Northeast Center v. FERC
Case Date: 02/08/2000
Court: United States Court of Appeals
Docket No: 98-1847
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For the First Circuit No. 98-1847 No. 98-1876 No. 98-2072 TOWN OF NORWOOD, MASSACHUSETTS, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. ____________________ No. 98-2198 No. 98-2199 NORTHEAST CENTER FOR SOCIAL ISSUES STUDIES Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. ____________________ ON PETITIONS FOR REVIEW OF ORDERS OF THE FEDERAL REGULATORY COMMISSION Before Boudin, Stahl and Lipez, Circuit Judges. Charles F. Wheatley, Jr. with whom Wheatley & Ranquist, Kenneth M. Barna, Alan K. Posner and Rubin & Rudman were on consolidated brief for petitioner Town of Norwood, Massachusetts. Richard Roos-Collins, Natural Heritage Institute, for petitioner Northeast Center for Social Issue Studies. Larry D. Gasteiger with whom Douglas W. Smith, General Counsel, Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solicitor, Federal Energy Regulatory Commission, were on consolidated brief for respondent. Edward Berlin with whom Robert V. Zener, Swidler Berlin Shereff Friedman, LLP, William J. Madden, John A. Whittaker and Winston & Strawn were on brief for intervenor New England Power Company. Zori G. Ferkin with whom Earle H. O'Donnell, Andrew B. Young, Donald W. Stever and Dewey Ballantine LLP were on brief for intervenor USGen New England, Inc. February 2, 2000 BOUDIN, Circuit Judge. In this case, the Town of Norwood, Massachusetts ("Norwood") and the Northeast Center for Social Issue Studies ("Northeast Center") seek review of a series of orders of the Federal Energy Regulatory Commission ("FERC") directed inter alia to New England Power Company ("New England Power"), which engages in interstate wholesale electric power distribution in New England. In a companion decision, Town of Norwood v. New England Power Company, No. 99-1047, we decide today a separate appeal by Norwood from the dismissal of an antitrust and breach of contract suit that it brought in the district court against New England Power and others. I. THE HISTORY Our history of this case is drawn primarily from the administrative record. For many years New England Power served as one of the major wholesalers of electric power in New England. It operates a high voltage transmission network, and in the past has owned and operated a number of generating plants, including hydroelectric, fossil, and nuclear. New England Power is a subsidiary of New England Electric System, which also owns four "retail" distribution companies, including Massachusetts Electric Company ("Mass Electric") serving Massachusetts, and Narragansett Electric Company ("Narragansett") serving Rhode Island. New England Power sells wholesale power that it generates or buys from others both to affiliates like Mass Electric and to non-affiliated wholesale customers like Norwood, which operates its own municipal electric system serving businesses and residents in the Town of Norwood, Massachusetts. In general, wholesale sales in interstate commerce are subject to regulation by FERC under the Federal Power Act, 16 U.S.C. 791a-828c, see 16 U.S.C. 824(a), while retail rates (e.g., those charged by Mass Electric to its business and residential customers) are subject to state regulation, e.g., Mass. Gen. Laws ch. 164, 93-94E; see also Boston Edison Co. v. City of Boston, 459 N.E.2d 1231, 1233 (Mass. 1984). Traditionally, at both the federal and state level, electricity sales have been regulated on the familiar public utility model: the rates have been set forth in filed tariffs, unreasonable or unduly discriminatory rates have been forbidden, and an administrative agency has been charged with overseeing rates and other related subjects (such as extension of lines, mergers, and the like). See generally Town of Concord v. Boston Edison Co., 915 F.2d 17, 20 (1990), cert. denied, 499 U.S. 931 (1991). In many cases, as with New England Power, the suppliers are vertically integrated and are engaged in electricity generation, intercity transmission, and local distribution. See id. at 19. As with other, once fully regulated industries, legislators and regulators have over the last 25 years sought to introduce a greater measure of competition into the electric power industry. In the case of electric power, this has been achieved not by encouraging duplication of intercity transmission or local distribution networks--as is occurring in the telephone industry-- but primarily by regulatory changes. These include imposing obligations on facilities' owners to carry power for other suppliers ("wheeling"), encouraging customers to choose among competing suppliers, and discouraging anticompetitive practices by a variety of means, including restructuring so as to reduce the incentives for anticompetitive behavior. See generally