Michigan Public Power Agency v. F.E.R.C., 04-1111.

Decision Date15 April 2005
Docket NumberNo. 04-1111.,04-1111.
Citation405 F.3d 8
PartiesMICHIGAN PUBLIC POWER AGENCY and Michigan South Central Power Agency, Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Michigan Electric Transmission Company, LLC, Intervenor
CourtU.S. Court of Appeals — District of Columbia Circuit

Alan I. Robbins argued the cause and filed the briefs for petitioners.

Robert H. Solomon, Deputy Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor.

Before: SENTELLE, HENDERSON and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS. Concurring opinion filed by Circuit Judge KAREN LeCRAFT HENDERSON.

ROGERS, Circuit Judge.

Michigan Public Power Agency and Michigan South Central Power Agency (collectively "Michigan Agencies") petition for review of two orders of the Federal Energy Regulatory Commission ruling that Michigan Electric Transmission Company ("METC") could pass through to the Michigan Agencies a share of the annual charges that the Commission had assessed directly to the Midwest Independent Transmission System Operator, Inc. ("MISO") and that, in turn, had been passed through to METC. The Michigan Agencies contend that the Commission acted beyond its statutory authority when it approved an amendment to their Transmission Ownership and Operating Agreements ("Operating Agreements") allowing METC to pass through annual charges to them, and that the Commission failed to engage in reasoned decisionmaking when, for the first time, it did not distinguish between the transmission that the Michigan Agencies take pursuant to their ownership interests and the transmission that they take as tariff customers. While we find no merit to the Michigan Agencies' contention that the Commission lacked authority to allow the pass-through of annual charges to them, because the Commission failed to provide an adequate explanation for its apparent departure from past practice, we grant the petition for review and remand the case to the Commission for further explanation.

I.

The Commission has a nearly twenty-year history of assessing annual charges directly to public utilities. As the court recently noted, the Commission is "[o]bligated by statute to recoup its costs from industries it regulates." Midwest Indep. Transmission Sys. Operator, Inc. v. FERC ("MISO II"), 388 F.3d 903, 905 (D.C.Cir.2004). In the Omnibus Budget Reconciliation Act of 1986, Congress required the Commission to "assess and collect fees and annual charges in any fiscal year in amounts equal to all of the costs incurred by the Commission in that fiscal year." 42 U.S.C. § 7178(a)(1) (2000). According to the Commission, it "is required to collect not only all its direct costs but also all its indirect expenses such as hearing costs and indirect personnel costs." Revision of Annual Charges Assessed to Public Utilities, Order No. 641, FERC Stats. & Regs. ¶ 31,109, at 31,841 n. 4, 65 Fed. Reg. 65,757, 65,757 (Nov. 2, 2000). These annual charges, however, may be directly assessed only to public utilities. See 16 U.S.C. § 824(f) (2000); 18 C.F.R. § 382.201 (2004).

The Commission initially calculated annual charges with respect to electricity regulation based on both a public utility's transmission and wholesale sales in interstate commerce. See Annual Charges Under the Omnibus Budget Reconciliation Act of 1986, Order No. 472, FERC Stats. & Regs. ¶ 30,746, 52 Fed. Reg. 21,263 (June 5, 1987). In 2000, however, the Commission altered its methodology for calculating annual charges in Order No. 641 to consider only the transmission of electricity in interstate commerce by public utilities. See Order No. 641, FERC Stats. & Regs. ¶ 31,109, 65 Fed. Reg. 65,757 (Nov. 2, 2000) (codified at 18 C.F.R. § 382.201). See generally MISO II, 388 F.3d at 906-08.

The Commission's methodological shift in calculating annual charges was motivated in large part by the sweeping changes in the electricity industry brought about by Order No. 888, FERC Stats. & Regs. ¶ 31,036, at 31,654, 61 Fed. Reg. 24,540, 21,551 (May 10, 1996), and related orders that, among other things, required the functional unbundling of transmission and generation services, required public utilities' transmission facilities to guarantee nondiscriminatory access for all market participants, and encouraged utilities to place transmission assets under the control of umbrella entities called "regional transmission organizations" ("RTOs") or "independent system operators" ("ISOs"). See generally MISO II, 388 F.3d at 906; Midwest ISO Transmission Owners v. FERC ("MISO I"), 373 F.3d 1361, 1363-65 (D.C.Cir.2004). Regarding the last feature, the Commission envisioned that an ISO, like MISO, "would assume operational control — but not ownership — of the transmission facilities owned by its member utilities, thereby `separat[ing] operation of the transmission grid and access to it from economic interests in generation.'" MISO I, 373 F.3d at 1364 (quoting Order No. 888, FERC Stats. & Regs. ¶ 31,036, at 31,654, 61 Fed. Reg. at 21,551).

