East Kentucky Power Co-Op, Inc. v. F.E.R.C.

• Decision Date: 15 June 2007
• Docket Number: No. 06-1003.,06-1003.
• Citation: 489 F.3d 1299
• Parties: EAST KENTUCKY POWER COOPERATIVE, INC., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Dairyland Power Cooperative, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

489 F.3d 1299

EAST KENTUCKY POWER COOPERATIVE, INC., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Dairyland Power Cooperative, et al., Intervenors.

No. 06-1003.

United States Court of Appeals, District of Columbia Circuit.

Argued March 16, 2007.

Decided June 15, 2007.

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

Alan I. Robbins argued the cause for petitioner. With him on the briefs was Elizabeth B. Teuwen.

Larissa A. Shamraj and Jeffrey L. Landsman were on the brief for intervenors Midwest Municipal Transmission Group and Dairyland Power Cooperative in support of petitioner. Robert A. Jablon entered an appearance.

Jeffery S. Dennis, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were John S. Moot, General Counsel, and Robert H. Solomon, Solicitor. Judith A. Albert, Attorney, entered an appearance.

Michael E. Small argued the cause for intervenors Midwest ISO Transmission Owners in support of respondents. With him on the briefs was Arnold B. Podgorsky. Andrew T. Swers and Wendy N. Reed entered appearances.

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

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge.

In petition for review, customers of a public utility challenge a decision of the Federal Energy Regulatory Commission ("FERC" or the "Commission") that approved new charges for electricity service. Petitioners argue that the Commission's decision to approve the charges was arbitrary and capricious because the services for which the charges were assessed are already covered in existing contracts that shield them from new charges unless they are for "new services." Petitioners further argue that the Commission did not engage in reasoned decisionmaking because its conclusion is inconsistent with previous determinations it has made with regard to the same charges. FERC responds that the services for which new charges are assessed are "new services," and distinguishes its conclusions in previous proceedings by arguing that the utility owners (intervenors in support of FERC) had failed to demonstrate that the services were not already covered by existing rates.

Under our particularly deferential standard of review for the Commission's decisionmaking, we conclude that FERC considered substantial evidence that the proposed tariff was assessed to collect charges associated with new services and that its decision to approve that tariff was rational. We also find that FERC's conclusion was not inconsistent with its prior determinations because, as the Commission has explained, new evidence was before it. We therefore deny the petition.

I.

In 1996, FERC introduced electric utility companies operating under its authority to a brave new regulatory world with its vanguard Order No. 888, whose aspirational title made up in optimism what it lacked in literary flair. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, FERC Stats. & Regs. ¶ 31,036, 61 Fed.Reg. 21,540 (1996) ("Order No. 888"). Promulgated in response to the anti-competitive effects of vertical integration and, in particular, the unlawful practice of some electric utilities to provide third-party wholesalers of electric power inferior access or no access at all to their transmission networks, see Order No. 888 at 31,682-84, this remedial order required the "functional unbundling" of wholesale generation and transmission services. Id. at 31,654. If vertical integration (the predecessor to functional unbundling) offered a prix fixe menu of utility services, functional unbundling required the a la carte alternative: Under the new system, previously integrated utilities were now required to maintain a wholesale marketing function separate from their transmission functions. Both would deal with one another at arm's length. Utilities were required to state separate rates for their generation, transmission, and ancillary services and, when providing any of those services for themselves (or their affiliates), do so under the same terms and with the same priority as those available to other market participants. The purpose was to prevent a utility from gaining special access to service or special price deals by virtue of its integration of functions.

In addition to the unbundling requirements that it imposed, Order No. 888 encouraged, but did not demand, the formation of Regional Transmission Organizations ("RTOs"): multi-utility entities that could manage all transmission services for a particular region. By consolidating control (but not ownership) of the now unbundled transmission services, FERC hoped to preserve the efficiencies produced by vertical integration while forestalling its anti-competitive effects. Wholesale competition would be encouraged over broad geographic areas, Order No. 888 at 31,730-32, see also Public Util. Dist. No. 1 of Snohomish County v. FERC, 272 F.3d 607, 610-11 (D.C.Cir. 2001), while operational redundancies would be reduced or eliminated. Regional transmission reliability would also be enhanced. See Order No. 888 at 31,730-32.

