Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-00-01297/USCOURTS-caDC-00-01297-0/pdf.json

Parties Involved:
American Electric Power Company, Inc.
Intervenor
Federal Energy Regulatory Commission
Respondent
Wabash Valley Power Association, Inc.
Petitioner

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 7, 2001 Decided November 2, 2001

No. 00-1297

Wabash Valley Power Association, Inc.,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

American Electric Power Company, Inc.,

Intervenor

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

James T. Malysiak argued the cause for petitioner. With

him on the briefs was Lee A. Freeman, Jr.

Andrew K. Soto, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief was Susan J. Court, Associate Solicitor.

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 1 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

J. A. Bouknight, Jr. argued the cause for intervenor. With

him on the brief were Douglas G. Green and Samuel T.

Perkins. Shannen W. Coffin entered an appearance.

Before: Ginsburg, Chief Judge, Edwards and Sentelle,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: American Electric Power Co., Inc.

("AEP") and Central and South West Corp. ("CSW"), two

large regional utility holding companies, jointly petitioned the

Federal Energy Regulatory Commission ("FERC" or "Commission") for merger approval, as required by s 203 of the

Federal Power Act, 16 U.S.C. s 824b(a) (1994). When presented with a merger or acquisition request, FERC "shall

approve" the request if the merger or acquisition "will be

consistent with the public interest." Id. After lengthy review, FERC conditionally approved the AEP-CSW merger

and required the combined company, referred to as New

AEP, to divest certain generation assets and share transmission capacity information. See Am. Elec. Power Co. & Cent.

& S. W. Corp., 90 F.E.R.C. p 61,242 (Mar. 15, 2000). Wabash

Valley Power Association, Inc. ("Wabash"), an Indiana competitor and customer of AEP, petitions for review.

Wabash contends that FERC's decision was both procedurally and substantively defective. Many of Wabash's claims

have been forfeited, however, because they were not properly

raised with FERC in the first instance. Therefore, these

claims may not be considered by the court. And we find no

merit in the claims that are properly before this court.

Because AEP and CSW sought merger approval in the

midst of sweeping regulatory changes in the electric industry,

FERC chose to impose "interim" mitigation measures to

limit New AEP's market power. Wabash contends that

FERC's approach is improper under the Federal Power Act,

because the interim measures are deficient. We disagree.

On the record at hand, we find that FERC acted reasonably

in adopting two stages of restrictions to limit New AEP's

market power. Both stages of restrictions adequately limit

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 2 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

New AEP's ability to strategically manipulate electricity generation to cause transmission bottlenecks. We also reject

Wabash's claims that FERC's merger approval should be

overturned because it is inconsistent with subsequent staff

statements and because it did not fully eliminate rate pancaking. These claims have no bearing on the question of whether FERC's approval of the merger was arbitrary and capricious. We therefore deny Wabash's petition for review.

I. Background

AEP and CSW sought to merge in the midst of a seachange in the regulations governing the electricity industry.

Because many of the issues raised by petitioner relate to the

application of these new regulations, we begin with a brief

summary of the current regulatory landscape and then move

to the procedural history of this case.

A. Current Regulations

By amending portions of the Federal Power Act of 1935,

the Energy Policy Act of 1992 authorized FERC to order

utilities to transmit other sellers' power over their transmission lines on a case-by-case basis. See Pub. L. No. 102-486,

106 Stat. 2776, 2915-16 (1992) (codified at 16 U.S.C. ss 824jk); Transmission Access Policy Study Group v. FERC, 225

F.3d 667 (D.C. Cir. 2000) (hereinafter Transmission Access)

(discussing history), cert. granted sub nom. New York v.

FERC, 121 S. Ct. 1185 (2001). Finding that utilities would

use their market power to deny transmission access to competing generation sources, FERC subsequently used its statutory authority, see 16 U.S.C. ss 824d(b), 824e(a), to require

utilities to provide open access to their transmission lines in a

nondiscriminatory fashion. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, Order No. 888, 61 Fed.

Reg. 21,540 (May 10, 1996), clarified, 76 F.E.R.C. p 61,009

(July 2, 1996) and 61 Fed. Reg. 51,696 (Oct. 3, 1996), on reh'g,

Order No. 888-A, 62 Fed. Reg. 12,274 (Mar. 14, 1997), clarified, 79 F.E.R.C. p 61,182 (May 16, 1997), on reh'g, Order No.

888-B, 62 Fed. Reg. 64,688 (Dec. 9, 1997), on reh'g, Order No.