Under Order No. 641, the Commission assesses annual charges to each public utility that provides transmission service. Order No. 641, FERC Stats. & Regs. ¶ 31,109, at 31,855, 65 Fed. Reg. at 65,758. Specifically, Order No. 641 states:

If an ISO or RTO public utility has taken over from individual public utilities the function of providing transmission service and has, accordingly, a tariff or rate schedule (and thus rates) on file for such service, then it is the ISO or RTO public utility that will be responsible for paying annual charges, and it will be assessed annual charges based on all transmission that it provides pursuant to its tariff or rate schedule. If an individual public utility continues to provide transmission service, however, and still has, accordingly, a tariff or rate schedule (and thus rates) on file for such service, then that individual public utility will continue to be responsible for paying annual charges.

Id. (footnotes omitted). The Commission also stated in Order No. 641 that it would "continue its existing policy that municipal utility systems ... will not be required to pay annual charges." Id. at 31,485, 65 Fed. Reg. at 65,760.

MISO provides transmission service, see generally MISO I, 373 F.3d at 1365, and therefore the Commission directly assesses annual charges to MISO rather than to METC or other transmission owners in the region that MISO serves. The transmission owners first report their transmissions in megawatts to MISO, which converts them to megawatt hours and reports that figure to the Commission. See Mich. Elec. Transmission Co., 2003 WL 22026844, 104 F.E.R.C. ¶ 61,236, at 61,806 n. 9. (2003) ("Initial Order"). The Commission then calculates MISO's annual charges based on the proportion of its megawatt hours compared to all other public utilities operating in interstate commerce. See Order No. 641, FERC Stats. & Regs. ¶ 31,109, at 31,841-42, 65 Fed. Reg. at 65,758 (codified at 18 C.F.R. § 382.201(b)). The Commission bills MISO, which, in turn, may pass through a proportionate share of the annual charges to various transmission owners, like METC, through its rates. See id. at 31,855-57, 65 Fed. Reg. at 65,765-67. These transmission owners, in turn, may pass through the charges to their customers, regardless of whether the customers are jurisdictional utilities. See id. at 31,845 n. 34, 65 Fed. Reg. at 65,760 n. 34. As Order No. 641 makes clear, and the Commission reiterated here, while annual charges may not be directly assessed to non-jurisdictional utilities, like the Michigan Agencies, see id. at 31,845, 65 Fed. Reg. at 65,760; see also 16 U.S.C. § 824(f), "[a]s transmission customers they may, of course, be charged rates by the transmission provider that reflect annual charges assessed to the transmission provider," Order No. 641, FERC Stats. & Regs. ¶ 31,109, at 31,845 n. 34, 65 Fed. Reg. at 65,760 n. 34.

The petition for review arises from METC's June 30, 2003 filing pursuant to 16 U.S.C. § 824d to amend the Operating Agreements so that, as relevant, it could pass through a share of the Commission's annual charges to the Michigan Agencies. Noting that the Operating Agreements gave it the right to apply unilaterally to the Commission for an amendment, METC stated that it sought to recover "its prudently incurred costs associated with service to the Customers," which are "municipal power agencies that purchase transmission service for their members within the METC pricing zone." Filing of Mich. Elec. Transmission Co., Docket No. ER03-1003-00, at 2, 4 (June 30, 2003). METC's amendment states, in relevant part:

If the Capacity Entitlement of [the Michigan Agencies] served hereunder is treated under the [MISO] Open Access Transmission Tariff ... as [the Michigan Agencies] load served by the METC system such that the MISO imposes charges on METC in connection with such entitlement, [the Michigan Agencies] shall reimburse METC for the full amount of [their] share of any charges paid by METC for ... annual charges assessed to public utilities pursuant to 18 CFR [§] 382.201 imposed on METC in connection with the [Michigan Agencies'] Capacity Entitlement.

Id. at Exhibit A.

The Michigan Agencies intervened and protested the amendment on the ground that it would be unlawful to pass through annual charges to them. They argued that as municipal agencies, they are not "public utilities" subject to the Commission's jurisdiction under 18 C.F.R. § 382.201, and that as co-owners of the METC transmission system, they have not previously been subject to annual charges, an exemption they noted is reflected in Order No. 641, FERC Stats. & Regs. ¶ 31,109, at 31,845, 65 Fed. Reg. at 65,760. The Commission,...

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