United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 20, 2009 Decided May 8, 2009
No. 06-1426
ALCOA INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
On Petition for Review of Orders
of the Federal Energy Regulatory Commission
David R. Poe argued the cause for petitioner. With him
on the briefs were Sonia C. Mendonca and Brett A. Snyder.
Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Cynthia A. Marlette, General Counsel, and
Robert H. Solomon, Solicitor.
Before: SENTELLE, Chief Judge, TATEL and GRIFFITH,
Circuit Judges.
Opinion for the Court filed by Circuit Judge GRIFFITH.
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GRIFFITH, Circuit Judge: The newly created Electric
Reliability Organization proposed that its costs be allocated
according to a method of computation called net energy for
load. Alcoa asks us to review the decision of the Federal
Energy Regulatory Commission that approved the proposal.
We find the decision reasonable and thus deny the petition for
review.
I.
Until recently, the reliability of the nation’s bulk-power
system depended on participants’ voluntary compliance with
industry standards. In 2005, Congress decided this
arrangement was no longer acceptable and enacted legislation
requiring the development of mandatory, FERC-approved
electric reliability standards. See Energy Policy Act of 2005,
Pub. L. No. 109-58, § 1211(b), 119 Stat. 594, 942; Mandatory
Reliability Standards for the Bulk-Power System, 72 Fed.
Reg. 16,416, 16,419 (Apr. 4, 2007). To carry out this change,
Congress added section 215 to the Federal Power Act (FPA),
which provides for the creation of a national Electric
Reliability Organization charged with establishing and
enforcing such standards. 16 U.S.C. § 824o(a)(2) (2006). Any
entity may apply, but FERC can certify only one Electric
Reliability Organization. Before doing so, the Commission
must determine that the applicant meets certain criteria. See
id. § 824o(c). Relevant here is the requirement that the entity
certified, in order to fund its activities, have rules in place that
“allocate equitably reasonable dues, fees, and other charges
among end users [of the bulk-power system].” Id.
§ 824o(c)(2)(B).
On February 17, 2006, FERC issued Order No. 672 to
implement section 215. Among other things, the order
clarifies what an entity must do to qualify as the national
3
Electric Reliability Organization and the methods it may
employ to distribute its costs among customers of electric
energy. Rules Concerning Certification of the Electric
Reliability Organization (Order No. 672), 71 Fed. Reg. 8662
(Feb. 17, 2006). With regard to cost allocation, the preamble
to Order No. 672 focuses on “net energy for load.” Net energy
for load allocates costs on the basis of energy consumption
alone, and the Commission agreed with the majority of
commenters that this “is one fair, reasonable and
uncomplicated method,” id. at 8665; see also id. at 8682. The
Commission declined, however, to “rule out other
apportionment methods that can be shown to be just and
reasonable.” Id. at 8665. It did not require any particular
formula but instead allowed the applicant “flexibility” in
deciding which cost allocation method to propose. Id. at 8682.
The actual regulations that resulted from this rulemaking
provide that “[a]ny person who submits an application for
certification as the Electric Reliability Organization shall
include in its application a formula or method for the
allocation and assessment of [its] dues, fees and charges.” 18
C.F.R. § 39.4(a) (2008).
On April 4, 2006, the North American Electric Reliability
Corporation (NERC) sought certification as the nation’s
Electric Reliability Organization. It was the sole applicant.
Historically, NERC had operated as a voluntary reliability
organization that issued nonbinding guidelines and
operational standards for the bulk-power system. It had been
funded by assessments to its members based on net energy for
load, and its application proposed to use this method for
apportioning the costs of its services as the Electric Reliability
Organization. See J.A. at 81 (Request for Certification). Alcoa
intervened and objected to NERC’s use of the net energy for
load method, arguing that the method departs from FERC’s
ratemaking precedent and would inequitably distribute
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NERC’s costs among electric energy customers. Alcoa
proposed that NERC employ a cost allocation method that,
like FERC’s traditional transmission rate structure, accounts
for capacity-related costs in addition to operating costs. See
J.A. at 117–20 (Motion to Intervene).
