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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 9, 2003 Decided June 13, 2003
No. 02-1087
EAST TEXAS ELECTRIC COOPERATIVE, INC. ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
SOUTHWEST POWER POOL, INC., ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
John H. Conway argued the cause for petitioner. With
him on the briefs were Christine C. Ryan, A. Hewitt Rose,
III and Brian C. Drumm.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
Dennis Lane, Solicitor, Federal Energy Regulatory Com-
mission, argued the cause for respondent. With him on the
brief was Cynthia A. Marlette, General Counsel.
Wallace F. Tillman was on the brief for amicus curiae
National Rural Electric Cooperative Association in support of
petitioners.
Before: GINSBURG, Chief Judge, and ROGERS and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: This case involves a recurring issue
under the open access policies of Order No. 888 of the
Federal Energy Regulatory Commission (‘‘FERC’’) regarding
the extent to which utilities should receive compensation for
the use of their transmission facilities for services provided in
concert with other transmission providers. See Transmis-
sion Access Policy Study Group v. FERC (‘‘TAPS’’), 235 F.3d
667, 725–26 (D.C. Cir. 2000), aff’d sub nom. New York v.
FERC, 535 U.S. 1 (2002). East Texas Electric Cooperative,
Inc. and two of its member utilities (together, ‘‘East Texas’’)
petition for review of orders accepting Southwest Power
Pool’s (‘‘SPP’’) procedure for allocating network transmission
revenue among its member utilities. Southwest Power Pool,
Inc., 89 F.E.R.C. ¶ 61,284 (1999) (‘‘Initial Order’’); Order on
Rehearing, Southwest Power Pool, Inc., 98 F.E.R.C. ¶ 61,038
(2002) (‘‘Rehearing Order’’). East Texas challenges FERC’s
conclusion that the allocation procedure is fair and just,
claiming that it is unduly discriminatory to require a showing
of integration only by small transmission owners such as East
Texas in order to receive revenue allocations for the use of its
facilities by SPP. East Texas also contends that FERC’s
finding that East Texas is a customer, and thus not integrat-
ed with SPP’s transmission system, is unsupported by sub-
stantial evidence in the record. We deny the petition with
regard to the integration standard but grant the petition
because of a lack of any valid finding that East Texas’s
facilities are not integrated with SPP’s transmission system.
3
I.
East Texas is a non-profit generation and transmission
electric cooperative located in Texas with three members, two
of which, Northeast Texas Electric Cooperative and Tex–La
Electric Cooperative of Texas, are also petitioners. SPP is a
power pool that provides electric transmission services on
behalf of its transmission-owner members pursuant to its
Regional Tariff. The SPP came into existence as a regional
reliability council. SPP, Inc., 82 F.E.R.C. ¶ 61,267 at 62,049
(1998). According to FERC, East Texas was a participant in
SPP prior to SPP’s proposed amendments to the Regional
Tariff. East Texas seeks to recover the costs of its transmis-
sion facilities from SPP’s network customers should it partici-
pate in SPP’s Regional Tariff.
In Order No. 888, FERC required all jurisdictional utilities
to offer network services to any customers which agreed to
pay set tariffs under its open access tariff policy. Promoting
Wholesale Competition Through Open Access Nondiscrimi-
natory Transmission Servs. by Pub. Utils., Order No. 888,
FERC Stats. & Regs. ¶ 31,036, at 31,636, 61 Fed. Reg. 21,540
(1996) (‘‘Order No. 888’’), on reh’g, Order No. 888–A, FERC
Stats. & Regs. ¶ 31,048 at 30,530 (1997) (‘‘Order No. 888–A’’),
clarified, 79 F.E.R.C. ¶ 61,182 (1997), on reh’g, Order 888–B,
81 F.E.R.C. ¶ 61,248, 62 Fed. Reg. 64,688 (1997), on reh’g,
Order 888–C, 82 F.E.R.C. ¶ 61,046 (1998), aff’d sub nom.
TAPS, 235 F.3d 667. In doing so, FERC addressed whether
those customers would be entitled to credits from the trans-
mission-providing utility based on any transmission-related
benefits that the utility might receive from the customer’s
transmission facilities. Order No. 888, ¶ 31,036 at 31,741–43.
