taken place.

FERC also acknowledged that a generator could engage in
“remote self-supply” if its station power requirements over the
netting period exceeded its gross output, but there was another

2
See PJM Interconnection, LLC, 93 F.E.R.C. ¶ 61,061 (2000);
PJM Interconnection, LLC, 94 F.E.R.C. ¶ 61,251, reh’g denied, 95
F.E.R.C. ¶ 61,333 (2001); PJM Interconnection, LLC, 95 F.E.R.C. ¶
61,470 (2001).
 7

off-site generator owned by the same entity that was producing
sufficient excess electricity over that period to make up for the
deficit. According to FERC, in such a case there likewise would
be no “sale.” But if a generator’s station power requirements
over the netting period exceeded its gross output, and the source
of the power was a third party (i.e., there was no remote facility
with sufficient excess supply), such a provision of station power
would in fact be a sale for end-use outside FERC’s jurisdiction.
It would be a retail sale subject to both retail transmission rates
and state-jurisdictional local distribution charges.

Among FERC’s reasons for approving station power netting
was that it would ensure that wholesale generators “do not bear
a cost that has no relationship to any ‘service’ purportedly being
provided by another party.” Netting would therefore further
reduce the disparities between wholesale generators and
vertically-integrated utilities. FERC added that it would look
favorably upon the use of a longer netting period, such as a day
or a week; indeed in a fourth PJM order, FERC accepted a
modification of the station power tariff that changed the netting
period from one hour to one month.

Not long after the final FERC order in the PJM matter, New
York wholesale generator KeySpan-Ravenswood filed a
complaint with FERC challenging NYISO’s treatment of station
power. On the basis of the PJM orders, KeySpan alleged that
NYISO’s treatment of station power was unjust and
unreasonable because it left the matter to the “vagaries of local
utilities.” FERC agreed and directed NYISO to file a proposed
revised tariff covering the provision of station power and
allowing self-supplying wholesale generators to net station
power over some reasonable period. FERC explained, however,
that it was not necessary for NYISO’s proposal to incorporate
 8

aspects of the PJM tariff that would be inappropriate for New
York.3

II

The four pairs of orders under review are follow-ons to the
initial KeySpan-Ravenswood proceedings.4 In a tariff approved
by FERC in the first pair of these orders, NYISO determined
that the appropriate station power netting period for New York
was one month.5 The utilities challenged that proposed tariff on
a number of grounds, which they reiterate before us. It is their
contention that monthly netting violates the Federal Power Act

3
See KeySpan-Ravenswood, Inc. v. New York Indep. Sys.
Operator, Inc., 99 F.E.R.C. ¶ 61,167 (KeySpan I), on reh’g, 100
F.E.R.C. ¶ 61,201 (2002) (KeySpan II).
4
The four pairs of orders under review are: KeySpan-
Ravenswood, Inc. v. New York Indep. Sys. Operator, Inc., 101
F.E.R.C. ¶ 61,230 (2002) (KeySpan III), reh’g denied, 107 F.E.R.C.
¶ 61,142 (2004) (KeySpan IV); Nine Mile Point Nuclear Station, LLC
v. Niagara Mohawk Power Corp., 105 F.E.R.C. ¶ 61,336 (2003),
reh’g denied, 110 F.E.R.C. ¶ 61,033 (2005); AES Somerset, LLC v.
Niagara Mohawk Power Corp., 105 F.E.R.C. ¶ 61,337 (2003), reh’g
denied, 110 F.E.R.C. ¶ 61,032 (2005); Niagara Mohawk Power Corp.
v. Huntley Power LLC, 109 F.E.R.C. ¶ 61,169 (2004), reh’g denied,
111 F.E.R.C. ¶ 61,120 (2005). The latter three pairs of orders involve
failed attempts by utility Niagara Mohawk to charge generators for
delivery of netted-out station power, contrary to the KeySpan orders.
In all instances, the generators were not physically connected to
Niagara’s local distribution facilities.
5
The record does not indicate why NYISO chose one month over
alternative netting periods. NYISO is an independent entity and is
governed by a board of directors, none of whom is affiliated with
market participants.
 9