FERC disagreed. It determined that NERC’s proposal to
allocate costs on the basis of net energy for load satisfied the
requirement that the applicant have rules in place that
equitably allocate its costs among electric energy users. See
Order Certifying North American Electric Reliability
Corporation as the Electric Reliability Organization
(Certification Order), 116 F.E.R.C. ¶ 61,062, at 61,318
(2006). The Commission saw Alcoa’s challenge to the net
energy for load method as “an impermissible collateral attack
on Order No. 672.” Id. Alcoa’s challenge, FERC reasoned,
should have been directed at Order No. 672 and was therefore
untimely at the certification stage. Accordingly, FERC
declined to revisit its earlier conclusion that net energy for
load is fair and reasonable. Id. Finding that the application
met all other statutory requirements, FERC certified NERC as
the nation’s first Electric Reliability Organization.
Alcoa sought rehearing, repeating its argument that
acceptance of the net energy for load method would represent
an unjustified departure from established ratemaking
precedent. J.A. at 227–32 (Request for Rehearing). FERC,
however, was unmoved from its position that Alcoa’s
argument was an untimely collateral attack, explaining that
Order No. 672 “ruled that if the . . . Applicant proposed to
allocate funding based on net energy for load it would be a
fair and reasonable method.” Order on Petitions for Rehearing
and Clarification (Rehearing Order), 117 F.E.R.C. ¶ 61,126,
at 61,665 (2006). According to FERC, its decision not to
select the net energy for load method as the exclusive means
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to allocate costs was merely intended to allow applicants the
ability to propose different methods. Despite ruling the
challenge untimely, FERC nonetheless went on to reject
Alcoa’s request that NERC abandon the net energy for load
method and employ a demand-based approach. FERC
determined that Alcoa had failed to demonstrate how the
latter could be applied to allocate costs “on a continent-wide
basis for NERC funding purposes.” Id. Alcoa now seeks
review in this court.
II.
We must first decide whether Alcoa’s challenge to the net
energy for load method is an untimely collateral attack on
Order No. 672 which we lack jurisdiction to consider. Section
313 of the FPA establishes a thirty-day limitations period for
“[a]ny person . . . aggrieved by an order issued by the
Commission” to apply for rehearing, 16 U.S.C. § 825l(a), and
a sixty-day limitations period beginning after rehearing to
petition for judicial review of the aggrieving order, id.
§ 825l(b). A party is aggrieved and may petition for judicial
review “if it can establish both the constitutional and
prudential requirements for standing,” Pub. Util. Dist. No. 1 v.
FERC, 272 F.3d 607, 613 (D.C. Cir. 2001), including an
“actual or imminent, not ‘conjectural’ or ‘hypothetical,’”
injury in fact, Lujan v. Defenders of Wildlife, 504 U.S. 555,
560–61 (1992) (quoting Whitmore v. Arkansas, 495 U.S. 149,
155 (1990)).
Alcoa did not seek rehearing of Order No. 672 and
instead challenged the Commission’s subsequent order
certifying NERC as the Electric Reliability Organization. The
jurisdictional issue—whether this challenge came too late—
turns on whether Alcoa was “aggrieved” by Order No. 672. In
FERC’s view, Order No. 672’s endorsement of the net energy
6
for load method aggrieved Alcoa, and its failure to mount any
challenge to that order, let alone a timely one, bars its petition.
According to FERC, the Certification Order, which Alcoa did
challenge, merely implemented the Commission’s previous
determination. See Br. of Resp’t 11–13. Alcoa disagrees. It
maintains that it was not “aggrieved” by Order No. 672,
which did not actually set a particular cost allocation method
for the Electric Reliability Organization. See Br. of Pet’r 21;
Reply Br. of Pet’r 4–8. In other words, because Order No. 672
did not require the use of net energy for load, the issue of cost
allocation on that basis was not yet ripe for review.
