City of Kaukauna, WI v. FERC

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-1770

City of Kaukauna, Wisconsin, Inter Lake
Papers, Inc., and Wisconsin Electric Power Company,

Petitioners,

v.

Federal Energy Regulatory Commission,

Respondent.

On Petition for Review of Orders of the
Federal Energy Regulatory Commission.
80 FERC para.para. 62,232, 62,233, 62,234 and 86 FERC para. 61,096.

Argued December 1, 1999--Decided June 6, 2000

Before Bauer, Cudahy and Flaum, Circuit Judges.

Cudahy, Circuit Judge. Central Wisconsin and its
medial artery, the Fox River, are a rich source
of history, as this case reveals.

In this case, the petitioners each operate
hydropower projects at federally owned dams on
the Lower Fox River (the part of the river below
Lake Winnebago). All of these projects are
located downstream of the government-owned dam at
Menasha (the Menasha dam), which controls the
level of Lake Winnebago and regulates the flow of
the Fox River as it leaves the lake. In September
of 1997, the Federal Energy Regulatory Commission
(FERC or the Commission) exercised its power
pursuant to sec. 10(f) of the Federal Power Act
(FPA), 16 U.S.C. sec. 803(f), and assessed the
petitioners a total of $338,984 in charges for
"headwater benefits." These hydropower
enhancements were realized at the petitioners’
projects as a consequence of the more even flow
of the river attributable to the improvement of
the Menasha dam’s storage-and-release capability
in 1937. FERC also required the petitioners to
begin paying annual "headwater benefit" charges.
The petitioners argued to FERC that these charges
were unjustified because they already owned the
rights to "headwater benefits" as a result of a
series of conveyances beginning in the mid-
nineteenth century--starting with a grant from
the United States to the State of Wisconsin in
1848. FERC rejected this argument, and the
petitioners filed for review in this court. We
agree with the petitioners and reverse.

I. The History and Development of the Fox River/1

In 1634, the French explorer Jean Nicolet
became the first European to set foot in
Wisconsin, claiming it for France. He began his
exploration at Green Bay, where the Fox River
flows into Lake Michigan, and traveled up the Fox
in a southwesterly direction through Lake
Winnebago as far as the site of the present city
of Berlin, Wisconsin. Forty years later, Father
Jacques Marquette and Louis Jolliet traveled
farther up the Fox, eventually reaching the
portage between the Fox and Wisconsin Rivers,
where the two rivers are only about a mile apart.
From that portage--where the city of Portage,
Wisconsin, is now located--the Fox River flows
northeastward into Lake Michigan, and the
Wisconsin River (which Marquette and Jolliet then
followed) runs southwestward into the Mississippi
River. For more than a century after Marquette
and Jolliet discovered it, European fur traders
used the portage as a link in their passage
westward.

In September of 1828, three companies of the
First United States Infantry arrived at the Fox-
Wisconsin portage to build Fort Winnebago. One of
the main reasons for establishing this strong
point was to prevent the Winnebago Indians from
closing the commercially important trail between
the rivers. This military presence encouraged
settlers to come to the area, and travelers
eventually became dissatisfied with the well-worn
but marshy trail. This path was virtually
impassible during times of high water, and
eventually the idea of a canal gained attention.
Given the recent success of the Erie Canal and
the great interest in canals in this pre-railroad
era, a Fox-Wisconsin canal seemed like a splendid
idea. If the canal and other improvements to the
Fox River were successful, there would be a
continuous waterway from the Atlantic coast to
New Orleans, by way of the Great Lakes. In 1837,
the Winnebago Indians were somehow induced to
give up all their lands in Wisconsin, and a group
of New York and Wisconsin businessmen formed the
Portage Canal Company. Construction of a canal
between the Fox and Wisconsin Rivers began, but
it stalled after the expenditure of $10,000.
Years passed.

Joel R. Poinsett,/2 President Martin Van
Buren’s Secretary of War, saw military value in
completing the Fox-Wisconsin waterway, and he
urged Congress to appropriate money to complete
its construction. Morgan L. Martin, territorial
delegate from Wisconsin, suggested that money
could be saved by giving land and water rights to
Wisconsin and letting it build the canal and
improve the Fox River. See Ina Curtis, Early Days at
the Fox-Wisconsin Portage 48 (Columbia County Hist.
Soc. 1981). Congress favored Martin’s idea, and
in 1846, Congress passed a law granting to
Wisconsin, upon its becoming a state (which
happened two years later), all public lands and
water rights necessary for the construction of
the canal and the improvement of the Fox River,
including land "on each side of the said Fox
River, and the lakes through which it passes"
from the portage to Green Bay. Act of Aug. 8,
1846, 170 Stat. 83 (1846). On August 8, 1848, the
brand new State of Wisconsin gave its assent to
this Act of Congress, accepting the offer. See
Act of Aug. 8, 1848, 1848 Wis. Laws 58. As part
of its acceptance, Wisconsin declared,
"[W]henever a water power shall be created by
reason of any dam erected or other improvements
made on any of said rivers, such water power
shall belong to the state subject to future
action of the [Wisconsin] legislature." Id. at
sec. 16, 1848 Wis. Laws at 62. Work on the canal
and other improvements began in June of 1849
under the direction of the newly created
Wisconsin Board of Public Works, but progress was
slow because of mix-ups between the Board and its
contractors. In 1851, the first dam was built
across the natural outlet of Lake Winnebago at
Menasha. See Ellen Kort, The Fox Heritage 74 (Windsor
Pub. 1984). The canal between the Fox and the
Wisconsin was completed by May of 1851,/3 but
the State was buckling under the financial
burden./4 Morgan Martin then reentered the
scenario, taking over as a new contractor and
attempting to complete the improvements along the
Fox River from Lake Winnebago to Green Bay.

