Alabama Municipal Electric Authority v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 2, 2011 Decided December 13, 2011

No. 10-1141

ALABAMA MUNICIPAL ELECTRIC AUTHORITY,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

CITY OF DALTON, GEORGIA, DOING BUSINESS AS DALTON
UTILITIES AND SOUTHERN COMPANY SERVICES, INC.,
INTERVENORS

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

Randolph Lee Elliott argued the cause and filed the briefs
for petitioner.

Cynthia S. Bogorad, Peter J. Hopkins, Sharon Coleman,
and Susan N. Kelly were on the briefs for amicus curiae
American Public Power Association in support of petitioner.
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Beth G. Pacella, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent. On
the briefs were Robert H. Solomon, Solicitor, and Lona T.
Perry, Senior Attorney.

Andrew W. Tunnell argued the cause for intervenors
Southern Company Services, Inc., et al. With him on the brief
were S. Chris Still, Kevin A. McNamee, Tom Blackburn, and
James H. McGrew.

Before: ROGERS and KAVANAUGH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

WILLIAMS, Senior Circuit Judge: Petitioner, Alabama
Municipal Electric Authority (“AMEA”), purchases power
wholesale from various sources, including Southern
Company, and sells it to 11 municipally owned utilities in
Alabama. To get the power to its customers, AMEA uses
“unbundled” transmission service provided by one of
Southern’s subsidiaries, Alabama Power Company.
(Southern’s other public utility subsidiaries are Georgia Power
Company, Gulf Power Company, and Mississippi Power
Company; as referred to here, Southern always includes such
subsidiaries.) When AMEA uses Southern’s transmission
system for such unbundled transmission, it pays the “Open
Access Transmission Tariff” paid by any party receiving such
service from Southern (including Southern itself). That tariff
embodies the average cost of transmission service across
Southern’s operations.

Southern, AMEA’s transmission provider, also sells
power directly to retail consumers in Alabama. For
transmission of these “bundled” retail sales, it uses the
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Alabama component of its transmission system, which has
lower unit costs than its transmission system as a whole.
According to AMEA the relatively high cost of transmission
service in Georgia drives Southern’s systemwide average
above its Alabama unit costs. In short, AMEA pays Southern
a transmission rate that is higher than the implied transmission
rate encompassed in the rates for Southern’s own bundled
retail sales in Alabama.

In a complaint filed with the Federal Energy Regulatory
Commission, AMEA challenged the rate differential. It
invoked FERC’s “comparability standard,” a policy adopted
in fulfillment of provisions of the Federal Power Act requiring
that all rates subject to FERC’s jurisdiction be “just and
reasonable” and forbidding “undue prejudice or disadvantage”
in ratemaking. See 16 U.S.C. § 824d; see also 16 U.S.C.
§ 824e(a) (barring any “unduly discriminatory or preferential”
rate). FERC has distilled its comparability standard into “a
‘golden rule of pricing’—a transmission owner should charge
itself on the same or comparable basis that it charges others
for the same service.” Inquiry Concerning the Commission's
Pricing Policy for Transmission Services Provided by Public
Utilities Under the Federal Power Act; Policy Statement, 59
Fed. Reg. 55,031, 55,035 (Nov. 3, 1994) (“Transmission
Policy Pricing Statement” or “Statement”); see also American
Electric Power Service Corporation (“AEP”), 67 FERC
¶ 61,168 (1994); Order No. 888, Promoting Wholesale
Competition Through Open–Access Non–Discriminatory
Transmission Services by Public Utilities, 61 Fed. Reg.
21,540 (May 10, 1996) (“Order No. 888”), on reh’g, Order
No. 888–A, 62 Fed. Reg. 12,274 (Mar. 14, 1997) (“Order No.
888-A”).

The comparability issue raised in AMEA’s complaint had
been reserved under the settlement agreement under which
FERC approved Southern’s transmission rates. AMEA
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stresses that the settlement explicitly assigned Southern the
burden of proof on the issue. In fact, the issue appears to turn
entirely on the meaning of various prior FERC orders
expounding the comparability concept, and we owe deference
to reasonable FERC interpretations of such orders. Natural
Gas Clearinghouse v. FERC, 108 F.3d 397, 399 (D.C. Cir.
1997).

FERC denied the relief, Alabama Municipal Elec. Auth.
v. Alabama Power Co., 119 FERC ¶ 61,286 (2007), and
denied AMEA’s request for rehearing, 131 FERC ¶ 61,101
(2010). Despite the seeming breadth of the “golden rule,” we
find FERC’s ruling consistent with its comparability policy
and deny AMEA’s petition for review.

