Detroit Edison Co. v. F.E.R.C.

• Decision Date: 08 July 2003
• Docket Number: No. 02-1013.,02-1013.
• Citation: 334 F.3d 48
• Parties: DETROIT EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Midwest ISO Transmission Owners, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

334 F.3d 48

DETROIT EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Midwest ISO Transmission Owners, et al., Intervenors.

No. 02-1013.

United States Court of Appeals, District of Columbia Circuit.

Argued May 8, 2003.

Decided July 8, 2003.

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

John D. McGrane argued the cause for petitioner. With him on the briefs were Mary Ann K. Huntington and Gregory W. Camet.

Jennifer L. Key argued the cause and filed the briefs for intervenor Southern California Edison Company.

Larry D. Gasteiger, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor.

Gregg K. Stepan argued the cause for intervenor Midwest Independent Transmission System Operator, Inc. On the brief were Stephen G. Kozey and Stephen L. Teichler.

Before: EDWARDS, SENTELLE and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

Detroit Edison Co. petitions for review of a Federal Energy Regulatory Commission (FERC or Commission) order accepting a tariff filing that allows retail customers to take electric distribution service under the FERC tariff. Because we agree with Detroit Edison that FERC exceeded its statutory jurisdiction by accepting the tariff, we grant the petition for review.

I. Background

A. Statutory and Regulatory Background

The electric industry provides three principal services: the generation of electric energy, the transmission of that energy, and the distribution of that energy from the transmission facilities to individual customers. See Transmission Access Policy Study Group v. FERC, 225 F.3d 667, 690-91 (D.C.Cir.2000) ("TAPSG"), aff'd sub nom. New York v. FERC, 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002). These services reflect the three principal types of facilities in the industry: generating facilities used to produce energy, transmission facilities used to transmit energy in bulk over long distances (generally at higher voltages), and local distribution facilities used to distribute the energy to individual customers (generally at lower voltages). See id. Service is further divided into wholesale and retail service. Wholesale service involves the transmission or distribution of electric energy to customers that will resell the energy to end users. Id. Retail service, by contrast, denotes transmission or distribution to end users. Id. Section 201(b)(1) of the Federal Power Act (FPA) grants FERC jurisdiction over "transmission of electric energy in interstate commerce[,] ... the sale of electric energy at wholesale in interstate commerce," and the facilities used for such transmissions and wholesale transactions. 16 U.S.C. § 824(b)(1) (2000). States retain jurisdiction "over facilities used in local distribution." Id.

In its landmark Order 888,¹ FERC was forced to reevaluate its statutory jurisdiction in light of the Order's measures to increase competition and deregulation in the electric energy market. Prior to Order 888, "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." Pub. Util. Dist. No. 1 of Snohomish County, Wash. v. FERC, 272 F.3d 607, 610 (D.C.Cir.2001). FERC found that public utilities were using their monopoly control over interstate transmission facilities to gain advantage over potential competitors for sales of energy. See generally TAPSG, 225 F.3d at 681-83. Addressing these concerns, Order 888 mandated that the wholesale transmission of electric energy be unbundled from the sale of power. Order 888 at 31,635-36. FERC required utilities to file open access nondiscriminatory tariffs that contain the minimum terms and conditions of nondiscriminatory wholesale transmission services, which FERC prescribed in a pro forma tariff. Id. In addition, Order 888 provided that if state commissions order "unbundling" of retail transmissions, open access requirements apply to unbundled retail transmission service as well. Id.

In light of the unbundling and open access requirements, FERC made several jurisdictional determinations. First, FERC concluded that, pursuant to FPA § 201(b)(1), it has jurisdiction over the interstate transmission of electric energy to any wholesale or unbundled retail customer. Order 888 at 31,980; New York, 535 U.S. at 11, 122 S.Ct. at 1019-20. Importantly, FERC realized that unbundled retail "wheeling" (the collective process of transmission and distribution) could involve service over transmission facilities, as well as service over local distribution facilities. Order 888 at 31,980. Recognizing the statutory limit on its jurisdiction over local distribution facilities, FERC created a seven-factor test to determine whether a given facility is a local distribution facility (over which FERC has no jurisdiction) or a transmission facility (over which FERC does have jurisdiction). Id. at 31,770-71,31,981; New York, 535 U.S. at 23, 122 S.Ct. at 1026; TAPSG, 225 F.3d at 695. The seven-factor test considers the following: (1) local distribution facilities are normally in close proximity to retail customers; (2) local distribution facilities are primarily radial in character; (3) power flows into local distribution systems, it rarely if ever, flows out; (4) when power enters a local distribution system it is not reconsigned or transported on to some other market; (5) power entering a local distribution system is consumed in a comparatively restricted geographic area; (6) meters are based at the transmission local distribution interface to measure flows into the local distribution system; and (7) local distribution systems will be of reduced voltage. Order 888 at 31,981.

