Mid-Tex Elec. Co-op., Inc. v. F.E.R.C.

• Decision Date: 30 June 1987
• Docket Number: No. 86-1414,MID-TEX,86-1414
• Citation: 822 F.2d 1123
• Parties: ELECTRIC COOPERATIVE, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southwestern Public Service Company, Public Systems, Boston Edison Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1123

822 F.2d 1123

262 U.S.App.D.C. 61

MID-TEX ELECTRIC COOPERATIVE, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Southwestern Public Service Company, Public Systems, Boston Edison Company, et al., Intervenors.

No. 86-1414.

United States Court of Appeals District of Columbia Circuit.

Argued March 20, 1987.

Decided June 30, 1987.

As Amended June 30, 1987.

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

Robert A. O'Neil, with whom Wallace F. Tillman and Michael Oldak, Washington, D.C., were on the brief for petitioners. Ted M. Handel, Washington, D.C., also entered an appearance for petitioners.

Joshua Z. Rokach, Atty., F.E.R.C., with whom Catherine C. Cook, Gen. Counsel and Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., were on the brief for respondent.

Ben Finkelstein, with whom Thomas N. McHugh, Jr. and Donald Weightman, Washington, D.C., were on the brief for intervenor, Public Systems.

George F. Bruder and Albert R. Simonds, Jr., Washington, D.C., were on the brief for intervenor, Montaup Elec. Co.

Alan J. Statman, Washington, D.C., and Paul J. Kelly, Jr. were on the brief for intervenor, Southwestern Public Service Co.

Before GINSBURG and WILLIAMS, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge RUTH BADER GINSBURG.

RUTH BADER GINSBURG, Circuit Judge:

For the second time, we confront a challenge to a Federal Energy Regulatory Commission (FERC or Commission) rule allowing utilities to include a portion of their construction work-in-progress (CWIP) costs in rate base. A prior panel of this court upheld the first such challenge in part, vacating portions of the rule and remanding the CWIP issue to FERC for further consideration. Mid-Tex Electric Cooperative, Inc. v. FERC, 773 F.2d 327 (D.C.Cir.1985). FERC responded in two measures taken simultaneously: the Commission promulgated an interim rule that, in FERC's own words, "does not change the substance of the general provisions of the [vacated] CWIP rule"; ¹ looking to the longer term, the Commission requested additional public comments on various CWIP-related matters to assist the Commission in formulating permanent regulations in this area. Petitioners ² challenge the interim rule on substantive and procedural grounds; they argue that the Commission's interim action is fundamentally inconsistent with this court's directions in the prior Mid-Tex case; further, they maintain that FERC's promulgation of the interim rule without public notice and comment violates the relevant Administrative Procedure Act prescriptions. ³ Given the particular circumstances of this case, we reject the petitioners'

challenges and, accordingly, deny the petitions for review.

I.

The economic and regulatory framework for the CWIP rulemaking is set forth in detail in our earlier opinion, see Mid-Tex, 773 F.2d at 330-36, and therefore will be described here in abbreviated fashion. Speaking generally, utilities can recover the cost of constructing new generating or transmission facilities in one of two ways. Under the "AFUDC" method, ⁴ the carrying charges on the capital required to finance new construction--primarily interest on debt and a reasonable return on equity financing--accrue in a separate account that appears as a non-cash asset on the utility's balance sheet. Only when the new facility is operational is the entire cost of construction, including the amount representing accrued carrying charges held in the AFUDC account, added to the utility's rate base; until that time, therefore, the utility does not begin to recover those carrying charges from ratepayers. See Mid-Tex, 773 F.2d at 329-30. Under the CWIP method, by contrast, these carrying charges do not accrue separately; construction costs are added to rate base as they are incurred, and the utility therefore recovers its carrying charges from ratepayers through the return component of its rates, rather than by adding them to the cost of construction for recovery when the plant is in service. The two methods thus differ primarily in the timing of the carrying charges recovery--under CWIP, the utility recovers sooner, under AFUDC, recovery commences later. See generally R. Hahne & G. Aliff, Accounting for Public Utilities Secs. 1.04- (1986); Order 298, Construction Work in Progress for Public Utilities (Final Rule), 48 FED.REG. 24323, 24324-26 (June 1, 1983).

