United States Court of Appeals
For the First Circuit
No. 01-1376
CENTRAL MAINE POWER COMPANY,
Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
____________________
No. 01-1377
BANGOR HYDRO-ELECTRIC COMPANY, ET AL.,
Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
___________________
No. 01-1541
NSTAR SERVICES COMPANY,
Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
__________________
No. 01-1551
ALTERNATE POWER SOURCE, INC.,
Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
___________________
ON PETITION FOR REVIEW OF ORDERS OF
THE FEDERAL ENERGY REGULATORY COMMISSION
____________________
Before
Boudin, Circuit Judge,
Bownes, Senior Circuit Judge,
and Schwarzer,* Senior District Judge.
Michael E. Small and Harvey Reiter with whom Wendy N. Reed,
Wright & Talisman, P.C., David D'Alessandro, Morrison & Hecker,
LLP, Lisa Fink, State of Maine, Public Utilities Commission,
Kenneth G. Jaffe, Swidler Berlin Shereff Huber Friedman LLP,
Richard M. Lorenzo, Heidi Marie Werntz, Huber Lawrence & Abell,
Stephen L. Teichler, Duane, Morris & Heckscher LLP, and Joseph
W. Rogers, Assistant Attorney General, Office of Attorney
General, were on consolidated brief for petitioners Bangor
Hydro-Electric Company, Maine Public Utilities Commission,
Vermont Department of Public Service, National Grid USA, NSTAR
Services Company, Central Maine Power Company, and intervenors
Attorney General for the Commonwealth of Massachusetts and
Alternate Power Source, Inc.
Stephen G. Ward, Public Advocate, Office of Public Advocate,
and Wayne R. Jortner, Senior Counsel, Office of Public Advocate,
on consolidated brief for Maine Public Advocate, Amicus Curiae.
Beth G. Pacella with whom Kevin P. Madden, General Counsel,
*
Of the Northern District of California, sitting by
designation.
and Dennis Lane, Solicitor, were on consolidated brief for
respondent.
John N. Estes, III with whom Paul Franklin Wight, John S.
Moot, Skadden, Arps, Slate, Meagher & Flom LLP, Richard P.
Bress, Minh N. Vu, Michael J. Gergen, Latham & Watkins, David B.
Raskin, Joseph E. Stubbs, Steptoe & Johnson LLP, Joseph DeVito,
NRG Energy, Inc., James Bertrand, Leonard, Street and Deinard,
P.A., Daniel J. Mitchell, Bernstein, Shur, Sawyer & Nelson,
P.A., Larry F. Eisenstat, George E. Johnson, Michael R.
Engleman, Dickstein Shapiro Morin & Oshinsky, LLP, Jay T. Ryan,
Van Ness Feldman, P.C., James C. Beh, Jeffrey M. Jakubiak,
Donald F. Santa, Jr., Dionne E. Thompson, Troutman Sanders LLP
and Neil H. Butterklee, Consolidated Edison Company of New York,
were on consolidated brief for intervenors PG&E National Energy
Group, Inc., PG&E Generating Company, LLC, USGen New England,
Inc., PG&E Energy Trading-Power, L.P., Sithe New England
Holdings, LLC, PEC Energy Marketing, Inc., Consolidated Edison
Energy, Inc., American National Power, Inc., Power Development
Company, LLC, NRG Power Marketing, Inc., Connecticut Jet Power
LLC, Devon Power LLC, Middletown Power LLC, Montville Power LLC,
Norwalk Power LLC, Somerset Power LLC, Northeast Utilities
Service Company on behalf of the Northeast Utilities Operating
Companies and Select Energy, Inc., Mirant New England, LLC,
Mirant Canal, LLC, Mirant Kendall, LLC, FPL Energy, LLC and
Duke Energy North America, LLC.
June 8, 2001
BOUDIN, Circuit Judge. The petitions for review in
this case challenge orders of the Federal Energy Regulatory
Commission ("FERC") that have the effect of reinstituting an
earlier charge--the so-called installed capability ("ICAP")
deficiency charge--paid by electric utilities in New England who
fail to meet certain reserve capacity requirements. This court
stayed implementation of all but a small portion of the charge
pending judicial review. The background is complicated but can
be summarized as follows.
In New England, as in other regions of the country,
electrical power is furnished through a grid of interconnected
intercity transmission lines and local distribution lines within
each city or town. Power is generated within the region, or
purchased from outside (e.g., from Canada). Some utilities
engage in all three functions (generation, intercity
transmission, local distribution); but many are local
"retailers" who own only the local distribution facilities
within a town and purchase all of their needs from generating
utilities that have surplus power.1
1About 130 utilities in New England are members of New
England Power Pool ("NEPOOL"), a voluntary association formed in
1971 to facilitate the pooling of power and the coordination of
construction and maintenance of generating facilities. New Eng.
