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

• Decision Date: 22 January 1993
• Docket Number: No. 91-1354,91-1354
• Citation: 983 F.2d 1095
• Parties: , Util. L. Rep. P 13,916 GULF POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Florida Public Utilities Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1095

983 F.2d 1095

299 U.S.App.D.C. 281, Util. L. Rep. P 13,916

GULF POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Florida Public Utilities Company, Intervenor.

No. 91-1354.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 14, 1992.

Decided Jan. 22, 1993.

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

Dan H. McCrary, with whom Rodney O. Mundy, Birmingham, AL, and G. Edison Holland, Jr., Pensacola, FL, were on the brief, for petitioner. Mark A. Crosswhite, Birmingham, AL, entered an appearance for petitioner.

Robert H. Solomon, Atty., F.E.R.C., Washington, DC, for respondent. William S. Scherman, Gen. Counsel, Jerome M. Feit, Sol. and Thomas G. Lane, Atty., F.E.R.C., Washington, DC, were on the brief for respondent.

Thomas F. Brosnan and Andrea J. Chambers, Washington, DC, entered appearances for intervenor.

Before EDWARDS, RUTH BADER GINSBURG and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge KAREN LeCRAFT HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

I. Statutory Background

Under the Federal Power Act (FPA or Act), 16 U.S.C. §§ 824 et seq., a utility subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) must file with FERC a schedule of the rates it intends to charge its customers. 16 U.S.C. § 824d(c), (d). FERC reviews the rates to ensure that they are "just and reasonable"; the Act makes any rates that fall short of the just and reasonable standard unlawful. 16 U.S.C. § 824d(a).

When a utility wishes to change the rates it charges its customers, it must provide FERC with 60 days notice and file new rate schedules. 16 U.S.C. § 824d(d). Under the statute, FERC may waive the notice requirement for good cause. Id. Ordinarily, however, upon receiving the proposed schedules, the Commission decides whether to hold hearings to determine the reasonableness of the new rates and it may suspend the imposition of the rates for as long as five months while it decides on their reasonableness. 16 U.S.C. § 824d(e).

In order to give a utility the flexibility to respond efficiently to market fluctuations in costs, the statute allows it to include automatic adjustment clauses in its rate schedules to provide for "increases or decreases (or both), without prior hearing, in rates reflecting increases or decreases (or both) in costs incurred by an electric utility." 16 U.S.C. § 824d(f)(4). Under this provision, FERC countenances a utility's practice of including fuel adjustment clauses (FACs) in its rate schedules to allow it to adjust the rates automatically for the changing costs of fuel. See 18 C.F.R. § 35.14.

FERC permits a utility to include, as part of the FAC, the costs of "[f]ossil ... fuel consumed in the utility's own plants." 18 C.F.R. § 35.14(a)(2). These costs, however, "shall include no items other than those listed in Account 151...." 18 C.F.R. § 35.14(a)(6). Account 151 limits allowable fuel costs, in part, to "excise taxes, purchasing agents' commissions, insurance and other expenses directly assignable to the cost of fuel." Account 151, 18 C.F.R. Part 101. Because, as it has recognized, FERC maintains less regulatory vigilance over the automatic adjustment clauses, it interprets narrowly the scope of costs a utility may include in the FAC. See, e.g., Southern California Edison Co., 3 Fed.Energy Reg.Comm'n (CCH) p 61,075 (1978); Electric Cooperatives of Kansas, 14 Fed.Energy Reg.Comm'n (CCH) p 61,176 (1981); Kansas City Power & Light Co., 42 Fed.Energy Reg.Comm'n (CCH) p 61,249 (1988). It may, however, in its discretion, waive any of the regulations pertaining to the fuel adjustment clause. 18 C.F.R. § 35.19a.

II. Procedural Background

In 1986, as a result of a changing fuel market, Gulf Power Company (Gulf) was a party to a series of expensive long term coal purchasing contracts. Instead of continuing to purchase high priced coal and passing the cost on to its customers, Gulf voluntarily renegotiated the contracts from late 1986 to early 1988. The renegotiations resulted in Gulf agreeing to pay approximately $250 million in buyout costs to its coal suppliers and entering into new contracts projected to save Gulf approximately $600 million in coal costs over the life of the contracts.

On January 1, 1987, after effecting its first buyout, Gulf began passing the savings on to consumers by reducing the cost of coal in its FAC. At the same time, Gulf also began passing through to its customers the amortized cost of the buyout. Gulf believed it could pass this cost on to customers because the buyout expenses constituted "other expenses directly assignable to the cost of fuel" under Account 151. See Account 151, 18 C.F.R. Part 101. Although Gulf's customers paid the buyout costs, the overall cost of fuel was still cheaper than before the buyout occurred; for Gulf's wholesale customers, the net savings from the buyout were estimated at $4.3 million over the life of the contracts.