While FERC committed itself to a case-by-case determina-
tion, it warned that ‘‘mere interconnection between a custom-
er’s facilities and the transmission provider’s facilities will not
be sufficient to warrant a cost credit.’’ TAPS, 235 F.3d at
725. FERC thus ‘‘required the customer to demonstrate that
its ‘transmission facilities are integrated with the transmis-
sion system of the transmission provider’ and ‘provide addi-
tional benefits to the transmission grid in terms of capability
4
and reliability, and [are] relied upon for coordinated operation
of the grid.’ ’’ Id. at 726 (quoting Order No. 888, ¶ 31,036, at
31,742) (alteration in original).
It was in this context that SPP took a further step toward
compliance with Order No. 888 (and its progeny) when, on
September 7, 1999, it filed an amendment to its open access
transmission tariff (i.e., its ‘‘Regional Tariff’’) to add network
integration service. Previously, SPP offered only ‘‘point-to-
point’’ transmission service, i.e., service that extends between
specified points of receipt of electricity onto the transmission
grid and specified points of delivery of the electricity from the
grid. See TAPS, 225 F.3d at 725 n.12; SPP, Inc., 82
F.E.R.C. at 62,049. Under that service, thirteen transmis-
sion-owner SPP members had agreed to participate in the
Regional Tariff and, thus, to pool their resources, average
their costs, and share revenues with members participating in
the particular transaction. 82 F.E.R.C. at 62,049–50 & n.2.
By contrast, under network service all of the electricity
demand or ‘‘load’’ needed by a particular customer will be met
by the transmission provider from available generators or
other power sources on the grid as needed. TAPS, 225 F.3d
at 724–25. As part of the 1999 amendment to its Regional
Tariff, SPP included a new membership agreement to admin-
ister network transmission service and to act as an agent for
the participating transmission owners. Initial Order, 89
F.E.R.C. at 61,887. SPP proposed ‘‘to use each member
utility’s annual transmission revenue requirement as the basis
for zonal network rates,’’ id. at 61,889, and that revenues for
‘‘all network service would generally be allocated to the host
zone where the load is located.’’ Id. at 61,890. Under SPP’s
proposal, all network revenues would therefore be allocated
among transmission owners designated in certain schedules of
the Regional Tariff as the ‘‘hosts’’ of pricing zones. Pay-
ments by a customer would be transferred to the utility or
utilities whose ‘‘host zone’’ contains the location where the
‘‘load is allocated,’’ i.e., the location where the customer
receives the electricity.
East Texas filed a protest that included a challenge to
SPP’s procedure for allocating network revenues from cus-
5
tomers who took network service from SPP. It argued that
SPP’s procedure was unfair because transmission facilities
that East Texas owned that were located in SPP’s service
area could not receive any revenues for network services
provided by SPP; even if East Texas signed the membership
agreement and allowed SPP to use its facilities, it would not
necessarily be listed as a pricing ‘‘host zone.’’ According to
East Texas, this unfairly discriminated against it, and under-
mined the incentive for small transmission owners to join
regional transmission groups such as SPP, contrary to
FERC’s policy of encouraging the creation of regional groups
that contain all transmission systems within a geographic
area. See Reg’l Transmission Orgs., Order No. 2000, FERC
Stats. & Regs. ¶ 31,089 at 31,200 (1999), 65 Fed. Reg. 810
(2000), on reh’g, Order No. 2000–A, FERC Stats. & Regs.
¶ 31,092, 65 Fed. Reg. 12,088 (2000) (codified at 18 C.F.R.
§ 35.34) (‘‘Order No. 2000’’). SPP and two transmission-
owners of SPP responded that East Texas’s facilities are not
integrated into the SPP system and do not provide any
benefit to the SPP system by increasing the reliability or
effectiveness of the system. Further, they maintained, East
Texas could obtain compensation for any use of its transmis-
sion systems by filing for customer credits pursuant to Sec-
tion 30.9 of the Regional Tariff. Section 30.9 provides that
network customers owning facilities that are ‘‘integrated’’
with SPP’s system ‘‘may be eligible to receive consideration
either through a billing credit or some other mechanism.’’
Under Section 30.9 ‘‘integrated’’ means ‘‘integrated into the
plans or operations’’ of a transmission owner to serve the
owner’s customers.
In the Initial Order, FERC stated that:
East Texas Cooperatives’ opposition is limited to the
fact that as owners of transmission facilities, they should
be treated comparably to other transmission owners that
make up the pricing zones. Their argument that it is
discriminatory to only require small transmission owners
to make a showing under Section 30.9 of the tariff
ignores that fact that the large transmission owners
currently provide grid transmission service. The issue of
6
whether and to what extent East Texas Cooperatives’
transmission facilities are integrated with CSW [a SPP
member] is currently being litigated [in Docket EL98–
66–000]. Consequently, acceptance here of the East
Texas Cooperatives’ position would prejudice the out-
come of that hearing. Therefore, we will accept for filing
SPP’s treatment of revenues, subject to the outcome of
the ongoing litigation.