Power Pool, 79 FERC ¶ 61,374, at 62,576 (1997); New Eng. Power
Pool, 50 FERC ¶ 61,139, at 61,419-20 (1990). In 1997, NEPOOL
obtained FERC approval for the creation of an "independent
-4-
Regulation is divided between FERC and state regulatory
commissions, but generally speaking, FERC regulates wholesale
transactions (e.g., between a power-supplying utility with a
surplus and a local municipal utility that retails power). 16
U.S.C. § 824(b)(1) (1994); FPC v. Conway Corp., 426 U.S. 271,
276-77 (1976). In the past, power was provided largely on a
non-competitive basis with regulated rates based upon costs;
but, as in other industries like telecommunications, some power
regulators, including FERC, have been moving in recent years
toward more reliance upon competition. Town of Norwood v. FERC,
202 F.3d 392, 396 (1st Cir.), cert. denied, 121 S. Ct. 57
(2000).
An abiding concern in regulating electricity supply is
the need for adequate reserve capacity. The demand for
electricity varies, depending on weather, economic growth, and
other factors; supply is constrained by the time needed to build
new generating plants and by unexpected breakdowns in generation
or transmission facilities; and electricity cannot economically
be stored for future use in large quantities. To avoid the
extraordinary disruption of blackouts, regulators and utilities
system operator," ISO New England, Inc. ("ISO-NE"), a non-profit
company that manages New England's power grid and wholesale
electricity marketplace pursuant to a contract with NEPOOL. New
Eng. Power Pool, 79 FERC ¶ 61,374, at 62,577-79.
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calculate reserve requirements based on estimates of how much
generating capacity will be needed at the highest point of the
peak load.
Our case concerns the mechanism for assuring that
utilities will have the reserve power needed to satisfy peak
demand. Because the system as a whole must be built to satisfy
peak demand, a good deal of generating capacity is destined to
lie idle at least some of the time. A prudent utility that
retails power to local customers will purchase from a generating
utility a certain amount of reserve capacity--in effect,
capacity that is reserved for that retailer but may be used only
rarely. But it is not certain that under present industry
conditions the retailer has adequate economic incentive to
purchase all the reserve capacity that it needs. And if reserve
capacity is not purchased in sufficient amounts, generating
utilities may lack the incentive to build as much capacity as is
needed to supply peak demand.
The incentive structure in the industry is immensely
complicated and economists take different views on how best
(i.e., cheaply and reliably) to secure adequate reserves. But,
for a number of years prior to 1998, FERC and the New England
utilities under its supervision used the so-called ICAP
deficiency charge as a device to assure that purchasing
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utilities would buy adequate reserve capacity to cover projected
peak load plus a reserve margin. ISO New Eng., Inc., 91 FERC ¶
61,311, at 62,080 (2000); see also Municipalities of Groton v.
FERC, 587 F.2d 1296, 1302 (D.C. Cir. 1978).
In New England, beginning some time before 1990,
wholesale tariffs specified that load serving entities ("LSEs")-
-crudely, electricity retailers--had to pay a charge if they did
not purchase enough reserve capacity. From 1990 onward, the
charge was $8.75 per kilowatt-month; thus, if during a
particular period the reserves purchased by an LSE fell below
its allocated share of all needed reserves, the LSE paid the
specified charge times the amount of its deficiency. Through a
complicated arrangement, most of the money went as extra
compensation to power-supplying utilities, supplementing the
amounts they earned by selling electrical power and committing
reserve capacity.
The theory underlying the $8.75 figure, which prevailed
in New England from 1990 to 1998, was that it approximated the
cost (appropriately amortized) to construct a kilowatt-month of
new generating capacity available for peak demand conditions,
plus an additional "penalty."2 The penalty's theoretical basis
2Until 1998, the total ICAP deficiency charge implemented by
the New England Power Pool ("NEPOOL") consisted of an automatic
$6 per kilowatt-month "adjustment charge" and a possible $2.75
-7-
is not crystal clear, but the existence and value of the penalty
are not issues in this case. The key issue is whether FERC,
after allowing the $8.75 charge to be abandoned in New England
in 1998 and 1999, could reinstate it in 2000 in the way that it
did.
In 1998, New England utilities obtained FERC's approval
to abandon the flat ICAP deficiency charge in favor of a so-
called auction market for buying additional reserve capacity,
that is, required capacity over and above that acquired through
bilateral contracts (which are common and often long-term).
However, the auction market appears not to have been successful-
-among other things, the prices were thought to have been
subject to manipulation. In March 2000, ISO New England, Inc.
("ISO-NE")--the "independent system operator" that manages power
transactions on behalf of the utilities in the New England Power
Pool--sought FERC's consent to an end to the auction regime.
On June 28, 2000, FERC released a lengthy order ("the
June 28 order") that largely addressed other ISO-NE issues but
per kilowatt-month "deficiency charge," the latter charge being
waivable if NEPOOL found that a utility's deficiency was beyond
its reasonable control. ISO New Eng., 91 FERC ¶ 61,311, at
62,080 & n.94; New Eng. Power Pool, 50 FERC ¶ 61,139, at 61,420.
The automatic $6 charge was apparently intended to approximate
the cost of an appropriate generator with transmission
facilities, and the discretionary $2.75 charge apparently
represented an added penalty.
