Northeast Utilities Service Co. v. Federal Energy Regulatory Commission

June 3, 1993 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 92-1165

NORTHEAST UTILITIES SERVICE COMPANY,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1261

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1262

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1263

TOWNS OF CONCORD, NORWOOD AND WELLESLEY, MASSACHUSETTS, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1264

CENTRAL MAINE POWER CO., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1316

CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1328

CANAL ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1336

THE AMERICAN PAPER INSTITUTE, INC., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1340

BOSTON EDISON COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1510

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

ERRATA SHEET

The opinion of this court issued on May 19, 1993, is amended
as follows:

On page 28, line 12 from the bottom, within block quote:
change "single person with a least 75-percent" to "single person
with at least 75-percent".

On page 43, line 3 from the bottom: change "born" to
"borne".

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 92-1165

NORTHEAST UTILITIES SERVICE COMPANY,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1261

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1262

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1263

TOWNS OF CONCORD, NORWOOD AND WELLESLEY, MASSACHUSETTS, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1264

CENTRAL MAINE POWER CO., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1316

CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1328

CANAL ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1336

THE AMERICAN PAPER INSTITUTE, INC., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1340

BOSTON EDISON COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1510

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

PETITIONS FOR REVIEW OF ORDERS OF
THE FEDERAL ENERGY REGULATORY COMMISSION

Before
Torruella, Circuit Judge,

Bownes, Senior Circuit Judge,

and Boudin, Circuit Judge.

Gerald M. Amero, with whom Catherine R. Connors and Pierce,

Atwood, Scribner, Allen, Smith & Lancaster and Arthur W.

Adelberg, and Anne M. Pare, were on brief, for petitioner Central

Maine Power Company.
Harvey L. Reiter, with whom William I. Harkaway, Kathleen L.

Mazure, and McCarthy, Sweeney & Harkaway, were on brief, for

petitioners Vermont Department of Public Service, Vermont Public
Service Board, Rhode Island Attorney General, Rhode Island
Division of Public Utilities and Carriers, Maine Public Utilities
Commission and Massachusetts Department of Public Utilities.
George H. Williams, Jr., with whom Morley Caskin, was on

brief, for petitioners Canal Electric Company, Commonwealth
Electric Company and Cambridge Electric Light Company.
J.A. Bouknight, Jr., with whom David B. Raskin, David L.

Schwartz, and Newman & Holtzinger, P.C., and Robert P. Wax,

General Counsel, were on brief, for petitioner Northeast
Utilities Service Company.
Randolph Elliott, with whom William S. Scherman, General

Counsel, Jerome M. Feit, Solicitor, Katherine Waldbauer, and Eric

Christensen, were on brief, for respondent Federal Energy

Regulatory Commission.

Alan J. Roth, Scott H. Strauss, William S. Huang, Spiegel &

McDiarmid, Nicholas J. Scobbo, Ferriter, Scobbo, Sikora, Caruso &

Rodophele, Wallace L. Duncan and Duncan, Weinberg, Miller &

Pembroke, on brief for petitioner Massachusetts Municipal

Wholesale Electric Company.
Charles F. Wheatley, Jr., Peter A. Goldsmith and Wheatley &

Ranquist, on brief for petitioners Towns of Concord, Norwood &

David J. Bardin, Noreen M. Lavan, Eugene J. Meitgher, Steven

R. Miles, and Arent, Fox, Kintner, Plotkin & Kahn, on brief for

petitioner City of Holyoke Gas & Electric Department.
James T. McManus, Michael E. Small, Wright & Talisman, P.C.

and Frederick S. Samp, General Counsel, on brief for petitioner

Bangor Hydro-Electric Co.
Steven Halpern on brief for petitioner Massachusetts

Department of Public Utilities.
Alan H. Richardson on brief for petitioner American Public

Power Association.
Mitchell Tennenbaum, Senior Staff Attorney, on brief for

petitioner Maine Public Utilities Commission.
Edward G. Bohlen, Assistant Attorney General, and Scott

Harshbarger, Attorney General, on brief for petitioner

Massachusetts Attorney General.
Julio Mazzoli, Special Assistant, and James E. O'Neil,

Attorney General, on brief for petitioner Rhode Island Division
of Public Utilities and Carriers and Rhode Island Office of
Attorney General.
Robert F. Shapiro, Lynn N. Hargis and Chadbourne & Parke, on

brief for petitioner The American Paper Institute, Inc.
Wayne R. Frigard on brief for petitioner Boston Edison

Company.
George M. Knapp, Roger B. Wagner, David A. Fazzone, John F.

Smitka, and McDermott, Will & Emery, on brief for petitioner

Montaup Electric Company.
Robert S. Golden, Jr., Assistant Attorney General, Richard

Blumenthal, Attorney General, and Howard E. Shapiro, Special

Assistant Attorney General, and Van Ness, Feldman & Curtis, on

brief for intervenor Connecticut Department of Public Utility
Control.
Kenneth M. Simon, Larry F. Eisenstat, and Dickstein, Shapiro

& Morin, on brief for intervenor Masspower.

Harold T. Judd, Senior Assistant Attorney General, John P.

Arnold, Attorney General, Glen L. Ortman, John S. Moot, and

Verner, Liipfert, Bernhard, McPherson and Hand, Chrtd., on brief

for intervenors The State of New Hampshire and New Hampshire
Public Utilities Commission.
Kenneth D. Brown on brief for intervenor Public Service

Electric and Gas Company.
Edward Berlin, Kenneth G. Jaffee, Martin W. Gitlin, and

Swidler & Berlin, and Cynthia A. Arcate, on brief for intervenor

New England Power Company.

May 19, 1993

BOWNES, Senior Circuit Judge. These petitions for
BOWNES, Senior Circuit Judge.

review challenge the Federal Energy Regulatory Commission's

("FERC" or "the Commission") decision to conditionally

approve the merger of Northeast Utilities ("NU") and the

Public Service Company of New Hampshire ("PSNH"). Certain

joint petitioners and intervenors1 contend that FERC erred

when it: (1) held that the benefits of the merger outweighed

its costs; and (2) failed to condition the merger on NU's

waiver of single participant status ("SPS") in the New

England Power Pool ("NEPOOL"). A group of public and private

electric utilities, state commissions, state agencies,

independent power producers, cogenerators and electric end

users2 claim that FERC erred when it: (1) allowed the

consummation of the merger upon the filing of, rather than

upon approval of, a transmission tariff; (2) adopted

1 Joint petitioners and intervenors include: Central Maine
Power Company; Boston Edison Company; Bangor Hydro-Electric
Company; the Towns of Concord, Norwood and Wellesley,
Massachusetts; Maine Public Utilities Commission;
Massachusetts Department of Public Utilities; Vermont
Department of Public Service; Vermont Public Service Board;
Rhode Island Attorney General; Rhode Island Division of
Public Utilities and Carriers; Massachusetts Municipal
Wholesale Electric Company; and, City of Holyoke Gas &
Electric Department.

2 This group of petitioners and intervenors includes the
joint petitioners and intervenors listed in n.1, supra (with

the exception of Central Maine Power Company), and: The
American Paper Institute, Inc.; American Public Power
Association; Canal Electric Company; Commonwealth Electric
Company; Cambridge Electric Light Company; Massachusetts
Attorney General; and, Montaup Electric Company.

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transmission access conditions that gave "native load"

customers a priority over other customers; and (3) endorsed

"opportunity cost" pricing principles. The Holyoke Gas &

Electric Department ("Holyoke") argues that FERC erred when

it failed to: (1) conduct an appropriate review of the

environmental impact of the proposed merger; and, (2) make

findings regarding allegations of anticompetitive

consequences of the merger that were unique to Holyoke.

Finally, Northeast Utilities Service Company ("NUSCO")

asserts that FERC's orders changing the terms of three rate

schedules filed in conjunction with its merger application

were arbitrary, capricious, and an abuse of discretion.

For the reasons which follow, we reject

petitioners' arguments and affirm the Commission's decisions

with the exception of the Commission's decision to change the

terms of the Seabrook Power Contract which we remand for

consideration under the "public interest" standard.

I. BACKGROUND.

A. Parties to the Approved Merger.

Northeast Utilities ("NU") is a registered holding

company under the Public Utility Holding Company Act of 1935

(PUHCA). 15 U.S.C. 79 et seq. (1988). Northeast Utilities

Service Company ("NUSCO") is a service company subsidiary of

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NU and supplies centralized administrative and support

services to NU's operating companies.3

Prior to the merger, Public Service Company of New

Hampshire ("PSNH") was the largest electric utility in New

Hampshire, supplying electric service to some 375,000 retail

customers, approximately three-quarters of the State's

population, in every county in the State. PSNH also provided

wholesale service to the New Hampshire Electric Cooperative,

three New Hampshire municipalities, and one investor-owned

utility, Vermont Electric Power Company. PSNH had the

largest ownership share, approximately 35.6 percent, of

Seabrook Unit No. 1, a nuclear generating facility declared

to be available for service on June 30, 1990.

B. The Merger Proposal.

On January 28, 1988, PSNH filed a voluntary

petition in the United States Bankruptcy Court for the

District of New Hampshire for reorganization under Chapter 11

of the Bankruptcy Code. 11 U.S.C. 1101 et seq. (1988).

PSNH alleged that it was unable to recover in its rates the

outlays it had made in the construction and operation of the

Seabrook nuclear power plant. On April 20, 1990, after

3 NU's operating companies are Connecticut Light and Power
Company (CL&P), Western Massachusetts Electric Company,
Holyoke Water Power Company (HWP) and HWP's wholly-owned
subsidiary, Holyoke Power and Electric Company (HP&E). These
companies are wholly-owned subsidiaries of NU and are public
utilities supplying retail and wholesale electric service in
Connecticut and Massachusetts.

-8-

sifting through several competing reorganization plans, the

bankruptcy court approved NU's proposal to merge with PSNH

and to acquire and operate all of PSNH's power facilities.

See In re Public Service Co. of New Hampshire, 963 F.2d 469,

470 (1st Cir.), cert. denied, Rochman v. Northeast Utilities

Service Co., 113 S. Ct. 304 (1992).

NU's proposal contained a two-step process: first,

PSNH would emerge from bankruptcy as a stand-alone company

bound to a merger agreement with NU; second, PSNH would be

merged with an NU subsidiary created solely for the

acquisition (NU Acquisition Corporation), with PSNH emerging

as the surviving entity. After the merger, PSNH would be a

wholly-owned subsidiary of NU and would transfer its

ownership interest in Seabrook to a newly formed NU

subsidiary, North Atlantic Energy Corporation ("North

Atlantic"). The second step would occur only after all

necessary approvals were received from the relevant

regulatory agencies.

C. Procedural History.

On January 8, 1990, NUSCO, on behalf of NU and NU's

operating subsidiaries, filed an application with FERC under

section 203 of the Federal Power Act ("FPA"), 16 U.S.C.

824b (1988), seeking authorization for PSNH to dispose of all

of its jurisdictional facilities and concurrently to merge

with, and become a subsidiary of, NU. In connection with

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this application, NUSCO filed four rate schedules with FERC

pursuant to 205 of the FPA: the Seabrook Power Contract,4

the Sharing Agreement5 and two Capacity Interchange

Agreements.6

The Commission consolidated consideration of the

merger application and rate schedules, accepted the rate

schedules for filing and suspended their effectiveness, and

set for hearings before an administrative law judge ("ALJ")

the questions of whether the Commission should grant the

203 application and approve the rate schedules. See

Northeast Utilities Service Co., 50 F.E.R.C. 61,266, reh'g

granted in part and denied in part, 51 F.E.R.C. 61,177

(1990). In its order, the Commission directed the parties to

4 The Seabrook Power Contract is a life-of-the-unit power
sales agreement between PSNH and North Atlantic entered into
concurrently with NU's acquisition of PSNH and the transfer
of PSNH's share of Seabrook to North Atlantic. Under the
contract, PSNH agreed to purchase North Atlantic's entire
share of Seabrook capacity and energy, according to a cost-
of-service formula rate. The contract was intended to ensure
that North Atlantic would recover all of its costs from PSNH
regardless of whether or not Seabrook actually operated.

5 The Sharing Agreement allocates the benefits and obliga-
tions from the integrated operation of PSNH and the current
NU system, as well as the joint planning and operations of
these systems. This agreement established a formula for
sharing the expected post-merger benefits that would accrue
to NU and PSNH operating companies as a result of operating
efficiencies and the ability to take single participant
status under the NEPOOL agreement.

6 The two Capacity Interchange Agreements provide for the
sale and purchase of energy between PSNH and Connecticut
Light & Power Company (CL&P) over a ten-year term.

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address the effect of the proposed merger on NU's market

power and "whether any transmission conditions are necessary

to eliminate any adverse effect of the proposed merger and,

if so, what specific conditions should be imposed." 50

F.E.R.C. at 61,834-35.

On December 20, 1990, the ALJ issued its Initial

Decision approving the 203 application and the rate

schedules with certain modifications and conditions.

Northeast Utilities Service Co., 53 F.E.R.C. 63,020 (1990).

The Commission, in Opinion No. 364, issued on August 9, 1991,

affirmed in part and reversed in part the ALJ's decision,

conditionally approving the 203 application and the rate

schedules. Northeast Utilities Service Co., 56 F.E.R.C.

61,269 (1991). On January 29, 1992, after considering

additional filings by the parties and oral argument on

transmission pricing issues, the Commission issued Opinion

No. 364-A, affirming its conditional approval of the 203

application and rate schedules. Northeast Utilities Service

Co., 58 F.E.R.C. 61,070 (1992).

Petitions for review of Opinions No. 364 and 364-A

were filed in this court and in the District of Columbia

Circuit Court. The Judicial Panel on Multidistrict

Litigation consolidated these petitions for review in this

court, where further petitions for review were filed. 28

U.S.C. 2112(a) (1988). Subsequently, in Opinion No. 364-B,

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the Commission denied a request for rehearing of Opinion No.

364-A. Northeast Utilities Service Co., 59 F.E.R.C. 61,042

(1992). A petition for review of Opinions No. 364-A and 364-

B was filed in this court, where it was consolidated with the

earlier filed petitions. We review the Commission's orders

under the jurisdiction established by 16 U.S.C. 825l.

II. STANDARD OF REVIEW.

On review, we give great deference to the

Commission's decision. U.S. Dep't of Interior v. FERC, 952

F.2d 538, 543 (D.C. Cir. 1992). FERC's findings of fact are

reviewed under the "substantial evidence" standard of review.

16 U.S.C. 825l ("The finding of the Commission as to the

facts, if supported by substantial evidence, shall be

conclusive."). Therefore,

[w]e defer to the agency's expertise,
particularly where the statute prescribes
few specific standards for the agency to
follow, so long as its decision is
supported by "substantial evidence" in
the record and reached by "reasoned
decisionmaking," including an examination
of the relevant data and a reasoned
explanation supported by a stated
connection between the facts found and
the choice made.

Electricity Consumers Resource Council v. FERC, 747 F.2d

1511, 1513 (D.C. Cir. 1984). "Pure" legal errors require no

deference to agency expertise, and are reviewed de novo.

Questions involving an interpretation of the FPA involve a de

novo determination by the court of Congressional intent; if

-12-

that intent is ambiguous, FERC's conclusion will only be

rejected if it is unreasonable. Chevron USA v. Natural

Resources Defense Council, 467 U.S. 837, 842-45 (1984);

Boston Edison Co. v. FERC, 856 F.2d 361, 363 (1st Cir. 1988).

III. DISCUSSION.

A. Conditional Approval of the Merger.

1. Background.

In reaching his decision to approve the NU-PSNH

merger, the ALJ found that the merger would produce

significant benefits. Specifically, he found that: (1) PSNH

would emerge from bankruptcy as a viable utility on a solid

financial footing, 53 F.E.R.C. at 65,211; (2) improved

management techniques and economies of scale would reduce the

operating costs of Seabrook by some $527 million,7 id. at

65,212; (3) application of NU operating procedures to PSNH's

fossil steam plants would save $100 million, id. at 65,213;

(4) reductions in administrative and general expenses would

save $124 million, id.; (5) NU's record of buying lower-

priced coal on the spot market would save $39 million, id.;

and (6) the merger would yield $360 million in savings for NU

because of its ability to elect "single participant status"

7 This, and all other dollar amounts are net present values
unless otherwise noted.

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in the New England Power Pool (NEPOOL), a power pool

comprised of most of the utilities in New England. Id.

The ALJ also found that unless several conditions

were imposed, the merger would have short- and long-term

anticompetitive consequences because of the merged company's

increased market power over key transmission facilities in

both the New England region and the Rhode Island and Eastern

Massachusetts submarket ("Eastern REMVEC"). 53 F.E.R.C. at

65,214-19. Under the authority of 203(b) of the FPA, 16

U.S.C. 824b(b), the ALJ approved the merger subject to

several conditions, including the following: (1) the merged

company must offer firm (non-interruptible) transmission

service for a minimum of 30 days and a maximum of 20 years,

53 F.E.R.C. at 65,220-21; (2) non-firm service must be

offered for a one-day minimum term, id. at 65,220; (3) the

merger would be consummated concurrently with the filing of a

compliance tariff which fully reflects all of the terms and

conditions set out in the ALJ's Initial Decision, id. at

65,221; (4) NU must implement its New Hampshire Corridor

Proposal,8 thereby making available 400 MW of transmission

8 The New Hampshire Corridor Transmission Proposal allows
New England utilities to purchase long-term transmission
rights from NU-PSNH in order to connect with power sources in
northern New England and Canada. See 53 F.E.R.C. at 65,225.

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capacity for wheeling9 by utilities in both northern and

southern New England, id. at 65,225-27; and (5) the merged

company's veto power on NEPOOL's Management Committee would

be restricted for the ninety day period immediately following

consummation of the merger, id. at 65,230-31.

In Opinion No. 364, the Commission affirmed the

ALJ's finding that the merger, with appropriate conditions,

was consistent with the public interest. 56 F.E.R.C. at

62,011. It held, however, that the $364 million cost-shift

between NU-PSNH and other NEPOOL members should not have been

counted as a benefit of the merger because it simply shifted

costs dollar-for-dollar among the membership without any net

savings.10 56 F.E.R.C. at 61,997. The Commission also

held that, in evaluating the costs and benefits of the

merger, the ALJ correctly attributed the benefits resulting

from the merger to the merger even if those benefits could

have been achieved by other means.11 Id. at 61,994-96.

This conclusion was reiterated on rehearing in Opinion No.

364-A. 58 F.E.R.C. at 61,186-87.

9 "Wheeling" is defined as the "transfer by direct trans-
mission or displacement [of] electric power from one utility
to another over the facilities of an intermediate utility."
Otter Tail Power Co. v. U.S., 410 U.S. 366, 368 (1973).

10 This issue is discussed in Part III(B), infra.

11 This issue is discussed in Part III(A)(3), infra.

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Petitioners and intervenors argue that FERC erred,

as a matter of law, in holding that the benefits of the

merger outweighed its costs.

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2. The Statutory Standard.

FERC's authority to consider the merger

applications of utilities is set forth in 203(a) of the

FPA, 16 U.S.C. 824b(a): the Commission "shall approve" a

proposed merger of utility facilities if, "[a]fter notice and

opportunity for hearing, . . . the Commission finds that the

proposed disposition, consolidation, acquisition, or control

will be consistent with the public interest." Id. The

Commission has the additional authority to grant approval for

such transactions "upon such terms and conditions as it finds

necessary or appropriate to secure the maintenance of

adequate service and the coordination in the public interest

of facilities subject to the jurisdiction of the Commission."