In 1983, FERC issued Order 298, ⁵ which rejected the Commission's then existing policy of authorizing only the AFUDC method of cost recovery ⁶ in favor of a rule "adopt[ing] a fixed percentage approach that allows any utility to file to include up to 50 per cent of all CWIP in rate base." ⁷ Order 298 was challenged by petition to this court; in an opinion we will describe in more detail below, the panel that ruled on Order 298 "rejected petitioners' procedural challenges to the Commission's CWIP rulemaking [and] determined that FERC's stated purposes for adopting the rule are valid and that FERC reasonably concluded that the rule would indeed serve those purposes." Mid-Tex, 773 F.2d at 362. However, the Order 298 panel held that FERC had given insufficient consideration to the possible anticompetitive effects of the CWIP rule; the panel therefore vacated certain portions of the rule and remanded the matter back to the Commission. Id.

Some months after the remand, FERC issued Order 448. ⁸ The Commission promulgated Order 448 as an interim rule, effective immediately upon publication. This new Order temporarily restored many of the features of Order 298; in particular, the Commission announced, inter alia, that utilities could include up to 50% of CWIP in rate base, provided they "address" any anticompetitive objections they "reasonably anticipate that one or more of [their] wholesale customers may raise" and that they After FERC's promulgation of this interim rule, the petitioners here applied for rehearing before the Commission; simultaneously, they moved before this court for an order directing FERC to comply with the Mid-Tex mandate. They were unsuccessful in both fora, ¹⁰ and this appeal followed.

"suggest measures to mitigate such objections." ⁹

II.

A. Order 298 and the Mid-Tex remand

Petitioners' substantive challenge features alleged inconsistencies between Order 448 and the instructions set forth in the prior Mid-Tex opinion. FERC's actions, petitioners contend, attempt circumvention of the court-ordered reconsideration of CWIP's anticompetitive effects, and reinstate precisely the regulatory regime overturned by the first Mid-Tex court. Evaluating this challenge requires close inspection of both the interim rule itself and the reasons leading the first Mid-Tex court to vacate and remand Order 298, the earlier CWIP rule.

The CWIP rule embodied in Order 298, FERC determined, would have three beneficial effects: the rule would (a) mitigate AFUDC's bias against construction of new facilities; (b) allow utilities to assess more accurately the need for new facilities by reducing the tendency, under AFUDC, to overpredict future demand; and (c) advance the goal of price stability by mitigating the sudden price increases under AFUDC. See Mid-Tex, 773 F.2d at 332-34; Order 298, 48 FED.REG. at 24323, 24326-39 (June 1, 1983).

The prior Mid-Tex panel concluded, after careful review of the rulemaking record and governing precedents, both that FERC possessed the statutory authority to consider these benefits within its overall "public interest" calculus, see Mid-Tex, 773 F.2d at 344-47, and that record evidence adequately supported FERC's conclusion that its CWIP rule would achieve the asserted benefits. See id. at 347-49, 350-51. The remaining issue was "the extent of FERC's reliance on these [beneficial] considerations at the expense of other criteria which ... FERC is obliged to weigh in the balance." Id. at 344. The court found that FERC, when it balanced the probable beneficial and adverse consequences of Order 298, had given insufficient consideration to the CWIP rule's potential for harm; accordingly, the panel ordered FERC to examine that potential more carefully and, if necessary, to recalculate the net benefit of its new rule. See id. at 351-62.

The court's prime concern was the prospect that the CWIP rule might have an adverse impact on competition in the electric power industry. The prior Mid-Tex opinion featured two significant potential anticompetitive effects: "price squeeze" and "double whammy." Price squeeze, as that term is used here, is a by-product of disparities between state and federal regulation of the utility rate-making process. FERC regulates only sales of electricity for resale, i.e., the "wholesale" rates utilities charge other utilities for power then "retailed" to consumers; those retail rates, in turn, are subject to regulation by the several state power authorities. Many utilities operate in both the wholesale and retail markets, and are thus both suppliers and competitors of their wholesale customers. State regulators may choose not to allow utilities to pass CWIP costs along to their retail customers; where that is the case, wholesale prices, if they include some portion of the wholesaler's CWIP costs, may exceed retail prices from which CWIP costs are excluded. This "price squeeze" can enable utilities to drive their retail competitors from the retail market by reducing--or eliminating--the profit margin provided by the difference between allowable wholesale and retail prices.

Price squeeze relates to pricing policies with anticompetitive effects in the retail power market. Double whammy, on the other hand, refers to one way in which utilities may utilize CWIP to disadvantage competitors in the wholesale market. Double whammy "arises when a wholesale customer embarks on a construction program of its own in order to supply itself with all or part of its future power requirement, thereby...