Ohio Power Co. v. F.E.R.C.

• Decision Date: 28 July 1989
• Docket Number: No. 88-1293,88-1293
• Citation: 279 U.S.App.D.C. 327,880 F.2d 1400
• Parties: , Fed. Sec. L. Rep. P 94,528, 105 P.U.R.4th 530 OHIO POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, LCP Chemicals & Plastics, Inc., et al., Municipal Wholesale Electric Customers of Ohio Power Company, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1400

880 F.2d 1400

279 U.S.App.D.C. 327, Fed. Sec. L. Rep. P 94,528,

105 P.U.R.4th 530

OHIO POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent LCP Chemicals & Plastics, Inc., et al., Municipal Wholesale Electric Customers of Ohio Power Company, Intervenors.

No. 88-1293.

United States Court of Appeals, District of Columbia Circuit.

Argued Feb. 24, 1989.

Decided July 28, 1989.

Edward Berlin, with whom Andrew L. Lipps, Kenneth G. Jaffe, Washington, D.C., and Edward J. Brady, were on the brief, for petitioner.

Joanne Leveque, Attorney, F.E.R.C., with whom Catherine C. Cook, Gen. Counsel, and Joseph S. Davies, Deputy Sol., F.E.R.C., Washington, D.C., were on the brief, for respondent.

John Estes also entered an appearance for respondent.

Gregg D. Ottinger, Washington, D.C., and T.D. Kauffelt, Charleston, W. Va., were on the brief, for intervenors, Municipal Wholesale Electric Customer of Ohio Power Company and Industrial intervenors.

Before MIKVA, SILBERMAN, and SENTELLE, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

Concurring opinion filed by Circuit Judge MIKVA.

SENTELLE, Circuit Judge:

The Federal Energy Regulatory Commission (FERC) determined in a rate proceeding that Ohio Power Company's cost of coal purchased from an associated company was unreasonably high. The company has petitioned us to vacate the order on the grounds that it is for the Securities and Exchange Commission (SEC) to determine the reasonableness of contracts between associated companies. We grant the petition for the reasons set out below.

I. BACKGROUND

A. The Statute

The central issue raised by petitioner concerns the applied meaning of the phrase "subject matter" in section 318 of the Federal Power Act (FPA), 16 U.S.C. Sec. 825q, an issue to which section 13(b) of the Public Utility Holding Company Act of 1935 (PUHCA), 15 U.S.C. Sec. 79m(b), is relevant. FPA Sec. 318 and PUHCA Sec. 13 were enacted in different titles of the Public Utility Act of 1935, ch. 687, 49 Stat. 803 (1935) (codified as amended principally at 15 U.S.C. Secs. 79 to 79z-6 and 16 U.S.C. Secs. 824-825r (1982 & Supp. V 1987)), which initiated federal regulation of public utility holding companies theretofore insulated from effective state-level regulation by their multi-state operations. The broadly remedial purposes of the Public Utility Act included protection of investors, consumers, and the public from various abusive holding company practices, including non-arm's-length contracts within an associated group. See 15 U.S.C. Sec. 79a(b)(2). (The definitions of public utility holding company, associate company, and similar terms are set out in section 2 of PUHCA, 15 U.S.C. Sec. 79b. Those definitions are applicable to the present case but not in dispute.)

More particularly for our purposes, PUHCA Sec. 13(b) makes unlawful contracts between associates of a public utility holding company,

except in accordance with such terms and conditions and subject to such limitations and prohibitions as the [SEC] ... shall prescribe as necessary or appropriate in the public interest or for the protection of investors or consumers and to insure that such contracts are performed economically and efficiently for the benefit of such associate companies at cost, fairly and equitably allocated among such companies.

15 U.S.C. Sec. 79m(b). ¹ The SEC's Rule 90 prohibits associated companies from making or performing contracts for sale of goods or performance of services "at more than cost." 17 C.F.R. Sec. 250.90(a)(2) (1988). Under the SEC's Rule 91, a transaction is deemed to meet that standard when the price "does not exceed a fair and equitable allocation of expenses ... plus reasonable compensation for necessary capital procured through the issuance of capital stock...." 17 C.F.R. Sec. 250.91(a). The sale between associates of seller-produced goods is not "limited to cost," 17 C.F.R. Sec. 250.90(d)(2), but such a seller still may not charge its associate more than a fair market price. 17 C.F.R. Sec. 250.92(b).

Under the concurrently enacted provisions of the FPA, FERC regulates the justness and reasonableness of wholesale rates for electric power in interstate commerce. 16 U.S.C. Secs. 824, 824d, 824e. ² FERC's authority includes the power to determine that a "contract affect[ing]" such a rate is "unjust, unreasonable, unduly discriminatory or preferential" and to prescribe a just and reasonable contract. 16 U.S.C. Sec. 824e(a). Section 318 of the FPA provides that, in the absence of an SEC-granted exemption, the requirements of PUHCA govern when a company is subject both to a requirement of the SEC-administered PUHCA (including rules, regulations, and orders thereunder) "with respect to [an itemized list not at issue here] or any other subject matter" and of the FERC-administered FPA (including rules, regulations, and orders thereunder) "with respect to the same subject matter." 16 U.S.C. Sec. 825q (emphasis added).

