In the United States Court of Appeals for the District of Columbia Circuit

Transcription

1 USCA Case # Document # Filed: 05/28/2013 Page 1 of 47 ORAL ARGUMENT HAS NOT YET BEEN SCHEDULED Nos , , , , , , , , , , , , , , and (Consolidated) In the United States Court of Appeals for the District of Columbia Circuit SOUTH CAROLINA PUBLIC SERVICE AUTHORITY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. JOINT INITIAL BRIEF OF PETITIONERS/INTERVENORS CONCERNING COST ALLOCATION On Petition for Review from the Federal Energy Regulatory Commission FERC-RM (July 21, 2011), FERC-RM (May 17, 2012), & FERC-RM (Oct. 18, 2012) Andrew W. Tunnell Ed R. Haden Scott B. Grover BALCH & BINGHAM LLP 1710 Sixth Avenue North Birmingham, Alabama (205) ATunnell@balch.com Eaden@balch.com SGrover@balch.com Attorneys for Petitioners/Intervenors: Jonathan D. Schneider Harvey L. Reiter Jonathan P. Trotta STINSON MORRISON HECKER LLP 1775 Pennsylvania Avenue, NW, Ste 800 Washington, DC (202) JSchneider@stinson.com HReiter@stinson.com JTrotta@stinson.com Counsel for Petitioner/Intervenor Southern Company Services, Inc. Initial Brief: May 28, 2013 Counsel for Petitioners/Intervenors South Carolina Public Service Authority, the Large Public Power Council, and Sacramento Municipal Utility District

2 USCA Case # Document # Filed: 05/28/2013 Page 2 of 47 Kenneth G. Jaffe Michael E. Ward Alston & Bird LLP 950 F Street, NW The Atlantic Building, 7th Floor Washington, DC (202) Kenneth.Jaffe@alston.com Michael.Ward@alston.com Randall Bruce Palmer, Esquire, Senior Counsel Allegheny Energy, Inc. 800 Cabin Hill Drive Greensburg, PA (724) RPalmer@firstenergycorp.com Counsel for Petitioners/Intervenors American Transmission Systems Incorporated, Cleveland Electric Illuminating Company, FirstEnergy Solutions Corp., Jersey Central Power & Light Company, Metropolitan Edison Company, Monongahela Power Company, Ohio Edison Company, Pennsylvania Electric Company, Pennsylvania Power Company, The Potomac Edison Company, Toledo Edison Company, Trans-Allegheny Interstate Line Company, and West Penn Power Company Howard Haswell Shafferman Jack Nadim Semrani Ballard Spahr LLP 1909 K Street, NW 12th Floor Sue Deliane Sheridan Sheridan Energy & Environmental Consulting, LLC 1050 Thomas Jefferson Street, NW Suite 700 Washington, DC (202) SueDSheridan@yahoo.com Counsel for Petitioner/Intervenor Coalition for Fair Transmission Policy Randolph Lee Elliott Miller, Balis & O Neil, PC th Street, NW 12th Floor Washington, DC (202) RElliott@mbolaw.com Counsel for Petitioner/Intervenor National Rural Electric Cooperative Association Elias G. Farrah Winston & Strawn LLP 1700 K Street, NW Washington, DC (202) EFarrah@winston.com Counsel for Intervenor for Petitioners New York Transmission Owners

3 USCA Case # Document # Filed: 05/28/2013 Page 3 of 47 Washington, DC (202) HHS@ballardspahr.com SemraniJ@ballardspahr.com Counsel for Petitioner New York Independent System Operator, Inc. John Lee Shepherd, Jr. William Rainey Barksdale Karis Anne Gong SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 1440 New York Avenue, NW Washington, DC (202) John.Shepherd@skadden.com William.Barksdale@skadden.com Karis.Gong@skadden.com George Scott Morris Luther Daniel Bentley, IV Alabama Public Service Commission Suite North Union Street Montgomery, AL (334) Scott.Morris@psc.alabama.gov Luke.Bentley@psc.alabama.gov Counsel for Petitioner/Intervenor Alabama Public Service Commission Tamara L. Linde Vice-President Regulatory Jodi L. Moskowitz General Regulatory Counsel Operations and Compliance PSEG SERVICES CORP. 80 Park Plaza, T-5G Newark, NJ (973) Tamara.Linde@PSEG.com Jodi.Moskowitz@PSEG.com Counsel for Petitioners/Intervenors PSEG Energy Resources & Trade LLC, PSEG Power LLC, Public Service Electric and Gas Company, and Public Service Enterprise Group Inc.

4 USCA Case # Document # Filed: 05/28/2013 Page 4 of 47 CERTIFICATE OF PARTIES, RULINGS UNDER REVIEW, AND RELATED CASES The undersigned Petitioners and Intervenors respectfully file this Certificate as to Parties, Rulings, and Related Cases. Fed. R. App. P. 28(a)(1); D.C. Cir. R. 28(a)(1). I. PARTIES The Certificate of Parties is provided in the Joint Initial Brief of Petitioners/Intervenors Concerning the Statement of the Case, Statement of Facts and Standards of Review ( Joint Statement Brief ). II. RULINGS UNDER REVIEW Under review in this proceeding are the following final orders of the Federal Energy Regulatory Commission with the Commission issuance date and the Federal Register publication dates shown for each: 1) Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000, Final Rule, Docket No. RM , 136 FERC 61,051 (July 21, 2011), 76 Fed. Reg. 49,842 (Aug. 11, 2011); 2) Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No A, Order on Rehearing and Clarification, Docket No. RM , 139 FERC 61,132 (May 17, 2012), 77 Fed. Reg. 32,184 (May 31, 2012); and 3) Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No B, Order on Rehearing and Clarification, Docket No. RM , 141