We agree with Alcoa. Order No. 672 expressly left open
the possibility that the applicant would propose a cost
allocation method other than net energy for load. See Order
No. 672, 71 Fed. Reg. at 8682 (“[O]ur regulations provide[]
the ERO applicant the flexibility to propose a formula or
method for the allocation and assessment of ERO costs
. . . .”); see also 18 C.F.R. § 39.4(a). In its wake, Alcoa had
reason to think that the applicant might still choose its
preferred method of cost allocation. We fail to see how Alcoa
was imminently aggrieved by a determination that net energy
for load is one of potentially many acceptable methods of cost
allocation inasmuch as the order did not foreclose Alcoa’s
hoped-for outcome. It was only when an applicant actually
proposed, and FERC accepted, cost allocation based on net
energy for load that Alcoa suffered its alleged harm. That did
not occur until the Certification Order. Accordingly, we hold
that Alcoa did not suffer any actual or imminent injury as a
result of Order No. 672 for which it could have sought
review. Cf. DTE Energy Co. v. FERC, 394 F.3d 954, 960–61
(D.C. Cir. 2005) (holding that a party cannot seek review of a
conditional order that is subject to a further compliance filing
because that order has no binding effect and causes no actual
injury). Only after the Certification Order could Alcoa
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demonstrate a sufficient injury in fact. Alcoa timely sought
rehearing and judicial review of this order, and thus our
jurisdiction is proper.
III.
We turn next to Alcoa’s argument that FERC’s approval
of the net energy for load method constitutes an unexplained
departure from established ratemaking precedent. FERC’s
traditional transmission rate approach is intended to allow
service-providing utilities to recover reasonable rates that
reflect their costs of providing service. Second Taxing Dist. v.
FERC, 683 F.2d 477, 480 (D.C. Cir. 1982). Rates must also
generally adhere to the principle of “cost causation.” “Simply
put, it has been traditionally required that all approved rates
reflect to some degree the costs actually caused by the
customer who must pay them.” K N Energy, Inc. v. FERC,
968 F.2d 1295, 1300 (D.C. Cir. 1992).
FERC’s traditional two-part rate structure, composed of a
demand charge and an energy charge, addresses these two
principles. See Town of Norwood v. FERC, 962 F.2d 20, 21
(D.C. Cir. 1992); Second Taxing Dist., 683 F.2d at 480. The
demand component, which incorporates the capacity costs of
generation, reflects the fixed investment that load-serving
entities must make in order to meet peak customer demand.
The energy component incorporates the variable costs of
operating and generating electric power. See Second Taxing
Dist., 683 F.2d at 480; see also MICHAEL A. CREW & PAUL R.
KLEINDORFER, THE ECONOMICS OF PUBLIC UTILITY
REGULATION 174–78 (1986) (explaining demand-based
pricing). “Individual customers’ bills are the sum of a demand
charge, calculated to reflect the customer’s share of demand
costs, and an energy charge, calculated to reflect the costs of
producing the power used by the customer.” Second Taxing
8
Dist., 683 F.2d at 480; see also La. Power & Light Co., 6
F.E.R.C. ¶ 63,031, at 65,186 (1979).
Alcoa argues, and FERC does not dispute, that net energy
for load differs from this traditional approach in that it
allocates costs among customers on the basis of their energy
consumption alone without regard to their demand costs.
According to Alcoa, not only does this method depart from
FERC’s customary approach, but it inequitably distributes the
costs of the Electric Reliability Organization among users of
the bulk-power system. Because a significant portion of the
organization’s costs will be demand related, and because net
energy for load does not distribute these costs according to
each customer’s demand-related needs, customers with
traditionally low demand charges will be forced to shoulder a
greater share of the organization’s costs than they would
under the traditional two-part rate structure. See Br. of Pet’r
23–28; see also J.A. at 117–20 (Motion to Intervene).
Our review of this challenge is guided by the arbitrary
and capricious standard of the Administrative Procedure Act.
See 5 U.S.C. § 706(2) (2006); see also Wash. Gas Light Co. v.
FERC, 532 F.3d 928, 930 (D.C. Cir. 2008). We “affirm the
Commission’s orders so long as FERC ‘examine[d] the
relevant data and articulate[d] a . . . rational connection
between the facts found and the choice made.’” Midwest ISO
Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C.
Cir. 2004) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) (alterations in
original). In matters of ratemaking, our review is highly
deferential, as “[i]ssues of rate design are fairly technical and,
insofar as they are not technical, involve policy judgments
that lie at the core of the regulatory mission.” Town of
Norwood, 962 F.2d at 22; see also Entergy Servs., Inc. v.