-8-
which toward its end addressed the ICAP issue in a few
paragraphs, ISO New Eng., 91 FERC ¶ 61,311, at 62,080-81. In
the order, FERC agreed with ISO-NE that the auction did not
work, but, because ISO-NE had not proposed an alternative means
to ensure that LSEs would purchase adequate reserve capacity,
FERC said that although it would permit an end to the auction as
of August 1, 2000, it would "also require the ISO to revert to
administratively-determined sanctions for failure [of LSEs] to
meet the existing ICAP requirement," i.e., the projected reserve
capacity requirement. Id. at 62,081. ISO-NE was directed to
file tariffs "proposing an appropriate ICAP deficiency charge
within 30 days." Id.
ISO-NE responded with a filing that proposed a charge
of $0.17--a fraction (less than 2 percent) of the charge that
had prevailed from 1990 to 1998; this figure was proffered as an
average price paid for power during 1999 on the now abandoned
auction market. Various utilities who supply surplus power
protested bitterly; they not only challenged the proposal as
unsupported but said that if adopted this minimal figure would
become a de facto cap on prices in the bilateral-contract market
in which much of the reserve capacity is purchased, further
reducing incentives for generating utilities to construct new
plant.
-9-
On December 15, 2000, FERC issued a fourteen-paragraph
order ("the December 15 order") rejecting the proposed $0.17
charge. FERC brushed aside this figure as "a token payment,"
saying that use of the auction average was not appropriate. ISO
New Eng., Inc., 93 FERC ¶ 61,290, at 61,974-75 (2000). FERC
then ordered reinstatement of the original $8.75 figure,
effective August 1, 2000, until ISO-NE proposed some other
adequate regime. FERC said that $8.75 "represents an
approximation of the cost to install a peaking unit and
represents a reasonable basis for setting a level to incent the
construction of new generation." Id. at 61,975.
Petitions for rehearing followed, and FERC deferred the
$8.75 charge pending their disposition. On March 6, 2001, FERC
issued a decision on reconsideration ("the March 6 order"),
rejecting the petitions with one qualification. ISO New Eng.,
Inc., 94 FERC ¶ 61,237, at 61,846-47 (2001). After elaborating
on its reasons for disallowing the $0.17 charge and requiring a
return to the $8.75 level, FERC said that it would make the
higher charge effective only from April 1, 2001, onward; because
of intervening reliance on the $0.17 figure, it would be used
for payments from August 1, 2000, through March 31, 2001. Id.
Various utilities then petitioned for review in this
court, and other utilities intervened on both sides. 16 U.S.C.
-10-
§ 825l(b). This court then granted petitioners' motion to stay
the $8.75 charge pendente lite and expedited briefing. As the
stay order permitted, FERC then ordered the $0.17 charge to
continue in effect pending this court's review. Briefing and
oral argument in this court followed. In this court,
petitioners and others who support them principally attack the
adoption of the $8.75 charge and, secondarily, the rejection of
ISO-NE's proposed $0.17 charge. The standard of review varies,
of course, with the particular claim of error.3
On review, petitioners’ main assault is on FERC’s
imposition of the $8.75 charge. They do not contest FERC’s
statutory power to adopt an ICAP charge pursuant to its
authority to set just and reasonable rates for wholesale power,
16 U.S.C. §§ 824(b)(1), 824e(a) (1994); but they say that the
$8.75 charge is not supported by substantial evidence. We begin
with this claim and consider, in later sections, related claims
that FERC failed to consider reasonable alternatives and that
3
The conventional rule is that general issues of law are
considered de novo. Boston Edison Co. v. FERC, 856 F.2d 361,
363 (1st Cir. 1988). Agency reasoning or lack of it is tested
under the arbitrary and capricious standard, 5 U.S.C. §
706(2)(A) (1994); and raw findings of fact are sustained if
supported by substantial evidence, 16 U.S.C. § 825l(b); accord
5 U.S.C. § 706(2)(E). Boston Edison Co. v. FERC, 885 F.2d 962,
964 (1st Cir. 1989). Variations exist under some schemes, and
numerous subordinate rules of administrative law bear on review.
E.g., SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).
-11-
the orders are procedurally flawed (above all, by the lack of an
evidentiary hearing).
The Basis for the $8.75 Charge. Although petitioners'
caption refers to a lack of substantial evidence for adopting
the $8.75 charge, their attack is actually a multi-faceted
challenge to FERC’s reasoning, substantive judgments, alleged
misstatements and asserted failures to discuss issues or
evidence. There is, indeed, a good deal to criticize in FERC's
orders, and we conclude that further proceedings are necessary.
However, the criticisms can be understood and assessed only
against the background of FERC’s basic rationale for adopting
the $8.75 charge, and it is useful to set forth at the outset
our understanding of what FERC did and why it did it.
As already noted, FERC long ago approved an ICAP charge
for the New England area to cope with what it conceives to be a
need to assure adequate plant construction and margin of
reserves. Such ICAP charges are used in the New York region and
in the Pennsylvania-New Jersey-Maryland area; how the matter is
handled away from the east coast is less clear. See note 5
below. FERC has been moving federal energy regulation toward
more competition, but the transition is far from complete, and
no one knows for certain whether special incentives will be
needed indefinitely or what kind would work best.