Id. at 61,890–91. In seeking rehearing, East Texas argued
that Section 30.9 was inapplicable and Docket EL98–68–000,
in which the factual question of integration sufficient for a
customer credit was being litigated, involved different parties
and different issues.
In the Rehearing Order FERC reaffirmed its approval of
SPP’s revenue allocation procedure, but revised its reasoning.
98 F.E.R.C. at 61,108–10. FERC stated that in the Initial
Order it had ‘‘generally agreed’’ with SPP and its responding
members, again noting that East Texas’s opposition was
‘‘limited to’’ wanting to be treated ‘‘the same as the large
transmission owners that SPP has designated as pricing
zones.’’ Id. at 61,109. At this point, referring to its Initial
Order, FERC stated that:
East Texas Cooperatives’ argument that it is unduly
discriminatory or preferential to require them to rely on
Section 30.9 for revenue allocation, while large transmis-
sion owners are designated as pricing zones, ignores the
fact that the large transmission owners function in SPP
as transmission providers, while the Cooperatives func-
tion in SPP as transmission customers.
Id. While agreeing with East Texas that Docket No. EL98–
66–000 was ‘‘not sufficiently connected’’ to warrant condition-
ing acceptance of SPP’s tariff amendment on the outcome of
that litigation, and that Section 30.9 of the Regional Tariff on
its face does not require transmission owners to demonstrate
integration, FERC rejected East Texas’s claim of undue
discrimination. Id. at 61,109–10. FERC found that East
Texas had not adequately refuted its ‘‘earlier findings’’ that
7
its facilities ‘‘are used solely to distribute power to their
distribution members, do not provide any benefits to SPP in
terms of additional capability or reliability, are not relied
upon for coordinated operation of the SPP grid, and are not
integrated with any SPP transmission provider.’’ Id. at
61,110. FERC further found that East Texas ‘‘simply do[es]
not meet SPP’s criteria for inclusion of the transmission
facilities under the SPP tariff.’’ Id.
II.
In contending that FERC was arbitrary and capricious in
concluding that SPP’s revenue allocation procedure was fair
and just, East Texas maintains that the integration standard
FERC applied is only appropriate for customers under Sec-
tion 30.9 of the Regional Tariff, that East Texas is not a
customer of SPP, that FERC never found that it was, and
that there is not substantial evidence in the record to support
such a finding. Further, East Texas contends, no other
provision of the Regional Tariff authorizes such a test, the
standard is contrary to FERC policy, and FERC has failed to
provide an adequate explanation of why the standard should
apply.
FERC responds that in the Initial Order it found that East
Texas functions in SPP as a transmission customer, and, in
any event, East Texas’s position violates ‘‘both the governing
general ratemaking principle and the specific application of
§ 30.9.’’ Respondent’s Br. at 15. As FERC explains, under-
lying Section 30.9 is the principle ‘‘that those who benefit
from facilities should pay their costs,’’ and that ratemaking
principle ‘‘must be applied to prevent a mismatch between
benefits and costs: ‘The question [of credits] can only be
determined on a case-by-case basis because it depends on
whether the customer’s facilities are truly integrated with the
transmission system, rather than merely interconnected.’ ’’
Id. (quoting TAPS, 225 F.3d at 726) (alteration in original).
FERC recalls, id. at 16, that in Order No. 888, it stated that
‘‘the principles of comparability compel us to apply the same
8
standard to the transmission provider’s facilities for rate
determination purposes’’ as are applied to the customer’s
facilities. Order No. 888 at 31,743 n.452; see Fla. Mun.
Power Agency v. Fla. Power & Light Co., 74 FERC ¶ 61,006
at 61,010 & n.48 (1996) (cited in Order No. 888, ¶ 31,036 at
31,742–43 & n.451). Consequently, FERC maintains, its poli-
cy in Order No. 2000 encouraging public power and coopera-
tives to participate in regional transmission organizations
‘‘must be tempered with the fundamental rate principle un-
derlying § 30.9.’’ Respondent’s Br. at 17 n.6. Likewise,
referencing the Rehearing Order, 98 F.E.R.C. at 61,110,
FERC rejects East Texas’s reliance on the ‘‘seven factors
test’’ for distinguishing distribution from transmission as not
relevant to the important point, namely that East Texas’s
facilities benefit only it and its members, not SPP. Respon-
dent’s Br. at 15, 17. In sum, from FERC’s vantage point,
‘‘[t]his case involves application of a fundamental ratemaking
principle: that cost responsibility should match cost benefit,’’
and ‘‘parties should not be required to pay the costs of
facilities or services unless they actually receive some benefit
from them.’’ Id. at 2. Thus, ‘‘whether the costs of [East
Texas’s] transmission facilities can be recovered from SPP’s
network customers turns on whether those facilities are inte-
grated in SPP’s network planning and operation, and thus
benefit SPP’s customers.’’ Id.