because, as a practical matter, it encroaches upon state
jurisdiction over local distribution services and retail sales.
Although we are not told how much retail sale of station power
(and therefore local distribution charges) is left under a monthly
netting regimen, we are given to understand that it would not be
significant. Although FERC has acknowledged jurisdiction over
the transmission of power over the grid, according to petitioners
the monthly netting policy unlawfully extends federal
jurisdiction over local distribution services and retail sales
because it allows generators to avoid transmission and local
distribution charges altogether.

Petitioners also assert that in the seminal Order 888, in
which FERC laid the legal groundwork for the unbundling of the
electric power market, FERC explicitly recognized that delivery
services to end users remained under state jurisdiction and drew
no distinction between the typical industrial end user and a
power generator taking power from the grid. Assuming
arguendo that FERC has jurisdiction to approve the tariff,
petitioners’ remaining significant argument is that the one
month netting period is so long as to be unreasonable (arbitrary
and capricious).

The Commission responds first by asserting that we lack
jurisdiction over petitioners’ arguments based on the Act and
Order 888 because they did not, in a timely manner, petition for
review of the earlier PJM orders and KeySpan I, in which the
netting principle was adopted. See 16 U.S.C. § 825l(b).
Petitioners claim that not all of them were parties to those earlier
proceedings, and that in any event they were not aggrieved until
FERC approved monthly netting in New York in KeySpan III
and so had no right to seek review of the earlier orders. It is
clear that petitioners were not dissatisfied with the prospect of
there being some sort of station power netting in New York;
indeed, as we emphasize below, petitioners have no quarrel with
 10

an hourly netting tariff. This, however, does not necessarily
mean that they had no standing to challenge the earlier orders.

But even had petitioners all been parties to the earlier
proceedings and been aggrieved by the PJM orders or KeySpan
I, they would not have forfeited their right to challenge the
principle of netting by not petitioning for review earlier. Even
if a party technically can establish standing (aggrievement), it
need not seek review if it is satisfied with the practical impact of
the order; and that does not foreclose its ability to challenge the
principle as beyond the agency’s statutory authority when the
agency later utilizes it to cause substantial injury.6
See Sacramento Mun. Util. Dist. v. FERC, 428 F.3d 294, 299
(D.C. Cir. 2005) (identifying an objection “to the Commission’s
. . . statutory authority” as a typical situation in which “agency
rules can . . . be challenged on substantive grounds when they
are applied, even though the statutory period for judicial review
has expired”).

III

Petitioners’ statutory argument is not insubstantial; the
Commission’s jurisdictional rationale is a bit confusing. It

6
Suppose the federal government decided to preempt state
regulation of a highway, and the federal agency promulgated a rule
reducing the speed limit from the state’s seventy miles per hour to
sixty-five. While a common carrier utilizing the highway might
technically be aggrieved by such a move and even doubt the legality
of the exercise of federal power, it might not deem such slight harm
worthy of a suit in federal court. Nonetheless, if the federal
government later reduced the speed limit to forty-five – now causing
significant harm to the carrier – nothing would bar the carrier from
then challenging the government’s preemption of state authority.
 11

insists that no sale of any kind takes place when a generator
takes power from the grid for station power service, so long as
its netting is positive for the month. So FERC does not appear
to rely on its wholesale jurisdiction (although the generator’s
delivery of power to the grid is a wholesale sale and the
deduction made for station power taken is valued at the same
wholesale price).7 To be sure, FERC does have undoubted
jurisdiction over interstate transmission (the grid), and the
generators at issue in this case take station power directly from
the grid. But it has not clearly articulated why that jurisdiction
permits it to determine that no sale of any kind – including a
retail sale – takes place when the generator takes station power
from the grid.