Energy Information Administration, U.S. Dep't of Energy, The Changing Structure of the Electric Power Industry: Selected Issues, 1998, DOE/EIA-0562(98) (1998). Both Massachusetts and Rhode Island have been seeking to foster retail competition in the supply of electricity. To this end, in December 1996, New England Power filed with FERC proposed amendments to power sales agreements with Mass Electric and Narragansett. Prior to the filing, requirements contracts obligated New England Power to supply its affiliates with all of their needs for electric power; the wholesale rates were specified in tariff schedules and termination by either side required lengthy prior notice (e.g. seven years). The proposed amendments permitted the affiliates to terminate on short notice, but subject to paying as a termination charge a portion of the costs incurred by New England Power in preparing itself to meet their projected longer-term requirements. FERC referred the new filings to an administrative law judge, New England Power Co., 78 F.E.R.C. 61,080 (1997), under whose auspices settlement discussions occurred. See New England Power Co., 80 F.E.R.C. 63,003 (1997). In May 1997, New England Power filed proposed settlement agreements, which again permitted early termination for its affiliates (subject to termination charges), and provided that after termination New England Power would provide Mass Electric and Narragansett (at their option) with new "wholesale standard offer rates" which are described below. The settlement also committed New England Power to file a plan with FERC, by October 1, 1997, to divest itself of most of its generation business. Both of these steps, more fully described below, were purportedly designed to foster competition. On October 1, 1997, New England Power sought approval from FERC to sell practically all of its non-nuclear electrical generating plants to USGen New England, Inc. ("USGenNE"), a subsidiary of a major west coast public utility holding company ("PG&E"). The sale required FERC approval both for the sale of certain facilities and the transfer of hydroelectric licenses. 16 U.S.C. 801, 824b. In connection with its proposed purchase of assets, USGenNE agreed to assume responsibility for providing wholesale standard offer service to Mass Electric and Narragansett, and New England Power proposed to implement a rate freeze that would prevent increases in rates for its remaining wholesale customers, including Norwood. Since 1983, Norwood has purchased electricity at wholesale from New England Power and resold it to local businesses and residential customers. Its agreement with New England Power, as extended by Norwood, obligated Norwood to take its requirements from New England Power through October 31, 2008. Regarding the wholesale standard offer rates proposed for New England Power affiliates as an unfair advantage to retail "competitors," Norwood notified New England Power on March 4, 1998, that it was switching to a different wholesale supplier. Norwood has now become a wholesale customer of Northeast Utilities, another major supplier of wholesale electricity in New England. New England Power countered on March 18, 1998, by filing a proposed tariff revision that would permit its remaining wholesale customers to terminate their long-term requirements contracts on 30 days' notice. But the tariff purported to subject such customers to payment of a contract termination charge to permit New England Power to recover the revenues that it would have collected had the customers continued to pay the fixed tariff rate through the contract term, less the expected costs avoided by not providing service. New England Power subsequently billed Norwood for a portion of this termination charge but Norwood apparently has declined to pay. In the proceedings before FERC, Norwood objected to each of the three measures proposed by New England Power: (1) its proposed settlement with its affiliates to terminate their requirements contracts and to provide them the option of wholesale standard offer rate service; (2) its proposed divestiture of generating facilities to USGenNE and the associated freeze on the wholesale rates New England Power charged to its unaffiliated wholesale customers; and (3) its March 1998 tariff amendments allowing unaffiliated wholesale customers like Norwood to terminate their requirements contracts on short notice but only on payment of a contract termination charge. In a set of orders in these three proceedings issued between November 1997 and June 1998, FERC rejected virtually all of Norwood's requests for relief. Among other things, FERC approved the settlement agreement; it approved the sale of non-nuclear generating facilities to USGenNE and the transfer of hydroelectric licenses to it; and it upheld New England Power's imposition of a contract termination charge on