16 U.S.C. 824b(b). As the Commission noted when it

reviewed the Initial Decision of the ALJ,

[m]erger applicants need not show that a
positive benefit will result from a
proposed merger. The applicant must
fully disclose all material facts and
show affirmatively that the merger is
consistent with the public interest. It
is sufficient if the "probable merger
benefits . . . add up to substantially
more than the costs of the merger."

56 F.E.R.C. at 61,994 (quoting Utah Power & Light Co., 47

F.E.R.C. at 61,750 (1989) (footnotes omitted); see also

Pacific Power & Light Co. v. Federal Power Commission, 111

F.2d 1014, 1016 (9th Cir. 1940). We review the record,

therefore, to determine whether the Commission's finding that

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the probable benefits of the NU-PSNH merger were

substantially more than its costs was supported by

substantial evidence.

3. Discussion.

Petitioners make two claims with regard to FERC's

evaluation of the costs and benefits of the NU-PSNH merger.

First, they argue that the Commission should not have

included resolution of PSNH's bankruptcy as a benefit of the

merger because: (1) PSNH actually emerged from bankruptcy on

May 16, 1991, the effective date of the Reorganization Plan

("RP"); and (2) prior to gaining the bankruptcy court's

approval of the two-step RP, PSNH had to show that it would

be financially viable as a stand-alone entity because

regulatory approval for the second step of the RP (merger

with and into NU) was not assured. These two facts, however,

do not imply that it was error for FERC to consider the

"resolution of PSNH's bankruptcy" as a benefit, indeed as a

principal benefit, of the merger.

It is true that PSNH, as a technical matter,

"emerged" from bankruptcy prior to FERC's consideration of

the proposed merger. The ALJ and the Commission did not hold

otherwise. The ALJ stated, and the Commission summarily

affirmed the fact that "[t]he merger is part of a plan which

enables a reorganized PSNH to emerge from bankruptcy." 53

F.E.R.C. at 65,211 (emphasis added); see also 56 F.E.R.C. at

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61,993. Like the state regulators who approved the two-step

merger plan, the Commission evaluated the plan as a whole,

anticipating "the merger not `stand alone' PSNH as the

ultimate destiny for the reorganized company." 53 F.E.R.C.

at 65,211. "All parties to the reorganization contemplated

[stand alone] status as an interim step en route to the

merger." Id. It was the entire plan, which admittedly had

two sequential and severable steps, that allowed PSNH to

emerge from bankruptcy. There is no evidence that the state

regulators would have approved a plan to allow PSNH to emerge

from bankruptcy that included only the first "stand alone"

step. Indeed, there is evidence to the contrary.

FERC also found that "resolving" PSNH's bankruptcy

meant more than simply the emergence of PSNH from the

protection of bankruptcy court. FERC held that the final

resolution of PSNH's bankruptcy included the treatment of its

creditors and stockholders who stood to lose approximately

$250 million in the absence of the merger. As the ALJ

observed, the Commission "regard[s] the right of these public

bondholders as of primary importance after the consumers have

been protected." 53 F.E.R.C. at 65,211 (quoting In re Evans,

1 F.P.C. 511, 517 (1937) (approving an acquisition involving

the reorganization of a bankrupt utility)). The Commission

also held that it was in the public interest to approve the

creation of a stronger, more viable merged entity, rather

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than leaving PSNH in a "weakened", "stand alone" state. This

holding was sufficiently supported by evidence in the record.

Petitioners also claim that, given the bankruptcy

court's "feasibility finding" required by 11 U.S.C.

1129(a)(11),12 the Commission was estopped from reaching

the conclusion that a "stand alone" PSNH would be "weak."

We disagree. The bankruptcy court and FERC evaluated the

merger proposal under different standards. The bankruptcy

court was required to determine the likelihood of further

liquidation or reorganization proceedings were the plan to be

approved. FERC was obliged to determine whether the plan was

"consistent with the public interest." It was not

inconsistent for FERC to find that although PSNH was capable

of surviving as a stand alone entity, it would not be

"consistent with the public interest" to prevent a merger

that would result in an even stronger utility. The

principles of estoppel simply do not apply in a case such as

this, where the issues litigated and the standards applied in

the two proceedings are so different.

12 The Bankruptcy Code provides that:
(a) The court shall confirm a plan [of
reorganization] only if all of the following
requirements are met:
(11) confirmation of the plan is not likely to be
followed by the liquidation, or the need for
further financial reorganization, of the debtor or
any successor to the debtor under the plan, unless
such liquidation or reorganization is proposed in
the plan.
11 U.S.C. 1129(a)(11).

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Even were petitioners correct in their asseveration

that FERC improperly counted the resolution of PSNH's

bankruptcy as a benefit of the merger, "the Commission's

error would be immaterial in light of the overwhelming excess

of other benefits ($791 million) over the costs (0) still

attributable . . . to the acquisition." City of Holyoke Gas

& Elec. Dep't v. S.E.C., 972 F.2d 358, 362 (D.C. Cir. 1992).

Second, petitioners argue that FERC erred as a

matter of law in weighing as merger benefits results or

alleged savings that were, or could be, achieved by

"alternate means." Specifically, petitioners contend that

FERC's failure to apply the "alternate means" test

contradicted general agency policy and general antitrust

principles.

It is undisputed that utilities are "not immune"

from antitrust laws. Otter Tail Power Co. v. U.S., 410 U.S.

366, 372-75 (1973); Town of Concord v. Boston Edison, 915

F.2d 17 (1st Cir. 1990), cert. denied, 111 S. Ct. 1337

(1991). At issue in this case is whether FERC is required by

statute, or otherwise, to engage in "standard" antitrust

analysis before passing on 203 merger applications. In

claiming that FERC has such an obligation, petitioners rely

on a statute governing agency approval of bank mergers (the

-21-

"Bank Merger Act") which states that the agency with

jurisdiction over a proposed bank merger,13

shall not approve
(A) any proposed merger transaction
which would result in a monopoly, or
which would be in furtherance of any
combination or conspiracy to monopolize
or to attempt to monopolize the business
of banking in any part of the United
States, or
(B) any other proposed merger
transaction whose effect in any section
of the country may be substantially to
lessen competition, or to tend to create
a monopoly, or which in any other manner
would be in restraint of trade, unless it
finds that the anticompetitive effects of
the proposed transaction are clearly
outweighed in the public interest by the
probable effects of the transaction in
meeting the convenience and needs of the
community to be served. . . .
(6) The responsible agency shall
immediately notify the Attorney General
of any approval by it pursuant to this
subsection of a proposed merger
transaction.

12 U.S.C. 1828(c)(5)-(6). The Supreme Court, interpreting

the Bank Merger Act, has held that before a bank merger which

is injurious to the public interest may be approved, "a

showing [must] be made that the gain expected from the merger

cannot reasonably be expected through other means." U.S. v.

Phillipsburg Nat. Bank & Trust Co., 399 U.S. 350, 372 (1970).

Petitioners claim that the language of the Bank Merger Act is

sufficiently similar to the statute governing FERC's approval

13 Jurisdiction varies depending on whether the resulting
entity is a national bank, a state member bank, a state
nonmember bank, or a savings association.

-22-

of proposed mergers, 16 U.S.C. 824b(a), because both

contain a "public interest" standard, to require FERC to use

the "alternate means" test which bank regulators must use in

evaluating proposed bank mergers. We disagree.

As with any matter of statutory construction, we

first examine the language of the statute. Under 16 U.S.C.

824b(a), the Commission is required, after notice and

opportunity for hearing, to approve a proposed merger of

utility facilities if it finds that the proposal "will be

consistent with the public interest." That is all the

statute says. There is no explicit reference to antitrust

policies or principles. There is no evidence that Congress

sought to have the Commission serve as an enforcer of

antitrust policy in conjunction with the Department of

Justice and the Federal Trade Commission. The Bank Merger

Act reveals a quite different intention. There, Congress

explicitly set out standards for approval of bank mergers

that incorporate principles embodied in the Sherman and

Clayton Acts. 12 U.S.C. 1828(c)(5). By requiring the

reviewing agency to notify the Attorney General of any

decision to approve a proposed bank merger, 12 U.S.C.

1828(c)(6), Congress expressed its desire to have bank

regulators serve as pre-screening bodies of mergers which,

because of their importance or character, in most cases also

deserve the attention of the Department of Justice.

-23-

The Bank Merger Act carries with it the implicit

presumption that mergers are to be disapproved (the agency

"shall not approve" a bank merger "unless it finds that the

anticompetitive effects are clearly outweighed in the public

interest" by the benefits of the merger, 12 U.S.C.

1828(c)(5)). The FPA, on the other hand, requires the

Commission to approve any merger that is "consistent with the

public interest." 16 U.S.C. 824b(a). Antitrust

considerations are, of course, relevant in FERC's

consideration of the "public interest" in merger proposals.

The statute, however, does not require FERC to analyze

proposed mergers under the same standards that the Department

of Justice or bank regulators must apply.

Although the Commission must include antitrust

considerations in its public interest calculus under the FPA,

it is not bound to use antitrust principles when they may be

inconsistent with the Commission's regulatory goals. See

Otter Tail, 410 U.S. at 373 ("[a]lthough antitrust

considerations may be relevant [in determining the public

interest], they are not determinative"). In Town of Concord,

this court observed that indiscriminate incorporation of

antitrust policy into utility regulation "could undercut the

very objectives the antitrust laws are designed to serve."

915 F.2d at 22. Therefore, "antitrust analysis must

sensitively `recognize and reflect the distinctive economic

-24-

and legal setting' of the regulated industry to which it

applies." Id. (quoting Watson & Brunner, Monopolization by

Regulated "Monopolies": The Search for Substantive

Standards, 22 Antitrust Bull. 559, 565 (1977)).

Petitioners may rest assured that were FERC to

approve a merger of utilities which ran afoul of Sherman Act

or other antitrust policies, the utilities would be subject

to either prosecution by government officials responsible for

policing the antitrust laws, or to suit by private citizens

meeting the requirements of standing. See Otter Tail, 410

U.S. at 374-5.

B. FERC's Failure to Condition Merger on NU's Waiver
of Single Participant Status.

Petitioners argue that the Commission erred in

failing to condition the merger on waiver by NU and PSNH of

"single participant status" ("SPS") in the New England Power

Pool ("NEPOOL"), thereby preventing the imposition of a $364

million cost shift from NU and PSNH to the other members of

NEPOOL.

1. Background.

NEPOOL is a power pool comprised of most of the

utilities in New England. The association is governed by the

New England Power Pool Agreement ("the Agreement") which

establishes a "comprehensive interconnection and coordination

arrangement" among its members in order "to achieve greater

-25-

reliability and economies in the production of electricity."

Groton v. FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978).

Section 202(a) of the Federal Power Act encourages such

voluntary interconnection and coordination of electricity

generating facilities in order to achieve economies of scale.

16 U.S.C. 824a; see also 16 U.S.C. 824a-1 (regarding

pooling agreements). The Agreement was approved as a filed

rate schedule by FERC's predecessor, the Federal Power

Commission. 53 F.E.R.C. at 65,213. Under its terms, each

member is required to supply the pool with resources

("Capacity Responsibility") according to a formula based upon

the relationship of the member's peak load to an estimate of

aggregate peak load of all members.

NU experiences its peak load in the summer, and

PSNH experiences its peak load in the winter. By aggregating

these two, complementary, peak loads, NU-PSNH can achieve a

lower Capacity Responsibility than would be the case if the

two utilities remained separate. Because the overall

capacity requirements of NEPOOL will not change as a result

of the merger, the Capacity Responsibilities of other members

must rise to make up for the savings accruing to NU-PSNH.

The ALJ accepted the "undisputed" estimate that "single

participant status" (SPS) will result in a shifting of some

$360 million in costs from NU-PSNH to other members of the

pool. Id.

-26-

-27-

2. Discussion.

Petitioners offer six arguments to support their

claim that FERC erred in failing to condition the merger on

waiver of SPS by NU and PSNH. First, petitioners claim that

the Commission did not properly interpret the provision of

the NEPOOL Agreement which governs the election of SPS. We

agree with the Commission's finding that the Agreement both

specifically allows for the election by NU-PSNH of SPS, and

encourages such elections. Section 3.1 of the Agreement

provides in relevant part that:

All Entities which are controlled by a
single person (such as a corporation or a
common law business trust) which owns at
least seventy-five percent of the voting
shares of each of them shall be

collectively treated as a single
Participant for purposes of this
Agreement, if they elect such treatment.
They are encouraged to do so. Such an

election shall be made by signing the
appropriate form at the end of a
counterpart of this Agreement.

(Emphasis supplied.) Both the ALJ and the Commission

interpreted section 3.1 to be an explicit endorsement of the

election of SPS by NU-PSNH. The ALJ stated that "[i]t is

undisputed that NU and PSNH qualify for such [single

participant] status under the Agreement." 53 F.E.R.C. at

65,213. The Commission gave great weight to the unrebutted

testimony of witness Bigelow, who participated in the

negotiation of the NEPOOL Agreement regarding the intent of

the original signatories to the Agreement and their

-28-

recognition of such potentially large cost-shifts among

NEPOOL members. Bigelow stated:

[W]hen we put NEPOOL together 20 years
ago, we recognized that these things
might happen. This is not something that
snuck up on people. . . . And we did
discuss at length what would happen
because . . . we were then coming up to a
potential merger of Boston Edison,
Eastern Utilities, New England Power. It
was recognized that these kinds of things
could happen in the future and we spelled
out the ground rules and recognized that
that would happen when it happened. And
the people who didn't like it got
something else for it.

53 F.E.R.C. at 65,214. Both the ALJ and the Commission

rejected petitioners' claim on the basis of both the language

of the Agreement, and Bigelow's unrebutted testimony that not

only had the signatories been aware of such a potentially

large savings shift, but that those utilities that were

dissatisfied with this risk received additional concessions

as compensation. We will not disturb the Commission's

findings.

Second, petitioners claim that the Agreement, as

interpreted in NEPOOL Power Pool Agreement, 56 F.P.C. 1562,

1580 (1976), aff'd sub nom. Municipalities of Groton v. FERC,

587 F.2d 1296 (D.C. Cir. 1978), prohibits utilities with peak

loads in different seasons from electing SPS. As the

Commission explained, this argument mischaracterizes the

Agreement and the decision of the Federal Power Commission

("FPC") in NEPOOL.

-29-

The NEPOOL Agreement, as initially filed
and as approved, allowed single
participant status for utilities
controlled by a single "person" owning at
least 75 percent of the voting shares of
each utility. An exception was expressly
allowed in the filed agreement for any
Vermont utility which elected to be
grouped with Vermont Electric Power
Company. This exception was approved for
essentially two reasons: (1) the Vermont
utilities had long acted as a single
contiguous integrated electric entity;
and (2) since they all experienced their
peak loads in winter, single participant
status would not give them a lower NEPOOL
Capability Responsibility (and consequent
savings). A broader exception was
denied, however, for a group of municipal
utilities (represented by MMWEC) that was
not entitled to single participant status
and that lacked the two cited attributes
of the Vermont utilities. The basis for
the denial was that allowing such status
for "any group of systems, such as MMWEC,
could well be detrimental to the
functioning of NEPOOL."
The NEPOOL decision, thus, does not
stand for the proposition that single
participant status is available only to
utilities having their peak loads in the
same season. Instead, another way,
indeed the primary way, in which
utilities may qualify is if they are
controlled by a single person with at
least 75-percent common ownership. That
is the basis upon which NU and PSNH will
presumably seek to qualify if the merger
is approved. Such status is expressly
allowed under the NEPOOL Agreement
regardless of when NU and PSNH experience
their peak loads.

56 F.E.R.C. at 61,996-97. The reasons offered by the FPC in

its decision to grant a special exception for Vermont

utilities seeking SPS were not intended to be, and are not,

conditions, in addition to those set out in the Agreement,

-30-

which must be satisfied to elect SPS. The FPC did not narrow

the scope of Section 3.1 to apply only to utilities sharing

the same peak load season; rather, it created a special

exception to the 75 percent rule to accommodate the unique

situation faced by Vermont utilities.

Third, petitioners claim that FERC failed to give

proper consideration to Section 4.2 of the Agreement, "the

interests of other pool members, and the purpose of the

Agreement as a whole." Essentially, petitioners argue that

allowing NU-PSNH to elect SPS would violate a general

provision of the Agreement, which states that participants

"shall not . . . take advantage of the provisions of this

Agreement so as to harm another Participant or to prejudice

the position of any Participant in the electric utility

business." We reject this argument for the same reasons

expressed by the Commission in its decision denying

petitioners' request for a rehearing:

[W]e find more relevance in the NEPOOL
Agreement's explicit endorsement of
single participant status than in the
agreement's general goal of "equitable
sharing" and prohibition on members
"taking advantage" of the agreement to
harm or prejudice other members. The
NEPOOL Agreement specifically encourages
eligible parties to seek single
participant status; the provisions cited
by the intervenors are general, not
specific. Construing the general
consistent with the specific, we find
single participant status for the merged
company consistent with an equitable
sharing, as envisioned by the NEPOOL

-31-

Agreement, and not violative of the ban
on taking advantage of the agreement's
provisions to harm or prejudice other
members.

58 F.E.R.C. at 61,189. We agree with FERC's interpretation

of the Agreement. The NEPOOL signatories explicitly

encouraged qualified members to seek SPS, indeed they

contemplated that members that merged might choose to do just

that. We agree with the Commission's construction of the

Agreement which avoids a direct conflict between Sections 3.1

and 4.2, and instead gives both provisions reasonable effect.

Fourth, petitioners argue that failure to condition

the merger on waiver of SPS would create "serious

disincentives" for current members to continue their

membership in NEPOOL, and that the breakup of NEPOOL is

contrary to the public interest. Petitioners imply that FERC

did not take seriously their complaints about SPS, but rather

rested its decision not to require a waiver solely on the

fact that the Agreement allowed the election of SPS. This is

simply not so.

The Commission reversed the ALJ on the issue of

whether SPS savings should be counted as a benefit of the

merger. The Commission found that because the cost shift

amounted to a zero-sum transaction, with NU and PSNH

benefitting and the other members burdened dollar-for-dollar,

the shift could not be counted as a benefit of the merger.

-32-

56 F.E.R.C. at 61,997. Thus, the Commission did not dismiss

petitioners' claims regarding SPS without thought.

Also, the ALJ found, and the Commission agreed,

that SPS was essential to the merger, and that the merger, as

conditioned, was in the public interest. FERC must approve a

proposed merger if it is consistent with the public interest.

16 U.S.C. 824b(a). FERC has the discretion to add

conditions to a proposed merger to ensure that the merger

will, taken as a whole, be in the public interest. 16 U.S.C.

824b(b). FERC need not, however, explain why every

condition, or failure to establish a condition is consistent

with the public interest when considered separately and apart

from the entire transaction. Petitioners seem to argue that

FERC was required by law to state why it was consistent with

the public interest to follow the explicit terms of the

approved fifteen year-old NEPOOL Agreement rather than to

condition the merger on waiver of a membership right

established by the Agreement. FERC had no such obligation.

It need not have explained why it failed to add a particular

condition prior to approving a merger. The statute simply

provides that "[t]he Commission may grant any application for

an order under this section in whole or in part and upon such

terms and conditions as it finds necessary or appropriate to

secure the maintenance of adequate service and coordination

in the public interest of facilities subject to the

-33-

jurisdiction of the Commission." 16 U.S.C. 824b(b). In

this case, the Commission set forth a reasonable basis for

approving the merger as consistent with the public interest

in light of the supplementary conditions the Commission found

necessary. FERC need not have gone further than this to

explain why it failed to place further conditions on the

merger.

