United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 26, 2009 Decided June 12, 2009
No. 08-1196
WESTAR ENERGY, INC., ET AL., PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
Consolidated with 08-1205
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
Martin J. Bregman argued the cause for petitioners. With
him on the briefs were Donald K. Dankner, Raymond B.
Wuslich, and Margaret H. Claybour.
Kathrine L. Henry, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Cynthia A. Marlette, General Counsel, and
Robert H. Solomon, Solicitor.
Before: HENDERSON, TATEL and KAVANAUGH, Circuit
Judges.
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Opinion for the Court filed by Circuit Judge
KAVANAUGH.
KAVANAUGH, Circuit Judge: Exercising its statutory
authority to ensure that rates for the sale of wholesale electric
power are just and reasonable, the Federal Energy Regulatory
Commission generally allows wholesale electricity sellers to
sell at market-based rates – unless the wholesaler possesses
market power in a particular region, in which case it must
make sales at cost-based prices. FERC’s approach raises the
issue at the heart of this dispute: Suppose a wholesaler sells
energy in a region where it has market power but the energy
ultimately is used in a region where the wholesaler does not
possess market power. Because of the difficulty in
monitoring transactions to determine where energy is
ultimately used, the Commission has ruled that the dispositive
factor in those circumstances is whether the wholesaler has
market power at the point of sale – not where the energy is
actually used or “sinks.” See Order No. 697, Market-Based
Rates for Wholesale Sales of Electric Energy, Capacity and
Ancillary Services by Public Utilities, 72 Fed. Reg. 39,904,
40,000 (July 20, 2007).
In this case, the Commission followed the point of sale
test – not a sink-based test – and ordered two electricity
wholesalers to make refunds to customers to the extent they
had previously made sales in areas where they have market
power at market-based prices. The wholesalers challenge the
Commission’s decision as arbitrary and capricious under the
Administrative Procedure Act. We conclude that FERC’s
decision was reasonable, and we therefore deny the petitions
for review.
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I
Electricity generators convert energy from coal, nuclear
power, natural gas, or other sources into electricity. The
generators then sell the electricity – either (i) as wholesalers
to utilities that serve retail customers or (ii) directly to retail
customers.
Congress has assigned the Federal Energy Regulatory
Commission the responsibility to ensure that all rates for
jurisdictional sales are just and reasonable. 16 U.S.C. § 824d.
FERC divides the areas served by an electricity wholesaler
into two categories: mitigated and non-mitigated areas.
Mitigated areas are those regions where a wholesaler
possesses market power. Sales in a mitigated area must occur
pursuant to a cost-based tariff to protect customers from the
wholesaler’s market power. In non-mitigated areas, the
wholesaler may make sales under a market-based tariff – that
is, a tariff that allows the wholesaler to “enter into freely
negotiated contracts with purchasers.” Morgan Stanley
Capital Group, Inc. v. Pub. Util. Dist. No. 1, 128 S. Ct. 2733,
2741 (2008).
Wholesalers often make “export sales” to utility
customers who in turn sell energy at retail to end users outside
of the wholesalers’ mitigated areas. Westar Energy, Inc. and
the Empire District Electric Company are electricity
wholesalers that sell to utility customers outside of their
mitigated areas.
In May 2005, Westar and Empire filed tariffs that
proposed (i) cost-based rates for sales to customers serving
energy needs within their mitigated areas and (ii) market-
based rates for sales to customers when the energy would be
used outside their mitigated areas. Under their proposals, the
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location where the energy is ultimately used – or “sinks” –
would determine whether the sale would be made at market
rates or cost-based rates. On several occasions between
November 2005 and March 2006, FERC accepted similar
sink-based tariffs filed by other wholesalers. See, e.g.,
Carolina Power & Light Co., 113 FERC ¶ 61,130 (2005).
In March 2006 – before officially accepting petitioners’
proposed tariffs – FERC changed course and began rejecting
the sink-based approach. MidAmerican Energy Co., 114
FERC ¶ 61,280 (2006). In August 2006, consistent with this
new policy, FERC denied Empire’s sink-based tariff and
ordered it to pay refunds for sales made within its mitigated
area that occurred after May 16, 2005, the earlier established
refund effective date. In September, the Commission
followed the same course with Westar, ordering refunds for
offending sales made after June 7, 2005, previously
established as Westar’s refund effective date. Both parties
petitioned for rehearing.
In July 2007, while those petitions for rehearing were
pending, the Commission published Order No. 697, Market-
Based Rates for Wholesale Sales of Electric Energy, Capacity
and Ancillary Services by Public Utilities, 72 Fed. Reg.
39,904 (July 20, 2007). This Order – issued after a notice-
and-comment rulemaking – rejected the sink-based test
because FERC concluded that it “is unrealistic to believe” that
such sales “can be traced to ensure that no improper sales are
taking place” and noted the “complex administrative
problems that would be associated with trying to monitor”
those sales. Id. at 40,000.
Relying on Order No. 697 and its recent precedents,
FERC affirmed the Empire and Westar decisions on
rehearing. In this Court, the petitioners now contend that
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those orders are arbitrary and capricious under the
Administrative Procedure Act. Our review under that test is
of course deferential.