Still under financial pressure, Wisconsin
decided to "privatize" the project. The Wisconsin
legislature issued a special charter to the Fox
and Wisconsin Improvement Company (Improvement
Company), and on July 6, 1853, Wisconsin
transferred "the works of improvement
[contemplated by the Act of Aug. 8, 1848 and
related acts], together with all and singular
rights of way, dams, locks, canals, water power
. . . to the same extent and in the same manner
that the State now hold[s] . . . ." Act of July
6, 1853, sec. 2, 1853 Wis. Laws 92, 93. Thus, the
State of Wisconsin disposed of its entire
interest in improving the Fox and dumped the
associated financial burdens of improvement by
transfer to the Improvement Company, which
continued the undertaking.

Carrying on the tradition of difficulty and
failure, the Improvement Company found itself
bankrupt by 1864. In 1866, the property of the
Improvement Company--consisting of the works of
improvement, the water powers and the lands--were
sold to a group of investors from New York at a
court-ordered foreclosure sale. The purchasers
were later incorporated as the Green Bay &
Mississippi Canal Company (Canal Company) with
the mission of expanding the canal and
improvements to make way for much larger craft.
See Act of April 12, 1866, sec. 2, 1866 Wis.
Private & Local Laws 1493, 1494. The Canal
Company operated for several years, but during
that time very little work was done on the Fox
River improvements. Instead, the Canal Company
focused on soliciting assistance from the federal
government. The anomaly of a public waterway’s
being held in private hands created some concern
in the halls of power, and eventually, none other
than Morgan Martin, together with others,
suggested that the rights and franchises of the
Canal Company come full circle and be surrendered
to the United States government.

In 1870, Congress authorized the Secretary of
War to enter into arbitration with the Canal
Company to determine what compensation should be
paid for the assets the United States required to
continue the improvements of the Fox River for
the purpose of navigation. See Act of July 7,
1870, 16 Stat. 189, ch. 210 (1870). Wisconsin
authorized the sale, see Act of March 23, 1871,
1871 Wis. Private & Local Laws 973, and the
arbitrators fixed the appropriate compensation at
$325,000 to be paid to the Canal Company. This
sum reflected the following valuations: water
powers, $140,000; personal property, $40,000; and
the improvements, $145,000. The Secretary of War
determined that the Canal Company’s water power
rights and personal property were not necessary
to the maintenance of navigation along the Fox
River and recommended to Congress that it acquire
only the property necessary to maintain
navigation, leaving the water power rights and
personal property in the hands of the Canal
Company. On June 10, 1872, Congress authorized
the purchase of the improvements only,
compensating the Canal Company in the amount of
$145,000--the prescribed $325,000 less the value
of the water power rights and personal property.
The Canal Company deeded the improvements to the
United States in September of 1872, transferring:

All and singular property and right of property
in and to the line of Water Communication between
the Wisconsin River aforsaid and the mouth of the
Fox River, including its locks, dams, canals and
franchises saving and excepting therefrom and
reserving to [the Canal Company] the following
described property right and portion of
franchises, which in the opinion of the Secretary
of War are of Congress and not needed for public
use . . . .

Deed from Green Bay & Mississippi Canal Company
to United States of America (Sept. 8, 1872) at 3
(1872 Deed), J. App. at 18 (emphasis in
original). What was "not needed for public use"--
i.e., not needed for navigation--was thus
reserved by the Canal Company, and the deed
described the reserved property as follows:

[A]ll that part of the franchise of [the Canal
Company] viz. the water power created by the
dams, and by the use of the surpluse [sic] water
not required for the purpose of navigation with
the rights of protection and preservation
appurtenant thereto and the lots, pieces or
parcels of land necessary to the enjoyment of the
same and those acquired with reference to the
same all subject to the right to use the water
for all purposes of navigation . . . .

1872 Deed at 3, J. App. at 18. After the
execution of this deed, the United States owned
all the dams and controlled the waterway under
its paramount interest in navigation. The Canal
Company owned all the water power rights created
by the dams, subject to the United States’s
navigation interest./5 The Canal Company leased
water power to several paper mills along the
Lower Fox River, and the United States maintained
navigation along the entire Fox River. However,
with the advance of the railroads, commerce on
the Fox River above Lake Winnebago dwindled, and
the canal was eventually abandoned. Improvement
along the Lower Fox River (below Lake Winnebago
and the Menasha dam to Green Bay) continued, and
in 1937 the government increased the spillway
capacity of the Menasha dam. This permitted more
effective control of the water level in Lake
Winnebago and, concurrently, stabilized the flow
in the Lower Fox River. Today, the Fox River is
used partly for navigation but mostly for water
power, which since the turn of the century means
hydroelectric power. And hydroelectric power is
a major focus of federal regulation.

II. Regulatory Background

In 1920, Congress enacted the Federal Water
Power Act (FWPA), 41 Stat. 1063 (1920), in order
to promote "the comprehensive development of the
water resources of the Nation, in so far as it
was within the reach of the federal power . . .
." First Iowa Hydro-Electric Cooperative v.
Federal Power Commission, 328 U.S. 152, 180
(1946). In 1930, Congress created a five-member,
independent Federal Power Commission (FPC) to
exercise licensing authority over dams and other
projects on navigable waters. See Act of June 23,
1930, 46 Stat. 797 (1930). Five years after that,
Congress amended the FWPA to provide for
regulation of wholesale electric power in
interstate commerce, renaming it the Federal
Power Act (FPA). See Public Utility Act of 1935,
49 Stat. 839 (1935). In 1977, the FPC was renamed
the Federal Energy Regulatory Commission. See
Department of Energy Organization Act, Pub. L.
No. 95-91, 91 Stat. 565 (1977).