Fifth, petitioners allege that FERC acted

inconsistently in its treatment of the NEPOOL Agreement's

provisions regarding voting rights and SPS. The Commission

adopted a condition limiting the merged company's NEPOOL

voting rights to prevent PSNH and NU from gaining a veto

power in NEPOOL. 56 F.E.R.C. at 62,043-45. FERC reasoned

that, while there was evidence that the signatories

anticipated that large cost-shifts would accompany the

election of SPS in merger situations, there was no evidence

that they anticipated the voting rights implications of such

mergers. 58 F.E.R.C. at 61,189. It was not, contrary to

petitioners' argument, inconsistent as a matter of logic to

condition voting rights where the Agreement was silent on the

need or lack of need to do so, while failing to condition SPS

where the Agreement explicitly favored the election of SPS.

Furthermore, it was not an error of law to condition voting

rights while leaving SPS rights untouched. Petitioners do

not contest the Commission's decision to condition NU-PSNH's

-34-

voting rights. We will uphold whatever conditions the

Commission imposes on a proposed merger so long as their

necessity is supported in the record by substantial evidence.

Finally, petitioners contend that the Commission

"failed to explain why burdening other NEPOOL members with

$364 million in additional costs with no offsetting benefits

to them is consistent with the public interest." In making

this argument, petitioners imply that each and every piece of

a complex package of merger agreements and conditions must be

able to withstand "public interest" analysis without regard

to other pieces of the package or to other conditions imposed

by the Commission. Petitioners also imply that if any

individual or group is harmed by a piece of the package, that

provision is not in the public interest and must therefore be

stricken or modified. Both implicit arguments are deeply

flawed.

In evaluating a transaction such as the one at

issue here, the Commission is required to find that the

entire transaction, taken as a whole, is consistent with the

public interest. 16 U.S.C. 824b(a). Each element of the

transaction need not benefit every utility or individual

which might be affected; rather, the whole transaction must

be consistent with the interest of "the public." There is no

reason to think that the interest of individual NEPOOL

members is synonymous with the "public" interest. As has

-35-

already been noted, FERC may add conditions to a proposed

merger before granting approval. 16 U.S.C. 824b(b). The

statute does not require, however, that FERC establish

conditions so that every effect of an approved merger could

withstand the "public interest" test.

At a less theoretical level, the ALJ determined

that the NEPOOL savings "were a vital part of the long and

strenuous negotiations which culminated in the resulting PSNH

reorganization plan," and the particular savings of $146

million for New Hampshire consumers were relied on

specifically by the State of New Hampshire in approving the

merged company's rate package. 53 F.E.R.C. at 65,213. The

Commission accepted this finding of the ALJ, while, at the

same time, it reversed the ALJ's decision to count the $360

million as a benefit of the merger. 58 F.E.R.C. at 61,997.

The fact that the cost-shift was not a benefit to be counted

in weighing the benefits and costs of the merger does not

mean that the election of SPS and the concomitant cost-shift

is not in the public interest. Election of SPS is in the

public interest because it is a central element of the merger

plan which, viewed as a whole, was found by FERC to be

consistent with the public interest based on substantial

evidence in the record. We approve the Commission's decision

not to condition the merger on waiver by NU of SPS.

C. Timing of Merger's Consummation.

-36-

In the proceedings before the ALJ, NU proposed

filing a transmission tariff within 60 days following the

merger. Intervenors and Commission staff proposed the filing

and approval of an interim transmission rate. The ALJ

rejected both proposals and instead held that the merger

would be consummated upon the filing of NU's compliance

tariff. He reasoned as follows:

I see no need for requiring one tariff
(with potential for controversy, charges,
collections and refunds) to be followed
by yet another tariff, with its own
potential for still other disputes.
Avoiding a transitional period will
make it unnecessary to require a
transitional tariff. To achieve this
result, consummation of the merger must
be conditioned on the concurrent filing
of a compliance tariff which fully
reflects all of the terms and conditions
set out in this Initial Decision. Such a
condition should encourage a prompt and
fair compliance filing because NU could
not begin to reap the merger benefits
without it.

53 F.E.R.C. at 65,221. The Commission concurred:

We believe the GTC [General
Transmission Conditions] and the NH
Corridor Proposal, as modified herein,
adequately mitigate the merger's
anticompetitive effects without requiring
the adoption of the Merger Tariff. Trial
Staff stated that the Merger Tariff would
make service available immediately upon
approval of the merger. We believe that
the presiding judge accomplished the same
result by allowing consummation of the
merger when NU submits its compliance
filing.
We further believe that delaying the
merger's consummation until the
Commission accepts NU's compliance

-37-

submittal for filing would be
inappropriate given the uncertainty
surrounding issues which may be
challenged and subject to further
litigation in the compliance proceeding
and given our commitment to act before
the Merger Agreement's December 31, 1991
termination date. We believe that NU and
PSNH are entitled to a prompt and fair
resolution of this proceeding. At the
same time the intervenors are entitled to
have service begin as soon as practical,
together with a fair resolution of any
disputes raised regarding NU's compliance
filing. Accordingly, we believe that it
is in the best interests of all parties
to allow NU to consummate the merger when
it submits its compliance filing. We
shall also require NU to begin honoring
such requests for transmission service
under the GTC, as modified herein, at
that time. Such transmission service
will be provided at either the firm or
non-firm transmission rates proposed in
NU's compliance filing, subject to
refund, and without a refund floor. In
reviewing NU's filing to ensure
compliance with this Opinion, we will
hold NU to a very high standard. As NU
itself states, "[i]f NU fails to comply
with the letter or spirit of such
[Commission] requirement, NU would be
subject to summary judgment with respect
to any aspect of its compliance filing."

56 F.E.R.C. at 62,025.

Petitioners' stated concern is that, by allowing

the merger to be consummated prior to FERC's approval of the

compliance tariff, FERC did not provide a sufficient guaranty

that NU would provide transmission access that would mitigate

-38-

the merger's anticompetitive effects.14 Petitioners do

not, however, seek to unravel the merger. Rather, they

propose that any cost shift under the NEPOOL Agreement, see

discussion in Part III(B), supra, be postponed until after

the compliance tariff is approved. Petitioners complain that

the course chosen by FERC creates an incentive on the part of

NU to delay proceedings on the compliance tariff, thereby

maximizing competitive advantage. Petitioners do not, of

course, point out that their proposal would create an

incentive on their part to delay final approval of the

compliance tariff, thereby postponing the day when the NEPOOL

cost shift will take effect.

The ALJ and the Commission carefully considered the

alternatives before reaching their decisions. The Commission

held that the anticompetitive effects of the merger would be

adequately mitigated by the dual requirements that NU

immediately provide transmission access upon the filing of

its compliance tariff, and that any fees collected by NU

would be subject to refund without a refund floor. Because

NU accepted these merger conditions, the Commission can

enforce NU's promise to pay such refunds if the Commission

finds them to be appropriate. See Distrigas of Massachusetts

Corp. v. FERC, 737 F.2d 1208, 1225 (1st Cir. 1984). FERC

14 We note that, at oral argument, petitioners conceded
that no one had as yet sought access to NU's transmission
facilities.

-39-

explicitly warned NU that "[i]n reviewing NU's filing to

ensure compliance with this Opinion, we will hold NU to a

very high standard." 56 F.E.R.C. at 62,025.

The Commission balanced the merging companies' need

for a "prompt and fair resolution" of the merger proceeding

against the intervenors' need "to have [transmission] service

begin as soon as practical, together with a fair resolution

of any disputes raised regarding NU's compliance filing." 56

F.E.R.C. at 62,025. An agency's discretion is at its

"zenith" when it fashions remedies to effectuate the charge

entrusted to it by Congress. Niagra Power Corp. v. FPC, 379

F.2d 153, 159 (D.C. Cir. 1967). See also, Consolo v. FMC,

383 U.S. 607, 620-21 (1966); Environmental Action, Inc. v.

FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991); Boston Edison Co.

v. FERC, 856 F.2d 361, 371 (1st Cir. 1988). We hold that

FERC's exercise of its discretion was not inappropriate in

these circumstances. FERC did not defer, as petitioners

suggest, consideration of the anticompetitive effects of the

merger which FERC itself identified. The Commission

recognized the effects, and dealt with them in a reasoned way

which balanced the competing interests of all parties.

FERC's remedy is not unreasonable, and we therefore affirm

its order.

D. Protection of Native Load Customers.

1. Priority of Services.

-40-

a. Background.

In its merger application, NU made a voluntary

commitment to provide wholesale transmission service,

including third party wheeling service,15 for any utility

over its existing transmission system. At the same time, NU

sought to limit this obligation by reserving an absolute

priority for power purchases on behalf of native load

customers (whose power needs NU is bound by franchise or

contract to meet). The ALJ held that although NU may

reasonably give native load service priority over wheeling

service if NU's transmission system had insufficient capacity

to serve both, 53 F.E.R.C. at 65,221-222, NU could not deny

firm wheeling requests based upon the reservation of

transmission capacity for its own non-firm sales, id. at

65,225.

In Opinion No. 364, the Commission balanced the

interests of native load customers and third party wheeling

customers and affirmed the ALJ's denial of an absolute

priority:

we . . . deny NU's proposal to give
higher priority to its own non-firm use
than to third party requests for firm
wheeling in allocating existing
transmission capacity. In no event,
however, will NU be required to provide
firm third party wheeling service out of
existing transmission facilities if

15 For a definition of "wheeling" see n.9, supra.

-41-

reliability of service to native load
customers would be adversely affected.

56 F.E.R.C. at 62,021 (footnote omitted). The Commission

found it "reasonable to allow NU to reserve firm transmission

capacity to provide reliable service to its native load

customers." Id. (Emphasis in original.)

On rehearing, NU asked the Commission to clarify

the scope of the "reliability" criterion. The Commission

"reiterate[d] that under no circumstances will NU be required

to provide firm wheeling service out of existing transmission

capacity where doing so would impair or degrade reliability

of service to native load customers." 58 F.E.R.C. at 61,199

(emphasis removed). The Commission held the concept of

reliability generally encompasses the: (1) reservation of

transmission capacity to back up large generating units; (2)

provision of generation reserves; and (3) coverage of certain

future needs. As to the coverage of future demand

requirements, the Commission specifically ordered that "any

capacity needed for reliability purposes within a reasonable

planning horizon must be offered for wheeling use until NU

expects to need the capacity for reliability reasons." Id.

at 61,199-200.

Petitioners assert that the decision to accord a

priority to native load over transmission load is arbitrary,

discriminatory, and anticompetitive. They argue that FERC

neither defined nor justified the priority granted by

-42-

allowing reservation of transmission capacity for native load

service and that any such priority creates competitive

advantages for NU. We hold that the Commission adequately

defined and reasonably justified its decision to allow such a

reservation and properly addressed the anticompetitive

concerns raised by the intervenors.

b. Discussion.

Although the Commission reaffirmed the general rule

that firm transmission service should be accorded priority

over non-firm service, even if the latter would benefit

native load, it nonetheless allowed NU to reserve firm

transmission capacity needed to ensure reliability of native

load service and allowed the use of this capacity for non-

firm transactions. 58 F.E.R.C. at 61,196. Thus, native load

service will receive a "priority" over third-party wheeling

service in allocating existing transmission capacity when

reliability of service to native load would be adversely

affected. The Commission specifically qualified this

priority by requiring NU to offer the capacity for wheeling

use until NU needed it to assure reliability to native load

customers.

There is nothing arbitrary or discriminatory about

FERC's decision. It struck a reasonable balance between the

competing interests of native load customers and third-party

wheeling customers. NU-PSNH is obligated to serve its native

-43-

load customers. In return for this obligation to serve, the

native load customers regularly bear the cost of transmission

facilities; native load customers pay for them, use them,

plan on them, and rely on them. As the ALJ noted, "[e]very

New England utility favors its own native load. Nothing in

the NEPOOL agreement requires its members to surrender their

native load preference, and none do." 53 F.E.R.C. at 65,222.

Thus, "NU should be allowed to give priority over safe and

reliable service to its native load customers using existing

transmission capacity built to serve those customers." 58

F.E.R.C. at 61,199. FERC explicitly defined and justified

the challenged native load "priority."

2. Transmission Upgrades Pricing.

a. Background.

NU's commitment to provide third-party transmission

service includes the obligation to build additional

transmission facilities as necessary to relieve transmission

constraints on its system. 58 F.E.R.C. at 61,204-10; 56

F.E.R.C. at 62,021-24. The issue then becomes, how should

the cost of constructing such transmission upgrades be

allocated. The ALJ stated that questions of cost allocation

are best addressed in future proceedings regarding the

particular responsibilities for particular facilities.

Nevertheless, the ALJ adopted the "but for" analysis for

determining responsibility proposed by NU witness Schultheis:

-44-

[W]heeling customers must make a pro rata
contribution whenever the facilities
would not have been needed but for the
wheeling transfers across a constrained
interface. This means that NU's native
load customers pay for the new facilities
they create the need for and wheeling
customers pay for the facilities they
create the need for.

53 F.E.R.C. at 65,223. The ALJ also noted that the financial

exposure of transmission customers was limited by the cost

caps to which NU was committed.16 Id. at 65,224. The

Commission agreed that cost questions should be litigated in

the context of a specific proposal, and accepted the concept

of the "but for" test as a framework for ascertaining cost

responsibility and the use of the proposed cost caps as a

reasonable means of limiting the transmission customers'

responsibility for future upgrades. 56 F.E.R.C. at 62,028-

030. The Commission reaffirmed that decision on rehearing.

58 F.E.R.C. 61,204-207.

Petitioners contend that the Commission failed to

adequately explain the pricing policy it will employ in

pricing transmission upgrades. Basically, petitioners claim

the ruling is too ambiguous to determine whether, or how, the

16 NU committed to cap cost responsibility to "(1) those
specific facilities identified by NU at the time of the
wheeling request as needing to be built or upgraded either at
the time of the request or in the future; and (2) the maximum
dollar amount contained in NU's initial estimate of a
wheeling customer's pro rata share of the costs of future
upgrades needed to accommodate a request for wheeling
service."
56 F.E.R.C. at 62,031-32.

-45-

Commission changed its policy from the traditional "rolled-

in" approach used in pricing transmission service. We hold

that the Commission provided a clear and reasoned

justification for the principles that will guide its future

determinations of transmission upgrade pricing. We affirm

the Commission's decision not to modify the basic principles

adopted in its order.

b. Discussion.

In accepting as reasonable the "but for" test, the

Commission has done no more than approve a framework for

determining cost responsibility which furthers the general

principle that transmission costs should be borne by those

entities responsible for the cost. 58 F.E.R.C. 61,205.

Under this test, incremental cost pricing could be found

appropriate when firm wheeling across a particular interface

would degrade reliability absent upgrades. The Commission

specifically declined, however, to answer the requests of the

intervenors to decide the "rolled-in versus incremental"

rate17 issue in the abstract and chose instead to evaluate

it only within the context of a particular rate proposal or

upgrade. Id. The Commission articulated how it envisioned

17 Under "rolled in" pricing principles, the upgrade costs
would be rolled in with other company costs and charged to
all ratepayers as part of NU's general rate structure; while
administratively simple, it ignores any concept of
responsibility. Thus, incremental pricing principles look to
hold parties responsible for their share of upgrade costs.

-46-

pricing transmission upgrades and adopted a condition

limiting the amount NU may propose to collect from a

transmission customer to the greater of

(1) the incremental cost of new network
facilities required at the time the
customer's new transmission load is added
or (2) the rolled-in cost of all network
facilities required to serve the combined
transmission loads of [NU], including any
required transmission additions.

Id. at 61,206. Thus, a wheeling customer may be charged the

greater of rolled-in cost rates or incremental cost rates.

The Commission acknowledged that the introduction

of incremental cost pricing principles is a departure from

its traditional pricing policies18 and justified this new

policy on NU's unprecedented obligation to provide third

party transmission service. Id. The Commission noted that

incremental cost pricing may be appropriate in certain

circumstances, but decided to leave the details of cost

responsibility questions to a future specific section 205

rate case. When such a case arises, NU will bear the burden

of justifying "any direct assignments of costs and

support[ing] any arguments that reliability is degraded by a

particular firm transmission service. No presumption is

18 The Commission generally has adhered to rolled in
pricing, but has never precluded particularized cost
allocations to specific customers where appropriate. See

Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,291 n.163

(1988); Public Service Co. of Indiana, 51 F.E.R.C. 61,367,

at 62,203 (1990).

-47-

created by NU's `but for' criterion that firm wheeling

customers always cause the need for upgrades." Id. at 61,207

(quoting 56 F.E.R.C. at 62031). The Commission also allowed

that any reliance by NU upon the "but for" test may be

challenged in future actions. The Commission sufficiently

explained and justified the principles that will guide its

transmission upgrade pricing.

E. Opportunity Cost Pricing.

As has already been discussed, the Commission found

it necessary to impose a number of conditions on the proposed

NU-PSNH merger to mitigate the merged company's market power

in the markets for transmission and short-term bulk power.

58 F.E.R.C. at 61,195. Specifically, the Commission held

that NU must provide firm transmission service out of

existing capacity for any utility, subject only to a

reservation of sufficient capacity to maintain reliable

service to its native load customers and to honor existing

contractual obligations. NU was prohibited, however, from

denying a request for firm transmission service by reserving

capacity for non-firm transactions that would enable it to

provide more economical service to its native load customers.

56 F.E.R.C. at 62,014-21; 58 F.E.R.C. at 61,196-200. FERC

also held that NU must build additional transmission

facilities as needed to provide transmission where

insufficient capacity exists. 56 F.E.R.C. at 62,021-24; 58

-48-

F.E.R.C. at 61,204-10. The Commission found that these and

other conditions would "adequately mitigate" the merger's

anticompetitive effects. 58 F.E.R.C. at 61,213.

On rehearing, NU and the States of Connecticut and

New Hampshire argued that the Commission should address the

issue of firm transmission pricing because, in Opinion No.

364, FERC had established principles governing the related

issue of firm transmission priority which made NU's ability

to purchase inexpensive power (which would lower its cost of

serving its native load customers) subordinate to its

obligation to provide firm transmission for third parties.

58 F.E.R.C. at 61,201-02. The Commission agreed, but

declined to approve "opportunity cost pricing"19 outside

the context of a specific tariff proposal. Instead, the

Commission announced three "basic goals" to guide its future

decisions on the pricing of firm transmission service on the

merged company's existing capacity, and left the door open to

NU to propose a tariff based on opportunity costs or any

19 As the Commission explained, opportunity costs
are the revenues lost or costs incurred
by a utility in providing third-party
transmission service when transmission
capacity is insufficient to satisfy both
a third-party wheeling request and the
utility's own use. For example,
opportunity costs might include the
revenues lost or costs incurred because a
utility must reduce its own off-system
purchases or sales in order to overcome a
constraint on the [transmission] grid.
58 F.E.R.C. at 61,200-201.

-49-

other methodology that would meet the three goals. The

Commission explained its decision as follows:

We are now confronted with the need to
provide NU with enough specificity
regarding what it will be allowed to
propose for the pricing of future third-
party wheeling service, so that the
company can decide whether to proceed
with the merger. We also cannot ignore
the need to act as expeditiously as
possible given the commercial realities
and time pressures presented in corporate
matters subject to our jurisdiction, and
in particular the need to resolve a
bankruptcy situation. At the same time
we are confronted with the need to ensure
an adequate record on pricing issues and
to afford all parties an adequate
opportunity to voice their objections.
Balancing these respective needs, we
conclude that the best course is to
provide guidance on pricing issues, but
to defer specific pricing issues to the
compliance phase of this proceeding, or
to subsequent cases where the Commission
may consider specific proposals from NU
in a concrete, factual setting and with a
more developed record.
. . . .
First, the native load customers of the

utility providing transmission service

should be held harmless. Second,

transmission customers should be charged

the lowest reasonable cost-based rate for

third-party transmission service. Third,

the pricing should prevent the collection

of monopoly rents by the transmission

owner and promote efficient transmission

decisions. In ruling on specific

proposed rates, we will balance these
three goals in light of the facts and
circumstances presented at that time.