-12-
Against this background, FERC has insisted that reserve
requirements be maintained but, in 1998 and 1999, it allowed
ISO-NE to substitute a short-term auction market as an
enforcement device. That scheme, it appears, did not work and
petitioners do not contend otherwise. So FERC simply restored
the pre-existing $8.75 ICAP charge for the time being while
making clear that it was open to other proposals from ISO-NE or
others for a better way to assure adequate reserves. In the
abstract, there is nothing in this rationale that is startling,
let alone irrational; but the devil, as usual, is in the
details.
First, petitioners attack FERC’s statement that $8.75
"represents an approximation of the cost to install a peaking
[generating] unit." In fact, say petitioners, FERC has not
cited "even one iota of evidence in support of this fact-
intensive assertion" and the highest figure that "even the
proponents of the $8.75 charge could muster [in affidavits] . .
. was $5." Petitioners may be correct on the numbers, but the
problem is with FERC’s verbal sloppiness rather than any more
fundamental defect.
As petitioners know perfectly well, the $8.75 figure
was, even when adopted years ago, an overstatement of the cost
of a peaking unit; the record before FERC in these proceedings
-13-
established that in 1990 the peaking unit cost was estimated at
about $5 and the balance, and certainly the balance above $6,
see note 2 above, therefore represented a further "penalty"
charge with a different rationale, see New Eng. Power Pool
Agreement, 56 FPC 1562, 1599-1600 (1976), petition for rev.
denied sub nom. Municipalities of Groton v. FERC, 587 F.2d 1296
(D.C. Cir. 1978).4 Petitioners do not even explicitly address,
let alone challenge, the rationale for the additional "penalty"
charge.
Thus, it is apparent that when FERC called the $8.75
charge "the cost" of a peaking unit, it was adopting the
original rationale as well as the original figure, but
carelessly simplifying the rationale. This is a venial sin
except so far as it symbolizes FERC’s broader failure to address
carefully and fully objections to a rate change--the forced re-
adoption of the original $8.75 charge--that might increase
local electrical rates in New England by many millions of
dollars annually.
Admittedly, the actual impact of the $8.75 charge on
retail electric rates in New England is not certain--despite
4Before the creation of ISO-NE, the further penalty was not
even paid to the sellers of power to encourage further
construction but was paid to the New England Power Pool to
defray its operating expenses. New Eng. Power Pool, 50 FERC ¶
61,139, at 61,420 (1990).
-14-
dire predictions from retailing utilities. The ICAP charge is
paid only if an LSE fails to buy adequate reserve capacity in
advance; the charge, including the penalty, is the spur to do
so. So if LSEs comply with their obligations through bilateral
contracts, there remains a question as to how much the
background ICAP charge will drive up retail prices in New
England. In any event, FERC's description of $8.75 as an
approximation of generation costs is not a serious problem,
unless actual peaking costs are shown to have fallen (an issue
to which we return below).
Petitioners' second claim of error is more basic.
Petitioners point to FERC’s central determination that $8.75
represents "a reasonable basis for setting a level to incent
[i.e., create the incentive for] the construction of new
generation." They then say that ISO-NE showed that there was
enough planned construction in New England to provide adequate
reserves without the charge; that FERC did not respond to
affidavit showings by opponents that the charge was unnecessary;
that there is nothing to show that a charge above $0.17 is
needed; and that merely to point to the prior $8.75 charge is
insufficient given the lapse in time and changes in the
industry.
-15-
These contentions have more force than FERC admits but
less than petitioners pretend. As to whether any charge is
needed, FERC says on appeal that this issue is not properly
presented because it was decided by FERC in its June 28 order
and judicial review from that order has not been sought. But
the reason review has not been sought is that petitions for
rehearing were filed at FERC and FERC has still not acted upon
them. We doubt that an agency can use a prior order as a
premise for a drastic second step--a possibly multimillion
dollar rate increase--but insulate the premise from review by
failing to act on rehearing petitions. Cf. Competitive
Telecomms. Ass'n v. FCC, 87 F.3d 522, 531 (D.C. Cir. 1996).
In all events, the question whether any charge is
needed overlaps with the further questions whether a substantial
charge is needed and whether $8.75, $0.17 or some other figure
should be used. This last question, at least, was not decided
in the June 28 order; indeed, it arose in response to that
order. Nor did FERC make in the June 28 order any detailed
findings of a kind that might control at the second stage, the
setting of an interim charge. In short, FERC’s "jurisdictional"
objection to our consideration of the claimed error is hollow.
On the other hand, petitioners’ own claims on the
merits are overstated. That ISO-NE says reserves are adequate
-16-
without a charge proves little: it appears that most of the
utilities served by ISO-NE are net buyers and have a self-
interested incentive to object to a charge. And even if present
"plans" promise ample new construction, FERC's orders (bolstered
by affidavits presented below) apparently reflect the reasonable
view that plans are only that and can easily be affected by the
prospect that reserve requirements for buyers will or will not
have teeth. If a buying utility can purchase below its reserve
requirement without penalty, it may find it worthwhile to do so
most of the time--while counting on the system to bail it out in
a crisis.