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 3 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

888-C, 82 F.E.R.C. p 61,046 (Jan. 20, 1998), aff'd, Transmission Access, 225 F.3d 667, cert. granted sub nom. New York,

121 S. Ct. 1185. Order No. 888, among other things, set forth

the framework for creating Independent System Operators

("ISOs"), independent companies that manage transmission

facilities owned by utilities. 61 Fed. Reg. at 21,596. ISOs

have no financial stake in any power market participant, have

the ability to halt generation causing transmission system

constraints, and must provide real-time transmission information to market participants. Id.

At the same time, FERC also issued Order No. 889 which

required all owners and operators of electricity transmission

systems to participate in an Open Access Same-time Information System, or OASIS. Open Access Same-Time Information System and Standards of Conduct, Order No. 889, 61

Fed. Reg. 21,737 (May 10, 1996), on reh'g, Order No. 889-A,

62 Fed. Reg. 12,484 (Mar. 14, 1997), on reh'g, Order No. 889-

B, 62 Fed. Reg. 64,715 (Dec. 9, 1997), aff'd, Transmission

Access, 225 F.3d 667, cert. granted sub nom. New York, 121

S. Ct. 1185. One of the main functions of an OASIS is to

calculate Available Transmission Capacity ("ATC"), the difference between a transmission system's total capacity and

already-committed capacity. Order No. 889, 61 Fed. Reg. at

21,749. Because ATC often limits where electricity can be

sold, this information allows generators to determine additional potential markets.

In 1999, FERC found that the changes brought by Orders

Nos. 888 and 889 had imposed significant strain on "traditional means of grid management" and that "continued discrimination in the provision of transmission services by vertically

integrated utilities may also be impeding fully competitive

electricity markets." Regional Transmission Organizations;

Notice of Proposed Rulemaking, 64 Fed. Reg. 31,390, at

31,391 (June 10, 1999). Although Orders Nos. 888 and 889

reduced overt discrimination, transmission-owning utilities resorted to "more subtle means to frustrate their marketing

competitors and favor their own marketing interests." Id. at

31,402. As a consequence, the Orders were ineffective in

completely removing transmission discrimination. Functional

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 4 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

limitations arising from the relatively small size of the ISOs

also limited their ability to provide essential information

accurately, such as ATC: "it is not possible to calculate

accurately the transmission capability of one system without

knowing the flows scheduled by all other interconnected

transmission providers in the region." Id. at 31,403.

In response to the shortcomings of Orders Nos. 888 and

889, FERC issued Order No. 2000, which established the

framework for Regional Transmission Organizations, or

RTOs. See Regional Transmission Organizations, Order

No. 2000, 65 Fed. Reg. 810 (Jan. 6, 2000), on reh'g, Order No.

2000-A, 65 Fed. Reg. 12,088 (Mar. 8, 2000), petitions for

review pending sub nom. Public Utility District No. 1 of

Snohomish County, Washington v. FERC, No. 00-1174 (D.C.

Cir. argued Oct. 17, 2001). RTOs build upon many ISO

features and have four main characteristics: independence,

sufficient size and regional scope, operational authority for all

transmission facilities under their control, and exclusive authority for maintaining short term grid reliability. 65 Fed.

Reg. 810, at 842-75. FERC requires RTOs to be larger,

more independent, and exercise more sophisticated control

over the transmission system than ISOs. In 2001, FERC

further clarified the scope requirements of RTOs, forcing

several parties into mediation with an ultimate goal of creating four RTOs - one for the Northeast, Southeast, Midwest,

and West. See, e.g., Order Provisionally Granting RTO

Status, 96 F.E.R.C. p 61,061 (July 12, 2001).

B. Procedural History

AEP and CSW jointly applied to FERC for merger approval on April 30, 1998. At that time, AEP, through whollyowned subsidiaries, provided power to three million customers in Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia, and West Virginia with over 23,000 megawatts ("MW") of

generating capacity and 22,000 miles of transmission lines.

Am. Elec. Power Co., 90 F.E.R.C. p 61,242, at 61,776. CSW,

also through wholly-owned subsidiaries, served 1.7 million

customers in Arkansas, Louisiana, Oklahoma, and Texas with

over 14,000 MW of generating capacity and 16,000 miles of

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 5 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

transmission lines. See Joint Application of Am. Elec. Power

Co., Inc. & Cent. & S. W. Corp. (Apr. 30, 1998), reprinted in

Joint Appendix ("J.A.") 134, 165 (hereinafter "Joint Application").