Our review is confined to a determination of whether
FERC’s orders are arbitrary and capricious, an abuse of
discretion, or contrary to law under the Administrative Proce-
dure Act. Mo. Pub. Serv. Comm’n v. FERC, 215 F.3d 1, 3
(D.C. Cir. 2000); 5 U.S.C. § 706(2)(A). While the court’s
review of ratemaking decisions is highly deferential, Pac. Gas
& Elec. Co v. FERC, 306 F.3d 1112, 1116 (D.C. Cir. 2002);
Mo. Pub. Serv. Comm’n, 215 F.3d at 3, FERC still must
provide a coherent and adequate explanation of its decisions.
See Fla. Power & Light Co. v. FERC, 88 F.3d 1239, 1243
(D.C. Cir. 1996); City of Vernon v. FERC, 845 F.2d 1042,
1046 (D.C. Cir. 1988).
9
A.
In the Initial Order, FERC appears to require that East
Texas make a showing of integration pursuant to Section 30.9
of the Regional Tariff in order to receive revenue allocations.
89 F.E.R.C. at 61,890–91. In the Rehearing Order, FERC
retreated from the position that Section 30.9 is itself relevant,
98 F.E.R.C. at 61,109–10, but continued to press the point
that East Texas must show that it is integrated with SPP’s
system to receive revenue under the Regional Tariff. Id. at
61,110. Essentially, then, FERC interpreted the Regional
Tariff to include, similar to the principles it laid out in Order
No. 888 for customer credits, a standard of integration that
transmission owners must meet to qualify as pricing ‘‘host
zones’’ to receive revenue allocations, and concluded that East
Texas failed to meet this requirement. FERC stated that it
was denying rehearing because East Texas ‘‘simply do[es] not
meet SPP’s criteria for inclusion of the transmission facilities
under the [Regional] Tariff,’’ criteria that require a showing
that East Texas’s transmission facilities benefit SPP’s trans-
mission system as a whole. Id.
The parties do not point to language in the Regional Tariff
(or SPP’s membership agreement) that indicates how an
entity, upon joining SPP as a transmission-owner member,
becomes a pricing ‘‘host zone’’ eligible to receive network
revenue. However, the purpose of identifying ‘‘host zones’’ is
to allow compensation of utilities for transmission service
provided to the SPP system so that SPP, in turn, can provide
network and point-to-point services. In other words, identifi-
cation of a ‘‘host zone’’ can only follow from a determination
that a utility is providing transmission service that benefits
the SPP system as a whole. The Regional Tariff defines a
‘‘transmission owner’’ as a member ‘‘whose transmission facil-
ities TTT make up the Transmission System,’’ and ‘‘Transmis-
sion System’’ as the ‘‘facilities used by [SPP] to provide
transmission service.’’ Likewise, the Regional Tariff and
membership agreement are designed to enable SPP to have
operating control of transmission-owner members’ facilities to
10
ensure service to support the overall functioning of SPP’s
transmission network. Under the membership agreement, a
transmission-owner member of SPP ‘‘appoints SPP as its
agent to provide service under the [Regional] Tariff over
Tariff Facilities which it owns or controls,’’ gives SPP authori-
ty to operate and control their transmission facilities ‘‘as
necessary to provide service in accordance with the [Region-
al] Tariff,’’ and must function in conformance with industry
reliability practices, allowing SPP to monitor and control
transmission operations in order to ensure the reliability of
the SPP grid.