Under the FPA, now codified at 16 U.S.C. sec.
791a et seq., a private party cannot build or
operate a dam or reservoir on navigable waters of
the United States for the purpose of developing
electric power without first obtaining a license
from FERC. See 16 U.S.C. sec. 817. Nor can an
unlicenced hydropower project use the "surplus
water" or "water power" from a government-
operated dam. See id. The Commission issues
licenses to parties, like the petitioners, that
have hydropower projects at government dams under
sec. 4(e) of the FPA./6 See 16 U.S.C. sec.
797(e). Section 10(e) of the FPA authorizes FERC
to charge licensed hydropower projects annual
fees for the occupancy and use of government dams
or other structures. See 16 U.S.C. sec.
803(e)./7

At issue in the present case, however, is
FERC’s power under sec. 10(f) of the FPA. See 16
U.S.C. sec. 803(f)./8 Section 10(f) authorizes
the Commission to charge appropriate fees to any
hydropower project, whether licensed or not, if
the project is benefitted by an upstream dam or
other upstream improvement. Congress enacted sec.
10(f) as a means of requiring power projects--
like the petitioners’ projects--to compensate
upstream dam owners for "headwater benefits"
conferred as a result of "a storage reservoir or
other headwater improvement." 16 U.S.C. sec.
803(f). As the Tenth Circuit has explained:

The term "headwater benefits" refers to the
situation in which an upstream reservoir, through
a program of water storage and subsequent
controlled release, alters the natural flow of a
river in such a way as to allow a downstream
hydroelectric facility to generate more electric
power than would otherwise be possible. This is
accomplished primarily by augmenting the natural
flow of the river with released storage water
during seasons when the natural flow would
otherwise not be sufficient to allow the
downstream facility to operate at full capacity.

Public Service Co. of Colorado v. FERC, 754 F.2d
1555, 1561 (10th Cir. 1985). See also 18 C.F.R.
sec. 11.10(a)(2) (defining "headwater benefits").
The system of assessing fees for "headwater
benefits" ensures that downstream power stations
"participate in the financial burden" shouldered
by upstream projects whenever storage-and-release
programs, that provide benefits to downstream
owners, are created or improved. In re Southern
California Edison Co., Ltd., 1 FPC 567, 574
(1939). See also Farmington River Power Co. v.
FERC, 103 F.3d 1002, 1004 (D.C. Cir. 1997).

While FERC clearly has authority to assess
water-power-related charges under both sec. 10(e)
and sec. 10(f) of the FPA, this authority is not
without limit. The FPA states that it is not
intended "in any way to interfere with the laws
of the respective States relating to the control,
appropriation, use, or distribution of water . .
. or any vested right acquired therein." 16
U.S.C. sec. 821. Thus, FERC cannot assess charges
for the use of water or water rights to which a
party has a vested right under state law. See
Public Service Co. of Colorado, 754 F.2d at 1566.

III. Headwater Benefits Assessment

In 1992, FERC informed the petitioners that it
would be conducting a "headwater benefit" study
on the Lower Fox River and would then assess
charges for benefits realized by projects
downstream of the government-owned dam at
Menasha, Wisconsin. As has been noted, the
Menasha dam is located where the Fox River leaves
Lake Winnebago and regulates the river’s flow as
it has done since its construction in 1851. All
of the petitioners’ hydropower projects are
located below the Menasha dam. Since 1937, when
its spillway capacity was increased, that dam has
provided "headwater benefits" to these downstream
projects through its storage-and-release
program./9 In 1994, FERC’s Office of Hydropower
Licensing issued a report suggesting that a total
"headwater benefit" fee of $338,984 be assessed
for past benefits/10 with additional charges
to be assessed in the future. The Director of the
Office of Hydropower Licensing, over the
petitioners’ objections, accepted this
suggestion, and on September 12, 1997, issued an
order imposing charges. See Wisconsin Electric
Power Co., 80 FERC para. 62,232, 64,399-400
(1997); City of Kaukauna, 80 FERC para. 62,233,
64,405 (1997); Repap Wisconsin Inc., 80 FERC
para. 62,234, 64,409-10 (1997). The Director
found that the petitioners were exempt from
"headwater benefit" charges prior to 1937, but
that their rights under the 1872 Deed did not
cover the incremental generation attributable to
the 1937 improvements to the Menasha dam. See
Wisconsin Electric Power Co., 80 FERC at 64,399;
City of Kaukauna, 80 FERC at 64,404; Repap
Wisconsin, 80 FERC at 64,409. The petitioners
sought a rehearing on the ground that, as
successors in interest to the Canal Company, they
already owned, even after 1937, all rights to
"water power" and "surplus water" not required
for navigation and employed in power production
at any dam or other improvement on the Fox River.

In its Order on Rehearing, the full Commission
rejected the petitioners’ argument. In making
this determination, FERC did not adopt the
Director’s reliance on the recent vintage of the
1937 improvements to the Menasha dam. Instead,
the Commission relied on three arguably
independent justifications: (1) the right to
"surplus water" and "water power" reserved in the
1872 Deed applied only to the "water power"
available at the individual dam sites where the
petitioners’ projects are located and therefore
did not extend to the upstream Menasha Dam; (2)
under the FPA, the petitioners’ rights to "water
power" and "surplus water" did not include
benefits attributable to the storage and release
of water from an upstream project; and (3) the
Canal Company did not in fact own any water power
rights at the Menasha Dam, and therefore could
not have assigned such rights to its successors.
See Wisconsin Electric Power Co., 86 FERC para.
61,096 (1999). The petitioners seek review in
this court.

