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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 21, 2006 Decided June 30, 2006
No. 05-1001
MAINE PUBLIC UTILITIES COMMISSION, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
MASSACHUSETTS MUNICIPAL WHOLESALE
ELECTRIC COMPANY, ET AL.,
INTERVENORS
Consolidated with
No. 05-1002
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Charles G. Cole argued the cause for Transmission Owner
Petitioners and supporting intervenors. With him on the briefs
2
were David B. Raskin, Alice E. Loughran, Kenneth G. Jaffe,
Elias G. Farrah, Mary E. Grover, Thomas N. Wies, G. Philip
Nowak, Michael E. Small, Sonia C. Mendonca, and Mary A.
Murphy. Michael F. McBride, Wendy N. Reed, and Stephen L.
Teichler entered appearances.
Harvey L. Reiter argued the cause for State Commission
Petitioners and supporting intervenors. With him on the briefs
were Lucy Holmes Plovnick, John P. Coyle, Scott H. Strauss,
and Randall L. Speck. Dennis Lane, Allan B. Taylor, and
Michael P. Shea entered appearances.
Robert H. Solomon, Solicitor, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were John S. Moot, General Counsel, and Judith A. Albert,
Attorney.
David B. Raskin, Charles G. Cole, Alice E. Loughran,
Kenneth G. Jaffe, Elias G. Farrah, Mary E. Grover, Thomas N.
Wies, G. Philip Nowak, Michael E. Small, Sonia C. Mendonca,
and Mary A. Murphy were on the brief for intervenors
Transmission Owners in support of respondent on Retention of
Return of Equity Adder. Wendy N. Reed entered an appearance.
Harvey L. Reiter, Lucy Holmes Plovnick, John P. Coyle,
Scott H. Strauss, and Randall L. Speck were on the brief for
intervenors in support of FERC on Elimination of ROE Adder
and RTO Termination Provisions. John E. McCaffrey entered
an appearance.
Before: GINSBURG, Chief Judge, and ROGERS and
GARLAND, Circuit Judges.
3
ROGERS, Circuit Judge: In these consolidated cases1,
owners of electric transmission facilities and several state public
utility commissions petition for review of orders of the Federal
Energy Regulatory Commission conditionally approving a
proposal to form a regional transmission organization in New
England (“RTO-NE”). The transmission owner members
(“TOs”) challenge FERC’s authority to reject the provision of
their Transmission Operating Agreement providing that FERC
review withdrawals from the RTO under Mobile-Sierra’s public
interest standard.2 The TOs also contend that FERC’s rejection
of this provision, and its rejection of an incentive adjustment to
the TOs’ return on equity (“ROE”) for local transmission
service, were arbitrary and capricious. The State Commissions
maintain that FERC’s approval of a 50 basis point incentive
adjustment to the TOs’ ROE for regional transmission was
arbitrary and capricious.
RTOs are a creation of FERC’s, and FERC has broad
authority over the decision to approve a RTO. A proposal to
establish a RTO is essentially a proposal to change the rates on
file; as such, FERC had authority under Section 205 of the
Federal Power Act (“FPA”), 16 U.S.C. § 824d (2000), to modify
1
Petitioners in No. 05-1002 are Northeast Utilities Service
Company, Bangor-Hydro Electric Company, Central Maine Power
Company, NSTAR Electric & Gas Corporation, New England Power
Company, The United Illuminating Company, and Vermont Electric
Power Company. Petitioners in No. 05-1001, who were intervenors
before FERC, are The Maine Public Utilities Commission, New
England Conference of Public Utilities Commissioners, and the
Vermont Department of Public Service (“State Commissions”).
2
The “Mobile-Sierra doctrine” is derived from the Supreme
Court’s companion cases, United Gas Pipe Line Co. v. Mobile Gas
Service Corp., 350 U.S. 332 (1956), and Federal Power Commission
v. Sierra Pacific Power Co., 350 U.S. 348 (1956).
4
the operating agreement as a condition of approving the RTO.
Further, in light of concerns about the effects on market
participants and the electricity market, FERC was not arbitrary
and capricious in requiring the “just and reasonable” standard of
review for withdrawals from the RTO. Finally, consistent with
the court’s deferential review under § 205 of the FPA of FERC’s
determinations regarding rate design, FERC’s ROE incentive
adjustments were not arbitrary and capricious. Accordingly, we
deny the petitions for review.
I.