II
Petitioners advance a variety of arguments assailing
FERC’s actions in this case.
First, petitioners suggest that FERC acted unreasonably
by imposing and applying a point of sale test rather than a
sink-based test. But in Order No. 697, FERC thoroughly
explained the problem with a sink-based test, noting the
“complex administrative problems that would be associated
with trying to monitor” that regime and concluding that it “is
unrealistic to believe that” such sales “can be traced to ensure
that no improper sales are taking place.” Order No. 697,
Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities, 72 Fed.
Reg. 39,904, 40,000 (July 20, 2007). FERC reiterated that
analysis in its orders in this case. Petitioners do not provide
any convincing reason to doubt the legitimacy of FERC’s
monitoring concern. We thus find no basis for disturbing
FERC’s reasoned decision to apply a point of sale test rather
than a sink-based test to petitioners’ market-based tariffs.
In that regard, it bears mention that a wholesaler such as
Westar or Empire can easily comply with the FERC rule and
still make sales into other regions at market-based rates. A
wholesaler simply needs to ensure that title passes at or
beyond the metered boundary between the mitigated and non-
mitigated areas, instead of inside a mitigated area. See Tr. of
Oral Arg. at 6 (petitioners’ counsel: “when Westar became
aware of the MidAmerican case in March of 2006, we fairly
quickly implemented that approach, and it was very easy to
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do that because all we had to do was to change where title
passed”).
Second, petitioners alternatively contend that FERC did
not sufficiently explain its March 2006 policy change from a
sink-based test to a point of sale test. But as already noted,
FERC carefully explained its reasoning in Order No. 697 and
its orders in this case, and that explanation was more than
adequate under the arbitrary and capricious test. The fact that
FERC changed its approach required no additional or special
explanation. Cf. FCC v. Fox Television Stations, Inc., 129 S.
Ct. 1800, 1810 (2009) (“We find no basis in the
Administrative Procedure Act or in our opinions for a
requirement that all agency change be subjected to more
searching review.”); id. (State Farm did not hold or imply that
every “policy change must be justified by reasons more
substantial than those required to adopt a policy in the first
instance”); id. at 1811 (agency’s reasoning is sufficient if it
shows that a new policy “is permissible under the statute, that
there are good reasons for it, and that the agency believes it to
be better”); id. at 1823 (Kennedy, J., concurring) (“The
question in each case is whether the agency’s reasons for the
change . . . suffice to demonstrate that the new policy rests
upon principles that are rational, neutral, and in accord with
the agency’s proper understanding of its authority.”).
Third, petitioners argue that FERC’s decision to order
retroactive refunds was arbitrary and capricious because, in
their view, they were entitled to rely on FERC’s acceptance of
the sink-based test at least until March 2006 when FERC
changed course. As a result, petitioners argue that FERC
could not order them to pay refunds for sales made between
mid-2005 (their FERC-established effective refund dates) and
March 17, 2006.
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This argument is unavailing. After filing their tariffs,
petitioners knew that any sales at unjust or unreasonable rates
before the Commission’s approval of their tariffs might be
subject to refund liability retroactive to the refund effective
date. See Empire Dist. Elec. Co., 110 FERC ¶ 61,214, at
61,806 (2005); Westar Energy Inc., 110 FERC ¶ 61,316, at
62,231 (2005). So FERC’s decision to impose refund liability
did not impermissibly upset any settled expectations. Indeed,
one purpose for establishing a refund date is to eliminate the
need to consider reliance-based arguments such as this.
Petitioners’ argument blinks that reality.
Fourth, petitioners contend that FERC acted
unreasonably by declining to exercise its authority to waive
their refund liability. Our review of an agency’s denial of a
waiver request is “extremely limited.” San Diego Gas &
Elec. Co. v. FERC, 904 F.2d 727, 731 (D.C. Cir. 1990).
FERC’s general practice is to order refunds when it concludes
that a wholesaler with market power has been selling energy
at unjust or unreasonable rates. See AEP Power Mktg., Inc.,
108 FERC ¶ 61,026, at 61,135 (2004). And FERC has not
waived refund liability for any wholesaler similarly situated to
petitioners here. See MidAmerican Energy Co., 123 FERC ¶
61,013, at 61,052 (2008); Okla. Gas & Elec. Co., 123 FERC ¶
61,012, at 61,046 (2008); Carolina Power & Light Co., 114
FERC ¶ 61,294, at 62,046 (2006). We therefore find nothing
unreasonable about the Commission’s adhering to its standard
approach in denying petitioners’ waiver request. Petitioners
point to FERC’s decision in South Carolina Electricity & Gas
Co., 121 FERC ¶ 61,263 (2007), as an example of the
Commission declining to impose refund liability on a
similarly situated wholesaler. There, however, the wholesaler
represented to FERC that it had not made any offending sales
under its sink-based tariff. Because FERC accepted this
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representation, it had no occasion to address the issue of
refund liability.
***
We deny the petitions for review.
So ordered.