The more difficult question concerns FERC’s failure to
discuss in any detail the extensive affidavit filings by
objectors who claim that--given the current state of the
industry and conditions in New England--no substantial charge or
at least none greater than $0.17 is needed. Some of these
filings are by recognized experts and are substantial and
detailed; and although there are counter-affidavits from
utilities who are presumably net sellers, this is the kind of
material that one would normally expect an agency to analyze
seriously in its decision before making drastic changes,
especially where millions of dollars may ride on the outcome.
E.g., Noram Gas Transmission Co. v. FERC, 148 F.3d 1158, 1162-65
-17-
(D.C. Cir. 1998); K N Energy, Inc. v. FERC, 968 F.2d 1295, 1302-
04 (D.C. Cir. 1992).
Yet this case is not the typical one in which something
drastic is being done for the first time. The reserve
requirements have long existed in New England and are not
directly challenged by petitioners. And enforcement through a
substantial ICAP charge (indeed, from 1990 on with the precise
$8.75 figure) had been standard practice in New England for over
a decade before the temporary use of an auction in 1998 and 1999
which was either a failure (as FERC found) or at least not
successful enough for petitioners to defend in this court. So
FERC’s best answer is that the real status quo ante is the $8.75
figure and that the burden was really upon petitioners to
justify a departure (i.e., no charge or something less than
$8.75).
No one has cited any case law closely in point, but
common sense suggests the answer. FERC did not in the first
instance have to provide additional justification either for the
need for a substantial charge or for the $8.75 figure; but given
the detailed arguments in opposition and the possible dollar
impact of reinstatement of the $8.75 charge, it owed petitioners
(and the public who will likely pay some of any ICAP charge
through passed-on retail rate increases) some explanation as to
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why FERC was not persuaded by petitioners’ efforts to discredit
the notion of a substantial charge in general or the $8.75
charge in particular.
Undoubtedly FERC was annoyed, perhaps rightly, when its
direction to ISO-NE to reinstitute an administrative charge was
met by a proposal that FERC regarded as risible: a figure that
was a tiny fraction of the prior charge and of the ICAP charges
prevailing elsewhere on the Atlantic coast.5 And given the
impact of any widespread power shortage, FERC has every reason
to want effective enforcement of reserve requirements, even if
enforcement comes at a high price. Still, FERC is not therefore
excused from explaining its actions. Addressing contrary
arguments is part of establishing public acceptability and, in
any event, is part of FERC’s own responsibility. See Motor
Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 42-44, 48-50 (1983).
5The "installed capacity" deficiency charge in the New York
market was $12.50 per kilowatt-month in the year 2000, although
for the summer of 2000 the value of the charge was effectively
reduced to $8.75 per kilowatt-month by a rebate of up to $3.75
per kilowatt-month. N.Y. Indep. Sys. Operator, Inc., 93 FERC ¶
61,034, at 61,077-78 (2000). In the Pennsylvania-New Jersey-
Maryland market ("PJM"), where no penalty is added to the
estimated cost of adding generation capacity, the charge is
substantially lower; it was apparently $4.87 per kilowatt-month
in 1997, Pa.-N.J.-Md. Interconnection, 81 FERC ¶ 61,257, at
62,276 n.197 (1997) (amended Feb. 4, 1998), and, according to
the record on appeal, $5.25 per kilowatt-month in 2000.
-19-
What we have said applies as much to the specific
choice of the $8.75 figure as to the need for a substantial
charge. Absent evidence of significant change in construction
costs, FERC was entitled to revert to the pre-existing figure
rather than justify it afresh in the first instance, cf. S. La.
Area Rate Cases v. FPC, 428 F.2d 407, 433 (5th Cir.), cert.
denied, 400 U.S. 950 (1970); but it was not entitled to ignore
claims that the cost of peaking facilities is less than it was
in the past. Such claims have been made in this case; perhaps
they can be easily answered; or, if lengthy proceedings would be
needed to do so, FERC may be able to justify restoring the $8.75
charge on a provisional basis while making the evaluation. But
some response from FERC is required.
An agency's expert judgments are entitled to deference,
especially where safety concerns are on one side of the balance,
as they are here. E.g., Chem. Waste Mgmt., Inc. v. U.S. EPA,
869 F.2d 1526, 1538-40 (D.C. Cir. 1989); cf. K N Energy, 968
F.2d at 1303. If FERC had provided even a semblance of serious
discussion as to why a substantial ICAP charge was still
required and why the pre-existing figure was the best solution
on short notice, quite probably the charge would be sustained
outright. California’s recent experience is likely irrelevant
as to immediate causes but not as to consequences. But this is
-20-
all the more reason for FERC to write a decision reflecting a
serious look at objections.
Alternatives. In addition to attacking the $8.75
charge as unsupported, petitioners make a series of further
arguments, beginning with the claim that FERC "failed to
consider reasonable alternatives [to the $8.75 charge], which it
was obligated to do under reasoned decision-making principles."
