Potomac Electric Power Co. v. Fed. Energy Reg. Comm'n.

• Decision Date: 02 May 2000
• Docket Number: No. 99-1209,99-1209
• Citation: 210 F.3d 403
• Parties: (D.C. Cir. 2000) Potomac Electric Power Company, Petitioner v. Federal Energy Regulatory Commission, Respondent First Energy Corp., et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 403

210 F.3d 403 (D.C. Cir. 2000)

Potomac Electric Power Company, Petitioner v. Federal Energy Regulatory Commission, Respondent

First Energy Corp., et al., Intervenors

No. 99-1209

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 24, 2000

Decided May 2, 2000

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

Steven J. Ross argued the cause for petitioner. With him on the briefs were Allen C. Barringer, David B. Raskin and Cynthia L. Taub.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was John H. Conway, Deputy Solicitor. Jay L. Witkin, Solicitor, and Susan J. Court, Special Counsel, entered appearances.

Kevin J. McIntyre and Leonard W. Belter were on the brief for intervenors First Energy Corp., et al.

Before: Williams, Rogers and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge:

Potomac Electric Power Company ("PEPCO") petitions for review of two orders of the Federal Energy Regulatory Commission ("FERC") denying its request under § 206 of the Federal Power Act ("FPA"), 16 U.S.C. S 824e (1994), for unilateral modification of the rates prescribed by a long-term, fixed rate, power transmission service agreement between PEPCO and the Allegheny Power System ("APS"). Because FERC did not abuse its discretion in applying the stringent Mobile-Sierra public interest standard, and because a mere rate disparity or a benefit to the purchasing utility or its customers from a rate modification does not suffice, without more, to satisfy that standard, we conclude that FERC's decision to dismiss the complaint was a reasonable exercise of its authority. Accordingly, we deny the petition.

I.

In 1987, PEPCO entered into an 18.5 year power supply agreement with the Ohio Edison System, which was comprised of Ohio Edison Company and Pennsylvania Power Company. In order to effect delivery of the power to PEPCO's service area, PEPCO and the Ohio Edison System each entered into a transmission service agreement with the APS, an integrated electric utility system directly connected to both PEPCO and the Ohio Edison System. Under the three agreements, PEPCO would purchase contract entitlements to a share of the Ohio Edison System's installed generating capacity and associated energy, APS would purchase from the Ohio Edison System the power intended for PEPCO, and APS would, in turn, resell the power purchased from the Ohio Edison System to PEPCO. The dispute in the instant case involves the agreement between PEPCO and APS.

PEPCO's agreement with APS provided in relevant part that the base rate for the APS transmission service would commence at $1.70 per kW-month, increase to $2.255 per Kw-month in 1994, and increase again to $2.815 per kW-month in 1999. In addition, the agreement required PEPCO to pay an "adder" of $1.00 per megawatt-hour for each megawatt-hour of energy that APS delivered. Furthermore, the agreement was a "fixed rate" contract, meaning that the parties agreed not to unilaterally request a rate change from the Commission, as provided in section 9.3 of the agreement, which stated:

It is the intention of the parties that the rates and terms of service specified herein shall remain in effect for the entire term set forth in this Article, and shall not be subject to change pursuant to the Federal Power Actabsent mutual agreement of the parties or as provided in section 3.4.

Section 3.4, in turn, provided for renegotiation "[i]n the event that reasonably unforeseeable circumstances beyond the control of any party to this Agreement result in a gross inequity to any party" and outlined a procedure for dispute resolution in case parties fail to reach a new agreement.

APS submitted the three agreements for FERC approval in March 1987. See Monongahela Power Co., 39 F.E.R.C. p 61,350, reh'g denied, 40 F.E.R.C. p 61,256 (1987). In its review of the filing, FERC noted that PEPCO represented that "the rate levels are completely justified on the basis of cost factors." Id. at 62,093. Also as recounted by FERC at the time, PEPCO maintained that "once rates are determined to be cost-justified, the noncost factors such as the potential savings to PEPCO are superfluous, and the filing cannot be deemed deficient even if the noncost support were deemed insufficient." Id. FERC also noted that "[n]o party to [the] proceeding has alleged that the rates under the three proposed agreements are unjust and unreasonable," and that "[o]ur review indicates that the rates to PEPCO will not generate excessive revenues and should be accepted for filing without suspension." Id. at 62,096. FERC accepted the three contracts for filing to become effective June 1, 1987.See id. at 62,098.

