Atlantic City Elec. Co. v. F.E.R.C.

• Decision Date: 12 July 2002
• Docket Number: No. 97-1097.,No. 00-1503.,No. 00-1459.,No. 00-1460.,97-1097.,00-1459.,00-1460.,00-1503.
• Citation: 295 F.3d 1
• Parties: ATLANTIC CITY ELECTRIC COMPANY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Duquesne Light Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1

295 F.3d 1

ATLANTIC CITY ELECTRIC COMPANY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Duquesne Light Company, et al., Intervenors.

No. 97-1097.

No. 00-1459.

No. 00-1460.

No. 00-1503.

United States Court of Appeals, District of Columbia Circuit.

Argued February 5, 2002.

Decided July 12, 2002.

COPYRIGHT MATERIAL OMITTED

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

David B. Raskin and Richard L. Roberts argued the cause for PJM Utility petitioners and supporting intervenor. With them on the briefs were Charles G. Cole, David Earl Goroff, Kenneth G. Jaffe, Richard P. Bonnifield, Donald A. Kaplan and Floyd Ligon Norton IV. Arnold H. Quint and Richard T. Saas entered appearances.

Robert H. Solomon, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. Dennis Lane, Solicitor, and Monique Watson, Attorney, were on the brief.

Barry S. Spector argued the cause for intervenors PJM Interconnection, et al. With him on the brief were Arnold B. Podgorsky, Denise C. Goulet, Irwin Popowsky and William F. Fields. Paula M. Carmody entered an appearance.

Before: GINSBURG, Chief Judge, EDWARDS and SENTELLE, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

Nine utility members of the Pennsylvania-New Jersey-Maryland Interconnection (hereinafter "utility petitioners"),¹ petition this Court for review of two final orders issued by the Federal Energy Regulatory Commission ("FERC" or "the Commission"). These orders directed the owners of transmission assets entering into an agreement for an Independent System Operator ("ISO") to give up their right to file changes in tariff rates, terms, and conditions under section 205 of the Federal Power Act ("the Act"), 16 U.S.C. § 824d, and required the owners of transmission assets to modify their ISO agreements to forbid any owner from withdrawing without prior FERC approval pursuant to section 203 of the Act, 16 U.S.C. § 824b. The utility petitioners contend that FERC has exceeded its statutory authority by requiring the owners of transmission assets to cede their statutory right to file rate changes under section 205 of the Act. They also argue that FERC lacks jurisdiction under section 203 of the Act to require Commission approval for withdrawal from an ISO. Finally, petitioner Public Service Electric and Gas Company ("PSE&G") challenges FERC's order requiring the generic reformation of preexisting wholesale power contracts to reflect transmission pricing concepts available under the new regime as failing to comply with the Mobile-Sierra doctrine. Because we agree with the petitioners on all three issues, we grant the petitions for review.

I. Background

A. Statutory and Regulatory Framework

Section 201(b) of the Federal Power Act confers upon FERC 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. 16 U.S.C. § 824(b). Under section 205 of the Act, the Commission is obliged to assure that the rates and charges demanded or received by any public utility in connection with the interstate transmission or sale of electric energy are just and reasonable, and that no public utility's rates will unduly discriminate against any consumers. Id. § 824d(a), (b); see NAACP v. Federal Power Comm'n, 425 U.S. 662, 669-71, 96 S.Ct. 1806, 48 L.Ed.2d 284 (1976). Section 206 of the Act authorizes FERC to investigate, on its own motion or upon complaint, rates and terms of service. See 16 U.S.C. § 824e.