58 F.E.R.C. at 61,203 (emphasis added) (footnotes omitted).

FERC was careful to point out that it endorsed

opportunity cost pricing only insofar as NU could show that

-50-

it could "propose rates which include legitimate, verifiable

opportunity costs." Id. The Commission warned NU that any

such proposal would be carefully scrutinized and would be

subject to challenge. Id. at 61,203-04. Specifically, FERC

stated that NU would have to address the following issues

should it seek recovery of opportunity costs:

(1) whether opportunity costs should be
capped by incremental expansion costs or
any other cap; (2) whether current
wheeling and wholesale requirements
customers should be treated differently
from future wheeling and wholesale
requirements customers, e.g., by

receiving "grandfather" rights to
embedded cost rates for the amount of
transmission capacity they already use;
(3) how NU will identify those customers
responsible for growth on its system and
what particular new facilities are
necessary to accommodate that growth; (4)
whether and how third parties should be
protected from uncertainty regarding
fluctuations in opportunity costs; (5)
how the proposed rates will prevent the
collection of monopoly rents; and (6) how
the proposed opportunity costs will be
verified.

Id. The Commission expressly postponed consideration of

whether opportunity cost pricing would be inconsistent with

nondiscriminatory pricing and nondiscriminatory terms and

conditions of service until those issues were raised in a

concrete factual context. Id. at 61,204, n.118.

Petitioners claim that FERC's decision amounted to

an arbitrary endorsement of opportunity cost pricing that was

not supported by evidence in the record, was inherently

-51-

discriminatory, and contrary to FERC's regulation of natural

gas pipelines. Petitioners' underlying concern seems to be

that when the issue arises next in the context of the

Commission's review of NU's compliance tariff, FERC will

simply approve the tariff and dismiss petitioners' objections

on the ground that opportunity cost pricing principles had

already been endorsed by the Commission. Although we

understand petitioners' concerns, we believe that they are

misplaced and that FERC did not go as far as petitioners fear

in endorsing opportunity cost pricing.

Petitioners will have an opportunity to contest any

compliance tariff proposed by NU. The Commission itself laid

out a number of issues which NU would have to address were it

to propose a tariff based on opportunity costs. 58 F.E.R.C.

at 61,203. Only after carefully considering the competing

interests of providing guidance to NU as to what kinds of

tariffs it would consider, and the need to endorse specific

methodologies only on the basis of a fully-developed record,

did the Commission decide to outline broad pricing goals

which would allow for a number of pricing schemes including

opportunity cost pricing. Id. It was squarely within the

Commission's power to defer consideration of petitioners'

assertions until after NU filed its compliance tariff. As

the Supreme Court has held, "[a]n agency enjoys broad

discretion in determining how to handle related yet discrete

-52-

issues in terms of procedures, and priorities." Mobil

Exploration & Producing Southeast, Inc. v. United

Distribution Cos., 111 S. Ct. 615, 627 (1991) (citations

omitted). Petitioners argue that deferral was inappropriate

in this case because their objections went "to the heart of

the public interest determination to be made." Maryland

People's Counsel v. FERC, 761 F.2d 768, 778 (D.C. Cir. 1985).

We disagree.

The Commission announced pricing goals and

conditions that it determined would keep the merger

consistent with the public interest, and would result in

"just and reasonable rates." Until NU proposed a specific

tariff regime, the Commission did not have a developed record

to evaluate on the merits. The Commission remains free to,

and we expect it will, invite objections to NU's compliance

tariff from affected parties, and will reject any proposed

tariff that conflicts with its statutory responsibility to

approve rates that are "just and reasonable," and to approve

mergers that are, as conditioned, "consistent with the public

interest."

F. Environmental Impact Statement.

The City of Holyoke Gas & Electric Department

("HG&E") alleges that FERC's refusal to examine the potential

environmental impacts of its approval of the merger was

arbitrary and capricious. We disagree.

-53-

The National Environmental Policy Act of 1969, 42

U.S.C. 4321 et seq., ("NEPA") requires federal agencies to

consider the potential environmental effects of a proposed

major federal action that may significantly affect the

quality of the human environment. Section 102(2)(C) of NEPA

states:

The Congress authorizes and directs that,
to the fullest extent possible: . . .
(2) all agencies of the Federal
Government shall
. . . .
(C) include in every recommendation or
report on proposals for legislation and
other major Federal actions significantly
affecting the quality of the human
environment, a detailed statement by the
responsible official on
(i) the environmental impact of the
proposed action,
(ii) any adverse environmental effects
which cannot be avoided should the
proposal be implemented,
(iii) alternatives to the proposed
action,
(iv) the relationship between local
short-term uses of man's environment and
the maintenance and enhancement of long-
term productivity, and
(v) any irreversible and irretrievable
commitments of resources which would be
involved in the proposed action should it
be implemented.

42 U.S.C. 4332(2)(C). Agencies were authorized, under

guidelines promulgated by the Council on Environmental

Quality ("CEQ"), to create categorical exclusions for actions

which do not individually or cumulatively have a significant

effect on the human environment. 40 C.F.R. 1507.3,

1508.4. FERC adopted such a category of exclusions,

-54-

including one for merger approvals such as the one at issue

in this case. That regulation states in pertinent part:

(a) General rule. Except as stated in
paragraph (b) of this section, neither an
environmental assessment nor an
environmental impact statement will be
prepared for the following projects or
actions:
. . . .
(16) Approval of actions under sections
4(b), 203, 204, 301, 304, and 305 of the
Federal Power Act relating to issuance
and purchase of securities, acquisition
or disposition of property, merger,
interlocking directorates, jurisdictional
determinations and accounting orders.

18 C.F.R. 380.4(a)(16). An agency need not issue a

"finding of no significant impact" in cases concerning

matters that fall into a categorical exclusion. 40 C.F.R.

1501.3, 1501.4, 1508.13.

CEQ guidelines also required agencies adopting

categorical exclusions to "provide for extraordinary

circumstances in which a normally excluded action may have a

significant environmental effect." 40 C.F.R. 1508.4. FERC

made such provision in its regulations:

(b) Exceptions to categorical
exclusions. (1) In accordance with 40 CFR
1508.4, the Commission and its staff will
independently evaluate environmental
information supplied in an application
and in comments by the public. Where
circumstances indicate that an action may
be a major Federal action significantly
affecting the quality of the human
environment, the Commission:
(i) May require an environmental report
or other additional environmental
information, and

-55-

(ii) Will prepare an environmental
assessment or an environmental impact
statement.
(2) Such circumstances may exist when
the action may have an effect on one of
the following:
(i) Indian lands;
(ii) Wilderness areas;
(iii) Wild and scenic rivers;
(iv) Wetlands;
(v) Units of the National Park System,
National Refuges, or National Fish
Hatcheries;
(vi) Anadromous fish or endangered
species; or
(vii) Where the environmental effects
are uncertain.
However, the existence of one or more of
the above will not automatically require
the submission of an environmental report
or the preparation of an environmental
assessment or an environmental impact
statement.

18 C.F.R. 380.4(b).20 HG&E argues that the NU-PSNH

merger might "alter mixes of generation in New England by

constraining the locations for new plants." HG&E points to

the language of 18 C.F.R. 380.4(b)(1)(ii) in support of its

position that FERC was compelled, at the least, to explain

why it was not obliged to perform the analysis of

environmental effects required by NEPA. HG&E also cites

FERC's decision in Southern California Edison Co., 49

F.E.R.C. 61,091 (1989) (holding that 380.4(b) was

triggered when approved merger would result in the dumping of

20 HG&E does not challenge the validity of any of the
applicable regulations cited above.

-56-

hundreds of tons of additional air contaminants into the most

polluted air in the United States).

There was no evidence in the record of identifiable

environmental harms that would likely result from the NU-PSNH

merger. The fact that new generating facilities might wind

up in different locations than would have been the case in

the absence of the merger does not approach in significance,

because its significance is not quantifiable, the known

effects of the merger between Southern California Edison

Company and San Diego Gas & Electric Company. Thus, the

factual situation presented in Southern California Edison is

completely distinguishable from that of this case.

The character and location of the future

environmental effects of the NU-PSNH merger are so uncertain

that no meaningful environmental review would have been

possible, even had FERC made the effort. Here, FERC was not

approving a regional development plan. It was merely

approving a merger between utility companies, albeit a merger

involving two of the largest utilities in New England.

Energy demand may increase in New England over the following

decades, and the fact of the merger may influence how those

needs are met. Nevertheless, any attempt by FERC to prepare

an EIS would have involved little more than spinning out

multiple hypothetical development forecasts, with multiple

options for the type, amount and location of future

-57-

generating facilities. See Kleppe v. Sierra Club, 427 U.S.

390, 401-2 (1976). Once concrete plans have been established

for the construction of transmission or generating

facilities, those proposals will be reviewed under NEPA or

the applicable state environmental review procedures.

FERC was justified in deciding that neither an

environmental assessment nor an environmental impact

statement was required prior to approving the NU-PSNH merger.

G. HG&E's "Unique" Harm.

HG&E also contends that because it relied on PSNH

New Hampshire Corridor facilities for over one-third of its

electricity supply, it would be "uniquely threatened" by NU

in head-to-head competition for large, industrial loads. To

protect itself, HG&E requested that FERC either:

(1) disapprove the merger; (2) require the divestiture or

restructuring of NU's retail business in Holyoke (HWP); or

(3) grant HG&E grandfather rights to PSNH New Hampshire

Corridor transmission. The ALJ rejected the "drastic remedy"

of divestiture of HWP, stating that it was "wholly uncalled-

for by anything in this record," and holding that HG&E would

be adequately protected by the conditions to the merger

designed to address the anticompetitive effects on

transmission dependent utilities ("TDUs"). 53 F.E.R.C. at

65,232.

As the ALJ described,

-58-

[t]he Transmission Dependent Utilities
(TDUs) are "entirely dependent on NU or
PSNH for their bulk power transmission
needs." These companies (most of which
involve municipal ownership) are not big
enough to own or construct sufficient
generation to meet their loads. As their
brief states, they "are physically unable
to engage in any bulk power transaction

without using the NU or PSNH transmission
systems. Absent economic access to NU's
or PSNH's transmission facilities, the
TDU cannot survive as an independent
entity." The TDUs compete with NU and
PSNH in the wholesale bulk power market;
each TDU, like NU/PSNH, seeks out
attractive sources of supply. TDUs thus
"are in the uneasy position of having
their only source of essential
transmission service in the hands of
their principal competitor." These small
companies, uniquely vulnerable to
possible anticompetitive conduct, are
entitled to some measure of protective
assurance regarding NU/PSNH's post merger
conduct.

53 F.E.R.C. at 65,232-33. The ALJ held that "[a]ll rates,

terms and conditions of NU/PSNH transmission service to the

TDUs in effect on this date shall . . . be maintained after

the merger, unless and until changes are either agreed upon

by the merged company and the TDUs, or authorized by the

Commission." 53 F.E.R.C. at 65,233. In short, while finding

that TDUs were "uniquely vulnerable" to anticompetitive

conduct by NU-PSNH, the ALJ found that HG&E had not shown

that it was entitled to protections beyond those given to

TDUs generally. The Commission agreed, 56 F.E.R.C. at

62,049, but bolstered the protection for TDUs ordered by the

-59-

ALJ by imposing the additional condition that NU establish a

special tariff for TDUs. Id. at 62,050.

HG&E points to no evidence in the record to

indicate that it faced anticompetitive consequences of the

merger sufficiently different in character or magnitude to

warrant greater protections than those given to other TDUs.

We therefore affirm the Commission's actions to protect TDUs,

which were adequately explained and supported in the record.

H. Modifications to the Filed Rate Schedules.

The Commission analyzed the Seabrook Power Contract

and Capacity Interchange Agreements filed by NUSCO under the

"just and reasonable" standard of 206 of the FPA,21 and

ordered the following modifications to the rate schedules:

(1) deletion of the automatically adjusting rate of return on

equity provision in the Seabrook Power Contract; (2)

reduction of the rate of return on equity in the Seabrook

Power Contract from 13.75 percent to 12.53 percent;22 (3)

21 Section 206(a) of the FPA, 16 U.S.C. 824(e)(a)
provides:
Whenever the Commission, after hearing
had upon its own motion or upon
complaint, shall find that any rate . . .
collected by any public utility . . . is
unjust, unreasonable, unduly
discriminatory or preferential, the
Commission shall determine the just and
reasonable rate . . . to be thereafter
observed and in force, and shall fix the
same by order.

22 NUSCO did not appeal this modification.

-60-

North Atlantic's decommissioning expenses under the Seabrook

Power Contract and any subsequent changes thereto were made

subject to review by the Commission; (4) reduction in the

rate of return on equity specified in the two Capacity

Interchange Agreements from 14.50 percent to 13.17 percent

for the period from July 27, 1990 through August 8, 1991, and

thereafter to 12.93 percent; and (5) the Seabrook Power

Contract could be modified by the Commission in the future

under the "just and reasonable" standard of 206 of the FPA,

rather than the "public interest" standard agreed to by the

parties. 56 F.E.R.C. at 61,993; 58 F.E.R.C. at 61,185.

Each of the three parties to the Seabrook Power

Contract ("SPC"), NU, PSNH and the State of New Hampshire,

waived its right to file a complaint under 206 regarding

the rates contained in the agreement. Section 12 of the SPC

also provided that:

[E]ach [party] further agrees that in any
proceeding by the FERC under Section 206
the FERC shall not change the rate
charged under this Agreement unless such
rate is found to be contrary to the
public interest.

NU argues that the Commission violated the "Mobile-Sierra"

doctrine23 when it modified the SPC in disregard of the

intent of the parties.

23 This doctrine is based on the companion cases of United

Gas Pipe Line Co. v. Mobile Gas Service Co., 350 U.S. 332

(1956) and FPC v. Sierra Pacific Power Co., 350 U.S. 348

(1956).

-61-

Under the Mobile-Sierra doctrine, the Commission

must respect certain private contract rights in the exercise

of its regulatory powers. Parties to a contract may: (1)

waive their rights to file a complaint challenging that

contract, and (2) restrict the power of the Commission to

impose rate changes under 206 to cases in which it finds

the rates contrary to the public interest a more difficult

standard for the Commission to meet than the statutory

"unjust and unreasonable" standard of 206. See Papago

Tribal Utility Authority v. FERC, 723 F.2d 950, 953 (D.C.

Cir. 1983), cert. denied, 467 U.S. 1241 (1984). In Papago,

the court held that, regardless of the parties' intent, the

Commission retained, in any event,

the indefeasible right . . . under 206
to replace rates that are contrary to the
public interest, "as where [the existing
rate structure] might impair the
financial ability of the public utility
to continue its service, cast upon other
consumers an excessive burden, or be
unduly discriminatory."

Papago, 723 F.2d at 953, (quoting Sierra, 350 U.S. at 355).

The court went on to note that "unduly discriminatory" in

this context "apparently means unduly discriminatory or

preferential to the detriment of purchasers who are not

parties to the contract." Papago, 723 F.2d at 953 n.4.

In this case, seemingly for the first time, the

Commission held that it also had the

-62-

authority under the public interest
standard to modify a contract where: it

may be unjust, unreasonable, unduly

discriminatory or preferential to the
detriment of purchasers that are not
parties to the contract; it is not the

result of arm's length bargaining; or it

reflects circumstances where the seller

has exercised market power over the

purchaser.

50 F.E.R.C. at 61,839 (emphasis added). The ALJ interpreted

that holding as follows:

The Commission made clear that in the
particular circumstances surrounding the
Seabrook contract, it retains power
through the "public interest" language
to make modifications under the
traditional just and reasonable and
nondiscrimination standards.

53 F.E.R.C. at 65,235. The standard established by the

Commission, and subsequently applied by the ALJ, conflates

the "just and reasonable" and "public interest" standards,

thereby circumventing the Mobile-Sierra doctrine. The

distinction between the "just and reasonable" and "public

interest" standards loses its meaning entirely if the

Commission may modify a contract under the public interest

standard where it finds the contract "may be unjust [or]

unreasonable." The parties' express intent was to avoid

review of rate schedules under the just and reasonable

standard. Mobile-Sierra protects their right to do so,

leaving the Commission with the power to modify rates only

when required by the public interest.

-63-

The Commission found that the SPC might unduly

discriminate against entities not parties to the contract,

and that there was no genuine arm's-length bargaining because

NU and PSNH negotiated the agreement at a time when they knew

they were about to merge and have identical interests. The

Commission held that, in this context, it could "carefully

scrutinize the rates, terms and conditions of the contract"

to determine if they were just. Id.

The Commission's explanation for employing a just

and reasonable standard seems to us inadequate. To the

extent the Commission is relying on NU's prospective

ownership of PSNH, it is unclear why the Commission should be

concerned about protecting PSNH from a perceived

disadvantageous arrangement imposed by its prospective owner

since any disadvantage visited on the prospective subsidiary

will be borne by its owner. If NU chooses to allocate risks

among its operating subsidiaries and one of its subsidiaries

is disfavored in this calculation, there would seem to be

little justification for the Commission stepping in on behalf

of the disfavored subsidiary absent some threat to the public

interest.

As for the seller's market power, reliance on this

factor threatens to erode the Mobile-Sierra doctrine so

substantially that a fuller explanation from the Commission

is required before proceeding down this route. After all,

-64-

some measure of market power could be present in a large

number of contracts. A case-by-case inquiry into the

presence and extent of market power would inject a new and

potentially time-consuming element into the Mobile-Sierra

analysis, and it is not entirely clear in any event why the

Commission should protect a buyer who voluntarily enters into

an agreement with a dominant seller.

The most attractive case for affording additional

protection, despite the presence of a contract, is where the

protection is intended to safeguard the interests of third

parties, notably the buyer's customers. The Mobile-Sierra

doctrine itself allows for intervention by FERC where it is

shown that the interests of third parties are threatened.

Mobile, 350 U.S. at 344-45; Sierra, 350 U.S. at 355.

However, the standard to be applied, as formulated by the

Supreme Court, is the protection of outside parties from

"undu[e] discriminat[ion]" or imposition of an "excessive

burden." Sierra, 350 U.S. at 355. If there is some reason

for departing from this public interest standard as framed by

the Supreme Court, the Commission has not supplied it.

We assume, without deciding, that: (1) FERC is

correct in its assertion that the State of New Hampshire did

not adequately represent the interests of non-parties to the

contract, and that, therefore, the SPC may have unduly

discriminated against those non-parties; and (2) the alleged

-65-

lack of arms'-length bargaining among NU, PSNH and the State

of New Hampshire gave the Commission the right to evaluate

the SPC. We hold, however, that the Commission was bound to

follow the Mobile-Sierra doctrine as explicated by Papago,

and therefore should have evaluated the SPC under the public

interest standard, not the just and reasonable standard.

We therefore remand this issue for reconsideration

by FERC under the public interest standard.24

IV. SUMMARY.

We affirm the Commission's orders in all respects

with the exception of its modifications of the Seabrook Power

Contract filed with the merger proposal which we remand for

consideration under the public interest standard.
UNITED STATES COURT OF APPEALS
consideration under the public interest standard.

