Sithe/Independence Power Part., L.P. v. F.E.R.C.

• Decision Date: 29 January 1999
• Docket Number: No. 97-1723,97-1723
• Citation: 165 F.3d 944
• Parties: , Util. L. Rep. P 14,254 SITHE/INDEPENDENCE POWER PARTNERS, L.P., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Niagara Mohawk Power Corporation, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 944

165 F.3d 944

334 U.S.App.D.C. 157, Util. L. Rep. P 14,254

SITHE/INDEPENDENCE POWER PARTNERS, L.P., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Niagara Mohawk Power Corporation, Intervenor.

No. 97-1723.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 17, 1998.

Decided Jan. 29, 1999.

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

Richard P. Bress argued the cause for petitioner. With him on the briefs was David L. Schwartz.

David H. Coffman, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solicitor.

Edward Berlin argued the cause for intervenor. With him on the brief were Kenneth G. Jaffe and Michael E. Ward.

Before: EDWARDS, Chief Judge, WILLIAMS and GINSBURG, Circuit Judges.

Opinion for the Court filed by Chief Judge EDWARDS.

EDWARDS, Chief Judge:

Petitioner Sithe/Independence Power Partners ("Sithe") challenges two orders of the Federal Energy Regulatory Commission ("FERC" or "Commission"), dismissing Sithe's complaint against Niagara Mohawk Power Corporation ("Niagara") and denying rehearing of that dismissal. Pursuant to a 1991 agreement, Sithe, an independent power producer, receives transmission services from Niagara, an electric utility. The challenge in this case centers on the loss component of the overall rate that Sithe pays Niagara for this service. Sithe argues that, in computing loss rates on an incremental basis, Niagara is violating established Commission policy, which requires that base and loss rates be computed using a consistent methodology. Sithe also argues that Niagara's method of assigning loss calculation priorities unfairly discriminates on the basis of a customer's contract date. In the orders on review, FERC dismissed Sithe's challenge, finding that Niagara's rate methodology was not inconsistent with Commission policy, and that the rates charged were not unduly discriminatory. Because we are unable to ascertain the basis for the Commission's ruling, we remand this matter to the Commission for further proceedings.

I. BACKGROUND

A. Transmission Services Agreement

Sithe owns and operates a cogeneration facility in New York state. Pursuant to a 1991 power purchase agreement, Sithe sells the bulk of the electric energy produced at this facility to Consolidated Edison Company of New York ("Con Ed"). Niagara, in turn, owns and operates electric generation, distribution, and transmission facilities in New York. In order to enable the transmission of energy from the cogeneration facility to Con Ed, Sithe entered into a Transmission Services Agreement ("TSA") with Niagara on November 5, 1991. Under the agreement, which extends for a twenty year period from the initiation of service, Niagara provides Sithe with roughly 805 megawatts ("MW") of firm transmission service and up to 250 MW of interruptible transmission service. In exchange, Sithe pays Niagara a base transmission rate and also compensates Niagara with in-kind energy for transmission line losses. FERC accepted the TSA for filing on February 5, 1992, and accepted a revised version for filing on July 6, 1994. Service under the TSA commenced on November 15, 1994.

Under the TSA, the total charge for transmission service consists of a base charge for Niagara's embedded costs--i.e., construction and operation expenses and a reasonable return on its investment--plus an additional charge for Niagara's transmission loss costs--i.e., the costs to the utility of making up the power loss that inevitably occurs during transmission. There are at least two basic methodologies that a utility may use to compute its base and loss rates: the "rolled-in" rate method and the incremental rate method. The rolled-in rate methodology charges a rate based on the average cost to the utility of serving all of its customers on an integrated system. "[E]ach transmission customer [is treated] not as using a single transmission path but rather as using the entire transmission system," and, accordingly, "each transmission customer pays its share of the capital costs of the entire system" based on the amount of electricity it has transmitted over the system. Northern States Power Co. v. FERC, 30 F.3d 177, 179 (D.C.Cir.1994). On the other hand, the incremental rate methodology charges a rate based on how a given customer's individual use affects the system. Each transmission customer pays an amount that compensates the utility for the marginal costs that its use imposes, which is a function of such factors as distance and direction.