unaffiliated purchasers who sought to terminate their existing contracts prematurely. Norwood sought direct review in this court, 16 U.S.C. 825l(b), and we have consolidated its appeals into the present case. Separate petitions for review of the FERC orders were filed in this court by Northeast Center. Its petitions challenged the orders insofar as they approved the sale to USGenNE of New England Power's hydroelectric generating facilities and associated licenses. Northeast Center challenged these actions on the ground that FERC had violated the Federal Power Act by failing to consider whether the divestiture would reduce property tax revenues of adjacent communities, and that FERC had violated both that statute and environmental laws by failing to give adequate attention to the potential environmental impact of the transfers. This court consolidated these petitions for review with those of Norwood. II. DISCUSSION 1. Norwood's main attack, but not its only one, is upon FERC's approval of the contract termination charge that the New England Power tariff amendment of March 18, 1998, imposes on unaffiliated wholesale customers; this charge, as already explained, applies to a requirements contract customer who chooses to end its purchases before the end of the contract term and without the required notice. The amendment provides the customer an option to terminate at short notice but sets a specific tariff- based price on early departure. FERC is entitled to review tariff amendments governing wholesale power sales under a "just and reasonable" standard, 16 U.S.C. 824d(a); and at least on the surface the amendment serves the Commission's goal of fostering competition by giving Norwood an option to enter immediately into competitive purchasing. But Norwood argues that FERC's action is unlawful for a number of independent reasons, which we next address. First, Norwood says that the approval is inconsistent with the Commission's "stranded cost recovery" provisions adopted in FERC Order No. 888 and associated regulations. Order No. 888 imposed on investor-owned power companies a general obligation to wheel power for customers, many of whom had previously bought their power from one transmission company--normally, an integrated supplier--but now wished to use that company merely to transport power bought from another company. The order conditioned this wheeling obligation on the customers contributing to the recovery of the so-called "stranded costs" of the transporting company. Stranded costs were defined in detail by FERC formulas but the general concept was this: in providing "bundled" service (generation and transmission), power companies had made investments expecting to recover them from captive customers. The wheeling obligation imposed by Order No. 888 could permit such customers to reach cheaper power elsewhere; and in some cases this would leave the power companies with investments, especially in generation facilities, that could not be fully recovered in a competitive environment. Stranded cost recovery to protect reasonable expectations was FERC's quid pro quo for open access to competing electricity suppliers during this period of transition. The stranded cost recovery for which the orders and regulations provided was framed as an obligation of those customers who had previously been power customers of the integrated supplier but now chose to use only its transmission system. See 18 C.F.R. 35.26(b)(1), (c)(2) (1999). Norwood's first objection to the contract termination charge in this case is that although Norwood previously bought power from New England Power, it got its transmission service for such power from Boston Edison and does not intend to use New England Power transmission service in the future. Thus, says Norwood, it falls outside the scope of FERC's stranded cost regulation and the tariff is inconsistent with Order No. 888. FERC concedes that its Order No. 888 regulations do not apply in this case. But, as FERC notes, there is a separate (although parallel) justification for stranded cost recovery in the present case: Norwood as a requirements-contract customer of power furnished by New England Power is being afforded an option to switch immediately to a competing supplier, without the seven years' notice required by the contract. New England Power Co., 83 F.E.R.C. 61,174, at 61,722-23 (1998). In short, there is a different reason for similar relief; and while Order No. 888 does not mandate the new tariff, neither does it forbid it. See Order No. 888, 61 Fed. Reg. at 21662 (reserving the possibility of stranded cost recovery in other situations). Norwood also argues that Order No. 888 and FERC's regulations excluded from stranded cost recovery those cases where a requirements contract was entered into or extended after July 11, 1994. FERC's stated reason for this limitation was that on