5 USCA Case # Document # Filed: 05/28/2013 Page 5 of 47 FERC 61,044 (Oct. 18, 2012), 77 Fed. Reg. 64,890 (Oct. 24, 2012). III. RELATED CASES The Certificate of Related Cases is provided in the Joint Statement Brief. Respectfully submitted, / s/jonathan D. Schneider Jonathan D. Schneider STINSON MORRISON HECKER LLP 1775 Pennsylvania Avenue, NW, Ste 800 Washington, DC (202) JSchneider@stinson.com Counsel for Petitioners/Intervenors South Carolina Public Service Authority, the Large Public Power Council, and Sacramento Municipal Utility District And on behalf of Petitioners and Intervenors supporting Petitioners ii

6 USCA Case # Document # Filed: 05/28/2013 Page 6 of 47 CORPORATE DISCLOSURE STATEMENT Corporate Disclosures for entities joining this Brief are in the Joint Statement Brief. This brief is submitted by Petitioners Alabama Public Service Commission; Coalition for Fair Transmission Policy; FirstEnergy Companies; Large Public Power Council; National Rural Electric Cooperative Association; New York Independent System Operator, Inc.; PSEG; Sacramento Municipal Utility District; South Carolina Public Service Authority; and Southern Company Services, Inc; and by Intervenor New York Transmission Owners. Respectfully submitted, / s/jonathan D. Schneider Jonathan D. Schneider STINSON MORRISON HECKER LLP 1775 Pennsylvania Avenue, NW, Ste 800 Washington, DC (202) JSchneider@stinson.com Counsel for Petitioners/Intervenors South Carolina Public Service Authority, the Large Public Power Council, and Sacramento Municipal Utility District And on behalf of Petitioners and Intervenors supporting Petitioners iii

7 USCA Case # Document # Filed: 05/28/2013 Page 7 of 47 TABLE OF CONTENTS Page CERTIFICATE OF PARTIES, RULINGS UNDER REVIEW, AND RELATED CASES... i CORPORATE DISCLOSURE STATEMENT... iii TABLE OF CONTENTS... iv TABLE OF AUTHORITIES... vi GLOSSARY... ix STATEMENT OF JURISDICTION...1 STATEMENT OF ISSUE...1 STATUTORY ADDENDUM...1 STATEMENT OF CASE...1 STATEMENT OF FACTS...1 SUMMARY OF ARGUMENT...2 STANDING...5 ARGUMENT...5 I. FERC Has No Authority To Compel Non-Customers to Fund Transmission Developers Project Costs....5 A. FERC's Cost Allocation Mandate Directs Utilities To Implement Tariffs Assessing Costs to Entities to Whom They Do Not Necessarily Provide Transmission Service...5 B. FERC Lacks Authority Under the FPA To Order Unilaterally A Funding Mechanism for Transmission Providers Where No Underlying Commercial Relationship Exists...8 iv

8 USCA Case # Document # Filed: 05/28/2013 Page 8 of 47 C. FERC Concedes That There is No Precedent for Allocating Costs to Non-Customers and Fails To Provide a Reasoned Explanation Reconciling its Own Contrary Decisions...22 D. FERC Lacks the Authority To Require That Transmission Providers File Cost Allocation Methodologies for Which Cost Recovery Has Not Been Sought E. FERC Cannot Avoid Review With Its Non-Credible Assertion That Its Orders Address Cost Allocation, Not Cost Recovery from Non- Customers...27 II. Conclusion...29 CERTIFICATE AS TO LENGTH OF BRIEF...33 CERTIFICATE OF SERVICE...34 v

9 USCA Case # Document # Filed: 05/28/2013 Page 9 of 47 FEDERAL CASES TABLE OF AUTHORITIES 1 Page *Atlantic City Elec. Co. v. FERC, 295 F.3d 1 (D.C. Cir. 2002)...11, 13, 26 City of Winnfield v. FERC, 744 F.2d 871 (D.C. Cir. 1984)...13 Connecticut Light & Power v. FPC, 324 U.S. 515 (1945)...15 Consumers Energy Co. v. FERC, 226 F.3d 777 (6th Cir. 2000)...26 *Exxon Mobil Corp. v. FERC, 430 F.3d 1166 (D.C. Cir. 2005)... 13, *ExxonMobil Oil Corp. v. FERC, 487 F.3d 945 (D.C. Cir. 2007)...25 FPC v. Florida Power & Light Co., 404 U.S. 453 (1972)...22 FPC v. Louisiana Power & Light Co., 406 U.S. 621 (1972)...10 *FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956)... 2, 12, Ft. Pierce Util. Auth. v. FERC, 730 F.3d 778 (D.C. Cir. 1984)...27 Illinois Commerce Commission v. FERC, 576 F.3d 470 (7th Cir. 2009)... 10, Authorities chiefly relied upon are marked with asterisks. vi

