Niagara Mohawk Power Corp. v. F.E.R.C.

• Decision Date: 23 June 2006
• Docket Number: No. 04-1227.,No. 05-1047.,No. 05-1144.,No. 05-1046.,No. 05-1033.,No. 05-1044.,No. 05-1043.,No. 04-1229.,04-1227.,04-1229.,05-1033.,05-1043.,05-1044.,05-1046.,05-1047.,05-1144.
• Citation: 452 F.3d 822
• Parties: NIAGARA MOHAWK POWER CORPORATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Reliant Energy, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

452 F.3d 822

NIAGARA MOHAWK POWER CORPORATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Reliant Energy, Inc., et al., Intervenors.

No. 04-1227.

No. 04-1229.

No. 05-1033.

No. 05-1043.

No. 05-1044.

No. 05-1046.

No. 05-1047.

No. 05-1144.

United States Court of Appeals, District of Columbia Circuit.

Argued April 10, 2006.

Decided June 23, 2006.

Elias G. Farrah argued the cause for petitioners and intervenors in support of petitioners. With him on the briefs were Michael F. McBride, Rebecca J. Michael, Kenneth Jaffe, Donald J. Stauber, Jennifer L. Key, Donald K. Dankner, and Raymond B. Wuslich. Robert V. Zener and Phyllis E. Lemell entered appearances.

Diane T. Dean, Assistant Counsel, Public Service Commission of New York, argued the cause and filed the briefs for petitioner Public Service Commission of New York.

Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief was John S. Moot, General Counsel.

Kenneth M. Simon argued the cause for Competitive Generators in support of respondent. With him on the brief were Michael J. Rustum, Robert C. Fallon, Deborah A. Carpentier, David E. Blabey, Edgar K. Byham, David Blake Johnson, Steven L. Miller, Steven A. Weiler, Kenneth Richard Carretta, Randolph Q. McManus, and Betsy R. Carr. Melissa E. Maxwell entered an appearance.

Arnold H. Quint was on the brief for intervenor New York Independent System Operator, Inc.

Before: GRIFFITH, Circuit Judge, and EDWARDS and SILBERMAN, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge SILBERMAN.

SILBERMAN, Senior Circuit Judge.

New York electric power utilities and the New York State Public Service Commission petition for review of FERC orders approving and enforcing a tariff filed by the New York Independent System Operator (N.Y.ISO), the manager of New York's electric power transmission facilities. The tariff allows electricity generators that provide power to the transmission grid to avoid transmission and local distribution charges for the power these generators take from the grid for such purposes as heating, air conditioning, lighting, and powering office equipment (called "station power"), so long as the power the generators produce in any month exceeds the power taken. Petitioners assert, inter alia, that FERC's approval of monthly netting for NYISO was unlawful and unreasonable, and that the netting formula imposed in the NYISO tariff should be supplanted with a one-hour netting period. We deny the petition.

I

This case has its genesis in the unbundling of the New York electric energy market. The provision of electric energy to end users traditionally involves three components: electricity generation; high voltage, long-distance power transmission (transmission services); and finally lower voltage, local distribution of electricity from the transmission facilities to end users (distribution services). Prior to 1996, vertically integrated utilities in New York owned facilities covering all three components of this service. Subsequently, however, utilities began divesting their generation facilities, and the vast majority of electricity generation in the state of New York is now performed by independent wholesale generators. While the traditional utilities maintain ownership of the transmission and local distribution facilities, New York state's transmission grid today is operated and controlled by the not-for-profit New York Independent System Operator, or NYISO. Thus, as we understand it, in the typical situation an independent wholesale generator produces the electricity, it is transmitted across the state over NYISO's transmission facilities (or grid), and it is then stepped-down and delivered to a retail user over a utility's local distribution lines.

Jurisdiction over this sale and delivery of electricity is split between the federal government and the states on the basis of the type of service being provided and the nature of the energy sale. Under section 201(b)(1) of the Federal Power Act, 16 U.S.C. § 824(b)(1), FERC has jurisdiction over both the interstate transmission of electricity and the sale of electricity at wholesale in interstate commerce. States retain jurisdiction over retail sales of electricity and over local distribution facilities. Thus transmission occurs pursuant to FERC-approved tariffs; local distribution occurs under rates set by a state's public service commission.