When a local distribution facility is used to delivery energy to an unbundled retail customer, FERC lacks any statutory authority, and the state has jurisdiction over that transaction. Order 888 at 31,981; New York, 535 U.S. at 22-23, 122 S.Ct. at 1025-26. By contrast, when a local distribution facility is used in a wholesale transaction, FERC has jurisdiction over that transaction pursuant to its wholesale jurisdiction under FPA § 201(b)(1). Order 888 at 31,980; TAPSG, 225 F.3d at 695. In sum, FERC has jurisdiction over all interstate transmission service and over all wholesale service, but FERC has no jurisdiction over unbundled retail distribution service-i.e., unbundled retail service over local distribution facilities. For our purposes, the most important result of these jurisdictional determinations is that customers can take any FERC-jurisdictional service under a utility's open access tariff, which the utility is required to file with FERC. Customers must take nonFERC-jurisdictional service, such as unbundled retail distribution, under a state tariff.

Finally, Order 888 addressed the concern that unbundled retail customers could take distribution service under FERC-jurisdictional transmission tariffs (i.e., open access tariffs on file with FERC) in lieu of state-jurisdictional tariffs, to avoid stranded costs charges assessed by state utility commissions. Order 888 at 31,772, 31,783. FERC affirmed that states have jurisdiction over local distribution "service"-i.e., the service of delivering electricity to end users-even "where there are no identifiable local distribution facilities." Id. at 31,783. Thus, FERC concluded that state utilities would be able to impose stranded costs charges through their jurisdiction over local distribution. Id.

B. Proceedings Before the Commission

In compliance with Order 888, Midwest Independent Transmission System Operator (Midwest), a company that operates but does not own electric transmission facilities, filed its Open Access Transmission Tariff (OATT). Midwest's OATT adopted the pro forma tariff's definition of "Eligible Customer," which includes "any retail customer taking unbundled Transmission Service pursuant to a state retail access program or pursuant to a voluntary offer of unbundled retail transmission service by the Transmission Provider." Order 888 at 31,931. On September 16, 1998, FERC conditionally accepted Midwest's OATT. See Midwest Indep. Transmission Sys. Operator, Inc., 84 FERC ¶ 61,231, 1998 WL 770197 (Initial Order).

In the Initial Order, FERC required that Midwest's OATT be modified to specify how wholesale transmission customers would obtain wholesale distribution services when a local distribution facility is involved. Id. at 62,172. Consistent with Order 888's jurisdictional determination, the Initial Order emphasized: "Of course, local distribution services for retail transmission customers will be subject to the jurisdiction of the state commission." Id. (emphasis added).

In response to the Initial Order, Midwest filed a revised OATT (Compliance Filing), which defined "Wholesale Distribution Service" to mean "[t]he provision of distribution service over a Transmission Owner's Distribution Facilities necessary to effectuate a transaction under this [OATT]." The term "Distribution Facilities" was circularly defined to include "[t]he facilities owned or controlled by a Transmission Owner and used to provide Wholesale Distribution Service." Paradoxically, then, Midwest's OATT defined "Wholesale Distribution Service" in such a way as to possibly cover retail distribution service as well as wholesale distribution service.

Detroit Edison protested the Compliance Filing because it was concerned that unbundled retail customers could take distribution service under the FERC-jurisdictional tariff (i.e., Midwest's OATT), and thus avoid paying stranded costs charges assessed by the Michigan Public Service Commission. On April 16, 1999, FERC accepted Midwest's Compliance Filing and rejected Detroit...