FOR THE FIRST CIRCUIT

No. 92-1165

NORTHEAST UTILITIES SERVICE COMPANY,

Petitioner,

24 We have considered, but find unpersuasive, NU's argument
that FERC committed error when it disrupted the bankruptcy
settlement by modifying the Capacity Interchange Agreements.

-66-

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1261

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1262

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY, ET AL.,

-67-

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

-68-

No. 92-1263

TOWNS OF CONCORD, NORWOOD AND WELLESLEY, MASSACHUSETTS, ET

AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1264

CENTRAL MAINE POWER CO., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

-69-

Respondents.

No. 92-1316

CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

-70-

No. 92-1328

CANAL ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

No. 92-1336

THE AMERICAN PAPER INSTITUTE, INC., ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

-71-

Respondents.

No. 92-1340

BOSTON EDISON COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

-72-

No. 92-1510

VERMONT DEPARTMENT OF PUBLIC SERVICE, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.,

Respondents.

PETITIONS FOR REVIEW OF ORDERS OF

THE FEDERAL ENERGY REGULATORY COMMISSION

Before

Torruella, Circuit Judge,

Bownes, Senior Circuit Judge,

and Boudin, Circuit Judge.

-73-

Gerald M. Amero, with whom Catherine R. Connors and

Pierce, Atwood, Scribner, Allen, Smith & Lancaster and Arthur

W. Adelberg, and Anne M. Pare, were on brief, for petitioner

Central Maine Power Company.

Harvey L. Reiter, with whom William I. Harkaway,

Kathleen L. Mazure, and McCarthy, Sweeney & Harkaway, were on

brief, for petitioners Vermont Department of Public Service,

Vermont Public Service Board, Rhode Island Attorney General,

Rhode Island Division of Public Utilities and Carriers, Maine

Public Utilities Commission and Massachusetts Department of

Public Utilities.

George H. Williams, Jr., with whom Morley Caskin, was on

brief, for petitioners Canal Electric Company, Commonwealth

Electric Company and Cambridge Electric Light Company.

J.A. Bouknight, Jr., with whom David B. Raskin, David L.

Schwartz, and Newman & Holtzinger, P.C., and Robert P. Wax,

General Counsel, were on brief, for petitioner Northeast

Utilities Service Company.

Randolph Elliott, with whom William S. Scherman, General

Counsel, Jerome M. Feit, Solicitor, Katherine Waldbauer, and

Eric Christensen, were on brief, for respondent Federal

Energy Regulatory Commission.

-74-

Alan J. Roth, Scott H. Strauss, William S. Huang,

Spiegel & McDiarmid, Nicholas J. Scobbo, Ferriter, Scobbo,

Sikora, Caruso & Rodophele, Wallace L. Duncan and Duncan,

Weinberg, Miller & Pembroke, on brief for petitioner

Massachusetts Municipal Wholesale Electric Company.

Charles F. Wheatley, Jr., Peter A. Goldsmith and

Wheatley & Ranquist, on brief for petitioners Towns of

Concord, Norwood &

David J. Bardin, Noreen M. Lavan, Eugene J. Meitgher,

Steven R. Miles, and Arent, Fox, Kintner, Plotkin & Kahn, on

brief for petitioner City of Holyoke Gas & Electric

Department.

James T. McManus, Michael E. Small, Wright & Talisman,

P.C. and Frederick S. Samp, General Counsel, on brief for

petitioner Bangor Hydro-Electric Co.

Steven Halpern on brief for petitioner Massachusetts

Department of Public Utilities.

Alan H. Richardson on brief for petitioner American

Public Power Association.

Mitchell Tennenbaum, Senior Staff Attorney, on brief for

petitioner Maine Public Utilities Commission.

Edward G. Bohlen, Assistant Attorney General, and Scott

Harshbarger, Attorney General, on brief for petitioner

Massachusetts Attorney General.

-75-

Julio Mazzoli, Special Assistant, and James E. O'Neil,

Attorney General, on brief for petitioner Rhode Island

Division of Public Utilities and Carriers and Rhode Island

Office of Attorney General.

Robert F. Shapiro, Lynn N. Hargis and Chadbourne &

Parke, on brief for petitioner The American Paper Institute,

Inc.

Wayne R. Frigard on brief for petitioner Boston Edison

Company.

George M. Knapp, Roger B. Wagner, David A. Fazzone, John

F. Smitka, and McDermott, Will & Emery, on brief for

petitioner Montaup Electric Company.

Robert S. Golden, Jr., Assistant Attorney General,

Richard Blumenthal, Attorney General, and Howard E. Shapiro,

Special Assistant Attorney General, and Van Ness, Feldman &

Curtis, on brief for intervenor Connecticut Department of

Public Utility Control.

Kenneth M. Simon, Larry F. Eisenstat, and Dickstein,

Shapiro & Morin, on brief for intervenor Masspower.

Harold T. Judd, Senior Assistant Attorney General, John

P. Arnold, Attorney General, Glen L. Ortman, John S. Moot,

and Verner, Liipfert, Bernhard, McPherson and Hand, Chrtd.,

on brief for intervenors The State of New Hampshire and New

Hampshire Public Utilities Commission.

-76-

Kenneth D. Brown on brief for intervenor Public Service

Electric and Gas Company.

Edward Berlin, Kenneth G. Jaffee, Martin W. Gitlin, and

Swidler & Berlin, and Cynthia A. Arcate, on brief for

intervenor New England Power Company.

-77-

BOWNES, Senior Circuit Judge. These petitions for
BOWNES, Senior Circuit Judge.

review challenge the Federal Energy Regulatory Commission's

("FERC" or "the Commission") decision to conditionally

approve the merger of Northeast Utilities ("NU") and the

Public Service Company of New Hampshire ("PSNH"). Certain

joint petitioners and intervenors25 contend that FERC erred

when it: (1) held that the benefits of the merger outweighed

its costs; and (2) failed to condition the merger on NU's

waiver of single participant status ("SPS") in the New

England Power Pool ("NEPOOL"). A group of public and private

electric utilities, state commissions, state agencies,

independent power producers, cogenerators and electric end

users26 claim that FERC erred when it: (1) allowed the

consummation of the merger upon the filing of, rather than

upon approval of, a transmission tariff; (2) adopted

25 Joint petitioners and intervenors include: Central
Maine Power Company; Boston Edison Company; Bangor Hydro-
Electric Company; the Towns of Concord, Norwood and
Wellesley, Massachusetts; Maine Public Utilities Commission;
Massachusetts Department of Public Utilities; Vermont
Department of Public Service; Vermont Public Service Board;
Rhode Island Attorney General; Rhode Island Division of
Public Utilities and Carriers; Massachusetts Municipal
Wholesale Electric Company; and, City of Holyoke Gas &
Electric Department.

26 This group of petitioners and intervenors includes the
joint petitioners and intervenors listed in n.1, supra (with

the exception of Central Maine Power Company), and: The
American Paper Institute, Inc.; American Public Power
Association; Canal Electric Company; Commonwealth Electric
Company; Cambridge Electric Light Company; Massachusetts
Attorney General; and, Montaup Electric Company.

-6-

transmission access conditions that gave "native load"

customers a priority over other customers; and (3) endorsed

"opportunity cost" pricing principles. The Holyoke Gas &

Electric Department ("Holyoke") argues that FERC erred when

it failed to: (1) conduct an appropriate review of the

environmental impact of the proposed merger; and, (2) make

findings regarding allegations of anticompetitive

consequences of the merger that were unique to Holyoke.

Finally, Northeast Utilities Service Company ("NUSCO")

asserts that FERC's orders changing the terms of three rate

schedules filed in conjunction with its merger application

were arbitrary, capricious, and an abuse of discretion.

For the reasons which follow, we reject

petitioners' arguments and affirm the Commission's decisions

with the exception of the Commission's decision to change the

terms of the Seabrook Power Contract which we remand for

consideration under the "public interest" standard.

I. BACKGROUND.

A. Parties to the Approved Merger.

Northeast Utilities ("NU") is a registered holding

company under the Public Utility Holding Company Act of 1935

(PUHCA). 15 U.S.C. 79 et seq. (1988). Northeast Utilities

Service Company ("NUSCO") is a service company subsidiary of

-7-

NU and supplies centralized administrative and support

services to NU's operating companies.27

Prior to the merger, Public Service Company of New

Hampshire ("PSNH") was the largest electric utility in New

Hampshire, supplying electric service to some 375,000 retail

customers, approximately three-quarters of the State's

population, in every county in the State. PSNH also provided

wholesale service to the New Hampshire Electric Cooperative,

three New Hampshire municipalities, and one investor-owned

utility, Vermont Electric Power Company. PSNH had the

largest ownership share, approximately 35.6 percent, of

Seabrook Unit No. 1, a nuclear generating facility declared

to be available for service on June 30, 1990.

B. The Merger Proposal.

On January 28, 1988, PSNH filed a voluntary

petition in the United States Bankruptcy Court for the

District of New Hampshire for reorganization under Chapter 11

of the Bankruptcy Code. 11 U.S.C. 1101 et seq. (1988).

PSNH alleged that it was unable to recover in its rates the

outlays it had made in the construction and operation of the

Seabrook nuclear power plant. On April 20, 1990, after

27 NU's operating companies are Connecticut Light and Power
Company (CL&P), Western Massachusetts Electric Company,
Holyoke Water Power Company (HWP) and HWP's wholly-owned
subsidiary, Holyoke Power and Electric Company (HP&E). These
companies are wholly-owned subsidiaries of NU and are public
utilities supplying retail and wholesale electric service in
Connecticut and Massachusetts.

-8-

sifting through several competing reorganization plans, the

bankruptcy court approved NU's proposal to merge with PSNH

and to acquire and operate all of PSNH's power facilities.

See In re Public Service Co. of New Hampshire, 963 F.2d 469,

470 (1st Cir.), cert. denied, Rochman v. Northeast Utilities

Service Co., 113 S. Ct. 304 (1992).

NU's proposal contained a two-step process: first,

PSNH would emerge from bankruptcy as a stand-alone company

bound to a merger agreement with NU; second, PSNH would be

merged with an NU subsidiary created solely for the

acquisition (NU Acquisition Corporation), with PSNH emerging

as the surviving entity. After the merger, PSNH would be a

wholly-owned subsidiary of NU and would transfer its

ownership interest in Seabrook to a newly formed NU

subsidiary, North Atlantic Energy Corporation ("North

Atlantic"). The second step would occur only after all

necessary approvals were received from the relevant

regulatory agencies.

C. Procedural History.

On January 8, 1990, NUSCO, on behalf of NU and NU's

operating subsidiaries, filed an application with FERC under

section 203 of the Federal Power Act ("FPA"), 16 U.S.C.

824b (1988), seeking authorization for PSNH to dispose of all

of its jurisdictional facilities and concurrently to merge

with, and become a subsidiary of, NU. In connection with

-9-

this application, NUSCO filed four rate schedules with FERC

pursuant to 205 of the FPA: the Seabrook Power

Contract,28 the Sharing Agreement29 and two Capacity

Interchange Agreements.30

The Commission consolidated consideration of the

merger application and rate schedules, accepted the rate

schedules for filing and suspended their effectiveness, and

set for hearings before an administrative law judge ("ALJ")

the questions of whether the Commission should grant the

203 application and approve the rate schedules. See

Northeast Utilities Service Co., 50 F.E.R.C. 61,266, reh'g

granted in part and denied in part, 51 F.E.R.C. 61,177

(1990). In its order, the Commission directed the parties to

28 The Seabrook Power Contract is a life-of-the-unit power
sales agreement between PSNH and North Atlantic entered into
concurrently with NU's acquisition of PSNH and the transfer
of PSNH's share of Seabrook to North Atlantic. Under the
contract, PSNH agreed to purchase North Atlantic's entire
share of Seabrook capacity and energy, according to a cost-
of-service formula rate. The contract was intended to ensure
that North Atlantic would recover all of its costs from PSNH
regardless of whether or not Seabrook actually operated.

29 The Sharing Agreement allocates the benefits and obliga-
tions from the integrated operation of PSNH and the current
NU system, as well as the joint planning and operations of
these systems. This agreement established a formula for
sharing the expected post-merger benefits that would accrue
to NU and PSNH operating companies as a result of operating
efficiencies and the ability to take single participant
status under the NEPOOL agreement.

30 The two Capacity Interchange Agreements provide for the
sale and purchase of energy between PSNH and Connecticut
Light & Power Company (CL&P) over a ten-year term.

-10-

address the effect of the proposed merger on NU's market

power and "whether any transmission conditions are necessary

to eliminate any adverse effect of the proposed merger and,

if so, what specific conditions should be imposed." 50

F.E.R.C. at 61,834-35.

On December 20, 1990, the ALJ issued its Initial

Decision approving the 203 application and the rate

schedules with certain modifications and conditions.

Northeast Utilities Service Co., 53 F.E.R.C. 63,020 (1990).

The Commission, in Opinion No. 364, issued on August 9, 1991,

affirmed in part and reversed in part the ALJ's decision,

conditionally approving the 203 application and the rate

schedules. Northeast Utilities Service Co., 56 F.E.R.C.

61,269 (1991). On January 29, 1992, after considering

additional filings by the parties and oral argument on

transmission pricing issues, the Commission issued Opinion

No. 364-A, affirming its conditional approval of the 203

application and rate schedules. Northeast Utilities Service

Co., 58 F.E.R.C. 61,070 (1992).

Petitions for review of Opinions No. 364 and 364-A

were filed in this court and in the District of Columbia

Circuit Court. The Judicial Panel on Multidistrict

Litigation consolidated these petitions for review in this

court, where further petitions for review were filed. 28

U.S.C. 2112(a) (1988). Subsequently, in Opinion No. 364-B,

-11-

the Commission denied a request for rehearing of Opinion No.

364-A. Northeast Utilities Service Co., 59 F.E.R.C. 61,042

(1992). A petition for review of Opinions No. 364-A and 364-

B was filed in this court, where it was consolidated with the

earlier filed petitions. We review the Commission's orders

under the jurisdiction established by 16 U.S.C. 825l.

II. STANDARD OF REVIEW.

On review, we give great deference to the

Commission's decision. U.S. Dep't of Interior v. FERC, 952

F.2d 538, 543 (D.C. Cir. 1992). FERC's findings of fact are

reviewed under the "substantial evidence" standard of review.

16 U.S.C. 825l ("The finding of the Commission as to the

facts, if supported by substantial evidence, shall be

conclusive."). Therefore,

[w]e defer to the agency's expertise,
particularly where the statute prescribes
few specific standards for the agency to
follow, so long as its decision is
supported by "substantial evidence" in
the record and reached by "reasoned
decisionmaking," including an examination
of the relevant data and a reasoned
explanation supported by a stated
connection between the facts found and
the choice made.

Electricity Consumers Resource Council v. FERC, 747 F.2d

1511, 1513 (D.C. Cir. 1984). "Pure" legal errors require no

deference to agency expertise, and are reviewed de novo.

Questions involving an interpretation of the FPA involve a de

novo determination by the court of Congressional intent; if

-12-

that intent is ambiguous, FERC's conclusion will only be

rejected if it is unreasonable. Chevron USA v. Natural

Resources Defense Council, 467 U.S. 837, 842-45 (1984);

Boston Edison Co. v. FERC, 856 F.2d 361, 363 (1st Cir. 1988).

III. DISCUSSION.

A. Conditional Approval of the Merger.

1. Background.

In reaching his decision to approve the NU-PSNH

merger, the ALJ found that the merger would produce

significant benefits. Specifically, he found that: (1) PSNH

would emerge from bankruptcy as a viable utility on a solid

financial footing, 53 F.E.R.C. at 65,211; (2) improved

management techniques and economies of scale would reduce the

operating costs of Seabrook by some $527 million,31 id. at

65,212; (3) application of NU operating procedures to PSNH's

fossil steam plants would save $100 million, id. at 65,213;

(4) reductions in administrative and general expenses would

save $124 million, id.; (5) NU's record of buying lower-

priced coal on the spot market would save $39 million, id.;

and (6) the merger would yield $360 million in savings for NU

because of its ability to elect "single participant status"

31 This, and all other dollar amounts are net present
values unless otherwise noted.

-13-

in the New England Power Pool (NEPOOL), a power pool

comprised of most of the utilities in New England. Id.

The ALJ also found that unless several conditions

were imposed, the merger would have short- and long-term

anticompetitive consequences because of the merged company's

increased market power over key transmission facilities in

both the New England region and the Rhode Island and Eastern

Massachusetts submarket ("Eastern REMVEC"). 53 F.E.R.C. at

65,214-19. Under the authority of 203(b) of the FPA, 16

U.S.C. 824b(b), the ALJ approved the merger subject to

several conditions, including the following: (1) the merged

company must offer firm (non-interruptible) transmission

service for a minimum of 30 days and a maximum of 20 years,

53 F.E.R.C. at 65,220-21; (2) non-firm service must be

offered for a one-day minimum term, id. at 65,220; (3) the

merger would be consummated concurrently with the filing of a

compliance tariff which fully reflects all of the terms and

conditions set out in the ALJ's Initial Decision, id. at

65,221; (4) NU must implement its New Hampshire Corridor

Proposal,32 thereby making available 400 MW of transmission

32 The New Hampshire Corridor Transmission Proposal allows
New England utilities to purchase long-term transmission
rights from NU-PSNH in order to connect with power sources in
northern New England and Canada. See 53 F.E.R.C. at 65,225.

-14-

capacity for wheeling33 by utilities in both northern and

southern New England, id. at 65,225-27; and (5) the merged

company's veto power on NEPOOL's Management Committee would

be restricted for the ninety day period immediately following

consummation of the merger, id. at 65,230-31.

In Opinion No. 364, the Commission affirmed the

ALJ's finding that the merger, with appropriate conditions,

was consistent with the public interest. 56 F.E.R.C. at

62,011. It held, however, that the $364 million cost-shift

between NU-PSNH and other NEPOOL members should not have been

counted as a benefit of the merger because it simply shifted

costs dollar-for-dollar among the membership without any net

savings.34 56 F.E.R.C. at 61,997. The Commission also

held that, in evaluating the costs and benefits of the

merger, the ALJ correctly attributed the benefits resulting

from the merger to the merger even if those benefits could

have been achieved by other means.35 Id. at 61,994-96.

This conclusion was reiterated on rehearing in Opinion No.

364-A. 58 F.E.R.C. at 61,186-87.

33 "Wheeling" is defined as the "transfer by direct trans-
mission or displacement [of] electric power from one utility
to another over the facilities of an intermediate utility."
Otter Tail Power Co. v. U.S., 410 U.S. 366, 368 (1973).

34 This issue is discussed in Part III(B), infra.

35 This issue is discussed in Part III(A)(3), infra.

-15-

Petitioners and intervenors argue that FERC erred,

as a matter of law, in holding that the benefits of the

merger outweighed its costs.

-16-

2. The Statutory Standard.

FERC's authority to consider the merger

applications of utilities is set forth in 203(a) of the

FPA, 16 U.S.C. 824b(a): the Commission "shall approve" a

proposed merger of utility facilities if, "[a]fter notice and

opportunity for hearing, . . . the Commission finds that the

proposed disposition, consolidation, acquisition, or control

will be consistent with the public interest." Id. The

Commission has the additional authority to grant approval for

such transactions "upon such terms and conditions as it finds

necessary or appropriate to secure the maintenance of

adequate service and the coordination in the public interest

of facilities subject to the jurisdiction of the Commission."