IV. Discussion

When we review a FERC order, we must ordinarily
determine "(1) whether the Commission abused or
exceeded its authority; (2) whether each
essential element of the Commission’s order is
supported by substantial evidence; and (3)
whether the Commission has given reasoned
consideration to each of the pertinent factors in
balancing the needs of the [regulated parties]
with relevant public interests." Central Illinois
Pub. Serv. Co. v. FERC, 941 F.2d 622, 627 (7th
Cir. 1991) (quoting Peoples Gas Light and Coke
Co. v. FERC, 742 F.2d 1109, 1111-12 (7th Cir.
1984)). A Commission order should not be reversed
if FERC has provided "a sound, well-reasoned
justification, based upon the evidence in the
record, for its action." Central Illinois Pub.
Serv. Co., 941 F.2d at 627 (quoting Northern
Indiana Pub. Serv. Co., 782 F.2d 730, 746 (7th
Cir. 1986)). Our review is usually quite
deferential, but, when asked to review FERC’s
interpretation of a contract as we are here,
focusing on the nineteenth-century conveyances,
we review with less deference. See Amoco Prod.
Co. v. FERC, 765 F.2d 686, 690 (7th Cir. 1985).
Thus, we will affirm FERC’s order only if we find
its "interpretation of the [conveyances] was
reasonable and in full conformance with law." Id.
(citing Texas Gas Transmission Corp. v. Shell Oil
Co., 363 U.S. 263, 268-69 (1960)).

The petitioners make the same argument before
us as they did before FERC. This argument, at its
core, is very simple: they claim without dispute
that they are the successors in interest of the
Canal Company and then argue that they already
own the water rights for which FERC has charged
them. Nothing in the language of the relevant
conveyances, they continue, supports the
Commission’s narrow constructions of the terms
"water power" and "surplus water." To the
contrary, say petitioners, the plain language of
the conveyances reserved to the Canal Company all
actual and potential water power interests along
the Fox River, including those that would later
be labeled "headwater benefits" in accordance
with sec. 10(f) of the FPA. In 1872, the
"headwater benefits" created by the Menasha
improvements were potential only, but, whenever
created, came within the applicable language of
the conveyances.

The petitioners’ thesis is that the "headwater
benefits" for which FERC charged them are merely
part of the "water power" and "surplus water"
they own as a result of the reservation in the
1872 Deed. To elaborate, their argument goes like
this: the State of Wisconsin claimed "water
power" "created by reason of any dam . . . or
other improvement" along the Fox River; then the
Improvement Company received the State’s entire
interest, including rights to "water power;" then
the Canal Company got the Improvement Company’s
entire interest, again including the rights to
"water power;" and finally, when transferring the
improvements to the United States, the Canal
Company kept the rights to "water power." Thus,
the petitioners conclude, because the Canal
Company’s interest in "water power" derives from
the State’s original claim over "water power"
"created by reason of any dam," the "water power"
(and "surplus water") reserved by the Canal
Company--and later acquired by the petitioners--
includes what has at some point in the evolution
of the river been labeled "headwater benefits."

The petitioners have a very strong argument.
Beginning with the grant of land from the United
States to the State of Wisconsin in 1848, the
State validly claimed ownership of all "water
power [that] shall be created by reason of any
dam erected or other improvements made on any of
said rivers." Act of Aug. 8, 1848 sec. 16, 1848
Wis. Laws 58, 62. See Kaukauna Water Power Co. v.
Green Bay & Mississippi Canal Co., 142 U.S. 254,
276 (1891) (holding, when asked to determine the
validity of the 1848 Act, that "we think it
within the power of the state to retain within
its immediate control such surplus as might
incidentally be created by the erection of the
dam"). Wisconsin later validly transferred its
entire interest to the Improvement Company. See
Green Bay & Mississippi Canal Co. v. Kaukauna
Water-Power Co., 35 N.W. 529, 531 (Wis. 1887)
(describing transfer). Then, in 1866, the Canal
Company acquired the Improvement Company’s entire
interest through a foreclosure sale. See Green
Bay & Mississippi Canal Co. v. Patten Paper Co.,
172 U.S. 58, 74 (1898) (describing transfer as
including "the property of [the Improvement
Company], consisting of the works of improvement,
lands and water powers"); Green Bay & Mississippi
Canal Co., 35 N.W. at 532. Thus, in 1866, the
Canal Company held the same property and rights
along the Fox River as the State had claimed
under its Act of August 8, 1848.

The crucial conveyance is the transfer
memorialized in the 1872 Deed. By that document,
the Canal Company "transferred and conveyed the
works of improvement to the United States,
reserving to itself the personal property and the
water powers . . . ." Patten Paper, 172 U.S. at
75. Specifically, recall that the United States
wanted only property necessary "for the purpose
of navigation" and that the deed reserved "the
water power created by the dams, and by the use
of surpluse [sic] water not required for the
purpose of navigation." 1872 Deed at 3, J. App.
at 18. See also Patten Paper, 172 U.S. at 75
(quoting deed and discussing the transaction).
Thus, under the reservation clause in the 1872
Deed, "whatever title the Canal Company had to
such water power and such surplus water at the
time of the conveyance, it kept . . . ." Kaukauna
Water Power Co., 142 U.S. at 278. As we have
noted, the Canal Company had title to "water
power . . . created by reason of any dam . . . or
other improvements" along the Fox River. Act of
Aug. 8, 1848, 1848 Wis. Laws 58, 62 (emphasis
added). The sheer breadth of the rights reserved
in the 1872 Deed suggests that the petitioners
already own all water-power-related rights along
the Lower Fox River. And it is noteworthy that
the United States, in 1872, took only property
necessary for the purpose of navigation. The
Commission has not argued that the energy-related
benefits of the storage-and-release program at
the Menasha dam are necessary for the purpose of
navigation.