that date it first gave public notice of its stranded cost proposal; thereafter, for new contracts the supplier and purchaser could make their own arrangements for early termination, recovery, and the like. Order No. 888, 61 Fed. Reg. at 21641; see also 18 C.F.R. 35.26(b)(7), (c)(1)(ii). Norwood says that while its original contract was made prior to July 11, 1994, New England Power and Norwood agreed to changes in the agreement after that date. But the restrictions in Order No. 888 are no more than conditions on stranded cost recovery under that order and do not preclude the Commission from allowing tariffs that permit somewhat similar recovery whenever a customer purports to disregard an existing contractual obligation. Second, Norwood claims that the tariffed termination charge is nothing more than an effort to collect contract damages for early termination through the Commission's processes, and that this conflicts with FERC's practice of deferring to the courts on matters of contract and deprives Norwood of the chance to counter a contract breach claim by showing that New England Power breached the contract first. Admittedly, the stranded cost recovery in the tariff is closely akin to contract damages, and the Commission in the past has declined to adjudicate some contract disputes. E.g., Southern Cal. Edison Co., 85 F.E.R.C. 61,023 (1998). But FERC's abstention in cases like Southern California Edison appears primarily to reflect an unwillingness to resolve disputes about the meaning of disputed contract provisions. Here, the Commission has not interpreted Norwood's contract with New England Power or determined whether Norwood has breached the contract or has been freed from the contract based on a breach by New England Power. See New England Power Co., 84 F.E.R.C. 61,175, at 61,920 (1998). It has merely upheld, on a generic basis, a termination charge for those customers who are bound by existing contracts but wish to avoid their obligations. Third, Norwood claims that FERC had to reject the New England Power tariff offering customers the termination option because it conflicts with the Mobile-Sierra doctrine and the filed rate doctrine. The former, developed in cases interpreting the Federal Power Act and the Natural Gas Act, Federal Power Comm'n v. Sierra Pac. Power Co., 350 U.S. 348, 354-55 (1956); United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344 (1956), prevents FERC from overriding a contract unless it finds that the contract is contrary to the public interest. See Texaco, Inc. v. FERC, 148 F.3d 1091, 1095-97 (D.C. Cir. 1998). The doctrine protects a party's interest in its contract (unless overridden by a public interest finding). In a sense, the addition of the express option to terminate earlier (at a specified price) can be viewed as modifying the contract. But from Norwood's vantage, the option merely gives it something that it did not have before; it remained free to insist that New England Power continue to supply power under the contract until expiration. The termination charge is certainly a detriment but, absent a showing that its formula is any worse than contract damages, it merely spells out what would have been the law's remedy if Norwood had no option but simply breached the existing contract. The filed rate doctrine can--so far as relevant here--be regarded as a prohibition on retroactive increases for tariffed services. See Arkansas La. Gas Co. v. Hall, 453 U.S. 571, 577-78 (1981). Formally, the filed rate doctrine says that the only lawful rate is that reflected in the tariff on file when the service is performed, id., but the refusal to permit retroactive increases is taken as a corollary, id. at 578. Most regulatory statutes, but not all, see Federal Power Comm'n v. Sunray DX Oil Co., 391 U.S. 9, 24 (1968), permit reparations to the customer if the tariff rate is later shown to be unreasonably high, but the carrier can never collect more than the tariffed rate. Norwood is not being asked to pay more for past purchases than provided for by the tariff in effect at the time of such purchases. The tariff change, as just noted, gives Norwood an option it did not have before to cancel future purchases on short notice by paying a termination charge--hardly a retroactive increase in charges for past purchases. Norwood says that the change is retroactive because it was imposed after Norwood had ceased to make purchases under FERC Tariff No. 1, Norwood having disclaimed its existing contract and signed on with a new supplier. But the change only governed Norwood as to its future purchases--or failures to purchase--from New England Power; there was no effort to increase rates for purchases made in the past, which is the pertinent concern of the filed rate doctrine. Fourth, Norwood says that New England Power has failed to supply data to show that it is "just