In Order 2000, FERC required all public utilities that own,
operate, or control interstate transmission facilities either to file
a proposal to participate in a RTO or to describe their efforts
toward joining one. See Regional Transmission Organizations,
F.E.R.C. Stats. & Regs. ¶ 31,089 (1999), 65 Fed. Reg. 810
(2000) (“Order 2000”), clarified on reh’g, F.E.R.C. Stats. &
Regs. ¶ 31,092, 65 Fed. Reg. 12,088 (2000) (“Order 2000-A”)
(codified at 18 C.F.R. § 35.34 (2006)), petitions for review
dismissed sub nom. Pub. Util. Dist. No. 1 of Snohomish County,
Washington v. FERC, 272 F.3d 607, 614 (D.C. Cir. 2001)
(“Snohomish County”). FERC conceived of the RTOs as
mechanisms for providing large and stable transmission systems
that would reduce regional pricing disparities and create an
efficient market for new power generators. See Order 2000,
F.E.R.C. Stats. & Regs. ¶ 31,089, at 30,933; Order 2000-A,
F.E.R.C. Stats. & Regs. ¶ 31,092, at 31,355; see also Pub. Serv.
Comm’n of Ky. v. FERC, 397 F.3d 1004, 1006-07 (D.C. Cir.
2005). By combining various utilities’ segmented transmission
facilities into a regional transmission grid under the control of
one independent entity, FERC anticipated that RTOs would
eliminate certain transmission inefficiencies and opportunities
for discrimination that hindered the formation of competitive
wholesale electric energy markets and that these new structures
5
would therefore result in significant benefits to the public. See
Snohomish County, 272 F.3d at 610-12.
By 2003, however, FERC had fully approved only two
RTOs. See Proposed Pricing Policy for Efficient Operation and
Expansion of Transmission Grid, 102 F.E.R.C. ¶ 61,032, at
61,062 (2003) (“Pricing Policy”). To encourage timely
formation of RTOs, FERC proposed a 50 basis point incentive
adjustment (“adder”) to the ROEs for TOs participating in a
FERC-approved RTO, and established the deadline of December
31, 2004 for qualifying for the proposed incentives. Id. at
61,065-66.
On October 31, 2003, an independent system operator
(“ISO”), ISO-New England, and a group of TOs submitted for
FERC approval, under Section 205 of the FPA, a proposal to
establish RTO-NE. Under the TOs’ Transmission Operating
Agreement (“TOA”), the TOs would transfer operational
authority over their transmission facilities to the RTO, subject
to certain reserved rights. Section 10.01 of the TOA set the
terms and conditions for members’ withdrawal from RTO
participation and termination of the RTO, providing in subpart
(f) that withdrawal “shall be effective unless the FERC finds that
such . . . withdrawal is contrary to the public interest under the
public interest standard of review as set forth” in the Mobile-
Sierra doctrine, supra note 2. In a related filing, on November
4, 2003, the TOs requested approval of a ROE recoverable under
the regional and local transmission rates charged by RTO-NE.
The ROE would consist of a base ROE of 12.8 percent, an
additional 50 basis points for participation in the RTO (and an
additional 100 basis points to reward future expansion by the
New England TOs, which is not at issue). The TOs sought the
50 basis point adder “to reward their willingness to transfer
operational control authority over their transmission facilities to
RTO-NE,” and noted that FERC’s proposed Pricing Policy
6
stated:
any entity that transfers operational control of
transmission facilities to a [FERC]-approved RTO
would qualify for an incentive adder of 50 basis points
on its ROE for all such facilities transferred.
Pricing Policy, 102 F.E.R.C. at 61,061.
FERC conditionally approved the RTO-NE by Order of
March 24, 2004. See ISO New England Inc., Order Granting
RTO Status Subject to Fulfillment of Requirements and
Establishing Hearing and Settlement Judge Procedures, 106
F.E.R.C. ¶ 61,280 (2004) (“Approval Order”). The petitioners
challenge three determinations FERC made in the Approval
Order: First, FERC rejected the TOs’ proposal that the Mobile-
Sierra “public interest” standard govern FERC review of
termination and withdrawal from RTO-NE and ordered that the
TOA be modified to set the “just and reasonable” standard for
such review in accordance with Section 205 of the FPA and
FERC’s published guidance. See Guidance on Regional
Transmission Organization and Independent System Operator
Filing Requirements Under the Federal Power Act, 104
F.E.R.C. ¶ 61,248, at 61,825 (2003) (“Guidance”). FERC
explained that the “public interest” standard “would prohibit any
meaningful review . . . under Section 205 . . . even in those
instances where revisions to RTO-NE’s operating agreements
may be necessary or appropriate as a result.” Approval Order,
106 F.E.R.C. at 62,030 (para. 59). Second, FERC summarily
approved, without suspension or hearing, the 50 basis point ROE
adder for regional transmission service, agreeing with the TOs
that their voluntary entry into RTO-NE and their commitment to
transfer day-to-day operational control to the RTO warranted the
ROE adder. Id. at 62,056. FERC explained that the adder was
consistent with its rulings in other cases and appropriate here
7
“because of the region-wide benefits that w[ould] be set in place
. . . .” Id. (para. 245). Third, FERC rejected the TOs’ proposed
50 basis point adder for local network service transmission not
controlled by the RTO on the ground that it was beyond the
scope of the incentive. Id. The TOs were directed to make a
compliance filing within 90 days. Id. at 62,057. Upon various
intervenors’ requests for rehearing or clarification of the
Approval Order, FERC reaffirmed its determinations by Order
of November 3, 2004. ISO New England, Inc., Order Accepting
Partial Settlement, Subject to Conditions; Accepting, in Part,
Compliance Filings; and Granting, in Part, and Denying, in
Part, Requests for Rehearing, 109 F.E.R.C. ¶ 61,147 (2004)
(“Rehearing Order”). These petitions for review followed.
