56 F.3d 247 (D.C. Cir. 1995), 93-1855, Indiana Municipal Power Agency v. F.E.R.C.

Docket Nº:93-1855.
Citation:56 F.3d 247
Party Name:INDIANA MUNICIPAL POWER AGENCY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Indiana Michigan Power Company, Intervenor.
Case Date:June 09, 1995
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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Page 247

56 F.3d 247 (D.C. Cir. 1995)

INDIANA MUNICIPAL POWER AGENCY, Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Indiana Michigan Power Company, Intervenor.

No. 93-1855.

United States Court of Appeals, District of Columbia Circuit

June 9, 1995

        Argued Feb. 7, 1995.

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[Copyrighted Material Omitted]

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        On Petition for Review of an Order of the Federal Energy Regulatory Commission.

        Thomas C. Trauger argued the cause for petitioner. With him on the briefs were James N. Horwood, Daniel I. Davidson, Paul D. Bruner and James R. McClarnon.

        Janet K. Jones, F.E.R.C., argued the cause for respondent. Jerome M. Feit, Sol., Joseph S. Davies, Jr., Deputy Sol., and Timm L. Abendroth, F.E.R.C., were on the brief for respondent.

        Edward J. Brady argued the cause for intervenor. With him on the brief was Marvin I. Resnik.

        Before: WALD, SILBERMAN and TATEL, Circuit Judges.

        Opinion for the court filed by Circuit Judge TATEL.

        Dissenting opinion filed by Circuit Judge WALD.

        TATEL, Circuit Judge:

        The Indiana Municipal Power Agency, an association of wholesale consumers of electric power, petitions this court for review of an order of the Federal Energy Regulatory

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Commission ruling that intervenor Indiana Michigan Power Company did not violate the Federal Power Act, FERC regulations, or a FERC-approved settlement agreement by including certain costs arising from its fuel supply contracts in its wholesale electricity rates. Because the Commission's decision to evaluate the reasonableness of Indiana Michigan's fuel contracts under its established prudence and market rate standards was well within its discretion, and because substantial evidence supports its findings that the coal contracts in question were priced below the weighted average price for comparable contracts and charged Indiana Michigan solely for coal, we deny the petition for review.

       I.

        The Indiana Michigan Power Company, a wholly-owned subsidiary of the American Electric Power Company, provides electricity to portions of Indiana and Michigan. In the early 1970's, at the behest of American Electric, Indiana Michigan acquired substantial low-sulfur coal reserves in Utah, known as the Price River properties, anticipating that this coal would provide the American Electric subsidiaries with a reliable supply of the "clean" fuel necessary to satisfy new federal and state air quality standards. Actual demand for the Price River coal, however, fell far below American Electric's projections, resulting in significant losses for Indiana Michigan over several years.

        Indiana Michigan used coal from Price River at one of its generating plants known as the Tanners Creek 1-3 facility. Several wholesale ratepayers, including members of the petitioner here, objected to Indiana Michigan's inclusion of the full price of this coal in its wholesale electricity rate, arguing that coal was available on the market at a significantly lower price and that the company was passing through the unreasonably high cost of Price River coal to its ratepayers in order to reduce its losses on Price River. In 1985, following a formal investigation by the FERC, American Electric and Indiana Michigan signed a settlement agreement with the Commission's trial staff, the "McDowell settlement." The settlement established a ceiling on the price per ton of coal that Indiana Michigan could include in its wholesale electricity rate at Tanners Creek 1-3, thus giving Indiana Michigan an incentive to purchase coal from other suppliers at the market rate instead of continuing to use and to charge its ratepayers for the expensive Price River coal. The McDowell settlement also allowed Indiana Michigan to apply any difference between the actual price of coal used at Tanners Creek 1-3 and the price ceiling towards amortizing a portion of its investment in the Price River mines, but only up to $75 million, approximately one-third of that amortization expense. Indiana Michigan would have to recover the remaining two-thirds from another source, most likely a buyer or American Electric's shareholders. See Indiana & Mich. Mun. Distribs. Ass'n, 62 F.E.R.C. p 61,189, at 62,228-29 [hereinafter FERC Opinion ]. Both FERC and the Securities and Exchange Commission approved the McDowell settlement. Because the cost of the Price River coal exceeded the price ceiling in the settlement, and because Indiana Michigan apparently had no other customers for this coal, it ceased production at the Utah mines shortly after agreeing to the settlement. Although it wanted to cut its losses by selling its interest in the mines, it could not find a buyer willing to pay its breakeven asking price of approximately $150 million, the two-thirds of the amortization expense it could not recover from wholesale ratepayers. See Indiana & Mich. Mun. Distribs. Ass'n, 51 F.E.R.C. p 63,019 at 65,083 [hereinafter ALJ Decision ].

