City of Holyoke Gas & Elec. Dept. v. F.E.R.C., 90-1565

• Decision Date: 31 March 1992
• Docket Number: No. 90-1565,90-1565
• Citation: 954 F.2d 740
• Parties: , 129 P.U.R.4th 631 CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Northeast Utilities Service Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 740

954 F.2d 740

293 U.S.App.D.C. 309, 129 P.U.R.4th 631

CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Northeast Utilities Service Company, Intervenor.

No. 90-1565.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 25, 1991.

Decided Jan. 28, 1992.

Order on Denial of Rehearing March 31, 1992.

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

David J. Bardin, with whom Marilyn D. Sonn, Washington, D.C., was on the brief, for petitioner.

Samuel Soopper, Atty., FERC, with whom William S. Scherman, Gen. Counsel, Jerome M. Feit, Sol., and Joseph S. Davies, Deputy Sol., Washington, D.C., were on the brief, for respondent. Catherine Cook, Atty., FERC, Washington, D.C., also entered an appearance, for respondent.

Frederic Lee Klein, with whom Paul H. Keck and Brian R. Gish, Washington, D.C., were on the brief, for intervenor.

Before SILBERMAN, D.H. GINSBURG and SENTELLE, Circuit Judges.

Opinion for the Court filed by Circuit Judge D.H. GINSBURG.

D.H. GINSBURG, Circuit Judge:

The City of Holyoke Gas & Electric Department entered into a power transmission agreement with Northeast Utilities Service Co. (NU). When NU filed the agreement with the FERC, Holyoke challenged the rate on various grounds, but the Commission approved it. Holyoke now petitions for review, alleging that the Commission acted arbitrarily and capriciously in upholding the rate as reasonable, denying Holyoke's request for an evidentiary hearing on the question of undue discrimination, and waiving the statutory notice period for filing a rate agreement.

Although we do not take issue with the methodology the Commission used in order to determine that NU's proposed rate is reasonable, we remand for the FERC to make the factual findings necessary to justify use of that methodology in this case, and to provide sufficient explanation of its decision and the assumptions underlying it. We conclude that the Commission's refusal to grant Holyoke a hearing and its waiver of the statutory notice period were proper.

I. BACKGROUND

Under a 1982 contract, NU charged Holyoke a rate of about $5 per kilowatt-year for nonfirm transmission of electrical power. Before that contract expired on October 31, 1988, NU notified Holyoke that the rate in the replacement contract would be raised to about $24 per kilowatt-year for the same service. Holyoke signed the renewal contract under protest and paid the increased rate as of November 1, 1988. Subsequently, Holyoke and NU negotiated two reductions of the renewal rate, which ultimately brought it down to about $11 per kilowatt-year.

During the eighteen-month period between the expiration of the old contract and the negotiation of the $11 rate, NU billed Holyoke under the terms of the applicable renewal agreement. NU did not file any of the new agreements with the Commission as required by § 205(e) of the Federal Power Act, Pub.L. No. 333, 49 Stat. 847 (1935) (codified as amended at 16 U.S.C. § 824d(e)), until Holyoke had, in April 1990, executed the $11 agreement without expressing any reservations. When it did finally file that agreement, NU also asked the Commission to waive the sixty-day notice requirement of § 205(d) in order to give the agreement an effective date of November 1, 1988, as provided by its terms.

In June 1990, Holyoke filed a protest out of time, claiming that waiver of the statutory notice period was unjustified and that the proposed rate was unreasonable and discriminatory and would enable NU to earn an excessive return on its equity. The Commission allowed the protest, but accepted the $11 rate as reasonable after determining that NU could lawfully have charged even a significantly higher rate. In accordance with its longstanding practice of deferring where possible to the terms of a private agreement, the FERC also granted NU's request for a waiver of the statutory notice period. Northeast Utilities Service Co., 52 FERC p 61,097 (1990) (NU Order). Holyoke sought rehearing and, when the FERC denied it, Northeast Utilities Service Co., 52 FERC p 61,336 (1990) (NU Rehearing), petitioned this court for review.

II. ANALYSIS

Holyoke now argues that the FERC was arbitrary and capricious in (A) finding NU's proposed rate reasonable, (B) denying Holyoke's request for a hearing at which to challenge NU's proposed rate as unduly discriminatory, and (C) waiving the statutory notice period. We consider these arguments in turn.