10 USCA Case # Document # Filed: 05/28/2013 Page 10 of 47 La. Pub. Serv. Comm n v. FCC, 476 U.S. 355 (1986)...20 Mobil Oil Corp. v. FPC, 483 F.2d 1238 (D.C. Cir. 1973)...20 Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir. 1972)...20 *Morgan Stanley Capital Group, Inc. v. Pub. Util. Dist. No. 1 of Snohomish County, Washington, 554 U.S. 527 (2008) , Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)...13 Permian Basin Area Rate Cases, 390 U.S. 747 (1968)...13, 23 Public Service Comm n of NY v. FERC, 866 F.2d 487 (D.C. Cir. 1989)...26 *United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956)... 2, 12, 16-18, 26 FERC ADMINISTRATIVE ORDERS Alliance Cos., 100 FERC 61,137 (2002)...23 American Electric Power Co., 49 FERC 61,377 at 62,381 (1989)...22 Midwest Indep. Transmission Sys. Operator, Inc., 109 FERC 61,168 (2004)...23 Midwest Indep. Transmission Sys. Operator, Inc., 131 FERC 61,173 (2010) Midwest Indep. Transmission Sys. Operator, Inc., 136 FERC 61,244 (2011) Southern California Edison Co., 70 FERC 61,087 (1995)...22 vii

11 USCA Case # Document # Filed: 05/28/2013 Page 11 of 47 OTHER AUTHORITIES Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000, FERC Stats. & Regs 31,323 (2011)...passim Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No A, FERC Stats. & Regs 61,132 (2012)...passim FEDERAL STATUTES Federal Power Act Section 201, 16 U.S.C Federal Power Act Section 201(b)(1), 16 U.S.C. 824(b)(1) Federal Power Act Section 203, 16 U.S.C. 824b...15 Federal Power Act Section 205, 16 U.S.C. 824d...1, 2, 4, 9-15, Federal Power Act Section 205(a), 16 U.S.C. 824d(a)...9, 25 Federal Power Act Section 205(c), 16 U.S.C. 824d(c)...9 Federal Power Act Section 206, 16 U.S.C. 824e...1, 2, 4, 9-10, 13-16, 26 Federal Power Act Section 206(a), 16 U.S.C. 824e(a) , 26 viii

12 USCA Case # Document # Filed: 05/28/2013 Page 12 of 47 GLOSSARY ALJ Commission EPA FERC FPA FPC Administrative Law Judge Federal Energy Regulatory Commission Environmental Protection Agency Federal Energy Regulatory Commission Federal Power Act Federal Power Commission LPPC Large Public Power Council. LPPC s members include Austin Energy, Chelan County Public Utility District No. 1, Clark Public Utilities, Colorado Springs Utilities, CPS Energy (San Antonio), ElectriCities of North Carolina, Grant County Public Utility District, IID Energy (Imperial Irrigation District), JEA (Jacksonville, FL), Long Island Power Authority, Los Angeles Department of Water and Power, Lower Colorado River Authority, MEAG Power, Nebraska Public Power District, New York Power Authority, Omaha Public Power District, Orlando Utilities Commission, Platte River Power Authority, Puerto Rico Electric Power Authority, Sacramento Municipal Utility District, Salt River Project, Santee Cooper, Seattle City Light, Snohomish County Public Utility District No. 1, and Tacoma Public Utilities. MISO NRECA NGA SECA Midwest Independent Transmission System Operator National Rural Electric Cooperative Association Natural Gas Act Seams Elimination Charge/Cost Adjustment/Assignment ix

13 USCA Case # Document # Filed: 05/28/2013 Page 13 of 47 STATEMENT OF JURISDICTION The Statement of Jurisdiction is provided in the Joint Statement Brief. STATEMENT OF ISSUE Under sections 205 and 206 of the Federal Power Act ( FPA ), 16 U.S.C. 824d, 824e, the Federal Energy Regulatory Commission ( FERC or the Commission ) is authorized to regulate the rates, terms and conditions of interstate transmission and wholesale services provided by public utilities to their customers under voluntary commercial relationships. The issue is whether FERC exceeded its authority in mandating that the costs of new transmission projects be allocated to beneficiaries of the project, regardless of whether those entities have requested or received transmission service from the transmission provider. STATUTORY ADDENDUM Pertinent statutes are reproduced in an addendum to the Joint Statement Brief. STATEMENT OF CASE The Statement of Case is provided in the Joint Statement Brief. STATEMENT OF FACTS The Statement of Facts is provided in the Joint Statement Brief. 1

14 USCA Case # Document # Filed: 05/28/2013 Page 14 of 47 SUMMARY OF ARGUMENT FERC has acted outside its statutory authority, governing Supreme Court precedent and its own case law in promulgating Order Nos and 1000-A (together, Orders ) by providing transmission developers with a mechanism to secure funding for their projects on a socialized basis, from entities with whom they have no business relationship and to whom they do not provide service. FERC s view that it has statutory authority supporting this action is contradicted by the plain language of FPA sections 205 and 206, 16 U.S.C. 824d, 824e, and by foundational precedent holding that a utility s right to cost recovery i.e., to charge rates in connection with the provision of transmission service in interstate commerce is established by contracts and voluntary commercial arrangements, not by FERC acting ostensibly under the FPA. United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956) ( Mobile ) and FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956) ( Sierra ) (together, Mobile- Sierra ). The FPA does not authorize FERC to mandate a broad assessment of charges by a transmission provider in essence a tax to entities that are not in a contractual or customer relationship with, or taking transmission service from, that provider. Certainly it does not allow an entity to charge entities in other regions where it clearly is not a service provider. 2