Petitioners say that "FERC's only response was that it was
inappropriate to consider these alternatives when proposed in a
rehearing request," and they contend that this response is
inadequate because rehearing was "the first time" in which
parties opposed to the $8.75 charge could propose alternatives.
Petitioners have markedly overstated any legitimate
grievance. Broadly speaking, agencies are expected to consider
reasonable alternatives to proposed actions, Farmers Union Cent.
Exch., Inc. v. FERC, 734 F.2d 1486, 1511 (D.C. Cir.), cert.
denied, 469 U.S. 1034 (1984); but here FERC did not refuse to
consider alternatives or rest "only" on the failure to present
the alternatives earlier. It said that the record did not
provide a basis to sustain the main alternative urged (i.e.,
using bilateral contract prices to construct an ICAP charge) and
that ISO-NE was welcome to formulate alternatives and support
-21-
them in a new filing. ISO New Eng., 94 FERC ¶ 61,237, at
61,847.
Furthermore, the sense that agencies should address
alternatives before acting is not hard and fast: if prompt
action is necessary and delay would be harmful, agencies
sometimes do need to take interim action, deferring to further
proceedings other facets of the problem or alternative solutions
that may take more time to develop. See Competitive Telecomms.
Ass'n, 87 F.3d at 531; Nat'l Air Carrier Ass'n v. Civil
Aeronautics Bd., 436 F.2d 185, 194-95 (D.C. Cir. 1970). And,
for multiple reasons in this case, there is nothing unreasonable
in FERC's demand that proponents furnish the proposed
alternatives with adequate support.
It is quite true that FERC should have said more to
explain why it concluded that "the record in this proceeding
does not contain adequate information to support a just and
reasonable ICAP deficiency charge based on prices in the
bilateral market." ISO New Eng., 94 FERC ¶ 61,237, at 61,847.
This is so even if we assume, with FERC, that petitioners could
have pointed to such alternatives before the December 15 order,
knowing that protests to the earlier compliance filing had urged
that the $8.75 charge be re-adopted. But FERC did address the
main alternative and found it wanting even if FERC's explanation
-22-
was too cryptic; the alternative was not rejected simply because
it was belatedly offered.
In all events, on remand FERC should explain why, on
this record, the bilateral-market prices are not an adequately
supported substitute. If other substantial alternatives were
presented, FERC should also address them. But we harbor some
doubts about the strength of petitioners' claim as to other
alternatives; it is hard in their briefs to find any substantial
discussion of what the alternatives were and why (absent the
$8.75 charge) they might be expected effectively to enforce the
reserve obligations that already exist.
The $0.17 Charge. This brings us to petitioners’ next
objection, which is superficially quite different because it
focuses on the rejection of the $0.17 charge rather than the
adoption of the $8.75 charge. Although petitioners do not
contest FERC's general authority to review the $0.17 charge, 16
U.S.C. §§ 824d, 824e (1994), they say that under established
case law, FERC had no power to "reject" ISO-NE's $0.17 proposal
without a "hearing" because it was not procedurally deficient or
substantively a "nullity," Mun. Light Bds. v. FPC, 450 F.2d
1341, 1345 (D.C. Cir. 1971), cert. denied, 405 U.S. 989 (1972).
Petitioners also say that the reasons given by FERC for the
rejection were unsound or unsupported.
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There is a body of case law, not entirely consistent
in rhetoric or substance, that limits the power of federal
ratemaking agencies like FERC summarily to reject new tariffs
except as to narrow grounds.6 The case law is a gloss on
statutory procedures designed to allow carriers to institute
rate changes on their own initiative and, subject both to
temporary delay or "suspension" and to refund of later-
overturned obligations, to place new rates into effect during
agency investigation and hearing. E.g., AT&T Co. v. FCC, 487
F.2d 865, 871-72 (2d Cir. 1973). But the $0.17 charge was not
just a typical utility-initiated rate charge but was purportedly
filed in compliance with FERC's June 28 order.
Here, FERC says that the $0.17 rate was inconsistent
with its June 28 order and that that order cannot be attacked in
this proceeding. The two propositions are quite different. We
have already explained why the premises of the June 28 order
cannot be insulated from criticism insofar as those premises are
used to support FERC’s later actions. However, the fact that
the June 28 order is still before FERC on rehearing petitions
6
E.g., ANR Pipeline Co. v. FERC, 931 F.2d 88, 92-93 (D.C.
Cir. 1991); United Gas Pipe Line Co. v. FPC, 551 F.2d 460, 463-
64 (D.C. Cir. 1977); Mun. Light Bds., 450 F.2d at 1345; accord
Fla. Power & Light Co., 67 FERC ¶ 61,326, at 62,148 (1994); cf.
Cajun Elec. Power Coop., Inc. v. FERC, 28 F.3d 173, 176-80 (D.C.
Cir. 1994) (summary approval of tariffs).
-24-
does not prevent FERC from relying upon it in evaluating a
purported compliance filing, which is just what the $0.17
proposal constituted. The June 28 order was effective unless
stayed, and no stay was secured either from FERC or from a
reviewing court.