The view that what are now known as "headwater
benefits" as recognized by the FPA remained with
the Canal Company in 1872 is buttressed by the
absence from the record before us of any
indication that at the time of the nineteenth-
century conveyances a discrete water power
interest called "headwater benefits" was
recognized or that there was recognition then, by
some other name, of a separate interest in what
is now described as "headwater benefits." Neither
party specifically addressed this question, but
so far as anything before us discloses, what have
now been separately identified as "headwater
benefits" were in 1872 part and parcel of the
larger category of "water power" and "surplus
water." This is not surprising since the
stabilization of flow that constitutes a
"headwater benefit" achieves its only actual
energy impact in making available a net increase
in "water power" at the various downstream dams.
A "headwater benefit" is therefore essentially an
enhancement of what is conventionally referred to
as "water power" at the various dams. In 1920,
sec. 10(f) of the FPA apparently carved out
"headwater benefits" as a separate
interest./11

FERC presents three arguments to challenge the
petitioners’ ownership of the "headwater
benefits." We will address them in turn. First,
the Commission found that the reservation clause
in the 1872 Deed applied only to "water power"
and "surplus water" developed at the petitioners’
individual dam sites. See Wisconsin Electric
Power Co., 86 FERC at 61,346. Although FERC
concedes that the 1872 Deed did reserve to the
petitioners "water power" and "surplus water"
rights at their individual dam sites, it in
addition believes that the "water power" and
"surplus water" rights are limited to these
particular dam sites. FERC argues that, based on
"historic origins and usage," both of the terms
"water power" and "surplus water" refer to the
"head and flow that a dam makes available at the
dam site."/12 Id. In support of this finding,
FERC cites Chemehuevi Tribe of Indians v. Fed.
Power Comm’n, 420 U.S. 395 (1975), which states
that "[t]he phrase ’surplus water or water power
from any Government dam’ had its origins in
legislation enacted in the late 19th and early
20th centuries, conferring on the Secretary of
War the authority to lease at individual dam
sites excess water for power development." Id. at
414. FERC quotes the Supreme Court’s language in
dicta accurately, but, of course, the context of
the quotation from Chemehuevi is entirely
different from that in which we address the
present issue; Chemehuevi discussed legislation
that was by its own terms site-specific, and
there was no room in the Chemehuevi discussion to
consider the enhancement of "surplus water" or
"water power" by systemic improvements. The
legislation analyzed in Chemehuevi involved
"surplus water" and "water power" that was
identified as being at dams, with no focus on the
enhancement of these interests by upstream
improvements. See, e.g., H.R. 16053, 63d Cong.,
2d Sess., sec. 14 (1914) (proposed amendment to
Dam Act referring to "the right to develop power
from the surplus water . . . at any navigation
dam") (emphasis added); S. 3331, 64th Cong., 1st
Sess., sec. 10 (1915) ("right to utilize the
surplus water-power . . . at any navigation dam)
(emphasis added); H.R. Rep. No. 404, 64th Cong.,
1st Sess., at 6 (1915) ("for the use of surplus
water and water power generated at dams . . . .")
(emphasis added).

But in all its discussion of how the terms
"surplus water" and "water power" were typically
used, FERC never directly addresses the fact that
the conveyances relevant to this case used
markedly different language than the proposed
legislation referred to by Chemehuevi. Here,
Wisconsin did not claim rights at a particular
dam or even rights at all dams along the Fox
River. The State claimed ownership of "water
power" created "by reason of any dam . . . or
improvement." Act of Aug. 8, 1848 sec. 16, 1848
Wis. Laws 58, 62 (emphasis added). "Water power"
created by reason of any dam or improvement
suggests a more expansive category than merely
"water power" at particular sites, as FERC would
have it; instead, "by reason of" seems to denote
a claim on "water power" as a systemic concept.

This conclusion is reinforced by the elementary
physics of water power. Water power, in the
physical sense, is the "[p]ower developed from
movement of masses of water . . . through the
force of gravity." McGraw-Hill Encyclopedia of Science &
Technology, vol. 19 at 396 (8th ed. 1996). At a
hydropower station, "potential energy from the
weight of water falling through a vertical
distance is converted to electrical energy." Id.,
vol. 6 at 34. The amount of power (usually
measured in kilowatts or megawatts) varies
directly with the "runoff" and the "head" at a
particular dam. See id., vol. 19 at 398. The "runoff"
is, quite simply, the volume of water that flows
past a point during a given period of time. See
id., vol. 6 at 34. The "head" is, again in simple
terms, the height of the dam from which the water
falls. See id. Thus, the "water power" at a
particular dam is the product of the dam’s height
and the rate of flow of the water./13 FERC has
already conceded that the petitioners own the
right to use the "head" created by the federal
dams at which they have projects. See note 8,
supra. But FERC overlooks something when it
suggests that "water power" and "surplus water"
only concern the energy produced by the head at
a particular dam site.