II.
The TOs challenge FERC’s modification of the termination
provision of the TOA on the ground that FERC violated the
Mobile-Sierra doctrine by rejecting the “public interest”
standard agreed to by the parties and ordering that termination
and withdrawals be subject to the “just and reasonable”
standard, which would grant FERC more searching review. The
TOs maintain that just as they have the statutory right under
Section 205 of the FPA to set rates and the right to enter into
RTO contracts waiving some of those rights, they also have the
right to set rate-related terms, including the length of their
service agreements.
“To determine whether the agency’s action is contrary to
law, we look first to determine whether Congress has delegated
to the agency the legal authority to take the action that is under
dispute.” Michigan v. EPA, 268 F.3d 1075, 1081-82 (D.C. Cir.
2001) (citing United States v. Mead Corp., 533 U.S. 218, 226-28
(2001)); cf. Chevron USA, Inc. v. Nat. Res. Def. Council, 467
U.S. 837, 842-43 (1984). The court applies the traditional tools
8
of statutory interpretation in determining congressional intent,
looking to the text, structure, purpose, and legislative history of
a statute. See Chevron, 467 U.S. at 842-43 & n.9.
Under Section 201(b) of the FPA, Congress has vested
FERC with jurisdiction over “all rates, terms, and conditions of
electric transmission service provided by public utilities in
interstate commerce, as well as over the sale of electric energy
at wholesale.” Atlantic City Elec. Co. v. FERC, 295 F.3d 1, 4
(D.C. Cir. 2002); 16 U.S.C. § 824(b). Section 205, in turn,
provides that the rates, terms, and conditions of electrical
transmission service subject to FERC jurisdiction “shall be just
and reasonable, and any such rate or charge that is not just and
reasonable is . . . unlawful” and bars utilities from exercising
“undue preference” or “undue prejudice” in the rates charged.
16 U.S.C. § 824d(a) & (b). A public utility may file changes to
rates, charges, classification, or service at any time after
providing 60 days’ public notice. Id. § 824d(d). These changes
go into effect immediately. Cities of Campbell v. FERC, 770
F.2d 1180, 1184-85 (D.C. Cir. 1985); Papago Tribal Util. Auth.
v. FERC, 723 F.2d 950, 952-53 (D.C. Cir. 1983). FERC,
however, can conduct a hearing under Section 205 to review any
rate changes and suspend them for a period of five months, but
it may reject them only upon finding that the proposed rate
changes fail to meet the standards of Section 205, with the utility
bearing the burden of demonstrating that the proposed changes
are “just and reasonable,” 16 U.S.C. § 824d(a), and non-
preferential, id. at 824d(b); cf. Tenn. Gas Pipeline Co. v. FERC,
860 F.2d 446, 449 (D.C. Cir. 1988). In addition, under Section
206, FERC “itself may initiate rate changes . . . but only upon
finding that the existing rates are unjust, unreasonable, unduly
discriminatory or preferential.” 16 U.S.C. § 824e(a); see Cities
of Campbell, 770 F.2d at 1185; Papago Tribal Util., 723 F.2d at
952.
9
Under the Mobile-Sierra doctrine, however, “utilities may
choose to voluntarily give up, by contract, some of their rate-
filing freedom under section 205.” Atlantic City, 295 F.3d at 10-
11. Thus, a utility may negotiate a transmission contract with a
provision relinquishing its right to file for a unilateral change in
rates. See id. at 11; Papago Tribal Util., 723 F.2d at 953.
Similarly, “by broad waiver, the parties [to a jurisdictional
contract] may eliminate . . . [FERC]’s power to impose changes
under § 206, except the indefeasible right of [FERC] under §
206 to replace rates that are contrary to the public interest.”
Papago Tribal Util., 723 F.2d at 953. Such fixed-rate contracts
are not subject to unilateral amendment by a party to the
contract, and once accepted for filing, FERC may subsequently
order modification only upon finding that the modification is
required by the “public interest,” see Potomac Elec. Power Co.
v. FERC, 210 F.3d 403, 406 (D.C. Cir. 2000), and upon a
showing that the changes are just, reasonable, and
nondiscriminatory, see Atlantic City, 295 F.3d at 10 (citing
Tenn. Gas, 860 F.2d at 454). The “public interest” standard was
described in Federal Power Commission v. Sierra Pacific Power
Co. as requiring modification of previously approved contracts
in instances “where [the existing rate structure] might impair the
financial ability of the public utility to continue its service, cast
upon other consumers an excessive burden, or be unduly
discriminatory.” Sierra, 350 U.S. at 355; see Atlantic City, 295
F.3d at 14.