"Historically, electric utilities were vertically integrated, owning generation, transmission, and distribution facilities and selling these services as a `bundled' package to wholesale and retail customers in a limited geographical service area." Public Utility Dist. No. 1 of Snohomish Co. v. FERC, 272 F.3d 607, 610 (D.C.Cir.2001) ("Snohomish Co.") (citation omitted); see New York v. FERC, ___ U.S. ___, 122 S.Ct. 1012, 1016-18, 152 L.Ed.2d 47 (2002). However, by 1940, significant economic changes and technological advances made it possible for many new entrants in the generating markets to sell energy at a lower price than many existing generation facilities. See Snohomish Co., 272 F.3d at 610; New York v. FERC, 122 S.Ct. at 1017-18. "But barriers to a competitive wholesale power market remained because if and when the existing vertically integrated utilities provided regional transmission access to these new efficient generating plants, they favored their own generation." Snohomish Co., 272 F.3d at 610. Finding that utilities would use their market power to deny transmission access to competing generation sources, FERC issued an order in 1996, relying upon its statutory authority under sections 205 and 206 of the Act, see 16 U.S.C. §§ 824d(b), 824e(a), requiring a restructuring of the power industry. That order, Order No. 888, required that the wholesale transmission function be unbundled from the sale of power and required utilities to provide open access to their transmission lines in a nondiscriminatory fashion. Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, Order No. 888, FERC Stats. & Regs. ¶ 31,036, 61 Fed. Reg. 21,540 (May 10, 1996), clarified, 76 F.E.R.C. ¶ 61,009, 1996 WL 363765, and 76 F.E.R.C. ¶ 61,347, 1996 WL 799257 (1996), on reh'g, Order No. 888-A, FERC Stats. & Regs. ¶ 31,048, 62 Fed. Reg. 12,274 (Mar. 14, 1997), clarified, 79 F.E.R.C. ¶ 61,182 (1997), on reh'g, Order No. 888-B, 81 F.E.R.C. ¶ 61,248, 1997 WL 833250, 62 Fed. Reg. 64,688 (1997), on reh'g, Order No. 888-C, 82 F.E.R.C. ¶ 61,046, 1998 WL 18148 (1998), aff'd, Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C.Cir.2000), aff'd sub nom. New York v. FERC, ___ U.S. ___, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002) (hereinafter "Order No. 888").

Order No. 888, among other things, set forth the framework for voluntarily creating Independent System Operators ("ISOs"), independent companies that manage transmission facilities owned by utilities. 61 Fed. Reg. at 21,595-97. ISOs have no financial stake in any power market participant, have the ability to halt generation causing transmission system constraints, and must provide real-time transmission information to market participants. Id. The Commission emphasized that an ISO's independence with respect to governance and financial interests was fundamental to assuring that an ISO would not favor any class of transmission users. Id. at 21,596. Order No. 888 also specifically required tight power pools to file open access tariffs and reformed power pool agreements to establish open, non-discriminatory membership provisions and to modify provisions that were unduly discriminatory or preferential. Id. at 21,594. Tight power pools are highly integrated pooling arrangements, involving a central dispatch, where utilities extensively coordinate their planning and operations. FERC stated that power pools could, but were not required to, satisfy Order No. 888's comparability² and nondiscrimination requirements by forming a properly constructed ISO. See id. at 21,593-94.

B. The PJM Interconnection

The Pennsylvania-New Jersey-Maryland ("PJM") Interconnection is a tight power pool. See Order No. 888, 61 Fed. Reg. at 21,594. The PJM power pool — the oldest and largest power pool in the nation — was formed as a voluntary organization comprised of investor-owned utilities that operate their generating and transmission facilities in a coordinated manner so that regional power loads can be met reliably and efficiently. It was formed in 1927, and became a "tight" power pool by operating as a single control area with freeflowing transmission ties in 1956. Under the 1956 operating agreement, the PJM members agreed to place their generating facilities under the control of a central system dispatcher. The PJM members formed the PJM Interconnection Association in 1993, an unincorporated association which served as the system dispatcher, responsible for administering the PJM service center and control center independent of any individual member of PJM. At no point in the power pool's history did FERC assert jurisdiction over the power pool under section 203 of the Act, which provides in pertinent part: "No public utility shall sell, lease, or otherwise dispose of the whole of its facilities subject to the jurisdiction of the Commission, or any part thereof of a value in excess of $50,000, or by any means whatsoever, directly or indirectly, merge or consolidate such facilities or any part thereof with those of any other person, or purchase, acquire, or take any security of any other public utility, without first having secured an order of the Commission authorizing it to do so." 16 U.S.C. § 824b(a).

In response to Order No. 888 the PJM members submitted to FERC in 1996 an open access tariff and several negotiated agreements that proposed to revise the PJM governance structure to put in place an ISO. The utility petitioners filed the tariff and ISO agreement under section 205 and, at the same time, petitioned FERC for a declaratory order disclaiming jurisdiction over the ISO agreement under section 203. The proposal contemplated that the PJM Interconnection Association would be transformed into the PJM ISO, a separate incorporated entity, which would be responsible for administering operational aspects of the transmission network, including dispatching generation to customers. PJM utilities would continue to own and physically operate their transmission facilities, subject to the ISO's directives.

C. FERC Proceedings

FERC asserted jurisdiction over the PJM restructuring under section 203, ruling that the proposal to transfer operational responsibilities to the ISO is a "disposition of jurisdictional facilities" within the meaning of section 203...