The actual unbundling of the New York electric energy market after 1996 was made possible by FERC's Order 888,¹ which required, among other things, the functional unbundling of wholesale generation and transmission services. Under the order, integrated utilities were required to file with FERC open access non-discriminatory transmission tariffs, which applied to both transmission services offered to third-party generators and to the utility's own electricity transmissions. The order also encouraged the creation of independent system operators, such as NYISO, to ensure competitive pricing of transmission services and further reduce utilities' market power.

In addition to addressing open access, Order 888 reaffirmed states' jurisdiction over local distribution services. Order 888 stated that even when FERC's test for identifying local distribution facilities concluded that no such facilities were utilized in a given transaction, states still had authority over the service of delivering electric energy to end users. This determination was crucial, as it directly affected utilities' ability to assess end users for "stranded costs." These are costs, such as those associated with long-term contractual commitments or large capital expenditures, that utilities had incurred with the expectation that the industry would remain bundled and that have now become "stranded" with the utilities. By establishing that states have jurisdiction over local delivery services and not just local distribution facilities, Order 888 allows utilities to assess stranded costs on all retail users. This prevents large industrial customers, for example, from avoiding stranded costs assessments by connecting their plants directly to transmission facilities and stepping down the voltage of the power themselves. See, e.g., Detroit Edison Co. v. FERC, 334 F.3d 48, 51 (D.C.Cir.2003). Order 888 therefore allows states to "assign stranded costs and benefits based on usage (kWh), demand (kW), or any combination or method they find appropriate."

With this statutory and regulatory background in mind, we turn to the subject matter of this consolidated petition—the treatment of station power in New York. FERC describes station power as the electricity used at a generating facility's site to power things such as heating, air conditioning, lighting, and office equipment. When a generator is operational, it might well be capable of redirecting some of its outbound generated electricity to its station power needs, thus "self-supplying" its station power "behind the meter." Certain generators, however, are physically incapable of supplying their station power behind the meter—for example, if produced power goes out to the grid on one set of power lines, and the facility's offices and electrical equipment are connected to a separate set of lines coming in from the grid. And even for those capable of self-supplying behind the meter, there may be periods when a generator is non-operational or only partially operational and thus incapable of meeting its station power demand. In such instances, generators— who at least in this case, as we understand it, are connected directly to transmission facilities—must look to the grid for their station power supply.

In a series of orders that preceded those here on review, FERC addressed the treatment of station power in the Pennsylvania-New Jersey-Maryland (PJM) electricity market.² The independent operator of that system's grid filed with FERC an amendment to its open-access transmission tariff proposing that generators be able to net, on an hourly basis, the station power pulled off the grid as "negative generation" against energy supplied to the grid during that hour. So a generator that pulled station power off the grid for fifty minutes of an hour, for example, but then supplied well in excess of that amount during the final ten minutes, would be deemed to have supplied the netted amount to the grid and consumed nothing. Over objections that the provision of station power to a generator constituted retail sales outside FERC's jurisdiction, FERC approved the hourly netting and held that when a generator is net positive over the period, no sale has taken place.

FERC also acknowledged that a generator could engage in "remote self-supply" if its station power requirements over the netting period exceeded its gross output, but there was another off-site generator owned by the same entity that was producing sufficient excess electricity over that period to make up for the deficit. According to FERC, in such a case there likewise would be no "sale." But if a generator's station power requirements over the netting period exceeded its gross output, and the source of the power was a third party (i.e., there was no remote facility with sufficient excess supply), such a provision of station power would in fact be a sale for end-use outside FERC's jurisdiction. It would be a retail sale subject to both retail transmission rates and state-jurisdictional local distribution charges.

Among FERC's reasons for approving station power netting was that it would ensure that wholesale generators "do not bear a cost that has no relationship to any `service' purportedly being provided by another party." Netting would therefore further reduce the disparities between wholesale generators and vertically-integrated utilities. FERC added that it would look favorably upon the use of a longer netting period, such as a day or a week; indeed...