and reasonable" to require Norwood to pay a contract termination charge allegedly amounting to $78 million for the period from 1998 through 2008. Norwood derives this figure by projecting the termination charges from April 1, 1998, through the expiration of the extended contract which Norwood has now disavowed. The Federal Power Act requires just and reasonable rates, 16 U.S.C. 824d(a), and the regulations for rate filings generally require the filing of cost of service data for new or increased rates, 18 C.F.R. 35.12, 35.13. But the termination charge is not a new or increased rate for supplying energy. It is a formula-driven charge to cover certain projected losses to New England Power caused by not supplying electricity after preparing to do so, calculated based on rates already approved by FERC. Thus the contract termination charge in no way represents a rate increase for Norwood. If these charges were miscomputed or unsupported, Norwood might well have a legitimate objection; but it has not explained any such objection to us, let alone tried to support it with citations or figures. Before FERC, Norwood primarily urged that the contract termination charge filing be rejected in its entirety. But in a footnote in its motion to intervene, and more fully in its motion for rehearing, Norwood also sought a hearing regarding the reasonableness of the amount that New England Power sought to recover--referring, inter alia, to alleged problems with the contract termination charge calculation. FERC denied the request for rehearing, concluding that no evidentiary hearing was necessary because no party had raised a disputed issue of material fact. New England Power Co., 84 F.E.R.C. 61,175, at 61,920 (1998). To whatever extent there was in fact a disputed issue regarding the termination charge calculation that necessitated a hearing, cf. Louisiana Energy & Power Auth. v. FERC, 141 F.3d 364, 371 (D.C. Cir. 1998), Norwood does not identify it to us. FERC suggested in its initial order that Norwood could file a section 206 complaint, 16 U.S.C. 824e, challenging the substance of the contract termination charge, New England Power Co., 83 F.E.R.C. 61,174, at 61,724 (1998), and presumably it can still do so, cf. Oxy USA, Inc. v. FERC, 64 F.3d 679, 690 (D.C. Cir. 1995). Fifth, Norwood's final set of objections to the termination charge are of a different character. In substance, Norwood complains that the termination charge imposed on it exceeds the charge imposed on affiliates of New England Power; that the so- called wholesale standard offer rate (available to the affiliates but not to Norwood) is unfairly low during the opening years and dangerously high thereafter; and that these discrepancies, and the threatened effects, require rejection of both the termination charge and the standard offer rates--or at least evidentiary hearings. The Commission's answer regarding the contract termination charge--that the affiliates "settled" with New England Power, New England Power Co., 83 F.E.R.C. 61,174, at 61,723 n.13 (1998), reh'g denied, 84 F.E.R.C. 61,175, at 61,920 (1998)--would make the hairs stand up on the neck of an old-fashioned utility lawyer. The utility tradition, growing out of hostility to preferences and rebates, has been to oppose unequal treatment or at least to treat it with great skepticism. Specifically, the Federal Power Act outlaws unjustifiably disparate treatment of similarly situated entities under the rubric of "undue preference." 16 U.S.C. 824d(b). But differential treatment does not necessarily amount to undue preference where the difference in treatment can be explained by some factor deemed acceptable by the regulators (and the courts). E.g., Cities of Newark v. FERC, 763 F.2d 533, 546 (3d Cir. 1985). The District of Columbia Circuit, which reviews more such regulatory matters than any other court, has approved divergent treatment that stems from a settlement, reasoning that there is a public interest in settlements and that one party should not be able to frustrate a settlement for everyone else. Cities of Bethany v. FERC, 727 F.2d 1131, 1138-40 (D.C. Cir.), cert. denied, 469 U.S. 917 (1984); United Mun. Distribs. Group v. FERC, 732 F.2d 202, 212-13 (D.C. Cir. 1984). Norwood attacks this justification for differential treatment on the ground that it should not apply where the non- settling parties were denied an opportunity to attack the settlement in the administrative proceeding. However, even assuming that such a limitation exists (and perhaps it should), the Administrative Law Judge found that Norwood's request for a hearing on the settlement was out of time and unsupported, New England Power Co., 80 F.E.R.C. 63,003, at 65,040-41 (1997), and Norwood offers no answer to this ruling. Under these circumstances, we think that the mere disparity in Norwood's contract termination charge vis |