16 U.S.C. 824b(b). As the Commission noted when it

reviewed the Initial Decision of the ALJ,

[m]erger applicants need not show that a
positive benefit will result from a
proposed merger. The applicant must
fully disclose all material facts and
show affirmatively that the merger is
consistent with the public interest. It
is sufficient if the "probable merger
benefits . . . add up to substantially
more than the costs of the merger."

56 F.E.R.C. at 61,994 (quoting Utah Power & Light Co., 47

F.E.R.C. at 61,750 (1989) (footnotes omitted); see also

Pacific Power & Light Co. v. Federal Power Commission, 111

F.2d 1014, 1016 (9th Cir. 1940). We review the record,

therefore, to determine whether the Commission's finding that

-17-

the probable benefits of the NU-PSNH merger were

substantially more than its costs was supported by

substantial evidence.

3. Discussion.

Petitioners make two claims with regard to FERC's

evaluation of the costs and benefits of the NU-PSNH merger.

First, they argue that the Commission should not have

included resolution of PSNH's bankruptcy as a benefit of the

merger because: (1) PSNH actually emerged from bankruptcy on

May 16, 1991, the effective date of the Reorganization Plan

("RP"); and (2) prior to gaining the bankruptcy court's

approval of the two-step RP, PSNH had to show that it would

be financially viable as a stand-alone entity because

regulatory approval for the second step of the RP (merger

with and into NU) was not assured. These two facts, however,

do not imply that it was error for FERC to consider the

"resolution of PSNH's bankruptcy" as a benefit, indeed as a

principal benefit, of the merger.

It is true that PSNH, as a technical matter,

"emerged" from bankruptcy prior to FERC's consideration of

the proposed merger. The ALJ and the Commission did not hold

otherwise. The ALJ stated, and the Commission summarily

affirmed the fact that "[t]he merger is part of a plan which

enables a reorganized PSNH to emerge from bankruptcy." 53

F.E.R.C. at 65,211 (emphasis added); see also 56 F.E.R.C. at

-18-

61,993. Like the state regulators who approved the two-step

merger plan, the Commission evaluated the plan as a whole,

anticipating "the merger not `stand alone' PSNH as the

ultimate destiny for the reorganized company." 53 F.E.R.C.

at 65,211. "All parties to the reorganization contemplated

[stand alone] status as an interim step en route to the

merger." Id. It was the entire plan, which admittedly had

two sequential and severable steps, that allowed PSNH to

emerge from bankruptcy. There is no evidence that the state

regulators would have approved a plan to allow PSNH to emerge

from bankruptcy that included only the first "stand alone"

step. Indeed, there is evidence to the contrary.

FERC also found that "resolving" PSNH's bankruptcy

meant more than simply the emergence of PSNH from the

protection of bankruptcy court. FERC held that the final

resolution of PSNH's bankruptcy included the treatment of its

creditors and stockholders who stood to lose approximately

$250 million in the absence of the merger. As the ALJ

observed, the Commission "regard[s] the right of these public

bondholders as of primary importance after the consumers have

been protected." 53 F.E.R.C. at 65,211 (quoting In re Evans,

1 F.P.C. 511, 517 (1937) (approving an acquisition involving

the reorganization of a bankrupt utility)). The Commission

also held that it was in the public interest to approve the

creation of a stronger, more viable merged entity, rather

-19-

than leaving PSNH in a "weakened", "stand alone" state. This

holding was sufficiently supported by evidence in the record.

Petitioners also claim that, given the bankruptcy

court's "feasibility finding" required by 11 U.S.C.

1129(a)(11),36 the Commission was estopped from reaching

the conclusion that a "stand alone" PSNH would be "weak."

We disagree. The bankruptcy court and FERC evaluated the

merger proposal under different standards. The bankruptcy

court was required to determine the likelihood of further

liquidation or reorganization proceedings were the plan to be

approved. FERC was obliged to determine whether the plan was

"consistent with the public interest." It was not

inconsistent for FERC to find that although PSNH was capable

of surviving as a stand alone entity, it would not be

"consistent with the public interest" to prevent a merger

that would result in an even stronger utility. The

principles of estoppel simply do not apply in a case such as

this, where the issues litigated and the standards applied in

the two proceedings are so different.

36 The Bankruptcy Code provides that:
(a) The court shall confirm a plan [of
reorganization] only if all of the following
requirements are met:
(11) confirmation of the plan is not likely to be
followed by the liquidation, or the need for
further financial reorganization, of the debtor or
any successor to the debtor under the plan, unless
such liquidation or reorganization is proposed in
the plan.
11 U.S.C. 1129(a)(11).

-20-

Even were petitioners correct in their asseveration

that FERC improperly counted the resolution of PSNH's

bankruptcy as a benefit of the merger, "the Commission's

error would be immaterial in light of the overwhelming excess

of other benefits ($791 million) over the costs (0) still

attributable . . . to the acquisition." City of Holyoke Gas

& Elec. Dep't v. S.E.C., 972 F.2d 358, 362 (D.C. Cir. 1992).

Second, petitioners argue that FERC erred as a

matter of law in weighing as merger benefits results or

alleged savings that were, or could be, achieved by

"alternate means." Specifically, petitioners contend that

FERC's failure to apply the "alternate means" test

contradicted general agency policy and general antitrust

principles.

It is undisputed that utilities are "not immune"

from antitrust laws. Otter Tail Power Co. v. U.S., 410 U.S.

366, 372-75 (1973); Town of Concord v. Boston Edison, 915

F.2d 17 (1st Cir. 1990), cert. denied, 111 S. Ct. 1337

(1991). At issue in this case is whether FERC is required by

statute, or otherwise, to engage in "standard" antitrust

analysis before passing on 203 merger applications. In

claiming that FERC has such an obligation, petitioners rely

on a statute governing agency approval of bank mergers (the

-21-

"Bank Merger Act") which states that the agency with

jurisdiction over a proposed bank merger,37

shall not approve
(A) any proposed merger transaction
which would result in a monopoly, or
which would be in furtherance of any
combination or conspiracy to monopolize
or to attempt to monopolize the business
of banking in any part of the United
States, or
(B) any other proposed merger
transaction whose effect in any section
of the country may be substantially to
lessen competition, or to tend to create
a monopoly, or which in any other manner
would be in restraint of trade, unless it
finds that the anticompetitive effects of
the proposed transaction are clearly
outweighed in the public interest by the
probable effects of the transaction in
meeting the convenience and needs of the
community to be served. . . .
(6) The responsible agency shall
immediately notify the Attorney General
of any approval by it pursuant to this
subsection of a proposed merger
transaction.

12 U.S.C. 1828(c)(5)-(6). The Supreme Court, interpreting

the Bank Merger Act, has held that before a bank merger which

is injurious to the public interest may be approved, "a

showing [must] be made that the gain expected from the merger

cannot reasonably be expected through other means." U.S. v.

Phillipsburg Nat. Bank & Trust Co., 399 U.S. 350, 372 (1970).

Petitioners claim that the language of the Bank Merger Act is

sufficiently similar to the statute governing FERC's approval

37 Jurisdiction varies depending on whether the resulting
entity is a national bank, a state member bank, a state
nonmember bank, or a savings association.

-22-

of proposed mergers, 16 U.S.C. 824b(a), because both

contain a "public interest" standard, to require FERC to use

the "alternate means" test which bank regulators must use in

evaluating proposed bank mergers. We disagree.

As with any matter of statutory construction, we

first examine the language of the statute. Under 16 U.S.C.

824b(a), the Commission is required, after notice and

opportunity for hearing, to approve a proposed merger of

utility facilities if it finds that the proposal "will be

consistent with the public interest." That is all the

statute says. There is no explicit reference to antitrust

policies or principles. There is no evidence that Congress

sought to have the Commission serve as an enforcer of

antitrust policy in conjunction with the Department of

Justice and the Federal Trade Commission. The Bank Merger

Act reveals a quite different intention. There, Congress

explicitly set out standards for approval of bank mergers

that incorporate principles embodied in the Sherman and

Clayton Acts. 12 U.S.C. 1828(c)(5). By requiring the

reviewing agency to notify the Attorney General of any

decision to approve a proposed bank merger, 12 U.S.C.

1828(c)(6), Congress expressed its desire to have bank

regulators serve as pre-screening bodies of mergers which,

because of their importance or character, in most cases also

deserve the attention of the Department of Justice.

-23-

The Bank Merger Act carries with it the implicit

presumption that mergers are to be disapproved (the agency

"shall not approve" a bank merger "unless it finds that the

anticompetitive effects are clearly outweighed in the public

interest" by the benefits of the merger, 12 U.S.C.

1828(c)(5)). The FPA, on the other hand, requires the

Commission to approve any merger that is "consistent with the

public interest." 16 U.S.C. 824b(a). Antitrust

considerations are, of course, relevant in FERC's

consideration of the "public interest" in merger proposals.

The statute, however, does not require FERC to analyze

proposed mergers under the same standards that the Department

of Justice or bank regulators must apply.

Although the Commission must include antitrust

considerations in its public interest calculus under the FPA,

it is not bound to use antitrust principles when they may be

inconsistent with the Commission's regulatory goals. See

Otter Tail, 410 U.S. at 373 ("[a]lthough antitrust

considerations may be relevant [in determining the public

interest], they are not determinative"). In Town of Concord,

this court observed that indiscriminate incorporation of

antitrust policy into utility regulation "could undercut the

very objectives the antitrust laws are designed to serve."

915 F.2d at 22. Therefore, "antitrust analysis must

sensitively `recognize and reflect the distinctive economic

-24-

and legal setting' of the regulated industry to which it

applies." Id. (quoting Watson & Brunner, Monopolization by

Regulated "Monopolies": The Search for Substantive

Standards, 22 Antitrust Bull. 559, 565 (1977)).

Petitioners may rest assured that were FERC to

approve a merger of utilities which ran afoul of Sherman Act

or other antitrust policies, the utilities would be subject

to either prosecution by government officials responsible for

policing the antitrust laws, or to suit by private citizens

meeting the requirements of standing. See Otter Tail, 410

U.S. at 374-5.

B. FERC's Failure to Condition Merger on NU's Waiver
of Single Participant Status.

Petitioners argue that the Commission erred in

failing to condition the merger on waiver by NU and PSNH of

"single participant status" ("SPS") in the New England Power

Pool ("NEPOOL"), thereby preventing the imposition of a $364

million cost shift from NU and PSNH to the other members of

NEPOOL.

1. Background.

NEPOOL is a power pool comprised of most of the

utilities in New England. The association is governed by the

New England Power Pool Agreement ("the Agreement") which

establishes a "comprehensive interconnection and coordination

arrangement" among its members in order "to achieve greater

-25-

reliability and economies in the production of electricity."

Groton v. FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978).

Section 202(a) of the Federal Power Act encourages such

voluntary interconnection and coordination of electricity

generating facilities in order to achieve economies of scale.

16 U.S.C. 824a; see also 16 U.S.C. 824a-1 (regarding

pooling agreements). The Agreement was approved as a filed

rate schedule by FERC's predecessor, the Federal Power

Commission. 53 F.E.R.C. at 65,213. Under its terms, each

member is required to supply the pool with resources

("Capacity Responsibility") according to a formula based upon

the relationship of the member's peak load to an estimate of

aggregate peak load of all members.

NU experiences its peak load in the summer, and

PSNH experiences its peak load in the winter. By aggregating

these two, complementary, peak loads, NU-PSNH can achieve a

lower Capacity Responsibility than would be the case if the

two utilities remained separate. Because the overall

capacity requirements of NEPOOL will not change as a result

of the merger, the Capacity Responsibilities of other members

must rise to make up for the savings accruing to NU-PSNH.

The ALJ accepted the "undisputed" estimate that "single

participant status" (SPS) will result in a shifting of some

$360 million in costs from NU-PSNH to other members of the

pool. Id.

-26-

-27-

2. Discussion.

Petitioners offer six arguments to support their

claim that FERC erred in failing to condition the merger on

waiver of SPS by NU and PSNH. First, petitioners claim that

the Commission did not properly interpret the provision of

the NEPOOL Agreement which governs the election of SPS. We

agree with the Commission's finding that the Agreement both

specifically allows for the election by NU-PSNH of SPS, and

encourages such elections. Section 3.1 of the Agreement

provides in relevant part that:

All Entities which are controlled by a
single person (such as a corporation or a
common law business trust) which owns at
least seventy-five percent of the voting
shares of each of them shall be

collectively treated as a single
Participant for purposes of this
Agreement, if they elect such treatment.
They are encouraged to do so. Such an

election shall be made by signing the
appropriate form at the end of a
counterpart of this Agreement.

(Emphasis supplied.) Both the ALJ and the Commission

interpreted section 3.1 to be an explicit endorsement of the

election of SPS by NU-PSNH. The ALJ stated that "[i]t is

undisputed that NU and PSNH qualify for such [single

participant] status under the Agreement." 53 F.E.R.C. at

65,213. The Commission gave great weight to the unrebutted

testimony of witness Bigelow, who participated in the

negotiation of the NEPOOL Agreement regarding the intent of

the original signatories to the Agreement and their

-28-

recognition of such potentially large cost-shifts among

NEPOOL members. Bigelow stated:

[W]hen we put NEPOOL together 20 years
ago, we recognized that these things
might happen. This is not something that
snuck up on people. . . . And we did
discuss at length what would happen
because . . . we were then coming up to a
potential merger of Boston Edison,
Eastern Utilities, New England Power. It
was recognized that these kinds of things
could happen in the future and we spelled
out the ground rules and recognized that
that would happen when it happened. And
the people who didn't like it got
something else for it.

53 F.E.R.C. at 65,214. Both the ALJ and the Commission

rejected petitioners' claim on the basis of both the language

of the Agreement, and Bigelow's unrebutted testimony that not

only had the signatories been aware of such a potentially

large savings shift, but that those utilities that were

dissatisfied with this risk received additional concessions

as compensation. We will not disturb the Commission's

findings.

Second, petitioners claim that the Agreement, as

interpreted in NEPOOL Power Pool Agreement, 56 F.P.C. 1562,

1580 (1976), aff'd sub nom. Municipalities of Groton v. FERC,

587 F.2d 1296 (D.C. Cir. 1978), prohibits utilities with peak

loads in different seasons from electing SPS. As the

Commission explained, this argument mischaracterizes the

Agreement and the decision of the Federal Power Commission

("FPC") in NEPOOL.

-29-

The NEPOOL Agreement, as initially filed
and as approved, allowed single
participant status for utilities
controlled by a single "person" owning at
least 75 percent of the voting shares of
each utility. An exception was expressly
allowed in the filed agreement for any
Vermont utility which elected to be
grouped with Vermont Electric Power
Company. This exception was approved for
essentially two reasons: (1) the Vermont
utilities had long acted as a single
contiguous integrated electric entity;
and (2) since they all experienced their
peak loads in winter, single participant
status would not give them a lower NEPOOL
Capability Responsibility (and consequent
savings). A broader exception was
denied, however, for a group of municipal
utilities (represented by MMWEC) that was
not entitled to single participant status
and that lacked the two cited attributes
of the Vermont utilities. The basis for
the denial was that allowing such status
for "any group of systems, such as MMWEC,
could well be detrimental to the
functioning of NEPOOL."
The NEPOOL decision, thus, does not
stand for the proposition that single
participant status is available only to
utilities having their peak loads in the
same season. Instead, another way,
indeed the primary way, in which
utilities may qualify is if they are
controlled by a single person with a
least 75-percent common ownership. That
is the basis upon which NU and PSNH will
presumably seek to qualify if the merger
is approved. Such status is expressly
allowed under the NEPOOL Agreement
regardless of when NU and PSNH experience
their peak loads.

56 F.E.R.C. at 61,996-97. The reasons offered by the FPC in

its decision to grant a special exception for Vermont

utilities seeking SPS were not intended to be, and are not,

conditions, in addition to those set out in the Agreement,

-30-

which must be satisfied to elect SPS. The FPC did not narrow

the scope of Section 3.1 to apply only to utilities sharing

the same peak load season; rather, it created a special

exception to the 75 percent rule to accommodate the unique

situation faced by Vermont utilities.

Third, petitioners claim that FERC failed to give

proper consideration to Section 4.2 of the Agreement, "the

interests of other pool members, and the purpose of the

Agreement as a whole." Essentially, petitioners argue that

allowing NU-PSNH to elect SPS would violate a general

provision of the Agreement, which states that participants

"shall not . . . take advantage of the provisions of this

Agreement so as to harm another Participant or to prejudice

the position of any Participant in the electric utility

business." We reject this argument for the same reasons

expressed by the Commission in its decision denying

petitioners' request for a rehearing:

[W]e find more relevance in the NEPOOL
Agreement's explicit endorsement of
single participant status than in the
agreement's general goal of "equitable
sharing" and prohibition on members
"taking advantage" of the agreement to
harm or prejudice other members. The
NEPOOL Agreement specifically encourages
eligible parties to seek single
participant status; the provisions cited
by the intervenors are general, not
specific. Construing the general
consistent with the specific, we find
single participant status for the merged
company consistent with an equitable
sharing, as envisioned by the NEPOOL

-31-

Agreement, and not violative of the ban
on taking advantage of the agreement's
provisions to harm or prejudice other
members.

58 F.E.R.C. at 61,189. We agree with FERC's interpretation

of the Agreement. The NEPOOL signatories explicitly

encouraged qualified members to seek SPS, indeed they

contemplated that members that merged might choose to do just

that. We agree with the Commission's construction of the

Agreement which avoids a direct conflict between Sections 3.1

and 4.2, and instead gives both provisions reasonable effect.

Fourth, petitioners argue that failure to condition

the merger on waiver of SPS would create "serious

disincentives" for current members to continue their

membership in NEPOOL, and that the breakup of NEPOOL is

contrary to the public interest. Petitioners imply that FERC

did not take seriously their complaints about SPS, but rather

rested its decision not to require a waiver solely on the

fact that the Agreement allowed the election of SPS. This is

simply not so.

The Commission reversed the ALJ on the issue of

whether SPS savings should be counted as a benefit of the

merger. The Commission found that because the cost shift

amounted to a zero-sum transaction, with NU and PSNH

benefitting and the other members burdened dollar-for-dollar,

the shift could not be counted as a benefit of the merger.

-32-

56 F.E.R.C. at 61,997. Thus, the Commission did not dismiss

petitioners' claims regarding SPS without thought.

Also, the ALJ found, and the Commission agreed,

that SPS was essential to the merger, and that the merger, as

conditioned, was in the public interest. FERC must approve a

proposed merger if it is consistent with the public interest.

16 U.S.C. 824b(a). FERC has the discretion to add

conditions to a proposed merger to ensure that the merger

will, taken as a whole, be in the public interest. 16 U.S.C.

824b(b). FERC need not, however, explain why every

condition, or failure to establish a condition is consistent

with the public interest when considered separately and apart

from the entire transaction. Petitioners seem to argue that

FERC was required by law to state why it was consistent with

the public interest to follow the explicit terms of the

approved fifteen year-old NEPOOL Agreement rather than to

condition the merger on waiver of a membership right

established by the Agreement. FERC had no such obligation.

It need not have explained why it failed to add a particular

condition prior to approving a merger. The statute simply

provides that "[t]he Commission may grant any application for

an order under this section in whole or in part and upon such

terms and conditions as it finds necessary or appropriate to

secure the maintenance of adequate service and coordination

in the public interest of facilities subject to the

-33-

jurisdiction of the Commission." 16 U.S.C. 824b(b). In

this case, the Commission set forth a reasonable basis for

approving the merger as consistent with the public interest

in light of the supplementary conditions the Commission found

necessary. FERC need not have gone further than this to

explain why it failed to place further conditions on the

merger.