For the 1872 Deed, which incorporated the
State’s claim to all "water power" created "by
reason of any dam . . . or improvement," did not
limit "water power" to the energy output
attributable only to the head at a particular
run-of-the-river dam. In addition to the head,
there, of course, needs to be water flowing at
that site, and the water flow is partly a
function of the storage-and-release program
upstream. By increasing the flow in the Lower Fox
River during dry periods, the Menasha dam’s
storage-and-release program augments the water
power available at all the individual downstream
sites, without a commensurate decrease during wet
periods,/14 thus producing a net gain in
"water power" annually. This effect on water
flow, which is evident at each of the dams,
strongly supports the petitioners’ interpretation
that the term "water power," as used in the 1872
Deed and in the other conveyances, includes an
enhancement of flow as well as the energy
contribution of the corresponding head. We
conclude that FERC’s attempt to limit the meaning
of "water power" to exclude this enhancement of
flow at the various dam sites is an unreasonable
interpretation of the reservation in the 1872
Deed./15

Another way of looking at the problem is, as we
have suggested, to recall that in 1872 there was
apparently no recognition of something called
"headwater benefits" (or a variant of the term)
as a separate interest. This is not surprising.
The stabilization of flow resulting from the
storage-and-release at the Menasha dam does not
produce capturable water power except as it
affects the water flow at the individual
downstream dam sites. The fact that "headwater
benefits" were later identified as a discrete
concept and separated from the comprehensive
notion of "water power" (at least in the drafting
of the FPA) does not undermine the effect of
conveyances made many years before its enactment.

The Commission argues, however, that based on
the interaction of sec. 4(e), sec. 10(e), sec.
10(f) and sec. 23(b) of the FPA "headwater
benefits" cannot be part of the "water power" or
"surplus water" rights held by the
petitioners./16 This is a difficult argument
because, as we have noted earlier, we are not
aware of any recognition in 1872 of something
called "headwater benefits" as an interest
separate from "water power." Nonetheless, FERC
says that, if we adopt the petitioners’ expansive
definitions, we create anomalous results in
interpreting the FPA. "Headwater benefits," FERC
explains, concern the "distinct energy benefits
to downstream projects of regulating the river
flow so that it remains even and predictable."
Respondent’s Br. at 14. See also Wisconsin
Electric Power Co., 86 FERC at 61,347. This, it
is contended, is somehow different from "water
power" which FERC defines as "hydroelectric power
created by the Government dam." Respondent’s Br.
at 5. FERC further argues that the petitioners’
attempt to conflate these two distinct concepts
is inconsistent with the FPA’s statutory scheme.
Making "headwater benefits" part of "water power"
or "surplus water," as the petitioners’ propose,
would violate congressional intent with respect
to the licensing scheme in the FPA. FERC
explains:

A more expansive interpretation of these terms
would in fact extend the jurisdiction of this
Commission beyond its accepted limits. If a
downstream project receiving headwater benefits
from an upstream government storage dam were said
to be using surplus water or water power from
that dam, the project would be required to be
licensed pursuant to Section 23(b)(1) of the FPA.
Yet the Commission has never required the
licensing of such projects on that basis, and
some projects receiving headwater benefits from
federal dams are in fact unlicenced. Indeed, in
the 1935 amendments to the Federal Water Power
Act, Congress found it necessary to adopt a
specific provision in Section 10(f) for charging
unlicenced projects for headwater benefits. Thus,
it is clear that Congress did not consider the
use of "surplus water or water power" to include
the mere receipt of headwater benefits by a
project.
Wisconsin Electric Power Co., 86 FERC at 61,347
(footnotes omitted).

We are quick to recognize FERC’s expertise in
interpreting the FPA, and we respect its concerns
about jurisdictional limitations, but we think
that this argument is misplaced. We are not
interpreting the FPA. What Congress intended in
the FPA and the scope of FERC’s jurisdiction
under that statute are not our concern here
because we are interpreting the 1872 Deed and
related conveyances, not the FPA. If we were
interpreting the FPA, or perhaps even a post-FPA
conveyance, there would be some force to FERC’s
argument. For if, under the statute, the receipt
of "headwater benefits" were to constitute the
use of "water power" or "surplus water," all
downstream projects receiving such benefits would
presumably require a license. This licensing
requirement would make FERC’s authority under
sec. 10(f) of the FPA to charge unlicensed
facilities for "headwater benefits" redundant. If
we were construing the FPA, this would be a
problem. But instead we are construing the 1872
Deed executed at a time, so far as we know,
before "headwater benefits" were separately
thought of or given a name. There is nothing in
the record indicating that the terminology used
in the FPA was current in 1872. The FPA was
enacted long after the 1872 Deed was executed,
and there is no reason to believe that usage
under the FPA controls the much earlier
instrument. See Florida E. Coast Ry. Co. v. CSX
Transp. Inc., 42 F.3d 1125, 1130 (7th Cir. 1994)
("Whereas the law in effect at the time of
execution sheds light on the parties’ intent,
subsequent changes in the law that are not
anticipated in the contract generally have no
bearing on the terms of their agreement.").

Finally, FERC argues that the 1872 Deed could
not have transferred "water power" rights at the
Menasha dam because those rights belonged to the
private owners of that dam in 1855. The Canal
Company, FERC argues, could not have conveyed
what it did not own. In support of this, FERC
cites a 1922 report from the Army Corps of
Engineers to the House of Representatives that
discusses the history of the Fox River and its
projects. See H. Doc. No. 146, 67th Cong. (1922).
We agree with FERC, at least for present
purposes, that the Canal Company did not own any
"water power" rights at the Menasha dam,/17
but we believe that FERC draws an incorrect
conclusion from this circumstance. As we have
earlier made clear, we are not concerned with
"water power" at the Menasha dam site but rather
with "water power" "created by reason of" the
Menasha dam. The petitioners’ argument is not
that they own "water power" created by the head
and flow at the Menasha dam but that, when the
Menasha dam releases stored water, it creates
additional power potential at their downstream
hydropower projects, and the consequent
incremental energy belongs to them./18 This is
what FERC refers to as "headwater benefits" under
sec. 10(f) of the FPA, but this usage does not
detract from the concept that the increased
generation of power realized by petitioners’
projects is correctly considered "water power"
"created by reason of [the Menasha] dam." The
increase is an enhancement of the "water power"
available at the various dams downstream and was
reserved by the 1872 Deed. Therefore, the
petitioners already own the rights to that "water
power," and we find that FERC’s reliance on the
ownership of "water power" rights at the Menasha
dam is unreasonable as well./19

V. Conclusion

For the foregoing reasons, we find FERC’s
interpretation of the petitioners’ rights under
the 1872 Deed and other conveyances--as
successors in interest to the Canal Company--to
be unreasonable. The United States could hardly
foresee the FPA and its requirements when it
entered into the 1872 Deed with the Canal
Company. However, it did not bargain then for
"headwater benefits" (or rights to incremental
power attributable to a storage-and-release
program of a government-owned dam, however
designated), and we are only holding it to its
agreement. Therefore, we Vacate the Commission’s
Order on Rehearing, and Remand for the entry of an
order consistent with this opinion.