As a threshold matter, and contrary to the TOs’ position, it
is not clear that Mobile-Sierra has any relevance to FERC’s
initial review of a contract to establish a RTO. As FERC points
out, this court has only had occasion to apply the Mobile-Sierra
public interest standard to FERC-approved contracts rather than
those submitted to FERC for initial approval. See, e.g., Potomac
Elec. Power Co., 210 F.3d at 409. This interpretation is
consistent with Mobile-Sierra’s recognized purpose of ensuring
10
contract stability by “subordinat[ing] the statutory filing
mechanism to the broad and familiar dictates of contract law.”
Borough of Lansdale v. FPC, 494 F.2d 1104, 1113 (D.C. Cir.
1974); see Potomac Elec. Power Co., 210 F.3d at 408; see also
ANR Pipeline Co. v. FERC, 771 F.2d 507, 519 (D.C. Cir. 1985).
Indeed, the TOs recognize that the TOA effects changes in
existing transmission service contracts and is thus subject to
FERC approval under Section 205. Thus, given that RTOs are
FERC’s creation, FERC has substantial leeway in deciding the
conditions under which it will approve a proposal to establish a
RTO. This circumstance -- in which a proposal for an RTO has
not yet received initial approval -- is distinguishable from other
situations in which parties have entered into a fixed-rate contract
and FERC “must summarily reject rate filings inconsistent with
the outstanding fixed rate contract whether or not the contracts
have been filed with the [FERC].” Borough of Lansdale, 494
F.2d at 1114.
Again, “the purpose of the Mobile-Sierra doctrine is to
preserve the benefits of the parties’ bargain as reflected in the
contract, assuming that there was no reason to question what
transpired at the contact formation stage.” Atlantic City, 295
F.3d at 14 (citing Town of Norwood v. FERC, 587 F.2d, 1306,
1312 (D.C. Cir. 1978)). FERC points out that there is no
expectation of contract stability when a contract is submitted to
FERC for the first time, has yet to be approved by FERC, and
has not yet gone into effect -- particularly when that contract is
a complex agreement establishing a new regional structure
impacting all market participants. [Red 23] This hardly seems
the situation Mobile-Sierra was designed to guard against, viz.,
where one party to a rate contract on file with FERC attempts to
effect a unilateral rate change by asking FERC to relieve its
obligations under a contract whose terms are no longer favorable
to that party. See Sierra, 350 U.S. at 355; see generally David
G. Tewksbury & Stephanie S. Lim, Applying the Mobile-Sierra
11
Doctrine to Market-Based Rate Contracts, 26 Energy L.J. 437,
439-47 (2005). Absent a pre-existing FERC-approved RTO
operating agreement, the TOs fail to explain why FERC would
be obligated, under either the FPA or the Administrative
Procedure Act, 5 U.S.C. § 706(2)(A) (2000), to approve all of
the terms of the TOA, which is submitted as part of the RTO-NE
proposal.
The TOs rely upon two cases to support their contention
that FERC exceeded its authority in ordering the modification to
the TOA; both cases are readily distinguishable. In Atlantic
City, 295 F.3d at 3-4, public utilities sought review of FERC
orders approving their ISO agreement on the condition that the
utilities modify their agreement so as to relinquish the right,
under Section 205, to file changes in tariff rates, terms, and
conditions, and to prohibit members from withdrawing from the
ISO without FERC approval under Section 203, 16 U.S.C. §
824b(a).3 The court held that FERC had exceeded its authority
when it required the utilities to cede their Section 205 right to
file rate changes and that FERC’s expansive reading of its
Section 203 jurisdiction could not be reconciled with Section
202, 16 U.S.C. § 824a, which leaves coordination and
interconnection arrangements to the voluntary action of the
utilities. See Atlantic City, 295 F.3d at 11-12.
The TOs seek to have the court apply Atlantic City’s
holding to what they claim is their right under Section 205 to set
the terms of the length of their RTO service agreement,
3
Section 203 now provides, in relevant part, that “[n]o public
utility shall, without first having secured an order of [FERC]
authorizing it to do so -- (A) sell, lease, or otherwise dispose of the
whole of its facilities subject to the jurisdiction of the [FERC], or any
part thereof of a value in excess of $10,000,000.” 16 U.S.C.A. §
824b(a)(1) (West Supp. 2006).
