Central Electric Power Co-Op. v. Southeastern Power

• Decision Date: 29 July 2003
• Docket Number: No. 02-2027.,No. 02-2035.,02-2027.,02-2035.
• Citation: 338 F.3d 333
• Parties: CENTRAL ELECTRIC POWER COOPERATIVE, INCORPORATED; Saluda River Electric Cooperative, Incorporated; South Carolina Public Service Authority, Plaintiffs-Appellants, v. SOUTHEASTERN POWER ADMINISTRATION; Charles A. Borchardt, in his capacity as Administrator of the Southeastern Power Administration; Federal Energy Regulatory Commission; Department of Energy; Spencer Abraham, in his capacity as Secretary of Energy, Defendants-Appellees. The Municipal Electric Authority of Georgia, Amicus Supporting Appellees. Central Electric Power Cooperative, Incorporated; Saluda River Electric Cooperative, Incorporated; South Carolina Public Service Authority, Plaintiffs-Appellees, v. Southeastern Power Administration; Charles A. Borchardt, in his capacity as Administrator of the Southeastern Power Administration; Federal Energy Regulatory Commission; Department of Energy; Spencer Abraham, in his capacity as Secretary of Energy, Defendants-Appellants. The Municipal Electric Authority of Georgia, Amicus Supporting Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

338 F.3d 333

CENTRAL ELECTRIC POWER COOPERATIVE, INCORPORATED; Saluda River Electric Cooperative, Incorporated; South Carolina Public Service Authority, Plaintiffs-Appellants, v. SOUTHEASTERN POWER ADMINISTRATION; Charles A. Borchardt, in his capacity as Administrator of the Southeastern Power Administration; Federal Energy Regulatory Commission; Department of Energy; Spencer Abraham, in his capacity as Secretary of Energy, Defendants-Appellees.

The Municipal Electric Authority of Georgia, Amicus Supporting Appellees.

Central Electric Power Cooperative, Incorporated; Saluda River Electric Cooperative, Incorporated; South Carolina Public Service Authority, Plaintiffs-Appellees, v. Southeastern Power Administration; Charles A. Borchardt, in his capacity as Administrator of the Southeastern Power Administration; Federal Energy Regulatory Commission; Department of Energy; Spencer Abraham, in his capacity as Secretary of Energy, Defendants-Appellants.

The Municipal Electric Authority of Georgia, Amicus Supporting Appellants.

No. 02-2027.

No. 02-2035.

United States Court of Appeals, Fourth Circuit.

Argued: June 5, 2003.

Decided: July 29, 2003.

ARGUED:

A. Hewitt Rose, III, BRICKFIELD, BURCHETTE, RITTS & STONE, P.C., Washington, D.C., for Appellants.

Gillian Flory, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

ON BRIEF:

Kathleen T. Spear, BRICKFIELD, BURCHETTE, RITTS & STONE, P.C., Washington, D.C.; Elizabeth H. Warner, SOUTH CAROLINA PUBLIC SERVICE AUTHORITY, Moncks Corner, South Carolina, for Appellants.

Robert D. McCallum, Assistant Attorney General, Robert Greenspan, Felix Baxter, C. Max Vassanelli, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

Donald W. Tyler, TYLER, CASSELL, JACKSON, PEACE & SILVER, L.L.P., Columbia, South Carolina, for Amicus Curiae.

Before WILKINSON and LUTTIG, Circuit Judges, and Henry E. HUDSON, United States District Judge for the Eastern District of Virginia, sitting by designation.

Reversed by published opinion. Judge WILKINSON wrote the opinion, in which Judge LUTTIG and Judge HUDSON joined.

OPINION

WILKINSON, Circuit Judge:

Plaintiffs brought this action in federal district court to set aside defendants' rate schedule for the sale of hydroelectric power under the Flood Control Act. Plaintiffs argued, and the district court held, that the rate schedule was arbitrary and capricious because it imposed a surcharge on plaintiffs in order to recover revenue shortages incurred during a prior rate period. However, the Flood Control Act authorizes defendants to recover such costs and affords them considerable discretion in structuring rate schedules in order to do so. We therefore reverse the judgment of the district court.

I.

In the Flood Control Act of 1944, Congress authorized the construction and operation of certain dam and reservoir projects. United States v. City of Fulton, 475 U.S. 657, 659, 106 S.Ct. 1422, 89 L.Ed.2d 661 (1986). Congress then assigned responsibility for selling the power produced by these projects to the Department of Energy (DOE), instructing the DOE to sell such power at below-market costs. The DOE sells and markets power through regional Power Marketing Administrations (PMAs) such as defendant Southeastern Power Administration (SEPA). Id. at 660, 106 S.Ct. 1422; 16 U.S.C. § 825s (2000); 42 U.S.C. § 7152 (2000). The PMAs are responsible for setting rate schedules based on the recovery of costs associated with generating hydroelectric power, the amortization of the federal capital investment and any past expenses not recovered under prior rate schedules. Finally, the Act requires PMAs to give preference in the sale of this low-cost power to public bodies and cooperatives such as the plaintiffs. 16 U.S.C. § 825s.