The methodology for computing rates in this case was not clearly specified in the TSA. With respect to the base transmission rate, the rate schedule that is part of the TSA identified a firm service rate of $1.49 per kilowatt ("kW") per month, which was later modified to $1.76 per kW per month. By agreement, this rate was based on the formula that had governed Niagara's earlier arrangements with New York State Electric & Gas Corporation ("NYSEG") and Central Hudson Gas & Electric Corporation ("CHGE"). Yet, the parties' characterizations of this underlying formula are at odds. It appears from the record that the $1.76 figure represents an average of the costs associated with a substantial portion--but not the entirety--of Niagara's transmission system. In other words, the starting point from which averages are taken excludes investment in a particular substation, a flat sum of $43.5 million, and various other expenses. In Sithe's view, then, the formula reflects an average, rolled-in methodology, even if it does not produce a fully embedded rate. In Niagara's view, however, the formula reflects a "hybrid," modified cost-of-service approach that is not "fully rolled-in."

With respect to the transmission loss rate, the TSA expressly provides for compensation, in the form of in-kind energy, for losses resulting from Niagara's service to Sithe. Section 9.1 of the agreement states that:

[Sithe] shall compensate NIAGARA MOHAWK for losses incurred by NIAGARA MOHAWK in its control area and NIAGARA MOHAWK shall compensate [Sithe] for losses avoided by NIAGARA MOHAWK in its control area as a result of NIAGARA MOHAWK's provision of transmission services hereunder. The determination of such losses and the procedure for compensation thereof shall be determined by NIAGARA MOHAWK's Power Control Department in accordance with NIAGARA MOHAWK's practices relating to other similar transactions and in accordance with GOOD UTILITY PRACTICE.

Transmission Services Agreement § 9.1, reprinted in Joint Appendix ("J.A.") 57. There is a dispute among the parties as to whether this provision explicitly identifies an incremental loss methodology. Before the Commission, Niagara argued that this conclusion was dictated by the language of the agreement, and that Sithe was fully aware of this when it entered into the agreement. Sithe, for its part, contended that the provision did not specify any methodology, and that it was unaware that Niagara employed an incremental approach until Niagara eventually supplied it with information underlying the rates it was charging, well after execution of the TSA. The Commission did not make an express finding on this point.

In any event, there is little dispute that Niagara does, in fact, compute Sithe's transmission loss charge on an incremental, rather than average, basis. Niagara's approach can be roughly summarized as follows. First, using a load flow model, Niagara takes two "snapshots" of its system each month, one during peak use and one during off-peak use, in order to determine the amount of energy being transmitted over the system and the amount of energy lost in transmission. Niagara then extrapolates from this data to calculate the total transmission losses incurred for each month. Next, Niagara removes its customers from the model one at a time and re-calculates losses at each step, thereby arriving at a marginal loss figure for each customer. To establish the order of removal, Niagara assigns its customers "priorities" based on the dates of their firm transmission contracts. Because transmission losses are a function of the current flowing over the system, incremental losses decrease exponentially as each load is removed from the calculation--i.e., the assigned priority substantially affects the amount of the loss for which a given customer will be charged. According to Sithe, "Niagara's use of an incremental loss factor to assign losses to Sithe instead of using an average, rolled-in loss factor costs Sithe approximately $10,000 per day." Amended Brief of Petitioner at 9.

B. Commission Proceedings

On March 29, 1995, Sithe filed a complaint with the Commission pursuant to § 206 of the Federal Power Act ("FPA"), 16 U.S.C. § 824e (1994), challenging Niagara's method of computing transmission losses under the TSA as unjust, unreasonable, and unduly discriminatory. Sithe contended, inter alia, that Niagara was violating the Commission's longstanding "matching policy" by using an incremental method to calculate Sithe's transmission loss charges, while at the same time using an average rolled-in method to calculate Sithe's base transmission rate. Sithe also contended that Niagara's method for determining incremental losses discriminated unfairly among its transmission customers by prioritizing transactions based on contract dates, and by reserving the highest priority for its own uses of the system. Sithe sought an order from the Commission finding Niagara's calculation of transmission losses to be unlawful and directing Niagara to calculate transmission losses on an average, system-wide basis.

In its answer, Niagara raised multiple arguments in support of its current method of computing Sithe's rates. First, Niagara suggested that Commission policy recognizes the benefits of flexibility in rate...