/1 When preparing this history section, we consulted
the briefs of both parties as well as several
historical resources. These sources included: The
Attainment of Statehood (Milo M. Quaife, ed., State
Hist. Soc. of Wis. 1928); Ina Curtis, Early Days at the
Fox-Wisconsin Portage (Columbia County Hist. Soc.
1981); August Derleth, The Wisconsin: River of a Thousand
Isles (Rinehart & Co. 1942); Thomas Huhti, Wisconsin
Handbook (Moon Pub. 1st ed. 1997); Ellen Kort, The Fox
Heritage (Windsor Pub. 1984); Wisconsin’s Past and
Present: A Historical Atlas (Univ. Wis. Press 1998);
Samuel Mermin, The Fox-Wisconsin Rivers Improvement: An
Historical Study in Legal Institutions and Political Economy
(Bd. of Regents Univ. Wis. 1968); Prairie, Pines and
People: Winnebago County in a New Perspective (James I.
Metz, ed., Oshkosh Northwestern Co. 1976); Joseph
Schafer, The Winnebago-Horicon Basin: A Type Study in Western
History (State Hist. Soc. of Wis. 1937); Some Laws and
Documents Relating to Hydraulic Power of Fox or Neenah River
(Moses Hooper, ed., Sarau & Weidner 1881); John N.
Vogel, et al., Lower Fox Corridor Study (State Hist. Soc.
of Wis. 1992). Specific citations to individual
sources will be provided only for facts unique to
that source.

/2 Mr. Poinsett was immortalized by his introduction
of poinsettia plants into the United States from
Mexico. See Curtis, supra note 1, at 48 n.1.

/3 The first vessels appeared on the canal on May
24, 1851. The River Times described the event:
"The beautiful steamer, John Mitchell, near
accomplished the feat of passing through the
canal at this place on Saturday last. She came up
as far as Main Street. As the John Mitchell came
up the canal, the Enterprise came up the
Wisconsin River to the head of the canal. The
blustering rivalry between the inhabitants of
different waters (the throat of each giving its
best pull and whistle alternately) was quite
exhilarating, and called out a large concourse of
citizens to gaze upon the scene presented and
make predictions for the future. After a short
time boats and citizens withdrew, amid strains of
music and the noise and confusions were over." In
the years that followed, the canal became an
important, and better coordinated, artery for
traffic. See Derleth, supra note 1, at 162-63.

/4 The Wisconsin Constitution prohibited the
creation of a debt of any size for internal
improvement, and funds from the sale of lands
were running out. See Schafer, supra note 1, at
103-04, 104 n.12.

/5 The United States maintains dams along the Fox
River only for public purposes like navigation
and flood control. Any other use of those dams is
incidental: the United States’s only obligation
is to public purposes. If the government decides
to undertake an action in the interest of
navigation and that action harms a party that is
using the water power--like the petitioners here-
-that user has no recourse: "The government may
lower the dam and embankment, or may remove the
same and destroy the water-power entirely, and
the plaintiff cannot prevent it." Green Bay &
Mississippi Canal Co. v. Kaukauna Water-Power
Co., 35 N.W. 529, 537 (Wis. 1887), aff’d Kaukauna
Water-Power Co. v. Green Bay & Mississippi Canal
Co., 142 U.S. 254 (1891). But, so long as the
United States maintains a dam for navigation
purposes, the water-power user may carry on its
use. See id.

/6 The exception is Wisconsin Electric’s project at
Appleton, which operates under a pre-1920 permit.
Wisconsin Electric’s other projects are federally
licensed, and, in any event, our ruling here does
not turn on whether a particular project is
licensed, so we need not distinguish between
petitioners’ licensed and unlicensed projects.

/7 The Commission has never charged the petitioners
that operated licensed hydropower projects
located at government dams annual fees under sec.
10(e) because, as FERC explains, the Commission
recognizes that the petitioners’ rights under the
1872 Deed exempt them from such charges for the
use of "surplus water" or "water power" at the
federal dams at which they are located. See,
e.g., City of Kaukauna, Wisconsin, 12 FERC para.
62,130 (1980).

/8 Section 10(f) of the FPA, 16 U.S.C. sec. 803(f),
reads, in full, as follows:

(f) Reimbursement by licensee of other
licensees, etc.

That whenever any licensee hereunder is directly
benefited by the construction work of another
licensee, a permittee, or of the United States of
a storage reservoir or other headwater
improvement, the Commission shall require as a
condition of the license that the licensee so
benefited shall reimburse the owner of such
reservoir or other improvements for such part of
the annual charges for interest, maintenance, and
depreciation thereon as the Commission may deem
equitable. The proportion of such charges to be
paid by any licensee shall be determined by the
Commission. The licensees or permittees affected
shall pay to the United States the cost of making
such determination as fixed by the Commission.