According to FERC’s December 15 order rejecting the
proposal, the $0.17 charge was a nominal rather than a plausible
response to the June 28 directive. If FERC was correct, it was
entitled to reject the filing as patently inconsistent with an
existing, unstayed directive. "[A] utility is not entitled to a
hearing before the non-conforming portion of its rate filing is
rejected or when it challenges an established policy," Jersey
Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1205 (D.C. Cir.
1987) (internal citations omitted); see also ANR Pipeline Co. v.
FERC, 931 F.2d 88, 92. FERC certainly did make a determination
of non-compliance, and in this determination it enjoys a
favorable standard of review, Pepperell Assocs. v. U.S. EPA, 246
F.3d 15, 22 (1st Cir. 2001).7 Whether FERC adequately explained
the determination is a different question.
7
FERC has "broad discretion . . . to determine whether a
filing substantially complies with its regulations." United Gas
Pipe Line Co. v. FERC, 707 F.2d 1507, 1512 (D.C. Cir. 1983)
(internal quotation marks omitted).
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In critiquing the determination, petitioners focus on
a terse and arguably confusing statement by FERC that the $0.17
was merely an average derived from the (now abandoned) auction
market and was not "useful." Yet, fairly read, FERC's June 28
order clearly envisaged a return to a substantial ICAP charge;
and the core concept of such a charge has long been in New
England, and still is in other Atlantic Coast regions, the cost
of adding new peak load generating capacity (not excluding a
possible penalty as well). That cost is far above $0.17 and
probably lies in the $5.00 range. On this premise, the $0.17
proposal was plainly non-complying, and FERC's rejection of the
$0.17 proposal was therefore well justified.
Procedural Matters. Petitioners' final argument on
review brings them back to FERC’s adoption of the $8.75 charge.
In adopting this charge, say petitioners, FERC "failed to
provide due process and unreasonably refused to hold a hearing."
Two quite different arguments are presented under this heading:
first, that FERC was required to hold not just a hearing (which
it did) but a specific kind of hearing before adopting the $8.75
charge; and second, that because selling utilities first
proposed the $8.75 charge in protesting the $0.17 filing, the
buying utilities had no fair opportunity to respond since
"[u]nder FERC’s rules, answers to protests are not permitted."
-26-
The term "hearing" is notoriously malleable, but what
petitioners got here was not only a hearing but a species of
evidentiary hearing8 which is now quite common in utility and
carrier regulation, e.g., Town of Norwood, 202 F.3d at 404.
Very extensive evidentiary submissions were made by both sides
in the form of affidavits from experts and others, together with
extensive written argument; indeed, it is these submissions by
buying utilities that petitioners complain (rightly in some
degree) were before FERC but not seriously addressed in its
orders.
At least where forward-looking industry-wide regulation
is at issue, it is increasingly common for agencies to employ
such hearings by affidavit and nothing more. In such
situations, courts have approved of this agency practice when
any genuine issues of material fact can be "adequately resolved
on the written record." E.g., Town of Norwood, 202 F.3d at 404;
La. Energy & Power Auth. v. FERC, 141 F.3d 364, 371 (D.C. Cir.
1998); see also La. Ass'n of Indep. Producers & Royalty Owners
v. FERC, 958 F.2d 1101, 1113 (D.C. Cir. 1992) (trial-type
evidentiary hearing not necessary to answer "purely technical
8
See 5 U.S.C. § 556(d) (1994); Seacoast Anti-Pollution
League v. Costle, 572 F.2d 872, 879-80 (1st Cir.)
(distinguishing a "public hearing"), cert. denied, 439 U.S. 824
(1978); Friendly, "Some Kind of Hearing", 123 U. Pa. L. Rev.
1267, 1270 & n.14 (1975).
-27-
issue" "whether additional pipeline capacity is needed to meet
future demand" (internal quotation marks omitted)).
Of course, an agency can do more: it can afford oral
hearings in which cross-examination is conducted before an
administrative law judge; in utility regulation, direct
testimony is commonly offered (as here) in written form.
Whether and when particular procedures are necessary is no
longer governed by clear-cut judicial rules. It is often said
that an agency’s decisions as to procedure are reviewed for
abuse of discretion,9 and, again, the reasons for deference are
especially strong where the decision is entangled with the
agency's expert judgment regarding forward-looking industry-wide
regulation, see, e.g., Fresno Mobile Radio, Inc. v. FCC, 165
F.3d 965, 971 (D.C. Cir. 1999).
Turning to the question whether buying utilities had
a fair opportunity to respond to the prospect of an $8.75
charge, there are two additional points. First, in 77 pages of
comments filed with FERC on August 28, 2000 (the very same day
that sellers filed protests arguing for the $8.75 charge),
buying utilities specifically anticipated, and responded
9E.g., R&W Technical Servs. Ltd. v. Commodity Futures
Trading Comm'n, 205 F.3d 165, 176 (5th Cir.), cert. denied, 121
S. Ct. 54 (2000); La. Pub. Serv. Comm'n v. FERC, 184 F.3d 892,
895 (D.C. Cir. 1999); City of St. Louis v. Dep't of Transp., 936
F.2d 1528, 1538 (8th Cir. 1991).
