Ky. Mun. Energy Agency v. Fed. Energy Regulatory Comm'n
| Decision Date | 05 August 2022 |
| Docket Number | 19-1236,C/w 19-1237, 20-1282, 20-1326, 20-1452, 20-1459, 21-1013, 21-1025 |
| Citation | 45 F.4th 162 |
| Parties | KENTUCKY MUNICIPAL ENERGY AGENCY, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Kentucky Utilities Company and Louisville Gas and Electric Company, Intervenors |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Latif M. Nurani argued the cause for municipal petitioners. With him on the briefs were Thomas C. Trauger and David E. Pomper.
Paul D. Clement argued the cause for petitioners Louisville Gas and Electric Company and Kentucky Utilities Company. With him on the briefs were Erin E. Murphy and Julie M.K. Siegal.
Scott Ray Ediger, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Matthew R. Christiansen, General Counsel, and Robert H. Solomon, Solicitor.
Before: Henderson, Tatel* , and Millett, Circuit Judges.
In 1998, the Federal Energy Regulatory Commission approved the merger of two electrical grid operators, Louisville Gas & Electric Company and Kentucky Utilities Company. To protect customers from the merger's potential anticompetitive effects, the Commission required the combined company (collectively, "Louisville Utilities") to join a then-new regional electrical grid organization, the Midwest Independent Transmission System Operator, Inc. ("MISO"). MISO would act like a free trade zone, allowing customers to buy power from generators across the region without having to pay multiple grid operators redundant fees to transmit electricity. By removing those redundant charges—known as "pancaked rates"—MISO membership would give Louisville Utilities customers access to more options for buying competitively priced power.
In 2006, the Commission granted Louisville Utilities’ request to leave MISO on the condition that it continue to depancake rates for a group of municipal customers in its wholesale market. Louisville Utilities complied with the Commission's order through an agreement called Schedule 402.
Twelve years later, Louisville Utilities asked the Commission to end its depancaking responsibilities under Schedule 402. Most of the customers protected by Schedule 402 objected.
The Commission largely approved the request on the ground that sufficient competition in electricity sales existed to provide Louisville Utilities customers alternative competitive sources for electricity even without depancaking. The Commission ended its analysis there without considering other effects of the modified merger order, like increased prices.
At the same time, the Commission took steps to protect customers that had reasonably relied on depancaking under Schedule 402 in their contracting and investing decisions.
A group of customers previously protected by Schedule 402 (collectively, "Municipal Customers") and Louisville Utilities both have petitioned for review of the Commission's orders. Municipal Customers argue that the Commission should not have greenlit the end of depancaking and that it insufficiently protected customers’ reliance interests. Taking a different view, Louisville Utilities argues that the Commission's remedy to shield customers from the end of depancaking was impermissibly broad.
We vacate the Commission's decision to end depancaking under Schedule 402. While the Commission adequately supported its conclusion that customers would continue to enjoy a competitive market without depancaking, it was arbitrary for the agency to completely ignore the significant effect that duplicative charges would have on customer rates. We also conclude that the Commission's decisions protecting reliance interests were reasonable, with two exceptions.
As a result, we grant the petitions for review in part and vacate and remand the challenged orders in part.
The Federal Power Act tasks the Federal Energy Regulatory Commission with regulating the sale and transmission of wholesale electricity in interstate commerce. See 16 U.S.C. § 824 ; FERC v. Electric Power Supply Ass'n , 577 U.S. 260, 264, 136 S.Ct. 760, 193 L.Ed.2d 661 (2016). Under Section 203 of the Act, public utilities must seek Commission approval for certain mergers to ensure that they are "consistent with the public interest[.]" 16 U.S.C. § 824b(a)(1), (4).
When deciding if a merger is in the public interest, the Commission considers "both the preservation of economic competition * * * and the various policies reflected in the statutes specific to energy regulation." Wabash Valley Power Ass'n, Inc. v. FERC , 268 F.3d 1105, 1115 (D.C. Cir. 2001) (citation omitted). The main goal of the Federal Power Act is "to encourage the orderly development of plentiful supplies of electricity * * * at reasonable prices." Id. (quoting NAACP v. Federal Power Comm'n , 425 U.S. 662, 670, 96 S.Ct. 1806, 48 L.Ed.2d 284 (1976) ).