The difficulty we see in petitioners’ jurisdictional argument,
however, is their clear concession that an hourly netting tariff
would not violate the Act – which is a recognition that, in
drawing the jurisdictional lines in this area, some practical
accommodation is necessary. Thus, utility petitioners argued for
hourly netting below, see, e.g., KeySpan III, 101 F.E.R.C. at ¶
62,001, and in its initial brief, petitioner Public Service
Commission clarified that it “does not disagree with netting per
se.” Counsel for the utilities reaffirmed this shared sentiment at
oral argument. In response to a question from the panel as to
whether the utilities had any objection to hourly netting, counsel
said, “No, we were, in fact, proposing that [before the
Commission].” Counsel elaborated that, “I have to speak for my
clients which are the utility petitioners and they have no problem

7
At oral argument, counsel for FERC was asked, “But even if it
was a sale it would be a wholesale sale in FERC’s jurisdiction?”
Counsel replied, “Yes, that is our jurisdictional hook”; but neither in
its brief nor in the orders below has FERC asserted that its jurisdiction
to order station power netting is founded on its statutory jurisdiction
over wholesale sales.
 12

with the hour[ly netting,] but the State, who has the legal
authority to regulate that retail sale and determine the
measurement period[,] may feel differently.” But then counsel
for the “state” – the New York Public Service Commission –
also conceded that hourly netting would be permissible.
Questioned further by the panel, counsel agreed that it would be
a valid policy judgment on the part of FERC to determine that
no retail sale occurred and that no local distribution service was
utilized if a generator was net positive over an hour. According
to counsel, the real issue is that “an hour . . . recognizes more
reasonably the fluctuations which FERC says in its decisions, it
wants to recognize.” And “[o]ne month does not recognize
fluctuations.”

Petitioners object to monthly netting because it eliminates
many – perhaps virtually all – of the station power transactions,
and a shorter netting period would eliminate fewer. But if we
were to accept petitioners’ logic, any netting out of what it
deems “retail sales” over any period would amount to a statutory
violation. It is possible to measure the power taken from the
grid over a shorter period than an hour. Indeed, it apparently
could be done in real time. If the Federal Power Act, as
petitioners contend, prevents NYISO from exerting authority
over state-jurisdictional transactions by netting them out, then
any such exertion must be a violation. And, on the other hand,
if hourly netting is perfectly consistent with the statute, we see
no principled reason why monthly netting violates the Act.

Nor do we see anything in Order 888 that buttresses
petitioners’ jurisdictional argument. Although the Commission
used the term “end users” in that order without qualification –
and it might well have been open to FERC to interpret the order
as treating generators like typical end users – FERC has made it
clear that the Order’s purpose was to prevent large industrial and
commercial users from avoiding their share of a utility’s
 13

stranded costs. Generators who purchased their facilities from
utilities, according to FERC, are deemed to have paid a premium
to cover some part of these stranded costs, and thus are in a quite
different position from a retail user. It is, therefore, certainly a
reasonable interpretation of Order 888 to carve out an exception
from the term “end user” for wholesale generators. Petitioners
would hang their hat on Order 888’s recognition that an end user
takes local distribution service even if, in fact, it does not
physically use a utility’s local distribution facilities – which is
really a fiction, if a reasonable one8 – but FERC is not required
to extend this fiction to the new creature in the market, the
wholesale generator.

In any event, petitioners’ concession equally undermines
their argument based on Order 888. If generators must be
thought of as equivalent to industrial end users, then hourly
netting would be equally illegitimate; and if not, we do not see
how the language of that order would permit netting over one
hour but not one month.