12
maintaining that, although FERC could have determined that the
TOA was contrary to the “public interest,” in the absence of
such a finding, FERC lacks the authority to modify a negotiated
contract to insert a different standard. However, the issue in
Atlantic City was limited to the question of whether FERC had
jurisdiction under either Sections 203 or 205 to oblige public
utilities to cede their rights to make future filings under Section
205. Id. at 11. The court noted that the parties did not dispute
FERC’s authority to review their agreement at the outset, or to
decide, based on evidence in the record, whether the entry and
exit rights specified therein were just and reasonable within the
meaning of Section 205. Id. at 12.
In essence, the TOs contend that they have a right to
contract for Mobile-Sierra protections with respect to a future
unilateral decision to change an existing transmission service
agreement — i.e., the decision to withdraw from RTO-NE —
and that FERC may not abrogate this right by requiring, in its
initial review of the contract under Section 205, that a provision
be struck that purportedly protects the withdrawal decision from
FERC review under the standards in Sections 205 and 206.
Although the court acknowledged in Atlantic City that the right
to set rates in the first instance is a statutory right of utilities,
295 F.3d at 10, and that Section 205 does not authorize FERC to
require a utility to cede the right to initially set such rates, id. at
11, there is no indication in the statute or in Atlantic City that
Sections 202(a)4 [Blue 23; Gray 6] or 205 must be interpreted to
4
Section 202(a) provides, in relevant part, that:
For the purpose of assuring an abundant supply of
electric energy throughout the United States . . .
[FERC] is empowered and directed to divide the
country into regional districts for the voluntary
interconnection and coordination of facilities for the
13
grant utilities the unilateral right in proposing a RTO to avoid
the levels of review provided by the statute and the terms of
FERC’s published Guidance. To the extent that the FPA does
not expressly address this question, FERC’s interpretation of its
authority under Section 205 is permissible and therefore entitled
to deference by the court under step two of the Chevron
analysis. See Chevron, 467 U.S. at 843; see Indep. Ins. Agents
of Am., Inc. v. Hawke, 211 F.3d 638, 643 (D.C. Cir. 2000); Pub.
Serv. Co. of Colo. v. FERC, 91 F.3d 1478, 1482-86 (D.C. Cir.
1996). After all, the “right” provided by Subsection 10.01(f) of
the TOA — that unilateral withdrawal shall be “effective unless
the FERC finds that such . . . withdrawal is contrary to the
public interest ” — is not a right one signatory has against
another; it is not, as TOs suggest, a mere “term” of the
transmission agreement in the sense of the length of time that
the agreement will be in effect. Instead, it is an attempt to limit
the statutory authority of FERC, a non-signatory to the
agreement, which FERC has not yet approved and accepted for
filing. Absent FERC’s approval of RTO-NE and the terms of
the TOA, this provision cannot alter the statutory status quo
ante.
In Northeast Utilities Service Co. v. FERC, the other case
on which the TOs rely, FERC conditionally approved the merger
of a public utility pursuant to Section 203 and reviewed its
associated initial rate filings under Section 205. 993 F.2d 937,
943 (1st Cir. 1993); see Northeast Utils. Serv. Co., 56 F.E.R.C.
generation, transmission, and sale of electric energy,
and it may at any time thereafter, upon its own
motion or upon application, make such modifications
thereof as in its judgment will promote the public
interest.
16 U.S.C. § 824a(a).
14
¶ 61,269, at 61,987 (1991), order on remand, 66 F.E.R.C. ¶
61,332, at 62,087 (1994). On appeal, the First Circuit
considered whether FERC had the authority in its initial review
of the filings to deny a utility the future protections of Mobile-
Sierra with respect to four rate schedules. In that case, the
parties sought to protect their rate schedules from amendment by
FERC except under circumstances that satisfied the stringent
“public interest” criteria.5 FERC had ordered language to be
struck that restricted subsequent FERC review of the contracts
to the Mobile-Sierra public interest standard. Northeast Utils.,
993 F.3d at 960. The First Circuit concluded that, by refusing
to allow negotiated rate schedules to be subsequently reviewed
under the public interest standard, FERC had unlawfully
circumvented the Mobile-Sierra doctrine. Id. at 960-61 (citing
Papago Tribal Util., 723 F.2d at 953-54).
However, the First Circuit was not confronted with a
contract provision that would insulate a future and not-yet
reviewed rate change from scrutiny under Section 205; the
merger-related rate schedules sought to limit subsequent review
of the rates, which had been filed and would be effective
5
One of the agreements provided:
Further, [contracting parties] shall not, and each
hereby waives (to the extent it may lawfully do so)
any right it may have to, file a complaint with respect
to the rates charged under this Agreement pursuant to
Section 206 of the Federal Power Act . . . without the
prior written consent of each of the others, and each
further agrees that in any proceeding by the FERC
under Section 206 the FERC shall not change the rate
charged under this Agreement unless such rate is
found to be contrary to the public interest.