15 USCA Case # Document # Filed: 05/28/2013 Page 15 of 47 All prior FERC precedent related to the allocation of costs, by the agency s own admission, Order No A at P 561, JA, pertains only to the allocation of a utility s costs to its own customers, and FERC previously has held that it cannot require entities that take no transmission service from the transmission provider to pay the costs of the provider s facilities. The Orders arbitrarily depart from this authority without reasoned explanation. FERC asserts that its jurisdiction is clearly broad enough to allow it to ensure that all beneficiaries of services provided by specific transmission facilities bear the costs of those benefits regardless of their contractual relationship with the owner or operator of those transmission facilities. Order No at P 531, JA. Rather than contractual relationships, it claims, the benefits received by users of the regional transmission grid provide a basis for how costs should be allocated. Order No A at P 565, JA. Confusing the scope of its jurisdiction with its authority under the FPA, FERC unlawfully leaps to the conclusion that any entity that purportedly benefits from the existence of a transmission facility may be assigned cost responsibility associated with the development of the transmission facility. But the FPA gives FERC only the limited authority to regulate the terms of transmission service provided by jurisdictional utilities to their customers under voluntary commercial arrangements devised, in the first instance, between the parties involved. 3

16 USCA Case # Document # Filed: 05/28/2013 Page 16 of 47 Public utilities have the exclusive right to devise or change their rates and tariffs, subject to the obligation to file them with FERC and to FERC s subsequent evaluation for reasonableness under sections 205 and 206. FERC has no authority to direct public utilities to implement a cost allocation mechanism providing a source of funding for transmission developers which have not yet made a rate filing with FERC. To the detriment of end users asked to foot the bill, the Orders confuse FERC's oversight function with the role the FPA reserves for regulated utilities to file rates for Commission review. FERC concedes that it cannot force unwilling customers to pay for additional service or mandate the use of a single region-wide joint transmission rate, but argues that the absence of that authority is irrelevant because the Orders do not address cost recovery. The ostensible distinction between the creation of a payment obligation and the mechanics of how those obligations will be paid is without a difference. In fact, the Orders further hold that the tariff filings FERC directs public utilities to make will establish a legal right to the collection of costs to be incurred by transmission developers chosen in the course of FERC-directed regional planning processes, whether or not the entities from whom costs are recovered are connected to or receive transmission service from the providers building the facilities. Order No A at P 615, JA. That holding underscores the fact that the core issue presented here whether FERC has 4

17 USCA Case # Document # Filed: 05/28/2013 Page 17 of 47 exceeded its authority by mandating the allocation of transmission costs even in the absence of a commercial relationship between transmission developers and the entities paying the costs is unaffected by FERC's ostensible reservation for another day of a decision regarding the mechanics of cost recovery. STANDING The Statement of Standing is provided in the Joint Statement Brief. ARGUMENT 1 I. FERC Has No Authority To Compel Non-Customers to Fund Transmission Developers Project Costs. 2 A. FERC's Cost Allocation Mandate Directs Utilities To Implement Tariffs Assessing Costs to Entities to Whom They Do Not Necessarily Provide Transmission Service. Central to Petitioners' challenge, the Orders provide that the costs of new regional and interregional transmission projects that are chosen in the course of FERC-directed planning processes may be allocated to beneficiaries of those projects, whether or not the entities to whom costs are allocated choose to take transmission service from, or have a customer or contractual relationship with, the 1 The standard of review is described in the Joint Statement Brief. 2 New York Independent System Operator, Inc. and New York Transmission Owners join in this brief solely in support of the argument that FERC does not have authority under FPA section 205 to accept filings that would allocate costs of transmission facilities to entities that do not have a customer or contractual relationship with the developer of such facilities, or to dictate inclusion of a tariff mechanism that allocates costs in the absence of such a relationship. 5

18 USCA Case # Document # Filed: 05/28/2013 Page 18 of 47 associated transmission developers. Indeed, FERC s claimed authority would even extend to approval of charges by an entity in one region to non-customers in other regions where the entity is undeniably not a service provider and has no preexisting tariff. FERC states that it may determine that an entity is a beneficiary of a transmission facility even if it has not entered a voluntary arrangement with the public utility transmission provider that is seeking to recover the costs of that transmission facility. Order No at P 505, JA. FERC rejected the argument that it lacks authority to require allocation of transmission cost to beneficiaries that do not have a contractual or formalized customer relationship with the entity that is collecting the costs. Id. at PP 530, JA -. FERC reasons that [r]ather than contractual relationships, the benefits received by users of the regional transmission grid provide a basis for how costs should be allocated. Order No A at P 565, JA. Further, FERC prohibits the use of voluntary contractual arrangements in the form of "participant funding from serving as an acceptable method for regional or interregional cost allocation. Order No at P 723, JA. Participant funding is defined by FERC as a cost allocation method in which the costs of a new transmission facility are allocated only to entities that volunteer to bear those costs. Id. at P 715, JA. With that, FERC specifically prohibits a region s public utilities from agreeing to allocate the cost of regional transmission 6

19 USCA Case # Document # Filed: 05/28/2013 Page 19 of 47 development only to those entities choosing to use the new facilities. FERC theorizes that this prohibition is needed in order to avoid a perceived free rider problem, resulting from the incentive of any individual beneficiary to defer investment in the hopes that other beneficiaries will value a transmission project enough to fund its development. Order No A at P 726, JA. Yet FERC declined to define or provide parameters for the calculation of benefits under the Orders, and retains the right to impose a definition at a later date. Order No A at PP 625, 674, JA,. To take the simplest example of the application of the allocation rule, where a transmission provider participates in a regional transmission planning group and another transmission provider within the region (which may be physically remote) successfully proposes that a new transmission project be included in the regional plan for cost allocation purposes, the first provider would be subject to sharing the costs of the new facility if it is determined to receive some benefit from the proposed transmission project. This would be so even if it had no usage rights on the facility, as long as it is determined to enjoy benefits (yet to be defined) from the existence of the new facility. If FERC accepted this regional cost-allocation method, a utility that is allocated a portion of the costs of the facility would be unable to argue that because it scheduled no service over the facility and itself saw no benefit it should pay none of the facility s costs. 7