IV

Petitioners’ argument, based on the APA – that the
Commission’s approval of monthly netting is unreasonable – is,
of course, not affected by their concession. But it will be
recalled that FERC did not mandate a one month netting period;
it only approved NYISO’s choice. And it had cautioned that its
approval of an hourly netting tariff in the adjacent Pennsylvania-

8
Paradoxically, FERC’s reasoning that the generators should not
have to pay for local distribution services they do not take is exactly
what it rejected in Order 888 when presented with industrial users who
wished to bypass the local utilities’ distribution facilities and connect
directly to transmission lines.
 14

New Jersey-Maryland market did not establish a required
approach. Indeed, as we noted, FERC subsequently approved a
modification to that tariff providing for monthly netting. FERC
observed, in later approving the NYISO tariff, that a monthly
netting period in New York would have the benefit of creating
uniformity with the adjacent PJM energy market to the south.
Petitioners respond that the New England market operates with
hourly netting, but that does not rebut FERC’s position that both
might be reasonable.

As should be apparent, the monthly netting tariff will result
in less revenue – a good deal less, according to petitioners –
flowing from the generators to the utilities. FERC’s concern
seems to be only that some version of netting is necessary in
order to put wholesale generators in roughly the competitive
position integrated utilities enjoy and that monthly netting
presumably puts the generator closer to a competitor who might
never need to take power from the grid. Petitioners claim that
this competitive concern is really irrelevant in the New York
market because there are few integrated utilities left. FERC
responds that there are some remaining and that other utilities
purchase power for resale and are, therefore, continuing to
compete with wholesale generators. Of course, the New York
wholesale generators are also competing with generators and
integrated utilities in the PJM market. In sum, we simply do not
see, on these arguments, how we could determine that a one-
hour, a one-month, or for that matter a one-week netting period
is unreasonable.

The strongest point petitioners make is that one month is
inconsistent with the hourly method by which actual power, as
opposed to transmission costs, is priced. Pricing of electricity
in New York is performed on an hourly basis. Any time a
generator pulls electricity off the grid, that withdrawal is
accounted for at what is called a locational-based marginal price
 15

(LBMP). Injections of electricity into the grid by generators are
likewise accounted for at the appropriate LBMP. Thus even if
a wholesale generator has positive net output over the month and
is treated as having made no “purchase” of station power over
that period – and thus treated as having used no transmission or
local delivery facilities in connection with that netted out station
power – the wholesale generator still is held accountable for the
actual electricity consumed. This, according to petitioners, is an
indication that the parties recognize that a sale took place (and,
according to petitioners, a retail sale), and so for transmission
and distribution purposes hourly netting is similarly required.
But FERC reasonably regards that hourly charge as an
accounting entry rather than an actual sale of power, and it does
not follow that hourly netting of power necessarily dictates
hourly netting for transmission and distribution costs. As FERC
also notes, NYISO’s billing and accounting practices are month-
based.

***

Accordingly, for the reasons stated, we deny the petition.9

9
Petitioners make a series of additional arguments, which we need
only mention briefly. They argue that the FERC orders violate both
the filed rate doctrine and the rule against retroactive ratemaking. The
“filed rate,” petitioners contend, is Part IV of the NYISO tariff, which
applies to retail service. This is but a variation on petitioners’ other
arguments, as it relies on the proposition that the provision of station
power service within the netting period is a state-jurisdictional retail
sale. As explained above, this argument cannot withstand petitioners’
concession that hourly netting is appropriate. Petitioners also argue
that the Huntley and AES Somerset orders violate the rule against
retroactive ratemaking because they allow the generators to net station
power beginning in July 1999, well before the April 1, 2003 effective
date of the NYISO station power netting tariff. But without there
 16

having been a preexisting relevant filed rate, there can be no
retroactive alteration of it. See Ark. La. Gas Co. v. Hall, 453 U.S. 571,
578 (1981).

The Public Service Commission argues that FERC’s orders have
the effect of discriminating against cogeneration facilities, who do not
have the benefit of netting station power; but this argument is
foreclosed because it was not raised below. See 16 U.S.C. § 825l(b).
Finally, utility petitioners argue that the station power tariff violates
NYISO’s governance structure because NYISO’s management
committee did not approve the tariff filing. We find this argument
meritless since NYISO was required to make such a filing to comply
with the Commission’s order in KeySpan I.