Ne. Utils. Serv. Co., 50 F.E.R.C. ¶ 61,266, at 61,838.
15
subsequent to the bankruptcy reorganization of what had been
the largest utility in New Hampshire. See Northeast Utils. Serv.
Co., 50 F.E.R.C. ¶ 61,266, at 61,821-23, reh’g granted in part
and denied in part, 51 F.E.R.C. ¶ 61,177 (1990), order on
remand, 66 F.E.R.C. ¶ 61,332, at 62,092-93 (1994). The court
stated that “[u]nder the Mobile-Sierra doctrine, [FERC] must
respect certain private contract rights,” Northeast Utilities, 993
F.2d at 960 (emphasis added), citing and quoting Papago Tribal
Utility Authority, 723 F.2d at 953), to which we alluded earlier
in this opinion. These circumstances are distinguishable from
FERC’s initial review, under Section 205, of a TOA that is part
of a proposal to establish a RTO. To the extent that Northeast
Utilities, 993 F.2d at 960-61, and its companion, Northeast
Utilities Service Co. v. FERC, 55 F.3d 686, 689-90 (1st Cir.
1995), might be interpreted to suggest that parties may, by
mutual agreement, limit FERC’s authority under Section 205
over initial review of a rate change, cf. Northeast Utils. Serv.
Co., 66 F.E.R.C. ¶ at 62,081, this suggestion is belied by the
First Circuit’s invocation of Section 206, not Section 205, as the
provision which is the subject of its analysis. See Northeast
Utils., 993 F.2d at 961-62; Northeast Utils., 55 F.3d at 687.
The TOs’ next challenge to FERC’s modification of the
TOA’s withdrawal provision as arbitrary and capricious — on
the ground that the modification is inconsistent with the
voluntary nature of RTO participation recognized in Order 2000
— fares no better. Our review of FERC orders under the
arbitrary and capricious standard of the Administrative
Procedure Act, 5 U.S.C. § 706(2)(A), is “highly deferential” to
the agency, Sithe/Independence Power Partners v. FERC, 165
F.3d 944, 948 (D.C. Cir. 1999); the court must affirm such
orders unless the agency failed to consider relevant factors or
made a “clear error of judgment,” see Citizens to Preserve
Overton Park, Inc. v. Volpe, 401 U.S. 402, 415-16, 416 (1971).
16
On rehearing, FERC made clear that the TOs’ ability to
withdraw from the RTO without Section 205 “just and
reasonable” review could “have a substantial [deleterious]
impact on other market participants and the markets
themselves.” Rehearing Order, 109 F.E.R.C. at 61,576 (para.
41). Intervenors argued before the agency that by giving the
TOs a unilateral right of withdrawal, the TOA gave the TOs too
much leverage over day-to-day operations. FERC had initially
explained that the proposed withdrawal arrangement could
subvert the independence of the RTO, contrary to the principles
for RTOs set forth in Order 2000. See Approval Order, 106
F.E.R.C. at 62,028, 62,030 (paras. 47, 59). On rehearing, FERC
further explained “full, meaningful review . . . would not be
possible . . . governed by a standard of review,” such as the
“public interest” standard, which “limits the application of the
just and reasonable standard.” Rehearing Order, 109 F.E.R.C.
at 61,576 (para. 40). FERC foresaw that a TO’s withdrawal
from an RTO “can have a substantial impact on other market
participants and the markets themselves.” Id. (paras. 40-41).
Given that FERC anticipates that RTOs will encourage entry
into the market, and that entrants have and will rely upon a
transmission grid controlled by an independent entity, ensuring
meaningful FERC review of changes regarding control of the
grid is a reasonable accommodation between FERC’s
responsibility to protect the public and the utilities’ contractual
rights to arrange their affairs. See id. at 61,581 (para. 73).
The TOs offer no persuasive response to either of FERC’s
concerns about market impact. Although they emphasize that,
under Order 2000, RTO formation was to be voluntary,6 [Blue
I at 30] there is nothing inconsistent with the TOs’ voluntary
6
See generally Order 2000, FERC Stats. & Regs ¶ 31,089, on
reh’g, Order 2000-A, FERC Stats. & Regs. ¶ 31,092; see also
Snohomish County, 272 F.3d at 613-17.
17
decision to organize themselves into RTO-NE, and FERC’s
insistence on compliance with its announced RTO terms and
conditions. See Approval Order, 106 F.E.R.C. at 62,030 (para.