* * *

AMEA treats FERC’s AEP order and its 1994
Transmission Pricing Policy Statement as the two
foundational documents of the comparability policy, and
FERC appears to accept that view. AMEA argues that the
two documents “required comparability between a
transmission provider’s open-access transmission service and
the transmission provider’s own use of its system to serve
bundled retail and wholesale customers.” Petitioner’s Br. 37.
According to AMEA the best way for Southern Company to
achieve this comparability would be for it “to adopt zonal,
license-plate rates for their [transmission tariff].” Petitioner’s
Br. 17; AMEA Complaint, Joint Appendix (“J.A.”) 2-3.
Under such a system, transmission service would be priced
according to the power’s destination: Transmission for all
power delivered in Alabama, whether retail or wholesale,
whether unbundled or part of bundled sale and transmission,
would be charged the same rate. Under the “postage stamp”
system currently employed for unbundled transmission, in
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contrast, the price of unbundled transmission service is the
same across Southern’s transmission network; yet the rates for
the transmission element of bundled retail transactions vary
by location.

FERC’s AEP decision set out to address “changing
conditions in the electric utility industry, e.g., the emergence
of non-traditional suppliers and greater competition in bulk
power markets.” 67 FERC ¶ 61,168 at 61,490. When power
utilities had operated simply as vertically integrated
monopolies, FERC’s duty to prevent “undue discrimination”
had focused on “discrimination in the treatment of different
customers,” id., presumably primarily to assure that the
utilities did not improperly shift costs from favored to
disfavored customers. With the development of “competition
in bulk power markets,” FERC believed its focus properly
shifted to “discrimination in the rates and services the utility
offers third parties when compared to its own use of the
transmission system.” Id. FERC decided “to refocus [its]
traditional analysis of undue discrimination” and announced
the rule that a transmission system “should offer third parties
access on the same or comparable basis, and under the same
or comparable terms and conditions, as the transmission
provider’s uses of its system.” Id. In articulating its “golden
rule” of pricing in its Transmission Pricing Policy Statement,
quoted above, FERC naturally relied on the articulation in
AEP. 59 Fed. Reg. at 55,034-35.

FERC’s next logical step in responding to the
development of competitive bulk power markets was its Order
No. 888, requiring utilities to “unbundle” wholesale
generation and transmission services, charging separate rates
for each. Order No. 888, 61 Fed. Reg. at 21,558. Holding
company operating subsidiaries were to “take transmission
service under the same tariff rates, terms, and conditions as
third-party customers that seek transmission service over the
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holding company system.” Order No. 888-A, 62 Fed. Reg. at
12,314.

In addressing the Commission’s application of these
principles to AMEA’s complaint, we start with a background
proposition—the line between rates subject and not subject to
FERC’s jurisdiction. With relatively minor qualifications (see
below), FERC has not exercised authority over the
transmission of bundled retail sales, whereas it does exercise
jurisdiction over unbundled wholesale transmission service
such as that of Southern. Order No. 888, 61 Fed. Reg. at
21,625. As a solution to the price differential from which it
suffers, AMEA suggested a fallback proposal (i.e., a substitute
for the license plate rate solution mentioned above) under
which FERC would order Southern to unbundle its retail sales
and use its transmission tariff rate for the transmission
component of its (hitherto) bundled retail sales. This would in
effect render jurisdictional an economic activity that has until
now been non-jurisdictional.

But when the Supreme Court reviewed Order No. 888, it
emphatically rejected a contention (made by Enron) that the
Commission should subject the transmission used for bundled
retail sales to the same sort of “open access” measures that the
order imposed on wholesale transmission. New York v.
FERC, 535 U.S. 1, 25-28 (2002). As FERC had found
discrimination in the wholesale electricity market—not the
retail electricity market—it was reasonable, said the Court, for
FERC to limit its regulatory response to the wholesale market.
Id. at 26-27. “Were FERC to investigate . . . and make
findings concerning undue discrimination in the retail
electricity market, § 206 of the FPA would require FERC to
provide a remedy for that discrimination.” Id. at 27. Justice
Thomas, writing for himself and Justices Scalia and Kennedy,
dissented on this point, arguing that because of the inherently
interstate character of electricity transmission (except in
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Alaska and Hawaii), the statute clearly gave FERC a mandate
to address undue discrimination in transmission regardless of
the type of transaction with which it was associated. The
dissenters would have required FERC to determine whether
regulating transmission in connection with bundled retail sales
was necessary to eliminate undue discrimination. Id. at 28-42.
Thus all justices took it as given that FERC was not engaged
in regulating the transmission involved in bundled retail sales.

In this context, AMEA’s fallback proposal that Southern
be ordered to unbundle its retail sales and use its transmission
tariff rate for transmission of the relevant power would as a
practical matter mean an exercise of FERC jurisdiction over
what FERC has decided, as all nine justices viewed the
matter, not to exercise jurisdiction. And although AMEA
characterizes the rate differential affecting it as undue
discrimination, it does not purport to have built the sort of
record FERC used to justify Order No. 888’s intervention in
the wholesale market, or otherwise to argue that we might be
entitled to command a drastic revision of prevailing
jurisdictional boundaries.