20 USCA Case # Document # Filed: 05/28/2013 Page 20 of 47 FERC asserts that the authority to collect transmission development costs can be given to a transmission developer by virtue of a FERC-approved tariff, even if the entity to whom costs are allocated is not a transmission customer of, and therefore does not have a contractual or service relationship with, the transmission developer. The obligation under the FPA to pay costs allocated under a regional or interregional cost allocation method is imposed by a Commission-approved tariff. Order No A at P 568, JA ; see also Order No A at P 615, JA. This involuntary cost contribution applies both to facilities designated in regional planning processes and to interregional facilities. Order No at P 582, JA ; Order No A at P 579, JA. Further, FERC's legal construct would permit tariff filings for recovery of the costs of facilities planned in one region from entities in another, again even in the absence of a customer or contractual relationship. 3 B. FERC Lacks Authority Under the FPA To Order Unilaterally A Funding Mechanism for Transmission Providers Where No Underlying Commercial Relationship Exists. Neither FPA section 205 nor section 206 authorizes FERC to establish a public utility s commercial right to collect rates for service. FERC is authorized to 3 See Order 1000-A at P 557, JA (indicating that for policy reasons FERC has decided not go so far as to compel the allocation of costs interregionally without the agreement of the related regions). 8

21 USCA Case # Document # Filed: 05/28/2013 Page 21 of 47 accept filed rates for transmission service, and to review and modify them, but a public utility s fundamental right to charge and collect rates filed with FERC rests on the commercial relationships between the public utility and the customers receiving service. This principle follows directly from the language of the statute itself. FPA section 205(a) specifies that [a]ll rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission shall be just and reasonable. 18 U.S.C. 824d(a). Section 205(c) requires a public utility to file a schedule showing all such rates and charges, and the classification, practices, and regulations affecting such rates and charges, together with all contracts which in any manner affect or relate to such rates, charges, classifications, and services. Id. 824d(c). A public utility may not change its rate schedules without advance notice to FERC and the public. Id. 824(d). FPA section 206(a) similarly provides that when FERC finds that any rate collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order. 9

22 USCA Case # Document # Filed: 05/28/2013 Page 22 of 47 These provisions authorize FERC to review public utility rates (and closely related practices) and to change them if they are unlawful. They do not vest FERC with the authority to establish a utility s right to compensation in the first instance, to collect charges, or to require utilities to establish a mechanism to charge non-customers; these are private commercial matters outside FERC s authority. Consistent with this fundamental precept, the plain language of FPA sections 205 and 206 applies only to transmission service to transmission customers. FPA sections 205 and 206 refer to rates made, demanded, received, observed, charged, or collected for the transmission of electric energy subject to the jurisdiction of the Commission. The sections make no logical sense outside the context of charges for transmission service rendered, as case law bears out. The purpose of the antidiscrimination provisions of section 206, for example, is to prevent discrimination among a [utility s] customers. FPC v. Louisiana Power & Light Co., 406 U.S. 621, 646 (1972). [A]ll approved rates [must] reflect to some degree the costs actually caused by the customer who must pay them. Illinois Commerce Commission v. FERC, 576 F.3d 470, 476 (7th Cir. 2009) (emphasis added) ( Illinois Commerce Commission ). That an entity might indirectly benefit from the existence of a transmission facility located 10

23 USCA Case # Document # Filed: 05/28/2013 Page 23 of 47 somewhere in its planning region gives the owner of the facility no authority to charge that entity unless it is actually receiving a transmission service from, and has a customer or contractual relationship with, the provider. FERC fails to point to any provision of the FPA that empowers it to require a public utility to charge non-customers, or indeed to accept such filings if made under FPA section 205. Instead, FERC asserts that the statute does not expressly forbid it to do what it now desires: Neither section 205 nor section 206 of the FPA state or imply that an agreement is a precondition for any transmission charges. [N]othing in these sections precludes flows of funds to public utility transmission providers through mechanisms other than agreements between the service provider and the beneficiaries of those transmission facilities. Order No at P 533 at JA (emphasis added); Order No A at P 570, JA. FERC s assertion turns the law on its head. As a creature of statute, FERC has only those authorities conferred upon it by Congress. Atlantic City Elec. Co. v. FERC, 295 F.3d 1, 8 (D.C. Cir. 2002) ( Atlantic City ). The FPA does not confer upon FERC the authority to establish a public utility s right to obtain cost recovery from a person in the absence of a commercial relationship between the utility and a customer. FERC cannot infer authority from the fact that it is not expressly denied. 11

24 USCA Case # Document # Filed: 05/28/2013 Page 24 of 47 The Supreme Court long ago held that the Federal Power Commission ( FPC ), FERC s predecessor, had the authority under the FPA and the similar provisions of the Natural Gas Act ( NGA ) to review filed rates, but not to establish a filing utility s right to collect them in the first instance. Mobile, 350 U.S. at 341, 347; Sierra, 350 U.S. at 353. Describing the FPC s rate review authority under the NGA provisions analogous to sections 205 and 206 of the FPA, 4 the Court in Mobile commented that [i]t is simply the power to review rates and contracts made in the first instance by natural gas companies and, if they are determined to be unlawful, to remedy them. Mobile, 350 U.S. at 341. Further, the Court held that the NGA provides only for notice to FERC of the rates established by natural gas companies and for review by FERC of those rates. If the purported change is one the natural gas company has the power to make [a matter not left to FERC], the change is completed upon compliance with the notice requirement and subject to FERC s review. Id. at 342. The Supreme Court reiterated this basic precept in Morgan Stanley Capital Group, Inc. v. Pub. Util. Dist. No. 1 of Snohomish County, Washington, 554 U.S. 527, 562 n.2 (2008) ( Morgan Stanley ), holding that the regulatory system created by the [FPA] is premised on contractual agreements voluntarily devised by 4 Sections 4 and 5 of the NGA and sections 205 and 206 of the FPA are in all material respects substantially identical with respect to rate matters. Sierra, 350 U.S. at