Under Section 203(b), the Commission may condition its approval of utility mergers on "such terms and conditions as it finds necessary or appropriate to secure" the public interest. 16 U.S.C. § 824b(b). The agency also has the power to adjust merger conditions "from time to time for good cause * * * as it may find necessary or appropriate" and to ensure they are consistent with the public interest. Id. ; see Westar Energy, Inc. , 164 FERC ¶ 61060, ¶ 15 (2018) ; see also id . at ¶ 15 n.24.
At the turn of this century, the Commission issued a series of orders to make electricity markets more competitive by providing wholesale buyers greater access to competing power plants. See Transmission Access Policy Study Group v. FERC , 225 F.3d 667, 682, 699 (D.C. Cir. 2000), aff'd sub nom. New York v. FERC , 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002).
As part of its reforms, the Commission addressed a barrier to competition known as "rate pancaking." Wabash Valley Power Ass'n , 268 F.3d at 1116. Grid operators typically charge fees to ferry electricity to a neighboring transmission network, like a state levying tolls to drive on its highways. When an electricity customer wishes to buy power from a plant located on another grid it may face pancaked rates—transmission fees "stacked on top of one another[,]" Louisville Gas & Elec. Co. v. FERC , 988 F.3d 841, 844 (6th Cir. 2021), "much like the total tolls paid when driving on a route that includes both the Pennsylvania and New Jersey turnpikes[,]" Wabash Valley Power Ass'n , 268 F.3d at 1116. The Commission has concluded that pancaked rates weaken competition by making it more expensive for customers to buy power from generators on other grids. See Louisville Gas , 988 F.3d at 844 ; see also Regional Transmission Orgs., 65 Fed. Reg. 810, 915 (Jan. 6, 2000).
In part to reduce rate pancaking, the Commission prodded utilities to band together to form organizations known as independent system operators or regional transmission organizations. These independent entities run grids on behalf of grid owners and charge customers standardized, non-duplicative fees to transmit electricity across their network. See Louisville Gas , 988 F.3d at 844 ; Midwest Indep. Transmission Sys. Operator, Inc. , 104 FERC ¶ 61105, ¶ 29 (2003).
In light of those reforms, the Commission overhauled its approach to reviewing electricity mergers under Section 203. In 1996, the Commission announced that it would analyze whether a proposed merger is in the public interest by "generally" considering its effect on three factors—competition, rates, and regulation. See Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act, Policy Statement, 61 Fed. Reg. 68,595, 68,596 (Dec. 30, 1996) ("Merger Statement"); see also id. at 68,597 ; 18 C.F.R. § 2.26.
On the competition factor, the Commission assesses whether the merger will significantly increase concentration in any market. See Merger Statement, 61 Fed. Reg. at 68,596. To do this, the Commission requires merging parties to identify products they each sell, customers that might be affected by the merger, and other suppliers that can compete to serve those customers. See id. at 68,600–68,601. The merging parties identify potential rivals by analyzing how much it would cost alternative suppliers to generate electricity and get it to customers and whether suppliers can physically access enough transmission capacity to deliver the energy. Id. at 68,601. The agency considers a generator a potential competitor to the merging parties if it can deliver the electricity to a relevant customer at a price that is no more than five percent above the market rate. See id. at 68,607 & n.6 ; see also 18 C.F.R. § 33.3(c)(4).
If a merger is projected to significantly increase a market's concentration, the agency will investigate its competitive effects more closely. Merger Statement, 61 Fed. Reg. at 68,608 ; cf. United States v. Philadelphia Nat'l Bank , 374 U.S. 321, 363, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963). Applicants may mitigate competitive harms to some degree by joining an independent operator that can allow more power plants to compete and reduce market concentration by preventing rate pancaking. See Merger Statement, 61 Fed. Reg. at 68,601 ; see also id. at 68,609–68,610, 68,616.
As for the second prong of its public-interest test, the Commission analyzes whether the merging parties have taken sufficient steps to ensure that the merger will not increase customers’ rates. See Merger Statement, 61 Fed. Reg. at 68,603. Applicants "bear[ ] the burden of proof to demonstrate that the[ir] customer[s] will be protected" from rate hikes. Id. So the agency requires applicants to propose "ratepayer protection mechanisms" in case the transaction's "expected benefits do not materialize." Id.
The third factor, which assesses how a merger will affect the relationship between the Commission's regulatory jurisdiction and that of state authorities, is not at issue in this case.
In 1997, two utilities in Kentucky, Louisville Gas & Electric Company and ...
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