In this context, FERC could reasonably conclude that for
SPP to be able to coordinate and control a large transmission
system, being a ‘‘host zone’’ of SPP entails providing services
that benefit SPP as a whole in that function. As a result,
FERC could find that SPP’s Regional Tariff includes a stan-
dard for transmission-owning members to qualify as a ‘‘host
zone’’ that required East Texas to show that its transmission
facilities would contribute to the overall functioning of the
SPP system, i.e., the integration standard. This conclusion is
consistent with the integration standard in the Regional
Tariff for customer credits, see Rehearing Order, 98 F.E.R.C.
at 61,109 n.33, itself based on the standard in Order No. 888
for customer credits. See also Fla. Mun. Power, 74 F.E.R.C.
at 61,010 & n.48. Accordingly, FERC did not act arbitrarily
in interpreting the Regional Tariff to require application of
the integration test to East Texas.
B.
East Texas contends, however, that even if the integration
standard is appropriate, it is unduly discriminatory. Accord-
ing to East Texas, under the Regional Tariff large utilities
that own transmission systems and that are already consid-
ered zone hosts are not required to make a showing of
integration. FERC rejects the suggestion that its require-
ment is unduly discriminatory on the ground that it found
11
that East Texas was a transmission customer while the large
utilities function as transmission providers, and maintains
that its finding is supported by the record because the large
transmission owners, unlike East Texas, have signed on as
members to the SPP system under the Regional Tariff and
therefore by definition are integrated into SPP’s system.
East Texas maintains that this is a post hoc argument
because FERC never suggested in its Orders that East Texas
could become a pricing ‘‘host zone’’ merely by signing SPP’s
membership agreement as a transmission owner, and further,
that signing the membership agreement does not guarantee a
utility will be treated as a transmission owner that has a
designated pricing ‘‘host zone.’’
FERC’s conclusion that ‘‘the large transmission owners
currently provide grid transmission service’’ and that, there-
fore, there is no discriminatory treatment of East Texas by
SPP is reasonable. Initial Order, 89 F.E.R.C. at 61,890.
The large owners are members of SPP who operate under the
Regional Tariff, and East Texas does not dispute that they
allow SPP to use their facilities to provide open access
transmission service on both a point-to-point and network
basis. Given the nature of the services provided by these
utilities as host zones of SPP, which entails providing trans-
mission service that benefits SPP as a whole, FERC could
reasonably conclude that the ‘‘large transmission owners
function in SPP as transmission providers’’ and therefore met
SPP’s integration standard. Rehearing Order, 98 F.E.R.C.
at 61,109. Indeed, this appears to be the import of FERC’s
decision in SPP, Inc., 82 F.E.R.C. at 62,049–50 & n.2, on
point-to-point service under the Regional Tariff. Moreover,
contrary to East Texas’s position, FERC’s decision here does
not unfairly benefit ‘‘large’’ owners over ‘‘small’’ owners; SPP
transmission owners include a city, a district, other coopera-
tives, a federal power administration as well as utilities, 98
FERC at 61,103 n.1 and there is a wide range in the annual
revenue requirements of these owners, suggesting a range in
sizes of the owners.
12
C.
In rejecting East Texas’s claim that its facilities are inte-
grated with SPP’s transmission system, however, FERC
failed to provide a valid basis for its ‘‘finding’’ that East
Texas’s facilities are ‘‘not integrated with any SPP transmis-
sion provider.’’ Rehearing Order, 98 F.E.R.C. at 61,110. In
its Rehearing Order, FERC did not make any findings, but
instead referred to ‘‘earlier findings’’ in its Initial Order. Id.
Those ‘‘earlier findings’’ do not appear in the Initial Order,
which instead deferred to Docket EL98–66–000 on the issue
of integration. 89 F.E.R.C. at 61,890–91. Given the lack of
both actual findings by FERC and any statement in the
Orders concerning the grounds to support a finding regarding
integration, a remand is required. Considerations mentioned
in FERC’s brief but not in its Orders do not suffice to
support its findings. See Burlington Truck Lines, Inc. v.
United States, 371 U.S. 156, 168–69 (1962); Mo. Pub. Serv.
Comm’n, 215 F.3d at 7. Unlike Pacific Gas, which FERC
relies upon, a remand is required not because FERC erred in
deciding whether to hold an evidentiary hearing, 306 F.3d at
1119, but because FERC failed to articulate any support in its
Orders for its factual findings.
Accordingly, we grant the petition for the purpose of
remanding the case on the issue of whether East Texas
facilities within the SPP pool area are integrated with SPP’s
transmission system; we otherwise deny the petition. On
remand, FERC may consider the findings in Docket EL98–
66–000, East Texas Cooperative, Inc. v. Central and South
West Services, Inc., 89 F.E.R.C. ¶ 63,005 (1999), where East
Texas sought credits for facilities, and may or may not
conduct a hearing on the issue, as needed.