A. The Reasonableness of the Proposed Rate

NU derived the $11 rate by determining the revenue it would require in order to recoup the costs it incurs to own and maintain those of its transmission facilities that are part of the New England Power Pool (NEPOOL), plus a 14.5% return on equity. Before the Commission, Holyoke maintained that the $11 rate is unreasonable on two grounds: 14.5% is too high a return on equity, and the city is entitled to the 50% "multi-system discount" that it formerly received. That discount was designed, by its terms, "to give due recognition of the payments made by [Holyoke] to other utility systems providing transmission service over [New England Power] Pool Transmission Facilities" for the same power.

Instead of evaluating the reasonableness of the proposed rate in light of Holyoke's specific objections, the Commission calculated the rate that NU could lawfully have charged Holyoke if it had "rolled in" the costs it incurs for all of its transmission facilities. Using this larger cost base and the lower return on equity proposed by Holyoke (11.25%), the FERC derived a comparison rate nearly double NU's proposed rate. The Commission therefore concluded that, a fortiori, NU's proposed "formula rate produces reasonable rates and provides Holyoke with a discount of about 47 percent from a rate level that would reflect a reasonable contribution to [NU's] rolled-in transmission costs." NU Order, 52 FERC at 61,487.

Holyoke takes issue with the Commission's use of a comparison rate based upon NU's rolled-in total costs--not in principle, for the practice seems eminently reasonable, but in the specific context of this case. The Commission did so upon the premise that in Public Service Company of New Hampshire, 46 FERC p 61,419 (1989) (PSNH), it had "recently affirmed the reasonableness of evaluating transmission rates in the New England region on the basis of the utility's rolled-in transmission costs." NU Order, 52 FERC at 61,486 n. 12. Holyoke, however, argues first that "[t]he FERC's finding in PSNH was utility-specific," made "in the context of the demonstrated and explained rolled-in cost of that one utility's facilities;" (emphasis original) and second that even if the use of rolled-in costs is proper in this case, the agency impermissibly failed to disclose the data and assumptions upon which it relied in calculating the comparison rate.

1. Rolled-in Costs

In reviewing the rate to be charged by an "integrated" transmission system--i.e., an interconnected system designed to operate in parallel, see Sierra Pac. Power Co. v. FERC, 793 F.2d 1086, 1088 (9th Cir.1986)--the "FERC favors rolled-in cost allocation." Id. at 1086 (citing Fort Pierce Util. Auth. v. FERC, 730 F.2d 778, 782 n. 11 (D.C.Cir.1984), which in turn cites Otter Tail Power Co., 12 FERC p 61,169 at 61,420 (1980)); see also Detroit Edison Co., 54 FPC 3012 (1975). If a transmission system is not integrated, however, then a rate set on the basis of rolled-in costs would require some ratepayers to bear the costs of facilities from which they derive no benefit. See Otter Tail, 12 FERC at 61,420 (implicit in use of rolled-in costs is "assumption that all customers ... receive the benefits that are inherent in ... an integrated system").

In this case the Commission failed to determine that the NU system is integrated and thus could appropriately have used rolled-in costs in setting its rates; of course, if NU could not have done so, then the Commission could not uphold the $11 rate on the ground that it is less than the presumptively reasonable rolled-in rate. The simple fact is that, as Holyoke points out, the PSNH decision upon which the FERC relied does not purport to find that NU's transmission system is integrated. Although there are in the present record some hints to that effect--for example, Holyoke's own expert testified that the New England regional transmission system operates as "an extensively coordinated grid"--it is not the office of this court to determine in the first instance whether they amount to substantial evidence. Accordingly, we remand this matter for the Commission to justify its use of the rolled-in cost methodology in this case, presumably by finding that NU's transmission system is integrated.

2. Failure to Disclose Calculations

Holyoke also argues that even if the use of rolled-in costs is proper in this case, the Commission acted arbitrarily by failing to identify the data and assumptions it used in calculating the comparison rate. According to Holyoke, the use of rolled-in costs could result in Holyoke being charged for the cost of certain generator leads for which it already pays directly. On rehearing, the Commission first stated that "beyond bare allegations, Holyoke offers no support" for this claim and then suggested that Holyoke's admitted entitlement to share in certain revenue credits "will help eliminate any double counting that may have occurred." NU Rehearing, 52 FERC at 62,318 n. 41.

Insofar as the Commission rejected Holyoke's double counting claim for want of factual support, we think it has placed the shoe on the wrong foot. Holyoke could hardly document the degree to which the Commission's calculation of a comparison rate includes facilities for which it is already paying elsewhere so long as the Commission does not disclose that calculation. Insofar as the Commission relied upon Holyoke's entitlement to revenue...