59). As intervenors observe, the TOs were not required to
proceed with RTO-NE if they found the termination condition
unacceptable. Moreover, having received the benefits of RTO
status, including the 50 basis point adder to ROE, the TOs can
hardly demonstrate that it is reasonable to permit withdrawals
without FERC’s first considering the impact on the criteria in
Order 2000. To the extent the TOs contend that, even if FERC
has authority to order the modification of the TOA, FERC failed
to make the necessary findings under Section 206, namely that
the proposed termination provision was “unjust and
unreasonable,” cf. W. Res., Inc. v. FERC, 9 F.3d 1568, 1574-76
(D.C. 1993); Sea Robin Pipeline Co. v. FERC, 795 F.2d 182,
184 (D.C. Cir. 1986), the court lacks jurisdiction to decide this
issue because it was not raised before FERC, see FPA § 313(b),
16 U.S.C. § 825l(b); DTE Energy Co. v. FERC, 394 F.3d 954,
955-56 (D.C. Cir. 2005).
III.
FERC’s determinations on the ROE adders involve matters
of rate design, which are technical and involve policy judgments
at the core of FERC’s regulatory responsibilities. Hence, the
court’s review of whether a particular rate design is just and
reasonable is highly deferential. See N. States Power Co. v.
FERC, 30 F.3d 177, 180 (D.C. Cir. 1994); Town of Norwood,
962 F.2d at 22.
The State Commissions challenge FERC’s approval of the
50 basis point incentive adder for regional service, which FERC
determined to be “just and reasonable.” The State Commissions
contend that: (1) the adder pretends to offer incentives for
transmission restructuring that has already occurred; (2) FERC
18
failed to calibrate its use of non-cost-based rate elements to
ensure that the resulting increases in rates would be no more
than is necessary to create such purported incentive for RTO
formation; (3) FERC’s determination is inconsistent with its
conclusion, in a factually-similar case involving a restructured
power pool, that such an adder would not motivate RTO
formation; and (4) FERC’s three rationalizations for the adder
fail because they are inaccurate, conclusory, and ignore the need
to avoid creating windfalls for public utilities.
FERC’s findings refute the State Commission’s first
objection. FERC found that ISO-NE’s full independence was
“limited by its contractual arrangement with NEPOOL,”
whereby “market participants, not ISO-NE, have the primary
authority to establish and revise rates, terms, and conditions
governing the operation of the New England wholesale
electricity market.” Approval Order, 106 F.E.R.C. at 62,029
(para. 52)] FERC had previously found that this governance
model could not meet FERC’s independence requirement under
Order 2000 unless the market participant committees within
NEPOOL were advisory. See Bangor Hydro-Electric Co., 96
F.E.R.C. ¶ 61,063, at 61,259 (2001). By contrast, FERC found
that the RTO-NE proposal meets the independence requirements
by calling for a governance structure designating authority over
the operation of New England markets “squarely in the hands of
a financially disinterested entity rather than with market
participants.” Approval Order, 106 F.E.R.C. at 62,029 (para.
53). In addition, the five-year term with automatic renewal of
the TOA would contribute to greater institutional stability and
independence than ISO-NE’s day-to-day operations under
interim contracts. Moreover, FERC points out, because “the
adder rewards the [TOs] for their future participation, as well as
for their initial surrender of control over their facilities,”
Respondent’s Br. at 35, FERC reasonably concluded the adder
does not only reward past action. The same could not be said in
19
the cases on which the State Commissions rely. See, e.g.,
Allegheny Power Sys. Operating Cos., 111 F.E.R.C. ¶ 61,308,
2005 WL 1301759, **14 (2005) (para. 54).
Second, FERC did the necessary calibration, determining
the 50 basis point adder to be within the zone of reasonableness.
See Approval Order, 106 F.E.R.C. at 62,056 (para. 246);
Rehearing Order, 109 F.E.R.C. at 61,600. FERC explained that
it had ensured that the ROE would result in reasonable rates by
making them
subject to a cap on the overall ROE . . . equal to the top
of the range of reasonable ROEs for a proxy group
consisting of the investor-owned transmission owners
participating in the relevant RTO whose shares are
publicly traded.
Pricing Policy, 102 F.E.R.C. at 61,067 (para. 37). To the extent
that the State Commissions consider this to be a meaningless
standard, they ignore the cap, as is evidenced by the cases on
which they rely. See City of San Antonio v. ICC, 631 F.2d 831,
852-53 (D.C. Cir. 1980); Sys. Fuels, Inc. v. ICC, 642 F.2d 112,
116 (5th Cir. 1981). Particularly in view of FERC’s authority to
consider non-cost factors in setting rates, see Permian Basin
Area Rate Cases, 390 U.S. 747, 791-92, 815 (1968); Pub. Utils.
Comm’n of Cal. v. FERC, 367 F.3d 925, 929 (D.C. Cir. 2004),
the State Commissions’ position on calibration demands too
much, cf. Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d
1486, 1501-02 (D.C. Cir. 1984). Here, FERC was applying
policy considerations to choose from among several “cost-
recovering rate[s].” FPC v. Conway Corp., 426 U.S. 271, 278
(1976). Because a ROE is “not susceptible to a precise
calculation,” Rehearing Order, 109 F.E.R.C. at 61,600 (para.