In 1996, FERC issued the first in a series of orders known collectively as "Order No. 888" to address problems associated with electric transmission monopolies in the bulk power markets. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, 61 Fed. Reg. 21,540 (1996), codified as revised at 18 C.F.R. Pts. 35 & 385 (1999).¹ The Order required all public utilities that own, operate, or control interstate transmission facilities to file an open access nondiscriminatory transmission tariff. See id. at 21,540. In its open access transmission tariff ("OATT") proceeding pursuant to Order No. 888, APS agreed to charge a rate of $1.49 per kW-month for its transmission service, a rate substantially less than the rate PEPCO was obligated to pay under its 1987 agreement with APS.

Thereafter, PEPCO filed a complaint against APS, requesting that FERC summarily order APS to reduce the rate for transmission services under the 1987 agreement to the same level as APS's rate for comparable service under its OATT. The Federal Power Act provides that electricity rates may be modified in one of two ways: under S 205, the seller may attempt to prompt rate changes by filing a new rate schedule, which will be reviewed by FERC to determine whether the proposed rates are just and reasonable, see 16 U.S.C. S 824d, and under S 206, FERC may reform the rates "upon its own motion or upon complaint" if it determines the rates have become "unjust, unreasonable, unduly discriminatory or preferential." Id. S 824e(a). PEPCO's request for a rate decrease, claiming that APS's rate was "excessive and unreasonable," asked FERC to exercise its authority under § 206 to modify existing contracts and reduce the contractual transmission rate to the OATT rate.

APS moved to dismiss the complaint, citing section 9.3 of the agreement under which the parties had agreed to eliminate the right of either party to initiate rate modification pursuant to FERC's S 206 authority. APS relied primarily on the "Mobile-Sierra" doctrine, named after the two Supreme Court cases that established the "public interest" standard for FERC review of electricity rates in contracts restraining unilateral rate changes. See United Gas Pipe Line Co. v. Mobile Gas Serv., 350 U.S. 332 (1956); Federal Power Comm'n v. Sierra Pacific Power Co., 350 U.S. 348 (1956). Under the public interest standard of the MobileSierra doctrine, FERC has § 206 authority to modify rates "fixed" by a Mobile-Sierra provision " '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.' " Papago Tribal Util. Auth. v. FERC, 723 F.2d 950, 953 (D.C. Cir. 1983) (alteration in original) (quoting Sierra, 350 U.S. at 355);see also Metropolitan Edison Co. v. FERC, 595 F.2d 851, 855 (D.C. Cir. 1979). In essence, APS maintained that PEPCO failed to make the required showing under the Mobile-Sierra doctrine that the public interest was adversely affected by the existing contract.

In response, PEPCO asserted that the public interest was adversely affected by the contractual rate because the excessive rates were entirely borne by its ratepayers. PEPCO also maintained that because of APS's market power, it had little bargaining power at the time it entered the agreement to influence the terms of the contract, including the MobileSierra provision in section 9.3. Furthermore, PEPCO contended that the rate APS charged itself and others, approximately half of what PEPCO was being charged for the same service, constituted undue discrimination prohibited under the Mobile-Sierra doctrine.

FERC dismissed PEPCO's complaint. See Potomac Elec. Power Co. v. Allegheny Power Sys., 85 F.E.R.C. p 61,160 (1998). Emphasizing that it "does not take contract modification lightly," FERC reasoned that the mere fact that PEPCO was subject to higher rates under its agreement with APS than it would be under APS's OATT was insufficient reason for abrogating an agreement that PEPCO had fully supported at the time of filing and FERC had approved as just and reasonable. Id. at 61,632-33. FERC also rejected PEPCO's request that it act sua sponte to reduce the rates for the benefit of PEPCO's ratepayers, reasoning that it would be inappropriate to convert PEPCO's unilateral request for reformation into a FERC-initiated contract modification where the parties' agreement contained a Mobile-Sierra provision, and where PEPCO had failed to satisfy the public interest standard. See id. at 61,633.

In denying PEPCO's petition for rehearing, FERC rejected PEPCO's contention that FERC had erred by failing to assess whether the rates were just and reasonable, and defined the issue instead to be whether the rates, having been found to be just and reasonable when originally approved, had become contrary to the public interest. See Potomac Elec. Power Co. v. Allegheny Power Sys. 87 F.E.R.C. p 61,030, at 61,105 (1999). FERC noted that, under its precedent, the fact that a contract has become uneconomic to one of the...