Other utilities also engaged in this buyout strategy in the 1980s. Mississippi Power Company, an affiliate of Gulf, ¹ participated in some of the same buyouts at issue in this case. While performing a routine audit of Mississippi Power in August 1987, FERC informed that utility that it needed a waiver to pass buyout costs through the FAC because those costs were not included in Account 151. Mississippi Power applied for such a waiver in September 1987. The Commission granted Mississippi's application and sua sponte made the waiver retroactive to January 1, 1987. Mississippi Power, 41 Fed.Energy Reg.Comm'n (CCH) p 61,004 (1987).

In December 1988, FERC issued an order declaring that buyout costs fell outside the scope of Account 151 and thus could not be automatically included in the fuel adjustment clause. Kentucky Utilities, 45 Fed.Energy Reg.Comm'n (CCH) p 61,409 (1988). Nonetheless, in Kentucky Utilities FERC indicated that it would grant a waiver from the FAC regulations and allow the pass through of buyout costs if the utility could demonstrate that the buyout provided "ongoing benefits" to its customers. Id. at 62,293.

In the spring of 1989, as the result of another routine audit, FERC discovered that Gulf had been passing through buyout costs for over two years. FERC then notified Gulf that it had to seek a waiver of notice and fuel adjustment clause requirements. Before filing for a waiver, Gulf obtained from all of its wholesale customers written consent to the pass through of the buyout costs. Gulf then filed a waiver request identical to the one Mississippi Power had filed two years earlier. The Commission rejected Gulf's waiver request because Gulf did not show that its buyout plan satisfied the ongoing benefits test of Kentucky Utilities. FERC letter of October 4, 1989 to Gulf, Gulf App. at 291.

In July 1990, Gulf filed a second waiver request in which it demonstrated compliance with Kentucky Utilities. In April 1991, FERC found that Gulf had satisfied the ongoing benefits test and granted a prospective waiver of the regulations (as of July 1990). In so doing, the Commission specifically noted that the present value of the savings from the buyouts substantially exceeded the buyout costs passed through the FAC. Moreover, FERC noted that Gulf had "proposed a detailed system of verifying savings ... and assuring that they are not exceeded by the costs of its contract terminations." Gulf Power Co., 55 Fed.Energy Reg.Comm'n (CCH) p 61,030 (1991). FERC declined, however, to grant Gulf a retroactive waiver. Thus, it ordered Gulf to refund to consumers, with interest, all payments Gulf had collected from January 1, 1987, until July 19, 1990, as a result of the pass through of buyout costs. Under protest, Gulf refunded $2.1 million in payments and $600,000 in interest to its customers. Gulf now petitions for review, claiming that FERC's refusal to grant a retroactive waiver was arbitrary and capricious. We agree that the penalty imposed on Gulf was excessive.

III. Issues on Review

FERC denied the retroactive waiver because Gulf began to pass through its buyout costs under the FAC without first seeking a waiver of both the notice provisions and the FAC regulations. We agree with FERC that Gulf committed at least a ministerial error in failing to seek the waiver before it began to pass through the buyout costs, but we find that the sanction the Commission imposed was not rationally arrived at on this record and was wholly disproportionate to the error Gulf committed.

Account 151 permits utilities such as Gulf to include in the FAC the costs of "excise taxes, purchasing agents' commissions, insurance, and other expenses directly assignable to the cost of fuel." Account 151, 18 C.F.R. Part 101. Gulf contends, and we believe, that it operated before Kentucky Utilities under a good faith assumption that buyout costs constituted "other expenses directly assignable to the cost of fuel." Id. But in January 1987, when Gulf began its pass through, the permissibility of including those costs in the FAC without seeking a waiver was not as certain as Gulf thought. Buyout costs--the costs of getting out of an unprofitable contract--result from the utility's decision not to use the fuel it had contracted to purchase. One reasonable interpretation of Account 151 is that "other expenses directly assignable to the cost of fuel" incorporates costs related only to fuel used by the utility. This interpretation would exclude buyout costs from Account 151 and thus from the FAC. Even if Gulf did not consider this possibility, it should have been aware that the Commission had not taken an express position on whether buyout costs could be included in the FAC when Gulf began its pass through. In 1987, then, this issue appeared to fall at the least into a "gray area" in the FAC regulations. Nevertheless, given FERC's strict interpretation of those regulations, Gulf should have sought...