Fifth, petitioners allege that FERC acted

inconsistently in its treatment of the NEPOOL Agreement's

provisions regarding voting rights and SPS. The Commission

adopted a condition limiting the merged company's NEPOOL

voting rights to prevent PSNH and NU from gaining a veto

power in NEPOOL. 56 F.E.R.C. at 62,043-45. FERC reasoned

that, while there was evidence that the signatories

anticipated that large cost-shifts would accompany the

election of SPS in merger situations, there was no evidence

that they anticipated the voting rights implications of such

mergers. 58 F.E.R.C. at 61,189. It was not, contrary to

petitioners' argument, inconsistent as a matter of logic to

condition voting rights where the Agreement was silent on the

need or lack of need to do so, while failing to condition SPS

where the Agreement explicitly favored the election of SPS.

Furthermore, it was not an error of law to condition voting

rights while leaving SPS rights untouched. Petitioners do

not contest the Commission's decision to condition NU-PSNH's

-34-

voting rights. We will uphold whatever conditions the

Commission imposes on a proposed merger so long as their

necessity is supported in the record by substantial evidence.

Finally, petitioners contend that the Commission

"failed to explain why burdening other NEPOOL members with

$364 million in additional costs with no offsetting benefits

to them is consistent with the public interest." In making

this argument, petitioners imply that each and every piece of

a complex package of merger agreements and conditions must be

able to withstand "public interest" analysis without regard

to other pieces of the package or to other conditions imposed

by the Commission. Petitioners also imply that if any

individual or group is harmed by a piece of the package, that

provision is not in the public interest and must therefore be

stricken or modified. Both implicit arguments are deeply

flawed.

In evaluating a transaction such as the one at

issue here, the Commission is required to find that the

entire transaction, taken as a whole, is consistent with the

public interest. 16 U.S.C. 824b(a). Each element of the

transaction need not benefit every utility or individual

which might be affected; rather, the whole transaction must

be consistent with the interest of "the public." There is no

reason to think that the interest of individual NEPOOL

members is synonymous with the "public" interest. As has

-35-

already been noted, FERC may add conditions to a proposed

merger before granting approval. 16 U.S.C. 824b(b). The

statute does not require, however, that FERC establish

conditions so that every effect of an approved merger could

withstand the "public interest" test.

At a less theoretical level, the ALJ determined

that the NEPOOL savings "were a vital part of the long and

strenuous negotiations which culminated in the resulting PSNH

reorganization plan," and the particular savings of $146

million for New Hampshire consumers were relied on

specifically by the State of New Hampshire in approving the

merged company's rate package. 53 F.E.R.C. at 65,213. The

Commission accepted this finding of the ALJ, while, at the

same time, it reversed the ALJ's decision to count the $360

million as a benefit of the merger. 58 F.E.R.C. at 61,997.

The fact that the cost-shift was not a benefit to be counted

in weighing the benefits and costs of the merger does not

mean that the election of SPS and the concomitant cost-shift

is not in the public interest. Election of SPS is in the

public interest because it is a central element of the merger

plan which, viewed as a whole, was found by FERC to be

consistent with the public interest based on substantial

evidence in the record. We approve the Commission's decision

not to condition the merger on waiver by NU of SPS.

C. Timing of Merger's Consummation.

-36-

In the proceedings before the ALJ, NU proposed

filing a transmission tariff within 60 days following the

merger. Intervenors and Commission staff proposed the filing

and approval of an interim transmission rate. The ALJ

rejected both proposals and instead held that the merger

would be consummated upon the filing of NU's compliance

tariff. He reasoned as follows:

I see no need for requiring one tariff
(with potential for controversy, charges,
collections and refunds) to be followed
by yet another tariff, with its own
potential for still other disputes.
Avoiding a transitional period will
make it unnecessary to require a
transitional tariff. To achieve this
result, consummation of the merger must
be conditioned on the concurrent filing
of a compliance tariff which fully
reflects all of the terms and conditions
set out in this Initial Decision. Such a
condition should encourage a prompt and
fair compliance filing because NU could
not begin to reap the merger benefits
without it.

53 F.E.R.C. at 65,221. The Commission concurred:

We believe the GTC [General
Transmission Conditions] and the NH
Corridor Proposal, as modified herein,
adequately mitigate the merger's
anticompetitive effects without requiring
the adoption of the Merger Tariff. Trial
Staff stated that the Merger Tariff would
make service available immediately upon
approval of the merger. We believe that
the presiding judge accomplished the same
result by allowing consummation of the
merger when NU submits its compliance
filing.
We further believe that delaying the
merger's consummation until the
Commission accepts NU's compliance

-37-

submittal for filing would be
inappropriate given the uncertainty
surrounding issues which may be
challenged and subject to further
litigation in the compliance proceeding
and given our commitment to act before
the Merger Agreement's December 31, 1991
termination date. We believe that NU and
PSNH are entitled to a prompt and fair
resolution of this proceeding. At the
same time the intervenors are entitled to
have service begin as soon as practical,
together with a fair resolution of any
disputes raised regarding NU's compliance
filing. Accordingly, we believe that it
is in the best interests of all parties
to allow NU to consummate the merger when
it submits its compliance filing. We
shall also require NU to begin honoring
such requests for transmission service
under the GTC, as modified herein, at
that time. Such transmission service
will be provided at either the firm or
non-firm transmission rates proposed in
NU's compliance filing, subject to
refund, and without a refund floor. In
reviewing NU's filing to ensure
compliance with this Opinion, we will
hold NU to a very high standard. As NU
itself states, "[i]f NU fails to comply
with the letter or spirit of such
[Commission] requirement, NU would be
subject to summary judgment with respect
to any aspect of its compliance filing."

56 F.E.R.C. at 62,025.

Petitioners' stated concern is that, by allowing

the merger to be consummated prior to FERC's approval of the

compliance tariff, FERC did not provide a sufficient guaranty

that NU would provide transmission access that would mitigate

-38-

the merger's anticompetitive effects.38 Petitioners do

not, however, seek to unravel the merger. Rather, they

propose that any cost shift under the NEPOOL Agreement, see

discussion in Part III(B), supra, be postponed until after

the compliance tariff is approved. Petitioners complain that

the course chosen by FERC creates an incentive on the part of

NU to delay proceedings on the compliance tariff, thereby

maximizing competitive advantage. Petitioners do not, of

course, point out that their proposal would create an

incentive on their part to delay final approval of the

compliance tariff, thereby postponing the day when the NEPOOL

cost shift will take effect.

The ALJ and the Commission carefully considered the

alternatives before reaching their decisions. The Commission

held that the anticompetitive effects of the merger would be

adequately mitigated by the dual requirements that NU

immediately provide transmission access upon the filing of

its compliance tariff, and that any fees collected by NU

would be subject to refund without a refund floor. Because

NU accepted these merger conditions, the Commission can

enforce NU's promise to pay such refunds if the Commission

finds them to be appropriate. See Distrigas of Massachusetts

Corp. v. FERC, 737 F.2d 1208, 1225 (1st Cir. 1984). FERC

38 We note that, at oral argument, petitioners conceded
that no one had as yet sought access to NU's transmission
facilities.

-39-

explicitly warned NU that "[i]n reviewing NU's filing to

ensure compliance with this Opinion, we will hold NU to a

very high standard." 56 F.E.R.C. at 62,025.

The Commission balanced the merging companies' need

for a "prompt and fair resolution" of the merger proceeding

against the intervenors' need "to have [transmission] service

begin as soon as practical, together with a fair resolution

of any disputes raised regarding NU's compliance filing." 56

F.E.R.C. at 62,025. An agency's discretion is at its

"zenith" when it fashions remedies to effectuate the charge

entrusted to it by Congress. Niagra Power Corp. v. FPC, 379

F.2d 153, 159 (D.C. Cir. 1967). See also, Consolo v. FMC,

383 U.S. 607, 620-21 (1966); Environmental Action, Inc. v.

FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991); Boston Edison Co.

v. FERC, 856 F.2d 361, 371 (1st Cir. 1988). We hold that

FERC's exercise of its discretion was not inappropriate in

these circumstances. FERC did not defer, as petitioners

suggest, consideration of the anticompetitive effects of the

merger which FERC itself identified. The Commission

recognized the effects, and dealt with them in a reasoned way

which balanced the competing interests of all parties.

FERC's remedy is not unreasonable, and we therefore affirm

its order.

D. Protection of Native Load Customers.

1. Priority of Services.

-40-

a. Background.

In its merger application, NU made a voluntary

commitment to provide wholesale transmission service,

including third party wheeling service,39 for any utility

over its existing transmission system. At the same time, NU

sought to limit this obligation by reserving an absolute

priority for power purchases on behalf of native load

customers (whose power needs NU is bound by franchise or

contract to meet). The ALJ held that although NU may

reasonably give native load service priority over wheeling

service if NU's transmission system had insufficient capacity

to serve both, 53 F.E.R.C. at 65,221-222, NU could not deny

firm wheeling requests based upon the reservation of

transmission capacity for its own non-firm sales, id. at

65,225.

In Opinion No. 364, the Commission balanced the

interests of native load customers and third party wheeling

customers and affirmed the ALJ's denial of an absolute

priority:

we . . . deny NU's proposal to give
higher priority to its own non-firm use
than to third party requests for firm
wheeling in allocating existing
transmission capacity. In no event,
however, will NU be required to provide
firm third party wheeling service out of
existing transmission facilities if

39 For a definition of "wheeling" see n.9, supra.

-41-

reliability of service to native load
customers would be adversely affected.

56 F.E.R.C. at 62,021 (footnote omitted). The Commission

found it "reasonable to allow NU to reserve firm transmission

capacity to provide reliable service to its native load

customers." Id. (Emphasis in original.)

On rehearing, NU asked the Commission to clarify

the scope of the "reliability" criterion. The Commission

"reiterate[d] that under no circumstances will NU be required

to provide firm wheeling service out of existing transmission

capacity where doing so would impair or degrade reliability

of service to native load customers." 58 F.E.R.C. at 61,199

(emphasis removed). The Commission held the concept of

reliability generally encompasses the: (1) reservation of

transmission capacity to back up large generating units; (2)

provision of generation reserves; and (3) coverage of certain

future needs. As to the coverage of future demand

requirements, the Commission specifically ordered that "any

capacity needed for reliability purposes within a reasonable

planning horizon must be offered for wheeling use until NU

expects to need the capacity for reliability reasons." Id.

at 61,199-200.

Petitioners assert that the decision to accord a

priority to native load over transmission load is arbitrary,

discriminatory, and anticompetitive. They argue that FERC

neither defined nor justified the priority granted by

-42-

allowing reservation of transmission capacity for native load

service and that any such priority creates competitive

advantages for NU. We hold that the Commission adequately

defined and reasonably justified its decision to allow such a

reservation and properly addressed the anticompetitive

concerns raised by the intervenors.

b. Discussion.

Although the Commission reaffirmed the general rule

that firm transmission service should be accorded priority

over non-firm service, even if the latter would benefit

native load, it nonetheless allowed NU to reserve firm

transmission capacity needed to ensure reliability of native

load service and allowed the use of this capacity for non-

firm transactions. 58 F.E.R.C. at 61,196. Thus, native load

service will receive a "priority" over third-party wheeling

service in allocating existing transmission capacity when

reliability of service to native load would be adversely

affected. The Commission specifically qualified this

priority by requiring NU to offer the capacity for wheeling

use until NU needed it to assure reliability to native load

customers.

There is nothing arbitrary or discriminatory about

FERC's decision. It struck a reasonable balance between the

competing interests of native load customers and third-party

wheeling customers. NU-PSNH is obligated to serve its native

-43-

load customers. In return for this obligation to serve, the

native load customers regularly bear the cost of transmission

facilities; native load customers pay for them, use them,

plan on them, and rely on them. As the ALJ noted, "[e]very

New England utility favors its own native load. Nothing in

the NEPOOL agreement requires its members to surrender their

native load preference, and none do." 53 F.E.R.C. at 65,222.

Thus, "NU should be allowed to give priority over safe and

reliable service to its native load customers using existing

transmission capacity built to serve those customers." 58

F.E.R.C. at 61,199. FERC explicitly defined and justified

the challenged native load "priority."

2. Transmission Upgrades Pricing.

a. Background.

NU's commitment to provide third-party transmission

service includes the obligation to build additional

transmission facilities as necessary to relieve transmission

constraints on its system. 58 F.E.R.C. at 61,204-10; 56

F.E.R.C. at 62,021-24. The issue then becomes, how should

the cost of constructing such transmission upgrades be

allocated. The ALJ stated that questions of cost allocation

are best addressed in future proceedings regarding the

particular responsibilities for particular facilities.

Nevertheless, the ALJ adopted the "but for" analysis for

determining responsibility proposed by NU witness Schultheis:

-44-

[W]heeling customers must make a pro rata
contribution whenever the facilities
would not have been needed but for the
wheeling transfers across a constrained
interface. This means that NU's native
load customers pay for the new facilities
they create the need for and wheeling
customers pay for the facilities they
create the need for.

53 F.E.R.C. at 65,223. The ALJ also noted that the financial

exposure of transmission customers was limited by the cost

caps to which NU was committed.40 Id. at 65,224. The

Commission agreed that cost questions should be litigated in

the context of a specific proposal, and accepted the concept

of the "but for" test as a framework for ascertaining cost

responsibility and the use of the proposed cost caps as a

reasonable means of limiting the transmission customers'

responsibility for future upgrades. 56 F.E.R.C. at 62,028-

030. The Commission reaffirmed that decision on rehearing.

58 F.E.R.C. 61,204-207.

Petitioners contend that the Commission failed to

adequately explain the pricing policy it will employ in

pricing transmission upgrades. Basically, petitioners claim

the ruling is too ambiguous to determine whether, or how, the

40 NU committed to cap cost responsibility to "(1) those
specific facilities identified by NU at the time of the
wheeling request as needing to be built or upgraded either at
the time of the request or in the future; and (2) the maximum
dollar amount contained in NU's initial estimate of a
wheeling customer's pro rata share of the costs of future
upgrades needed to accommodate a request for wheeling
service."
56 F.E.R.C. at 62,031-32.

-45-

Commission changed its policy from the traditional "rolled-

in" approach used in pricing transmission service. We hold

that the Commission provided a clear and reasoned

justification for the principles that will guide its future

determinations of transmission upgrade pricing. We affirm

the Commission's decision not to modify the basic principles

adopted in its order.

b. Discussion.

In accepting as reasonable the "but for" test, the

Commission has done no more than approve a framework for

determining cost responsibility which furthers the general

principle that transmission costs should be born by those

entities responsible for the cost. 58 F.E.R.C. 61,205.

Under this test, incremental cost pricing could be found

appropriate when firm wheeling across a particular interface

would degrade reliability absent upgrades. The Commission

specifically declined, however, to answer the requests of the

intervenors to decide the "rolled-in versus incremental"

rate41 issue in the abstract and chose instead to evaluate

it only within the context of a particular rate proposal or

upgrade. Id. The Commission articulated how it envisioned

41 Under "rolled in" pricing principles, the upgrade costs
would be rolled in with other company costs and charged to
all ratepayers as part of NU's general rate structure; while
administratively simple, it ignores any concept of
responsibility. Thus, incremental pricing principles look to
hold parties responsible for their share of upgrade costs.

-46-

pricing transmission upgrades and adopted a condition

limiting the amount NU may propose to collect from a

transmission customer to the greater of

(1) the incremental cost of new network
facilities required at the time the
customer's new transmission load is added
or (2) the rolled-in cost of all network
facilities required to serve the combined
transmission loads of [NU], including any
required transmission additions.

Id. at 61,206. Thus, a wheeling customer may be charged the

greater of rolled-in cost rates or incremental cost rates.

The Commission acknowledged that the introduction

of incremental cost pricing principles is a departure from

its traditional pricing policies42 and justified this new

policy on NU's unprecedented obligation to provide third

party transmission service. Id. The Commission noted that

incremental cost pricing may be appropriate in certain

circumstances, but decided to leave the details of cost

responsibility questions to a future specific section 205

rate case. When such a case arises, NU will bear the burden

of justifying "any direct assignments of costs and

support[ing] any arguments that reliability is degraded by a

particular firm transmission service. No presumption is

42 The Commission generally has adhered to rolled in
pricing, but has never precluded particularized cost
allocations to specific customers where appropriate. See

Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,291 n.163

(1988); Public Service Co. of Indiana, 51 F.E.R.C. 61,367,

at 62,203 (1990).

-47-

created by NU's `but for' criterion that firm wheeling

customers always cause the need for upgrades." Id. at 61,207

(quoting 56 F.E.R.C. at 62031). The Commission also allowed

that any reliance by NU upon the "but for" test may be

challenged in future actions. The Commission sufficiently

explained and justified the principles that will guide its

transmission upgrade pricing.

E. Opportunity Cost Pricing.

As has already been discussed, the Commission found

it necessary to impose a number of conditions on the proposed

NU-PSNH merger to mitigate the merged company's market power

in the markets for transmission and short-term bulk power.

58 F.E.R.C. at 61,195. Specifically, the Commission held

that NU must provide firm transmission service out of

existing capacity for any utility, subject only to a

reservation of sufficient capacity to maintain reliable

service to its native load customers and to honor existing

contractual obligations. NU was prohibited, however, from

denying a request for firm transmission service by reserving

capacity for non-firm transactions that would enable it to

provide more economical service to its native load customers.

56 F.E.R.C. at 62,014-21; 58 F.E.R.C. at 61,196-200. FERC

also held that NU must build additional transmission

facilities as needed to provide transmission where

insufficient capacity exists. 56 F.E.R.C. at 62,021-24; 58

-48-

F.E.R.C. at 61,204-10. The Commission found that these and

other conditions would "adequately mitigate" the merger's

anticompetitive effects. 58 F.E.R.C. at 61,213.

On rehearing, NU and the States of Connecticut and

New Hampshire argued that the Commission should address the

issue of firm transmission pricing because, in Opinion No.

364, FERC had established principles governing the related

issue of firm transmission priority which made NU's ability

to purchase inexpensive power (which would lower its cost of

serving its native load customers) subordinate to its

obligation to provide firm transmission for third parties.

58 F.E.R.C. at 61,201-02. The Commission agreed, but

declined to approve "opportunity cost pricing"43 outside

the context of a specific tariff proposal. Instead, the

Commission announced three "basic goals" to guide its future

decisions on the pricing of firm transmission service on the

merged company's existing capacity, and left the door open to

NU to propose a tariff based on opportunity costs or any

43 As the Commission explained, opportunity costs
are the revenues lost or costs incurred
by a utility in providing third-party
transmission service when transmission
capacity is insufficient to satisfy both
a third-party wheeling request and the
utility's own use. For example,
opportunity costs might include the
revenues lost or costs incurred because a
utility must reduce its own off-system
purchases or sales in order to overcome a
constraint on the [transmission] grid.
58 F.E.R.C. at 61,200-201.

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other methodology that would meet the three goals. The

Commission explained its decision as follows:

We are now confronted with the need to
provide NU with enough specificity
regarding what it will be allowed to
propose for the pricing of future third-
party wheeling service, so that the
company can decide whether to proceed
with the merger. We also cannot ignore
the need to act as expeditiously as
possible given the commercial realities
and time pressures presented in corporate
matters subject to our jurisdiction, and
in particular the need to resolve a
bankruptcy situation. At the same time
we are confronted with the need to ensure
an adequate record on pricing issues and
to afford all parties an adequate
opportunity to voice their objections.
Balancing these respective needs, we
conclude that the best course is to
provide guidance on pricing issues, but
to defer specific pricing issues to the
compliance phase of this proceeding, or
to subsequent cases where the Commission
may consider specific proposals from NU
in a concrete, factual setting and with a
more developed record.
. . . .
First, the native load customers of the

utility providing transmission service

should be held harmless. Second,

transmission customers should be charged

the lowest reasonable cost-based rate for

third-party transmission service. Third,

the pricing should prevent the collection

of monopoly rents by the transmission

owner and promote efficient transmission

decisions. In ruling on specific

proposed rates, we will balance these
three goals in light of the facts and
circumstances presented at that time.