        In 1985, Indiana Michigan finally found a serious prospect in AMAX, Inc., a corporation with mine holdings in several midwestern states. For AMAX, the Price River mines presented an opportunity to enter the western market. AMAX agreed to lease the mines for an initial period of twenty years for approximately $160 million, FERC Opinion at 62,229 n. 32, an amount that, together with the $75 million it was permitted to recoup from its wholesale ratepayers under the McDowell settlement, would allow Indiana Michigan to remove the mines from its books without taking a charge against earnings. At the same time, Indiana Michigan signed three contracts providing for AMAX to supply

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coal from its midwestern mines to three Indiana Michigan generating facilities--Tanners Creeks 1-3, Tanners Creek 4, and Breed--for periods of up to ten years. Id. at 62,229. The current dispute centers on these contracts.

        The simultaneous closing of the long-term supply contracts and the Price River lease aroused the suspicion of petitioner Indiana Municipal Power Agency, an association of municipalities served by Indiana Michigan whose members had participated in the earlier McDowell settlement proceedings. The Power Agency filed a complaint with the Commission challenging the legality of the two AMAX coal contracts covering Tanners Creek 4 and Breed. According to the complaint, Indiana Michigan entered the long-term coal contracts in order to induce AMAX to purchase the mines at its breakeven price, a price which no other buyer had been willing to pay. Because of the interdependence of the two transactions, the Power Agency claimed that Indiana Michigan had no incentive to negotiate for the lowest possible price for the coal. To the contrary, the Power Agency surmised, the higher the price Indiana Michigan wanted AMAX to pay for the mines, the higher the price it had to agree to pay AMAX for the coal. As a result, the Power Agency claimed that the contract price for the coal contained a "premium" or a "sweetener" to offset the inflated price AMAX paid for the troubled mines.

        In the initial proceedings before a FERC administrative law judge, the Power Agency contended that Indiana Michigan's passing the costs of coal under these allegedly "sweetened" contracts through to its wholesale ratepayers was unlawful on three grounds: it resulted in an unjust and unreasonable rate in violation of section 205 of the Federal Power Act; it violated FERC's cost accounting regulations that limit the costs allocable to a utility's Fuel Stock account to the invoice price of fuel and certain attendant costs; and it violated the cap established in the McDowell settlement by effectively passing through more than $75 million of the amortization of the Price River investment to the wholesale ratepayers. See ALJ Decision at 65,089-90. Ruling for the Power Agency on all three grounds, the ALJ found that AMAX would not have agreed to purchase the mines without the coal contracts, and that the effect of the transaction was to shift a portion of the Price River amortization expense from Indiana Michigan's shareholders to the wholesale ratepayers at the Tanners Creek 4 and Breed facilities. In the ALJ's view, this transfer violated the terms of the McDowell settlement by imposing more than $75 million of the Price River losses on wholesale ratepayers. Violating the settlement, in turn, amounted to charging the ratepayers an unreasonable and excessive price in violation of section 205 of the Federal Power Act. Id. at 65,087-88. Finally, because the sweetener in the contract price covered an amortization expense associated with the Price River mines rather than the cost of the coal, the ALJ ruled that including the full cost of the contracts in its Fuel Stock account violated FERC's fuel cost accounting regulation. Id. at 65,089.

        The FERC granted Indiana Michigan's petition for review and reversed the ALJ's decision. Instead of beginning its analysis with the McDowell settlement, the Commission ruled that the ALJ had failed to apply the appropriate legal standard under section 205 of the Federal Power Act, 16 U.S.C. Sec. 824d (1988). See FERC Opinion at 62,237-39. Analyzing the justness and reasonableness of the contracts under the framework established in its prior decisions, the Commission first examined the record to determine if the Power Agency had raised a "serious doubt" about Indiana Michigan's prudence in entering the contracts. Id. at 62,239. Although the Commission found nothing raising the requisite level of doubt, id., it recognized that the circumstances surrounding these negotiations could foster something akin to the self-dealing existing in transactions between affiliated companies. It therefore went on to apply the more stringent market rate standard it usually employs to determine...

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