B. OPCO, SOCCO, and the SEC

Petitioner Ohio Power Company (OPCO) is an operating public utility subsidiary of American Electric Power Company, Inc. (AEP), a public utility holding company subject to PUHCA. OPCO purchases coal from its wholly-owned subsidiary Southern Ohio Coal Company (SOCCO) on essentially a cost-pass-through basis. Because both are associates of a public utility holding company, it is unquestioned that the coal-sale transactions between OPCO and SOCCO are subject to SEC jurisdiction under section 13(b).

The SEC has issued four orders that touch on the price of the OPCO-SOCCO coal transactions. Ohio Power Company, Holding Co. Act Release No. 17,383 (Dec. 2, 1971), permitted OPCO to inject capital into the corporate shell of SOCCO so SOCCO could develop OPCO-owned coal reserves "to assure a reliable supply of coal." Id. The SEC noted that, under the proposal before it, SOCCO's charges to OPCO would be "based on" its actual costs plus a rate of return on capital no greater than that approved for OPCO by the Federal Power Commission, FERC's statutory predecessor. Id. at 2. There were no hearings and no findings, other than the ultimate finding that the proposed transaction was in the interest of the public, investors, and consumers. The order concluded with a "proviso that nothing in this order shall be construed as in any manner affecting the jurisdiction of any other regulatory authority with respect to the accounting or similar matter in connection with the proposed transactions." Id. Ohio Power Company, Holding Co. Act Release No. 20,515, 14 S.E.C. Docket 928 (Apr. 24, 1978), approved OPCO's sale of its coal mines and leases to SOCCO and its further capital contribution to SOCCO. Again, the SEC stated that "[t]he price at which SOhio [SOCCO] coal is sold to AEP system companies will not exceed the cost thereof to the seller." Id. at 929.

The SEC required both OPCO and SOCCO to file quarterly financial statements and statements setting out "the quantities of coal sold to each buyer, the price of such coal and the method used to compute the cost of coal sold." Id. at 930. Southern Ohio Coal Co., Holding Co. Act Release No. 21,008, 17 S.E.C. Docket 310 (Apr. 17, 1979), approved borrowings by SOCCO intended to reduce the cost of coal by providing cheaper capital. Southern Ohio Coal Co., Holding Co. Act Release No. 21,537, 19 S.E.C. Docket 1309 (Apr. 25, 1980), approved additional OPCO investment in SOCCO to finance capital improvements expected to reduce the cost of coal to SOCCO's buyers. As in the previous decisions, the last order adverted briefly to the contractual relation between the associates: "The price at which [SOCCO's] coal will be sold to AEP system companies will not exceed the cost thereof to the seller. For this purpose, cost will include reasonable compensation for necessary capital." Id. The SEC cited sections 6, 7, 9, 10, and 12 of PUHCA, 15 U.S.C. Secs. 79f, 79g, 79i, 79j, 79l, as authority for its various orders. None of the orders cite section 13(b) as authority.

C. The Decision Below

The present dispute arose in a rate proceeding initiated in 1982. All issues settled except the extent to which OPCO could include its costs for "captive coal" purchased from SOCCO in its recoverable cost of service. Ohio Power Co., 39 F.E.R.C. p 61,098, at 61,274 (1987). The Administrative Law Judge (ALJ) determined that section 318 and FERC's own regulations did not bar FERC's examination of the reasonableness of OPCO's captive coal purchases and that OPCO's coal costs had not been shown to be unreasonable. Id. at 61,275. The full Commission affirmed the ALJ's determination that the reasonableness of OPCO's captive coal costs were subject to review but determined that the price of the captive coal unreasonably exceeded a comparable market price. Id.

On the threshold section 318 issue, the ALJ had reasoned that the SEC's regulation of the "intra-corporate price of [captive] coal" was not the "same subject matter," in the section 318 sense, as FERC's regulation of utility rates. Id. at 61,276. FERC agreed for two reasons. First, FERC questioned whether the SEC had set the price of captive coal at cost, since it was "not clear" that the SEC statements regarding whether the price would be "based on" and "not exceed" cost had mandated a cost floor as well as ceiling. Id. FERC also cited the SEC's Rule 92, 17 C.F.R. Sec. 250.92, prohibition of inter-associate sales of goods "at a price which exceeds the price at which the purchasers might reasonably be expected to obtain comparable goods elsewhere," which FERC interpreted as indicating that the SEC might require a below-cost market price, id., and SEC authority for above-cost market prices, id. at 61,290 n. 17. FERC indicated that OPCO might apply this authority to the SEC for a market-based section 13 price.

Second, FERC reasoned that setting the inter-associate price, assuming the SEC had in fact done that, simply was not "the...