Whenever such reservoir or other improvement is
constructed by the United States the Commission
shall assess similar charges against any licensee
directly benefited thereby, and any amount so
assessed shall be paid into the Treasury of the
United States, to be reserved and appropriated as
a part of the special fund for headwater
improvements as provided in section 810 of this
title.

Whenever any power project not under license is
benefited by the construction work of a licensee
or permittee, the United States or any agency
thereof, the Commission, after notice to the
owner or owners of such unlicensed project, shall
determine and fix a reasonable and equitable
annual charge to be paid to the licensee or
permittee on account of such benefits, or to the
United States if it be the owner of such
headwater improvement.

/9 The petitioners do not dispute that their
projects, in fact, receive benefits from the
Menasha dam: the storage-and-release program,
which stabilizes the flow of the river, allows
the petitioners’ projects to generate more
electricity than otherwise would be available. It
is significant that all of the petitioners’
projects operate on a "run of the river" basis,
meaning that they do not alter the flow of the
river but merely take advantage of the water as
the Fox River flows from Lake Winnebago to Green
Bay. This means that none of the petitioners’
projects located closer to the Menasha dam
provides any "headwater benefits" to those
farther downstream. Thus, the only "headwater
benefits" at issue in this case are those
provided by the Menasha dam.

/10 The suggested fees cover the period from 1966.
The length of the assessment period was based on
the Commission’s policy of limiting retroactive
assessments to a period of 25 years, even though
the Commission asserts that it has the authority
to assess "headwater benefit" charges as far in
the past (after the passage of the FWPA in 1920)
as those benefits were received. See Louisville
Gas and Elec. Co., 58 FERC para. 61,338 (1992).
See also Wisconsin Electric Power Co., 86 FERC
para. 61,096, 61,344 at n.3.

/11 The term "headwater benefits," or some variant of
it, might have been in use somewhere before 1920,
but no such usage has been called to our
attention--certainly not a use in or before 1872.

/12 The "head" refers to the height from which water
falls, i.e. the height of the dam. The "flow"
obviously enough, refers to the quantity of water
that passes over the dam in a stated period of
time. More on this later. See, pages 19-20,
infra.

/13 This relationship is analogous to a like
relationship in electricity where electric power
in watts is the product of the electric potential
in volts (analogous to the height of the dam) and
the rate of flow of electric current in amperes.

/14 Of course, during wet periods, the Menasha dam’s
storage program decreases the natural flow of the
Fox River. But apparently the loss of this flow
does not result in a hydroelectric power loss, if
any, equaling the gain in dry periods. Hence, the
more uniform flow produces a net gain in
available power.

/15 We also note that this logic applies equally
strongly to the "surplus water" reserved by the
1872 deed. As the terms of the 1872 Deed imply,
"surplus water" refers to water not needed for
the government’s navigation uses. See 1872 Deed
at 3, J. App. at 18 (reserving the "surpluse
[sic] water not required for the purpose of
navigation"). FERC does not now nor, to our
knowledge, has it ever claimed that the Menasha
dam’s storage-and-release program modifies the
water flow in a way important for "the purpose of
navigation." Instead, the Menasha dam stores and
releases water in order to maintain an
appropriate water level in Lake Winnebago. See
Wisconsin Electric Power Co., 86 FERC para.
61,096, 61,344 (1999). In fact, this is the
purpose for which the spillways at that dam were
improved in 1937. See id. Although our
understanding of the scope of the term "water
power" supports our holding that the water
released from the Menasha dam creates and
enhances "water power," we also believe that the
water released is properly considered "surplus
water" within the meaning of the 1872 Deed.

/16 To support this conclusion, FERC cites its
decision in Pyramid Lake Pauite Tribe v. Sierra
Pacific Power Co., 1 FERC para. 63,035 (1977).
But, because Pyramid Lake was decided using
definitions of "water power," "surplus water" and
"headwater benefits" developed under the FPA, we
do not find this persuasive. As we presently
discuss, usage in the after-adopted FPA is not
determinative of usage in the 1872 Deed.

/17 FERC’s cited support for this point is ambiguous
at best, but we have found several historical
sources that confirm this fact. See, e.g., Some
Laws and Documents, supra note 1, at 161-64; Mermin,
supra note 1, at 140.

/18 The petitioners point to Kaukauna Water Power Co.
v. Green Bay & Mississippi Canal Co., 142 U.S.
254 (1891), in which the United States Supreme
Court held that the Kaukauna Water Power Company
could not divert water from a United States owned
dam (at which the Canal Company had a power
generation facility) because this would deprive
the Canal Company of its rights to all water
power created by the dam. This holding supports
the conclusion that "water power" includes the
flow approaching the dam.

/19 Although the Commission did not adopt the
Director’s conclusion that the petitioners did
not have rights to "headwater benefits" created
by the 1937 improvements at the Menasha dam but
that they did have rights in such benefits
existing prior to the date of the improvements,
we believe that the Director’s conclusion was
also unreasonable. This is so because the
petitioners’ rights are not limited to "surplus
water" or "water power" created on or before a
specific date. Wisconsin originally claimed all
"water power" rights created or to be created by
dams or improvements along the Fox River
regardless of when those dams or improvements
were made. See Act of Aug. 8, 1848, sec. 16, 1848
Wis. Laws 58, 62 ("Whenever a water power shall
be created by reason of any dam erected or other
improvement made on any of said rivers, such
water power shall belong to the state subject to
future action of the [Wisconsin] legislature.")
(emphasis added). Therefore, just as the
petitioners are exempt from sec. 10(e) charges
for the use of "water power" at dam sites (even
though those dams have been improved or rebuilt
since 1872), they are also exempt from sec. 10(f)
charges for "headwater benefits" even though the
Menasha dam was improved in 1937.