25 USCA Case # Document # Filed: 05/28/2013 Page 25 of 47 the regulated companies (quoting Permian Basin Area Rate Cases, 390 U.S. 747, 822 (1968) ( Permian Basin ); see also Otter Tail Power Co. v. United States, 410 U.S. 366, 374 (1973) ( Congress rejected a pervasive regulatory scheme for controlling the interstate distribution of power in favor of voluntary commercial relationships. ). Similarly, this Court has held that FERC plays an essentially passive and reactive role under section 205. City of Winnfield v. FERC, 744 F.2d 871, 876 (D.C. Cir. 1984) ( City of Winnfield ); see also Atlantic City Electric Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002) (quoting City of Winnfield). Accordingly, FERC is powerless under FPA sections 205 and 206 to require entities that have no contractual or commercial relationship with a transmission developer to pay for the developer s project costs, or to accept tariff filings from transmission developers purporting to secure funding from entities to whom they do not provide transmission service and with whom they have no commercially enforceable agreement. FERC itself acknowledges that the FPA does not authorize it to compel customers to accept or pay for new services, Order No at P 541, JA (citing Exxon Mobil Corp. v. FERC, 430 F.3d 1166, (D.C. Cir. 2005)). FERC distinguishes that authority on the ground that the requirements of [Order No. 1000] with respect to cost allocation do not impose any new service on beneficiaries. Id. Yet, the fact that the statute does not authorize FERC to require 13

26 USCA Case # Document # Filed: 05/28/2013 Page 26 of 47 an entity to take a new service makes it plain, a fortiori, that the agency lacks the authority it now claims to compel persons to fund the development of facilities by entities from which no service is taken. The reach of FERC s position is underscored by the fact that it is not limited even to the allocation of costs within regions, but would justify the allocation of costs interregionally by entities providing no service at all in the region called upon to fund a project. In an effort to sidestep the limitations in FPA sections 205 and 206, FERC asserts that its jurisdiction under FPA section 201(b)(1), 16 U.S.C. 824(b)(1), over the transmission of electric energy in interstate commerce is sufficiently broad to authorize it to provide for cost recovery by transmission developers from entities with which the developers have no contractual relationship. Order No at P 532, JA. FERC says that its jurisdiction therefore extends to the rates, terms and conditions of transmission service, rather than merely transactions for such transmission service. Id. Reciting its jurisdiction over all facilities for the transmission of electric energy under FPA section 201(b)(1), FERC concludes that it therefore has jurisdiction over the use of these transmission facilities in the provision of transmission service, which includes consideration of the benefits that any beneficiaries derive from those transmission facilities regardless of the specific contractual relationship that the beneficiaries may have with the owner or operator of these transmission facilities. Id. 14

27 USCA Case # Document # Filed: 05/28/2013 Page 27 of 47 Yet, as Petitioners commented on rehearing (JA ), FERC is fundamentally mistaken in its view that FPA section 201(b)(1) s grant of jurisdiction is a source of substantive authority. If FERC were right, the substantive sections of the FPA (e.g., sections 205 and 206, establishing rate authority, or section 203, establishing the authority over transfers of facilities) would function as mere suggestions for agency action, instead of defining its substantive authority. FERC denied on rehearing that it has made this fatal error. Order No A at P 577, JA ( The Commission has not confused the FPA s expression of jurisdiction in section 201 with a grant of substantive authority. ). Yet, on rehearing, FERC continues to rely on its generalized jurisdictional theme in response to Petitioners showing that a commercial relationship is a condition precedent to the allocation of costs. Order No A cites Connecticut Light & Power v. FPC, 324 U.S. 515 (1945) ( CL&P ) for the proposition that its jurisdiction must follow the flow of electric energy, an engineering and scientific, rather than a legalistic or governmental test. Order No A at P 563, JA. According to FERC, petitioners are advocating a legalistic test for assessing the scope of the Commission s jurisdiction that is inconsistent with the Supreme Court s interpretation of the FPA in [CL&P]. Id. at P 564, JA. The Commission misses the point. 15

28 USCA Case # Document # Filed: 05/28/2013 Page 28 of 47 Contrary to FERC s view, the scope of its jurisdiction does not define its substantive authority. Jurisdictional provisions in the FPA simply describe the set of facilities that may be affected by FERC actions taken pursuant to other provisions of the FPA that define FERC s substantive authority. Far from advocating a legalistic test, or, as FERC also puts it, ignoring substance in favor of form, Order No at P 537 n.427, JA, Petitioners ask only that FERC act within its statutorily defined authority. Signaling a retreat, FERC asserts in Order No A that the Orders are issued under section 206 of the FPA, pursuant to which it claims to have the authority to establish requirements regarding transmission planning and cost allocation which are practices affecting rates. Order No A at P 577, JA. Yet this tack is likewise unavailing. As discussed above, FERC cannot skirt the fact that FPA section 206 does not authorize it to create a utility s right to recover costs in the absence of an existing commercial relationship between a transmission provider and a transmission service customer. A factually supported finding that existing cost allocation methodologies result in unjust and unreasonable rates (if indeed, there were factual support for that finding) may authorize FERC to change existing rates. But it does not permit FERC to upset the fundamental balance of authority evident on the face of the statute itself, as articulated in Mobile-Sierra and Morgan Stanley. Section 206 simply provides the 16