FERC, 319 F.3d 536, 541 (D.C. Cir. 2003). When an agency
9
shifts course, however, it “must provide ‘a reasoned analysis
indicating that prior policies and standards are being
deliberately changed, not casually ignored.’” Entergy Servs.,
319 F.3d at 541 (quoting Greater Boston Television Corp. v.
FCC, 444 F.2d 841, 852 (D.C. Cir. 1970)).
In Order No. 672, the Commission explained that “[m]ost
commenters support use of a net energy for load-based
funding apportionment,” but acknowledged that a few
recommended other methods. Order No. 672, 71 Fed. Reg. at
8681. There were two central concerns to consider: the first
was the claim that net energy for load would not apportion
costs equitably; the second was the issue of “double
counting”—charging end users twice for the reliability
functions of the organization. See id. Reviewing the
arguments on both sides, FERC ultimately sided with the
majority of commenters. The Commission agreed that net
energy for load is “a fair and reasonable” way of allocating
costs among end users and concluded that, because it charges
based on energy consumed, the possibility of counting energy
consumption more than once is minimized. Id. In the
Certification Order, FERC referred to this discussion in
concluding that NERC’s proposed use of net energy for load
would “allocate equitably reasonable fees and charges among
end users.” See 116 F.E.R.C. at 61,318 (“In Order No. 672,
we found that funding apportionment method based on net
energy for load is a fair and reasonable method for allocating
costs that minimizes the possibility of ‘double-counting.’”).
Under the highly deferential standard that limits our review,
we hold that this decision is neither arbitrary nor capricious.
We also conclude that FERC adequately explained any
departure from its traditional two-part transmission rate
precedent. As an initial matter, it is not clear to us that the
Commission deviated from a prior practice. As explained in
10
the Rehearing Order and at oral argument, FERC has never
used a demand-based transmission rate to allocate the costs of
an entity like the Electric Reliability Organization. Charges
based on the organization’s costs are not transmission rates,
and the Commission has not applied its standard rate structure
to an entity that would operate on a continent-wide basis. See
Rehearing Order, 117 F.E.R.C. at 61,665; Oral Arg.
Recording at 35:35–:45 (stating that FERC was deciding on a
“different kind of rate for a different set of circumstances”).
But assuming for the sake of argument that FERC did
depart from past precedent, we hold it did so with an
explanation that, although admittedly spare, is nonetheless
adequate. On rehearing, FERC expressly rejected the idea that
its “demand allocation method should be employed for
assigning funding responsibility for any of NERC’s fixed
costs.” Rehearing Order, 117 F.E.R.C. at 61,665. It cited the
regulation that explains how wholesale transmission rates are
calculated, see id. at 61,665 n.59 (citing 18 C.F.R.
§ 35.13(h)(27)), and concluded that Alcoa “fail[ed] to
demonstrate how [it] would be appropriate or could be easily
developed on a continent-wide basis for NERC funding
purposes,” id. See also Br. of Resp’t 21 (“An attempt to apply
[demand allocation] to a national rate for all transmission
service would be, at best, problematic.”). We think this is a
sufficient explanation for why the Commission chose not to
apply its traditional transmission rate design to allocate the
costs of the national Electric Reliability Organization. That
the Commission’s discussion is styled as a response to
Alcoa’s argument is of no moment. Alcoa pushed for use of
the Commission’s traditional two-part transmission rate
structure. See J.A. at 118 (Motion to Intervene) (“The
distinction between demand and energy costs . . . is embedded
in the entire fabric of FERC electric regulation,” and NERC
offers no “basis for deviating from established Commission
11
policy and precedent.”); see also J.A. at 229–32 (Request for
Rehearing); Br. of Pet’r 25. In rejecting Alcoa’s argument on
the basis that Alcoa did not demonstrate how this structure
would be appropriate, we find it clear that FERC was
explaining its departure from its settled rate design policies.
Although FERC may not depart from its precedent solely
because a petitioner has failed to show why that precedent
should apply, that is not the situation we face here.
IV.
For the foregoing reasons, the petition for review is
Denied.