We therefore return to AMEA’s proposal of “license
plate” rates for Southern’s jurisdictional wholesale
transmission service. In fact AMEA’s argument misreads
FERC precedent, especially the 1994 Transmission Pricing
Policy Statement. The express goal of the Statement was “to
allow much greater transmission pricing flexibility.” 59 Fed.
Reg. at 55,031. The Statement noted that FERC’s “traditional
transmission pricing policy has permitted a public utility
providing firm transmission service to charge rates . . . on a
postage stamp basis (i.e., not distance sensitive).” Id. at
55,032. In response to comments asking for flexibility to
pursue other pricing options, FERC decided to allow new
methods “such as zones, or line-by-line methods.” Id. at
55,036; see id. at 55,039. AMEA argues that comparability
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compels Southern (and perhaps any utility spanning multiple
states and selling unbundled and bundled transmission
service) to use a zonal pricing system. It thus takes a
document opening the door to flexibility and turns it, in many
circumstances, perhaps most, into one slamming the door on
all but the “license plate” scheme.

AMEA also points to language from the “pro forma”
transmission tariff provided in Orders No. 888 and No. 890,
see Order No. 890, Preventing Undue Discrimination and
Preference in Transmission Service, 72 Fed. Reg. 12,266,
12,361 (Mar. 15, 2007), which it believes supports its reading.
Petitioner’s Br. 38-42. For example, Section 28.2 of the pro
forma transmission tariff in Order No. 888 provides that “the
Transmission Provider shall include the Network Customer’s
[e.g., AMEA’s] Network Load in its Transmission System
planning and shall . . . endeavor to construct and place into
service sufficient transmission capacity to deliver the Network
Customer’s Network Resources to serve its Network Load on
a basis comparable to the Transmission Provider’s delivery of
its own generating and purchased resources to its Native Load
Customers [e.g., Alabama Power’s retail customers].” 61 Fed.
Reg. at 21,718.

FERC counters that these passages concern only
comparability in non-rate terms and conditions of service.
Indeed, while the passage (and similar ones) mention a variety
of terms of service, rate provisions are not among them. We
have held that these exercises of power over non-rate
conditions are not inconsistent with the Commission’s
position in Order No. 888 (i.e., its general non-exercise of
jurisdiction over bundled retail service). Entergy Services v.
FERC, 375 F.3d 1204, 1210 (D.C. Cir. 2004). At oral
argument we inquired of FERC counsel just why the
Commission intervened as to non-rate matters (but not rates),
and she explained that FERC intervenes to maintain
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“transmission availability.” For instance, in the order
reviewed in Entergy, the Commission restricted a
transmission provider’s reservation of capacity for its own
bundled retail uses because that reservation “would have a
direct impact on the capacity available to other customers
taking firm transmission service.” Oral Argument Tr. 17. We
need not evaluate the strength of the distinction, as AMEA
rests its case on what the Statement and Order No. 888 say,
not on a challenge to the logic of what they say.

But what of the “‘golden rule of pricing’—a transmission
owner should charge itself on the same or comparable basis
that it charges others for the same service”? Statement, 59
Fed. Reg. at 55,035. Under FERC’s view, the “golden rule,”
as articulated in FERC orders, does not require comparable
pricing as between unbundled and bundled transmission
service. Order on Rehearing, 131 FERC ¶ 61,101 at PP 9-10.
In light of the jurisdictional versus non-jurisdictional divide,
that understanding seems reasonable, if not altogether
inevitable. AMEA points to nothing in the AEP order, the
Statement, or elsewhere, contradicting the view that
jurisdictional unbundled transmission service is not “the same
service” as the transmission component of non-jurisdictional
bundled retail service.

AMEA several times cites the Supreme Court’s decision
in FPC v. Conway, 426 U.S. 271 (1976), in which the Court
held that FERC could consider rates not subject to FERC
jurisdiction in order to determine whether jurisdictional rates
were unduly discriminatory. Later cases by this court
elaborated the “price squeeze” doctrine: a utility’s behavior
may be unduly discriminatory if it sells both retail and
wholesale power and attempts to “squeeze” its retail
competitors out of the market by selling wholesale power at a
high price. See Ellwood City v. FERC, 731 F.2d 959, 968
(D.C. Cir. 1984). But AMEA did not raise a price squeeze
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claim in its complaint to the Commission. AMEA Complaint,
J.A. 1-35; see also 18 C.F.R. § 2.17 (listing the “elements of
the prima facie” price squeeze case that a complainant must
make out). We therefore do not address the possibility that
Southern Company’s transmission pricing constitutes a “price
squeeze.” Our inquiry is limited to the issue reserved in the
settlement—whether Southern’s pricing violates FERC’s
comparability policy—and, giving FERC the appropriate level
of deference on its interpretation of its own orders, we
conclude that it does not.

* * *

The petition for review is therefore

Denied.