29 USCA Case # Document # Filed: 05/28/2013 Page 29 of 47 power to remedy unlawful rates already on file; it does not create a right to recover costs. FERC argues that the cost allocation provisions of Order No do not alter any existing contract provisions governing the use of existing transmission facilities and, therefore, are not inconsistent with the Mobile-Sierra doctrine regarding revision of contracts. Order No A at P 572, JA. Addressing Morgan Stanley, FERC states that it does not read the importance that the Supreme Court ascribes to voluntary contracts to imply that entities that use the transmission grid are entitled to structure their contractual arrangements so that they are shielded from paying costs that are roughly commensurate with benefits that they receive. In any event, Morgan Stanley never stated that, by refusing to sign a contract, an entity benefiting from another s improvement of the regional transmission grid can limit its obligation to something less than an obligation to pay for all benefits that it receives. Id. at P 567, JA. These distinctions are without merit. The core principle underlying Mobile- Sierra and Morgan Stanley is that a utility s right to secure cost recovery to establish its rates and charges for service is not conferred by FERC or the FPA; it springs from the parties consensual business relationship, which requires a customer s agreement to take service. Contrary to FERC s assertion, this principle applies regardless of whether FERC has altered existing contracts, or whether 17

30 USCA Case # Document # Filed: 05/28/2013 Page 30 of 47 public utilities can shield themselves by contract from legitimate charges. Mobile- Sierra and Morgan Stanley do not read so narrowly as FERC would hope. Further, FERC s dismissive reference to the importance that the Supreme Court ascribes to voluntary contracts belies the Court s words. Order No A at P 567, JA. The Court did not simply say that contracts matter; it reiterated the fundamental precept that the FPA is premised on contractual agreements that are voluntarily devised. Morgan Stanley, 554 U.S. at 533. This premise a direct function of the fact that the statute provides FERC only with the authority to review (and accept, modify or reject) rates and practices filed for its approval plainly limits FERC s authority to authorize the allocation of costs in the absence of a commercially enforceable relationship. Tellingly, in Order No. 1000, FERC dismisses the argument that its authority is, in all cases, based on the premise that a utility has a contractual relationship to provide service to its customers, with the assertion that section 205 does not specify any such limitation and no commenter has shown where it is expressed elsewhere in the FPA. Order No at P 530, JA. But, again, FERC answers the wrong question. The issue is not what the statute forbids, but 18

31 USCA Case # Document # Filed: 05/28/2013 Page 31 of 47 what it authorizes FERC to do; the authority FERC claims simply is not there, as the Supreme Court has held. 5 Nor can FERC circumvent the statutory framework by appealing to the perceived need to solve what it describes as the free rider problem. FERC describes its concern this way: Given the nature of transmission operations, it is possible that an entity that uses part of the transmission grid will obtain benefits from transmission facility enlargements and improvements in another part of that grid regardless of whether they have a contract for service on that part of the grid and regardless of whether they pay for those benefits. This is the essence of the free rider problem the Commission is seeking to address through its cost allocation reforms. Order No A at P 562, JA (citations omitted). Even if the problem FERC postulates were real (there is no record evidence offered for it, much less its significance), and even if there were no countervailing policy considerations, 6 it does not enable FERC to ignore the limits on its statutory 5 FERC's further assertion, Order No A at P 567, JA, that Morgan Stanley never stated that, by refusing to sign a contract, an entity benefiting from another s improvement of the regional transmission grid can limit its obligation to pay for all benefits that it receives is an exercise in flawed logic. That issue was not before the Court. Of course, there are many things the Court in Morgan Stanley did not say involving issues not presented. In any event, the issue here does not involve the refusal to sign a contract, but rather FERC's view that a utility may impose costs on entities regardless of whether or not they choose to take service and enter into a commercial relationship establishing the utility's right to recover costs. 6 In fact, some Petitioners argued below that the broad socialization of costs, ostensibly for the public good, without regard to actual usage of the relevant 19

32 USCA Case # Document # Filed: 05/28/2013 Page 32 of 47 authority and to bestow upon itself the power to create commercial obligations out of whole cloth. As this Court held in Mobil Oil Corp. v. FPC, 483 F.2d 1238, 1248 (D.C. Cir. 1973), Congress did not give the FPC carte blanche to take whatever action it might consider appropriate in furtherance of the objectives of the Act. (quoting Mobil Oil Corp. v. FPC, 463 F.2d 256, 263 (D.C. Cir. 1972)); see also, La. Pub. Serv. Comm n v. FCC, 476 U.S. 355, 374 (1986) ( [W]e simply cannot accept an argument that the FCC may nevertheless take action which it thinks will best effectuate a federal policy. An agency may not confer power upon itself. ). Moreover, the fact that FERC has left the definition of benefits entirely open-ended calls into question how, at this stage, FERC can even posit the existence of free-riders who obtain such benefits without paying commensurately for them. FERC is also wrong to rely on Illinois Commerce Commission, for the broad proposition that it is authorized to allocate costs broadly to entities identified as beneficiaries under the Orders. Order No at P 537, JA ; Order No A at PP 528, 565, JA -. FERC can only implement its vision of public policy within the confines of the FPA. The court in Illinois Commerce Commission itself refers to the allocation of costs to customers, consistent with the facilities, would lead to inefficient construction and risk substantial stranded costs. JA. 20