58 F.E.R.C. at 61,203 (emphasis added) (footnotes omitted).

FERC was careful to point out that it endorsed

opportunity cost pricing only insofar as NU could show that

-50-

it could "propose rates which include legitimate, verifiable

opportunity costs." Id. The Commission warned NU that any

such proposal would be carefully scrutinized and would be

subject to challenge. Id. at 61,203-04. Specifically, FERC

stated that NU would have to address the following issues

should it seek recovery of opportunity costs:

(1) whether opportunity costs should be
capped by incremental expansion costs or
any other cap; (2) whether current
wheeling and wholesale requirements
customers should be treated differently
from future wheeling and wholesale
requirements customers, e.g., by

receiving "grandfather" rights to
embedded cost rates for the amount of
transmission capacity they already use;
(3) how NU will identify those customers
responsible for growth on its system and
what particular new facilities are
necessary to accommodate that growth; (4)
whether and how third parties should be
protected from uncertainty regarding
fluctuations in opportunity costs; (5)
how the proposed rates will prevent the
collection of monopoly rents; and (6) how
the proposed opportunity costs will be
verified.

Id. The Commission expressly postponed consideration of

whether opportunity cost pricing would be inconsistent with

nondiscriminatory pricing and nondiscriminatory terms and

conditions of service until those issues were raised in a

concrete factual context. Id. at 61,204, n.118.

Petitioners claim that FERC's decision amounted to

an arbitrary endorsement of opportunity cost pricing that was

not supported by evidence in the record, was inherently

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discriminatory, and contrary to FERC's regulation of natural

gas pipelines. Petitioners' underlying concern seems to be

that when the issue arises next in the context of the

Commission's review of NU's compliance tariff, FERC will

simply approve the tariff and dismiss petitioners' objections

on the ground that opportunity cost pricing principles had

already been endorsed by the Commission. Although we

understand petitioners' concerns, we believe that they are

misplaced and that FERC did not go as far as petitioners fear

in endorsing opportunity cost pricing.

Petitioners will have an opportunity to contest any

compliance tariff proposed by NU. The Commission itself laid

out a number of issues which NU would have to address were it

to propose a tariff based on opportunity costs. 58 F.E.R.C.

at 61,203. Only after carefully considering the competing

interests of providing guidance to NU as to what kinds of

tariffs it would consider, and the need to endorse specific

methodologies only on the basis of a fully-developed record,

did the Commission decide to outline broad pricing goals

which would allow for a number of pricing schemes including

opportunity cost pricing. Id. It was squarely within the

Commission's power to defer consideration of petitioners'

assertions until after NU filed its compliance tariff. As

the Supreme Court has held, "[a]n agency enjoys broad

discretion in determining how to handle related yet discrete

-52-

issues in terms of procedures, and priorities." Mobil

Exploration & Producing Southeast, Inc. v. United

Distribution Cos., 111 S. Ct. 615, 627 (1991) (citations

omitted). Petitioners argue that deferral was inappropriate

in this case because their objections went "to the heart of

the public interest determination to be made." Maryland

People's Counsel v. FERC, 761 F.2d 768, 778 (D.C. Cir. 1985).

We disagree.

The Commission announced pricing goals and

conditions that it determined would keep the merger

consistent with the public interest, and would result in

"just and reasonable rates." Until NU proposed a specific

tariff regime, the Commission did not have a developed record

to evaluate on the merits. The Commission remains free to,

and we expect it will, invite objections to NU's compliance

tariff from affected parties, and will reject any proposed

tariff that conflicts with its statutory responsibility to

approve rates that are "just and reasonable," and to approve

mergers that are, as conditioned, "consistent with the public

interest."

F. Environmental Impact Statement.

The City of Holyoke Gas & Electric Department

("HG&E") alleges that FERC's refusal to examine the potential

environmental impacts of its approval of the merger was

arbitrary and capricious. We disagree.

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The National Environmental Policy Act of 1969, 42

U.S.C. 4321 et seq., ("NEPA") requires federal agencies to

consider the potential environmental effects of a proposed

major federal action that may significantly affect the

quality of the human environment. Section 102(2)(C) of NEPA

states:

The Congress authorizes and directs that,
to the fullest extent possible: . . .
(2) all agencies of the Federal
Government shall
. . . .
(C) include in every recommendation or
report on proposals for legislation and
other major Federal actions significantly
affecting the quality of the human
environment, a detailed statement by the
responsible official on
(i) the environmental impact of the
proposed action,
(ii) any adverse environmental effects
which cannot be avoided should the
proposal be implemented,
(iii) alternatives to the proposed
action,
(iv) the relationship between local
short-term uses of man's environment and
the maintenance and enhancement of long-
term productivity, and
(v) any irreversible and irretrievable
commitments of resources which would be
involved in the proposed action should it
be implemented.

42 U.S.C. 4332(2)(C). Agencies were authorized, under

guidelines promulgated by the Council on Environmental

Quality ("CEQ"), to create categorical exclusions for actions

which do not individually or cumulatively have a significant

effect on the human environment. 40 C.F.R. 1507.3,

1508.4. FERC adopted such a category of exclusions,

-54-

including one for merger approvals such as the one at issue

in this case. That regulation states in pertinent part:

(a) General rule. Except as stated in
paragraph (b) of this section, neither an
environmental assessment nor an
environmental impact statement will be
prepared for the following projects or
actions:
. . . .
(16) Approval of actions under sections
4(b), 203, 204, 301, 304, and 305 of the
Federal Power Act relating to issuance
and purchase of securities, acquisition
or disposition of property, merger,
interlocking directorates, jurisdictional
determinations and accounting orders.

18 C.F.R. 380.4(a)(16). An agency need not issue a

"finding of no significant impact" in cases concerning

matters that fall into a categorical exclusion. 40 C.F.R.

1501.3, 1501.4, 1508.13.

CEQ guidelines also required agencies adopting

categorical exclusions to "provide for extraordinary

circumstances in which a normally excluded action may have a

significant environmental effect." 40 C.F.R. 1508.4. FERC

made such provision in its regulations:

(b) Exceptions to categorical
exclusions. (1) In accordance with 40 CFR
1508.4, the Commission and its staff will
independently evaluate environmental
information supplied in an application
and in comments by the public. Where
circumstances indicate that an action may
be a major Federal action significantly
affecting the quality of the human
environment, the Commission:
(i) May require an environmental report
or other additional environmental
information, and

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(ii) Will prepare an environmental
assessment or an environmental impact
statement.
(2) Such circumstances may exist when
the action may have an effect on one of
the following:
(i) Indian lands;
(ii) Wilderness areas;
(iii) Wild and scenic rivers;
(iv) Wetlands;
(v) Units of the National Park System,
National Refuges, or National Fish
Hatcheries;
(vi) Anadromous fish or endangered
species; or
(vii) Where the environmental effects
are uncertain.
However, the existence of one or more of
the above will not automatically require
the submission of an environmental report
or the preparation of an environmental
assessment or an environmental impact
statement.

18 C.F.R. 380.4(b).44 HG&E argues that the NU-PSNH

merger might "alter mixes of generation in New England by

constraining the locations for new plants." HG&E points to

the language of 18 C.F.R. 380.4(b)(1)(ii) in support of its

position that FERC was compelled, at the least, to explain

why it was not obliged to perform the analysis of

environmental effects required by NEPA. HG&E also cites

FERC's decision in Southern California Edison Co., 49

F.E.R.C. 61,091 (1989) (holding that 380.4(b) was

triggered when approved merger would result in the dumping of

44 HG&E does not challenge the validity of any of the
applicable regulations cited above.

-56-

hundreds of tons of additional air contaminants into the most

polluted air in the United States).

There was no evidence in the record of identifiable

environmental harms that would likely result from the NU-PSNH

merger. The fact that new generating facilities might wind

up in different locations than would have been the case in

the absence of the merger does not approach in significance,

because its significance is not quantifiable, the known

effects of the merger between Southern California Edison

Company and San Diego Gas & Electric Company. Thus, the

factual situation presented in Southern California Edison is

completely distinguishable from that of this case.

The character and location of the future

environmental effects of the NU-PSNH merger are so uncertain

that no meaningful environmental review would have been

possible, even had FERC made the effort. Here, FERC was not

approving a regional development plan. It was merely

approving a merger between utility companies, albeit a merger

involving two of the largest utilities in New England.

Energy demand may increase in New England over the following

decades, and the fact of the merger may influence how those

needs are met. Nevertheless, any attempt by FERC to prepare

an EIS would have involved little more than spinning out

multiple hypothetical development forecasts, with multiple

options for the type, amount and location of future

-57-

generating facilities. See Kleppe v. Sierra Club, 427 U.S.

390, 401-2 (1976). Once concrete plans have been established

for the construction of transmission or generating

facilities, those proposals will be reviewed under NEPA or

the applicable state environmental review procedures.

FERC was justified in deciding that neither an

environmental assessment nor an environmental impact

statement was required prior to approving the NU-PSNH merger.

G. HG&E's "Unique" Harm.

HG&E also contends that because it relied on PSNH

New Hampshire Corridor facilities for over one-third of its

electricity supply, it would be "uniquely threatened" by NU

in head-to-head competition for large, industrial loads. To

protect itself, HG&E requested that FERC either:

(1) disapprove the merger; (2) require the divestiture or

restructuring of NU's retail business in Holyoke (HWP); or

(3) grant HG&E grandfather rights to PSNH New Hampshire

Corridor transmission. The ALJ rejected the "drastic remedy"

of divestiture of HWP, stating that it was "wholly uncalled-

for by anything in this record," and holding that HG&E would

be adequately protected by the conditions to the merger

designed to address the anticompetitive effects on

transmission dependent utilities ("TDUs"). 53 F.E.R.C. at

65,232.

As the ALJ described,

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[t]he Transmission Dependent Utilities
(TDUs) are "entirely dependent on NU or
PSNH for their bulk power transmission
needs." These companies (most of which
involve municipal ownership) are not big
enough to own or construct sufficient
generation to meet their loads. As their
brief states, they "are physically unable
to engage in any bulk power transaction

without using the NU or PSNH transmission
systems. Absent economic access to NU's
or PSNH's transmission facilities, the
TDU cannot survive as an independent
entity." The TDUs compete with NU and
PSNH in the wholesale bulk power market;
each TDU, like NU/PSNH, seeks out
attractive sources of supply. TDUs thus
"are in the uneasy position of having
their only source of essential
transmission service in the hands of
their principal competitor." These small
companies, uniquely vulnerable to
possible anticompetitive conduct, are
entitled to some measure of protective
assurance regarding NU/PSNH's post merger
conduct.

53 F.E.R.C. at 65,232-33. The ALJ held that "[a]ll rates,

terms and conditions of NU/PSNH transmission service to the

TDUs in effect on this date shall . . . be maintained after

the merger, unless and until changes are either agreed upon

by the merged company and the TDUs, or authorized by the

Commission." 53 F.E.R.C. at 65,233. In short, while finding

that TDUs were "uniquely vulnerable" to anticompetitive

conduct by NU-PSNH, the ALJ found that HG&E had not shown

that it was entitled to protections beyond those given to

TDUs generally. The Commission agreed, 56 F.E.R.C. at

62,049, but bolstered the protection for TDUs ordered by the

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ALJ by imposing the additional condition that NU establish a

special tariff for TDUs. Id. at 62,050.

HG&E points to no evidence in the record to

indicate that it faced anticompetitive consequences of the

merger sufficiently different in character or magnitude to

warrant greater protections than those given to other TDUs.

We therefore affirm the Commission's actions to protect TDUs,

which were adequately explained and supported in the record.

H. Modifications to the Filed Rate Schedules.

The Commission analyzed the Seabrook Power Contract

and Capacity Interchange Agreements filed by NUSCO under the

"just and reasonable" standard of 206 of the FPA,45 and

ordered the following modifications to the rate schedules:

(1) deletion of the automatically adjusting rate of return on

equity provision in the Seabrook Power Contract; (2)

reduction of the rate of return on equity in the Seabrook

Power Contract from 13.75 percent to 12.53 percent;46 (3)

45 Section 206(a) of the FPA, 16 U.S.C. 824(e)(a)
provides:
Whenever the Commission, after hearing
had upon its own motion or upon
complaint, shall find that any rate . . .
collected by any public utility . . . is
unjust, unreasonable, unduly
discriminatory or preferential, the
Commission shall determine the just and
reasonable rate . . . to be thereafter
observed and in force, and shall fix the
same by order.

46 NUSCO did not appeal this modification.

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North Atlantic's decommissioning expenses under the Seabrook

Power Contract and any subsequent changes thereto were made

subject to review by the Commission; (4) reduction in the

rate of return on equity specified in the two Capacity

Interchange Agreements from 14.50 percent to 13.17 percent

for the period from July 27, 1990 through August 8, 1991, and

thereafter to 12.93 percent; and (5) the Seabrook Power

Contract could be modified by the Commission in the future

under the "just and reasonable" standard of 206 of the FPA,

rather than the "public interest" standard agreed to by the

parties. 56 F.E.R.C. at 61,993; 58 F.E.R.C. at 61,185.

Each of the three parties to the Seabrook Power

Contract ("SPC"), NU, PSNH and the State of New Hampshire,

waived its right to file a complaint under 206 regarding

the rates contained in the agreement. Section 12 of the SPC

also provided that:

[E]ach [party] further agrees that in any
proceeding by the FERC under Section 206
the FERC shall not change the rate
charged under this Agreement unless such
rate is found to be contrary to the
public interest.

NU argues that the Commission violated the "Mobile-Sierra"

doctrine47 when it modified the SPC in disregard of the

intent of the parties.

47 This doctrine is based on the companion cases of United

Gas Pipe Line Co. v. Mobile Gas Service Co., 350 U.S. 332

(1956) and FPC v. Sierra Pacific Power Co., 350 U.S. 348

(1956).

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Under the Mobile-Sierra doctrine, the Commission

must respect certain private contract rights in the exercise

of its regulatory powers. Parties to a contract may: (1)

waive their rights to file a complaint challenging that

contract, and (2) restrict the power of the Commission to

impose rate changes under 206 to cases in which it finds

the rates contrary to the public interest a more difficult

standard for the Commission to meet than the statutory

"unjust and unreasonable" standard of 206. See Papago

Tribal Utility Authority v. FERC, 723 F.2d 950, 953 (D.C.

Cir. 1983), cert. denied, 467 U.S. 1241 (1984). In Papago,

the court held that, regardless of the parties' intent, the

Commission retained, in any event,

the indefeasible right . . . under 206
to replace rates that are contrary to the
public interest, "as where [the existing
rate structure] might impair the
financial ability of the public utility
to continue its service, cast upon other
consumers an excessive burden, or be
unduly discriminatory."

Papago, 723 F.2d at 953, (quoting Sierra, 350 U.S. at 355).

The court went on to note that "unduly discriminatory" in

this context "apparently means unduly discriminatory or

preferential to the detriment of purchasers who are not

parties to the contract." Papago, 723 F.2d at 953 n.4.

In this case, seemingly for the first time, the

Commission held that it also had the

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authority under the public interest
standard to modify a contract where: it

may be unjust, unreasonable, unduly

discriminatory or preferential to the
detriment of purchasers that are not
parties to the contract; it is not the

result of arm's length bargaining; or it

reflects circumstances where the seller

has exercised market power over the

purchaser.

50 F.E.R.C. at 61,839 (emphasis added). The ALJ interpreted

that holding as follows:

The Commission made clear that in the
particular circumstances surrounding the
Seabrook contract, it retains power
through the "public interest" language
to make modifications under the
traditional just and reasonable and
nondiscrimination standards.

53 F.E.R.C. at 65,235. The standard established by the

Commission, and subsequently applied by the ALJ, conflates

the "just and reasonable" and "public interest" standards,

thereby circumventing the Mobile-Sierra doctrine. The

distinction between the "just and reasonable" and "public

interest" standards loses its meaning entirely if the

Commission may modify a contract under the public interest

standard where it finds the contract "may be unjust [or]

unreasonable." The parties' express intent was to avoid

review of rate schedules under the just and reasonable

standard. Mobile-Sierra protects their right to do so,

leaving the Commission with the power to modify rates only

when required by the public interest.

-63-

The Commission found that the SPC might unduly

discriminate against entities not parties to the contract,

and that there was no genuine arm's-length bargaining because

NU and PSNH negotiated the agreement at a time when they knew

they were about to merge and have identical interests. The

Commission held that, in this context, it could "carefully

scrutinize the rates, terms and conditions of the contract"

to determine if they were just. Id.

The Commission's explanation for employing a just

and reasonable standard seems to us inadequate. To the

extent the Commission is relying on NU's prospective

ownership of PSNH, it is unclear why the Commission should be

concerned about protecting PSNH from a perceived

disadvantageous arrangement imposed by its prospective owner

since any disadvantage visited on the prospective subsidiary

will be borne by its owner. If NU chooses to allocate risks

among its operating subsidiaries and one of its subsidiaries

is disfavored in this calculation, there would seem to be

little justification for the Commission stepping in on behalf

of the disfavored subsidiary absent some threat to the public

interest.

As for the seller's market power, reliance on this

factor threatens to erode the Mobile-Sierra doctrine so

substantially that a fuller explanation from the Commission

is required before proceeding down this route. After all,

-64-

some measure of market power could be present in a large

number of contracts. A case-by-case inquiry into the

presence and extent of market power would inject a new and

potentially time-consuming element into the Mobile-Sierra

analysis, and it is not entirely clear in any event why the

Commission should protect a buyer who voluntarily enters into

an agreement with a dominant seller.

The most attractive case for affording additional

protection, despite the presence of a contract, is where the

protection is intended to safeguard the interests of third

parties, notably the buyer's customers. The Mobile-Sierra

doctrine itself allows for intervention by FERC where it is

shown that the interests of third parties are threatened.

Mobile, 350 U.S. at 344-45; Sierra, 350 U.S. at 355.

However, the standard to be applied, as formulated by the

Supreme Court, is the protection of outside parties from

"undu[e] discriminat[ion]" or imposition of an "excessive

burden." Sierra, 350 U.S. at 355. If there is some reason

for departing from this public interest standard as framed by

the Supreme Court, the Commission has not supplied it.

We assume, without deciding, that: (1) FERC is

correct in its assertion that the State of New Hampshire did

not adequately represent the interests of non-parties to the

contract, and that, therefore, the SPC may have unduly

discriminated against those non-parties; and (2) the alleged

-65-

lack of arms'-length bargaining among NU, PSNH and the State

of New Hampshire gave the Commission the right to evaluate

the SPC. We hold, however, that the Commission was bound to

follow the Mobile-Sierra doctrine as explicated by Papago,

and therefore should have evaluated the SPC under the public

interest standard, not the just and reasonable standard.

We therefore remand this issue for reconsideration

by FERC under the public interest standard.48

IV. SUMMARY.

We affirm the Commission's orders in all respects

with the exception of its modifications of the Seabrook Power

Contract filed with the merger proposal which we remand for

consideration under the public interest standard.

48 We have considered, but find unpersuasive, NU's argument
that FERC committed error when it disrupted the bankruptcy
settlement by modifying the Capacity Interchange Agreements.

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