Familiar with the influence on utilities of the powerful incentives to avoid regulations that limit monopolistic advantages, FERC suggested a further improvement to the novel system it envisioned. The multi-utility RTO would cede operational control of its collectively run transmission facilities to an Independent System Operator ("ISO"), which would have no financial interest in generation services and therefore no incentive to thwart FERC's goals of efficiency, competition, and improved reliability. See id. at 31,654, 31,730-32 (announcing certain principles to guide further consideration of ISO proposals).

Predictably, not all shared FERC's vision of how energy markets should function. Most utilities declined the Commission's invitation to voluntarily embrace a future of robust competition in the wholesale electricity market. And because FERC had required only unbundling, and not the formation of RTOs, utility companies were free to sit out that particular dance. FERC, anxious to see greater participation than had been achieved through mere suggestion, issued another order, directing transmission-owning utilities either to participate in an RTO or to explain their refusal to do so. See Regional Transmission Orgs., Order No. 2000, FERC Stats. & Regs. ¶ 31,089 (1999), 65 Fed.Reg. 810 (2000) ("Order No. 2000"); see also Pub. Util. Dist. No. 1, 272 F.3d at 612. And while participation was still voluntary (FERC apparently favored gradual steps in advancing its goals), see id. at 616, electric utilities took the Commission's cue and began to form RTOs and transfer operational control of their transmission facilities to ISOs.

One such ISO created in the wake of Order Nos. 888 and 2000 was the Midwest ISO ("MISO"), approved by FERC in 1998 to organize as a non-profit, non-stock corporation. See Midwest Indep. Transmission Sys. Operator, Inc., 84 FERC ¶ 61,231, at 62,138-39 (1998). The utilities that organized the MISO retained ownership and the physical operation and maintenance of their own transmission facilities, but the MISO was responsible for functional control over the transmission system, which included managing transmission availability and capacity, requests for transmission service, available ancillary services, and security. FERC conditionally approved a transmission tariff that provided a universal rate for all customers receiving these services from the MISO system. That tariff would be paid immediately by customers of all new wholesale and existing unbundled retail transmission service, id. at 62,167, and even though customers of existing wholesale services would now receive them through the MISO, they were afforded the benefit of their rates under existing agreements ("grandfathered agreements") and exempted from the MISO transmission tariff for six years. Id. The question before us is whether petitioners, who are customers of these grandfathered agreements and do not yet pay MISO service rates (the transmission tariff), must nonetheless pay the administrative costs associated with managing the MISO (an administrative tariff), from which they receive their transmission service.

This is not our first review of a dispute involving MISO tariffs and parties to agreements grandfathered into the MISO system. In Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C.Cir. 2004), we were asked to determine whether FERC may require the transmission owners to pay the MISO's administrative costs (the same costs at the center of the petition now before us) for service provided to customers of grandfathered agreements. Id. at 1367. The transmission owners argued that FERC violated the principle of "cost causation," which we had described as "requir[ing] that all approved rates reflect to some degree the costs actually caused by the customer who must pay them." Id. at 1368 (quoting KN Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C.Cir.1992)). The transmission owners argued that the costs imposed upon them for MISO service offered to customers of grandfathered agreements outweighed the benefits to those customers who, while receiving service under the MISO system, did not pay the MISO's universal transmission rate for the six-year transition period and therefore, according to the transmission owners' argument, did not "use" the ISO. See id. at 1369. Noting that the administrative charges in dispute covered "the costs of having an ISO," and that "the [Transmission] Owners . . . benefit from having an ISO," id. at 1371, this Court concluded that "FERC correctly determined that they should share the cost of having an ISO," id., even for bundled and grandfathered loads that deliver the same benefits afforded customers who are actually using an ISO (i.e., receiving...