33 USCA Case # Document # Filed: 05/28/2013 Page 33 of 47 statutory framework, and the decision, of course, only pertains to the allocation of costs by a transmission provider to its customers. In a final attempt to side-step the limits on its statutory authority, FERC contends that it is in fact addressing a voluntary relationship: The obligation under the FPA to pay costs allocated under a regional or interregional cost allocation method is imposed by a Commissionapproved tariff concerning the charges made by a public utility transmission provider for the use of the public utility transmission provider s facility. Such use is voluntary, and it does not become less so because it is determined in part by immutable laws of physics. Voluntary use therefore also entails voluntary acceptance of the terms and conditions of use set forth in the tariff, including an applicable cost allocation. Order No A at P 568, JA. This argument is flawed for several reasons. First, requiring utilities to file tariffs under which they must pay the costs of facilities they did not request to use is not a voluntary transaction. FERC cannot, through the imposition of tariff revisions upon jurisdictional utilities, establish an obligation to pay transmission developers for facilities the utility chooses not to use and then claim the transaction is voluntary. Second, FERC itself has acknowledged that it has no authority to require an existing transmission customer to accept a new transmission service it has not requested. Order No at P 541, JA (citing Exxon Mobil Corp., 430 F.3d 21

34 USCA Case # Document # Filed: 05/28/2013 Page 34 of , (D.C. Cir. 2005)). FERC s mandated tariff filing does not alter that proposition. Moreover, accepting FERC s rationale, a transmission provider could secure funding for a facility no one had requested, if FERC determined, under the immutable laws of physics, that some power would flow over that facility to ostensible users, wherever located. Under the immutable laws of physics, e.g., some tiny portion of power generated in the Midwest is ultimately consumed in Florida. FPC v. Florida Power & Light Co., 404 U.S. 453, (1972). But, FERC itself has explained that [i]nadvertent or unauthorized power flows are an unavoidable consequence of interconnected utility operations, American Electric Power Co., 49 FERC 61,377 at 62,381 (1989), and has consistently rejected unilateral attempts to impose charges on non-customers in such instances. Id.; Southern California Edison Co., 70 FERC 61,087 (1995). The notion that entities in Florida are receiving a transmission service from utilities in the Midwest, much less voluntarily choosing to do so, strains credulity, turning the statutory scheme of voluntary commercial relationships on its head. C. FERC Concedes That There is No Precedent for Allocating Costs to Non-Customers and Fails To Provide a Reasoned Explanation Reconciling its Own Contrary Decisions. FERC concedes that none of the precedent it cites contemplated cost allocation by transmission providers to entities who have not agreed to take 22

35 USCA Case # Document # Filed: 05/28/2013 Page 35 of 47 transmission service. FERC states: [t]he fact that the Commission has supported parts of its argument through reference to cases in which privity of contract existed between public utilities and the entities from which costs were recovered does not affect this conclusion [that FPA section 201 is sufficient to support the Orders]. Order No at P 540, JA (citing at n. 429 Midwest Indep. Transmission Sys. Operator, Inc., 109 FERC 61,168 (2004) and Alliance Cos., 100 FERC 61,137 (2002)). Similarly, in Order No A, FERC says that it appreciates that these prior decisions related to transmission rates for a single public utility transmission provider s facilities. Order No A at P 561, JA. Consistent with Permian Basin, FERC precedent has long recognized that its rate-related authority under the FPA requires the existence of contractual or voluntary commercial relationships between a utility and those charged for jurisdictional services. FERC has rejected rate filings that contravene this basic principle, from which the Orders diverge. FERC recently required a contractual relationship in Midwest Indep. Transmission Sys. Operator, Inc., 131 FERC 61,173 (2010) ( Green Mountain ), order on reh g, 136 FERC 61,244 (2011). There, FERC reversed an ALJ s holding that the Midwest Independent Transmission System Operator ( MISO ) could collect Seams Elimination Charge/Cost Adjustment/Assignment ( SECA ) transmission-related charges from a retail load-serving entity (Green Mountain) that was not a MISO transmission 23

36 USCA Case # Document # Filed: 05/28/2013 Page 36 of 47 customer or market participant. MISO s theory for such recovery was that Green Mountain benefited from the transmission service that MISO provided to Green Mountain s affiliate, BP Energy, which acted as an intermediary for Green Mountain. FERC overturned the ALJ s decision because there was no contractual relationship between MISO and Green Mountain. Green Mountain, 131 FERC 61,173 at P 421. Instead, FERC found BP Energy was properly responsible for [the] SECA charges because BP was the entity that took transmission service. Id., 131 FERC 61,173 at P 424. On rehearing, FERC stated that it disagreed with the [ALJ s] finding that, even though Green Mountain did not directly contract with [MISO], Green Mountain was ultimately responsible for transmission charges, since the procurement of network transmission service was for the benefit of Green Mountain and was its financial responsibility. Midwest Indep. Transmission Sys. Operator, Inc., 136 FERC 61,244 at P 204 (emphasis added). In Order No A, FERC attempted to distinguish Green Mountain by arguing that it turned solely on the requirements of the MISO tariff. Order No A at P 582. FERC s reasoning in Green Mountain, however, was broader. In Green Mountain, MISO had attempted to charge Green Mountain based on the fact that Green Mountain s ability to serve its retail loads was dependent on transmission service provided by the MISO. The Green Mountain orders rejected 24