207), and “is based, rather, on a range of reasonable returns,
which take into account a number of factors that may be both
20
cost-related and policy-related, including business risk factors,”
id., courts have recognized that there is a zone of reasonable
ROEs and have held FERC to an end-result test. See Permian
Basin, 390 U.S. at 797; Pub. Serv. Comm’n of Ky., 397 F.3d at
1009. FERC points out that there is not a sufficiently long track
record with which to measure the full value of the benefits of
RTOs on market performance. Cf. Midwest ISO Transmission
Owners v. FERC, 373 F.3d 1361, 1371 (D.C. Cir. 2004). In
FERC’s words on rehearing: in the RTO context, “it is
appropriate . . . to adjust the allowed return for [TOs] that
undertake commitments designed to enhance the overall
competitiveness and efficiency of the wholesale markets, so
long as the resulting rate of return is within the range of
reasonable returns.” Rehearing Order, 109 F.E.R.C. at 61,600
(para. 207). Given the expertise implicated in FERC’s
determination, and the measures it took to explain and cabin the
adder, the court can conclude that the determination meets this
minimum standard for reasonableness. See Midwest ISO
Transmission Owners, 373 F.3d at 1371.
Third, approval of the 50 point adder is consistent with
FERC precedent, see, e.g., PJM Interconnection LLC, 104
F.E.R.C. ¶ 61,124, at 61,435 (2003), and FERC’s Pricing
Policy, 102 F.E.R.C. at 61,065. The State Commissions point
to Allegheny Power System Operating Cos., 111 F.E.R.C. ¶
61,308, 2005 WL 1301759, **14, to support the obvious
proposition that FERC will not, and cannot, create incentives to
motivate conduct that has already occurred. In Allegheny certain
transmission-owning members of a RTO requested an incentive
adder for RTO membership nearly two years after they had
joined the approved RTO. See id. at **13-14. Here, the RTO
has yet to be approved and the adder does not reward only past
conduct; therefore, the case is inapposite.
In light of FERC’s findings, which are supported by
21
substantial evidence, see 16 U.S.C. § 8251(b), FERC reasonably
could conclude, as it did, that the transformation from an ISO to
a RTO would impose significant obligations on member TOs.
For the first time, an independent entity would control the open
access transmission tariff and other terms governing the market
with resulting significant benefit to the public.
The State Commissions’ other challenges are unpersuasive.
The objection that generic policies do not justify imposing the
adder because generalized policy statements (let alone proposed
policy) cannot justify agency action, see Pac. Gas & Elec. v.
FPC, 506 F.2d 33, 38-39 (1974); Pub. Serv. Comm’n of Ky., 397
F.3d at 1012, misses the mark. In Public Service Commission
of Kentucky, the court did not indicate that allowing adders to a
ROE was outside of the ambit of FERC’s ratemaking authority
under Section 205; rather, the court held that notice to interested
parties that adders were being considered was required prior to
FERC’s acceptance of them, see 397 F.3d at 1012. Congress
has since enacted the Energy Policy Act of 2005, albeit after
FERC issued the orders challenged here, which authorizes
FERC to “provide for incentives to each transmitting utility or
electric utility that joins a Transmission Organization.” Pub. L.
No. 109-58, § 1241(c), 119 Stat. 594 (2005) (codified at 16
U.S.C.A. § 824s(c) (West Supp. 2006)). The objection that,
even if the adder power now falls within FERC’s authority, 16
U.S.C.A. § 824s(c), this does not relieve FERC’s obligation to
determine if a non-cost based component was reasonable,
overlooks FERC’s explanations in the Rehearing Order that a
ROE is not susceptible to a precise calculation, 109 F.E.R.C. at
61,600. The objection also overlooks FERC’s explanations in
the Approval Order that the 50 point basis adder falls within a
zone of reasonableness, 106 F.E.R.C. at 62,056 (para. 246) and
that pre-existing regional arrangements by ROE filers failed to
meet the independence requirements of Order 2000, id. (para.
245).
22
Finally, contrary to the TOs’ contention, FERC’s rejection
of the adder for local rates was not arbitrary. Aware of the long-
standing practice in New England of distinguishing between
facilities providing regional services from those providing local
services, see Approval Order, 106 F.E.R.C. at 62,022 n.11,
FERC explained that the purpose of the 50 basis point adder was
to encourage utilities to cede control of regional facilities to an
independent entity responsible for providing regional
transmission service under the terms and conditions of a
regional tariff, see Rehearing Order, 109 F.E.R.C. at 61,599
(para. 201). By contrast, the TOs retained significant control of
local service, which operated under individual tariffs. Hence,
FERC reasonably concluded that there was nothing to reward.
Accordingly, we deny the petitions for review.