As "preference customers" under the Act, plaintiffs Central Electric Power Cooperative, Inc. ("Central Electric"), Saluda River Electric Cooperative, Inc. ("Saluda River"), and South Carolina Public Service Authority ("Santee Cooper") contract with SEPA to purchase hydro-electric power at below-market rates. Prior to the current dispute, plaintiffs had entered into contracts to purchase power effective September 30, 1985, through September 30, 1990. During the term of the contracts, however, much of the southeastern United States experienced a severe drought. The drought limited hydroelectric production in the area, forcing SEPA to make separate power purchases in order to honor its power supply contracts. These extra power purchases in turn caused SEPA to incur costs exceeding those contemplated by the 1985 rate schedule. Under the current rate, SEPA would not be able to cover its costs as required by the Flood Control Act. 53 Fed.Reg. 47,864-05 (Nov. 28, 1988). SEPA thus needed to devise a rate schedule that would address the shortfall.

In November 1988, SEPA explained the predicament to its preference customers and asked them to voluntarily amend their power contracts to reflect a rate increase effective June 1, 1989. SEPA then held two public forums and accepted written comments from interested parties. Several preference customers submitted written comments favoring the early rate increase. Central Electric filed written comments opposing the rate increase and declining to modify its contract.

On March 10, 1989, SEPA convened another meeting during which the parties discussed the alternatives available to SEPA: (1) charge the agreeing preference customers rates sufficient to cover the total revenue shortfall, including the non-agreeing customers' share; (2) charge the agreeing customers their portion of the shortfall through the proposed short-term rate and charge the non-agreeing customers their portion of the shortfall in the next rate filing; and (3) withdraw the proposed short-term rate and charge each preference customer its share of the revenue shortfall in the next rate filing. The preference customers present at the meeting strongly favored the second option, which gave each customer the option to choose when to pay its portion of the shortfall. SEPA subsequently adopted a rate schedule under which agreeing preference customers voluntarily amended their contracts, and FERC approved. Southeastern Power Admin., 49 F.E.R.C. ¶ 62,109 (1989). SEPA made clear, however, that non-agreeing customers who continued to purchase power from SEPA after the expiration of the 1985 contracts would pay their portion of the shortfall in the next rate filing. Ultimately, 168 of SEPA's 174 preference customers voluntarily amended their contracts.

On March 9, 1990, in anticipation of the September 30, 1990, contract expirations, SEPA published a proposed rate schedule for the October 1, 1990 contract term. 5 Fed.Reg. 8981 (Mar. 9, 1990). In addition to charging a new base rate, the schedule imposed an energy surcharge on the six preference customers who had not yet paid their share of the prior term's revenue shortfall. Plaintiffs filed a joint protest and comment with SEPA and orally opposed the surcharge at a public information and comment forum. Other preference customers filed written comments supporting the proposed rates.

After the DOE Deputy Secretary approved the proposed rates on an interim basis, plaintiffs filed before FERC a protest of the rate filing. They also made a motion to intervene in the FERC proceedings, which FERC granted. Plaintiffs argued that the surcharge was discriminatory and constituted illegal retroactive ratemaking. FERC, however, concluded that whether or not the surcharge constituted retroactive ratemaking was not relevant because the Flood Control Act does not prohibit retroactive ratemaking. Southeastern Power Admin., 55 F.E.R.C. ¶¶ 61,016, 61,045 (1991). FERC also dismissed plaintiffs' argument that the surcharge was discriminatory because "the decision to correct for past cost underrecoveries through a surcharge is not arbitrary or capricious, or in violation of the law." Id. FERC thus issued a final order approving the rate schedule. Id.

On August 15, 1991, plaintiffs brought this action in South Carolina district court, alleging that the 1990 rate surcharge violated the Flood Control Act. Plaintiffs requested that the district court declare the surcharge unlawful and enjoin SEPA from implementing it, and order SEPA to refund to plaintiffs any amounts charged them pursuant to the surcharge. Plaintiffs then moved for summary judgment, which the court granted in their favor. The district court concluded that plaintiffs' failure to amend their 1985 contracts was not a permissible basis upon which to impose the surcharge, and thus that defendants lacked a rational basis for the surcharge. This appeal followed.

II.

A.

Inasmuch as the complaint charges unlawful agency action, our review is governed by the Administrative Procedures Act. 5 U.S.C. §§ 701, 702 (2000). Given the expertise of agencies in the fields they regulate, a presumption of regularity attaches to administrative actions. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971) (overruled on other grounds by Califano v. Sanders, 430 U.S. 99, 105, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977)). Thus "[t]he ultimate standard of review is a narrow one." Id. at 416, 91 S.Ct. 814. Under 5 U.S.C. § 706, we ask only whether the challenged agency action was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." If an agency's decision was based on a consideration of the relevant factors and there has been no clear error of judgment, we must uphold it. Citizens to Preserve Overton Park, 401 U.S. at 416, 91 S.Ct. 814.

B.

Under the Flood Control Act, PMAs such as SEPA are required to set rates for the sale of hydroelectric power in accordance with two criteria. See 16 U.S.C. § 825s. First, PMAs must devise rate schedules that encourage "the most widespread use [of hydroelectric power] at the lowest...