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extensively to, arguments for the $8.75 charge. Thus, under the
particular circumstances of this case, FERC's general rule
against answers to protests, 18 C.F.R. § 385.213(a)(2) (2000),
did not prevent buying utilities from presenting the principal
arguments against the $8.75 charge.10
A second, more decisive point is that, whatever the
adequacy of the "hearing" provided before December 15, opponents
to the $8.75 charge had ample opportunity to contest the $8.75
charge in their requests for rehearing. See Boston Edison Co.
v. FERC, 885 F.2d 962, 966 (1st Cir. 1989). As noted above,
FERC's March 6 order considered the various arguments against
the $8.75 charge and responded to them. The main question
remains not whether petitioners' arguments were heard, but what
FERC should have done to respond to them adequately.
In all events, on remand petitioners are free to ask
FERC for the opportunity to make further submissions and to show
FERC why oral cross-examination is necessary. As we are
structuring our remand, petitioners will have no incentive for
delay and good reason for expedition; they can then consider
again whether they think oral cross-examination is vital. And
10
In the December 15 order, FERC invoked this rule to
justify refusing to consider a terse five-page answer filed by
one buying utility on September 12, 2000. ISO New Eng., 93 FERC
¶ 61,290, at 61,974.
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something may depend on how FERC proposes to answer the
objections made to its contemplated $8.75 charge and just how
much of an interim measure it intends the $8.75 charge to be.
Remand. We conclude that certain specific issues
raised by opponents of the $8.75 charge require more reasoned
consideration than FERC afforded. The results of FERC's orders
may well be defensible, given FERC's view that immediate action
is required and that the charge can be reconsidered if opponents
provide an adequate alternative regime. However, the immediate
impact of those orders is high and FERC's errors and omissions
are troubling. Thus, a remand is appropriate for further
explanation. Noram Gas, 148 F.3d at 1165-66.
The principal questions that FERC needs to answer more
fully are these: why, despite petitioners' various claims to
the contrary, a substantial ICAP charge is still required to
enforce reserve obligations; why, in light of petitioners'
claims of a lower present cost of peaking capacity, $8.75 is the
proper interim figure; and why any alternatives already
proffered by opponents are inadequate or are otherwise not
properly considered at this time. Answers can be imagined, but
it is FERC that must formulate and adopt them in the first
instance. SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).
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A reviewing court that perceives flaws in an agency's
explanation is not required automatically to set aside the
inadequately explained order. Allied-Signal, Inc. v. U.S.
Nuclear Regulatory Comm'n, 988 F.2d 146, 150-51 (D.C. Cir.
1993). Whether to do so rests in the sound discretion of the
reviewing court; and it depends inter alia on the severity of
the errors, the likelihood that they can be mended without
altering the order, and on the balance of equities and public
interest considerations. Int'l Union, United Mine Workers of
Am. v. Fed. Mine Safety & Health Admin., 920 F.2d 960, 966-67
(D.C. Cir. 1990). Here, a preliminary assessment suggests that
the errors at issue can probably be mended.
Further, FERC's warrant that the charge is needed now
to assure adequate energy supplies in New England carries
weight. FERC has plausibly adverted to the need for confidence
among power suppliers that reserve requirements will be
meaningfully enforced. Cf. Fresno Mobile Radio, 165 F.3d at
971. An on again-off again ICAP charge is not likely to
encourage suppliers to maintain marginal (i.e., high cost)
existing plant or to build new facilities for peak demand. At
least at this time, we think that the public interest in
assuring power is decisive.
-31-
In remanding, we leave open to FERC's informed judgment
the decision whether to conduct further proceedings (and, if so,
what kind) or whether simply to write a further decision on
reconsideration. Nor do we preclude FERC from modifying the
outcome if it is so advised. No time limit need be imposed at
this time. If FERC unduly delays, any party to this case may
apply to us for an order fixing a deadline for agency
reconsideration. Cf. Int'l Union, 920 F.2d at 967.
We retain jurisdiction over this case to issue all
orders necessary to assure compliance with our mandate and to
review whatever decision FERC makes on reconsideration in
response to our mandate, assuming that the decision remains
contested. Cf. BASF Wyandotte Corp. v. Costle, 598 F.2d 637,
663 (1st Cir. 1979); Kennecott Copper Corp. v. EPA, 462 F.2d
846, 851 n.21 (D.C. Cir. 1972). FERC's counsel is directed to
file a status report, served on all other parties, with the
Clerk of this court every 45 days from the date of this
decision.
Accordingly, FERC's orders of December 15, 2000, and
March 6, 2001, are not vacated at this time but the case is
remanded for further action consistent with this decision.
Parties may petition for rehearing of this court's decision in
the ordinary course. However, our prior stay order barring the
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$8.75 charge is vacated forthwith, and FERC is free to re-impose
its $8.75 charge prospectively, either at once or as of some
specified future date. All parties shall bear their own costs
in this court.
It is so ordered.
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