To determine whether a proposed merger meets the Federal Power Act's s 203 public interest standard, FERC requires applicants to conduct a competitive analysis screen,

referred to as an Appendix A analysis, using the framework

established by the Department of Justice/Federal Trade

Commission Merger Guidelines. See Inquiry Concerning the

Commission's Merger Policy Under the Federal Power Act;

Policy Statement, 61 Fed. Reg. 68,595, at 68,606 (Dec. 30,

1996). The Appendix A analysis requires applicants to:

1) identify the relevant products;

2) identify customers who may be affected by the merger;

3) identify potential competing suppliers to each identified customer; and

4) analyze market concentration, using the HerfindahlHirschman Index ("HHI") before and after the merger.

Id. at 68,607-08.

In their original application, AEP and CSW proposed connecting their two territories using a 250 MW east to west

transmission path, secured by contract from a third party.

Joint Application, reprinted in J.A. 138. Because this connection increased market concentration in several western

markets to a level above that allowed by Appendix A, AEP

and CSW sought to mitigate these impermissible HHI levels

by committing to the sale of 320 MW in the former territory

of CSW. Joint Application, reprinted in J.A. 145. AEP and

CSW also suggested other restrictions, including participation

in an ISO and the waiver of certain priority transmission

rights. Joint Application, reprinted in J.A. 150.

FERC found that the "Applicants' own analysis shows that

the proposed merger fails the screen thresholds in several

markets, ... there are problems concerning the assumptions

and data used in the Applicants' screen analysis, ... [and]

Applicants' analysis may not accurately define relevant geographic markets." Order Accepting for Filing and Suspending Proposed Tariffs and Agreements, Consolidating Dockets, and Establishing Hearing Procedures, 85 F.E.R.C.

p 61,201, at 61,818-19 (Nov. 10, 1998). These factors led

FERC to set the matter for a hearing to determine "the

effect of the merger on competition." Id. at 61,809.

Over 30 parties filed objections to the merger, though most

withdrew prior to the hearing. FERC trial staff and the

Applicants entered into two stipulations, one on May 24, 1999,

and the other on July 13, 1999, resolving most of the issues in

contention at the hearing. The three-week hearing finished

on July 19, 1999, and the presiding Administrative Law Judge

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 6 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

("ALJ") issued an initial order on November 23, 1999. The

ALJ's initial order imposed no conditions on the merger,

other than those stipulated by the Applicants. See Am. Elec.

Power Co., 90 F.E.R.C. p 61,242, at 61,776. On May 15, 2000,

FERC approved the merger, but with significant additional

conditions. Id. at 61,799-800.

The Applicants had agreed to divest 550 MW of power,

rather than the initially proposed 320 MW, from the West

Region. Instead of divesting entire plants, the Applicants

proposed selling minority interests in certain generating facilities, leaving New AEP with operational control of generation.

FERC found the amount of capacity to be divested acceptable

but that the divestiture proposal was an ineffective remedy

because the Applicants retained operational control of the

generation. This operational control could have given New

AEP "the ability to withhold capacity from the market and

thus affect electricity prices." Id. at 61,792. FERC therefore required New AEP to "divest their entire ownership

interest" in the facilities at issue. Id. Because of the time

necessary to divest this capacity, the Applicants proposed

forced interim power sales equivalent to the to-be-divested

capacity. FERC accepted this proposal, recognizing that the

forced sales would prevent the exercise of market power by

withholding output, but required the sales to begin immediUSCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 7 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

ately rather than shortly after merger, as the Applicants had

proposed. Id. at 61,794.

FERC also addressed market power concerns arising out

of the consolidation of generation and transmission. FERC

recognized the potential for New AEP to exercise vertical

market power, where one entity could affect the availability of

transmission by controlling the generation of electricity, and

found "that Applicants failed to show that the proposed

merger will not adversely affect competition as a result of

combining their generation and transmission." Id. at 61,786.

To remedy this market power, FERC imposed several requirements. First, the Applicants must "transfer operational

control of their transmission facilities to a Commissionapproved RTO." Id. at 61,788. Second, because, under

FERC's newly established framework, RTOs will not exist

prior to December 15, 2001, see Order No. 2000, 65 Fed. Reg.

at 812, FERC imposed interim mitigation measures in the

East Region emulating many of the anticipated functions of

an RTO. Am. Elec. Power Co., 90 F.E.R.C. p 61,242 at

61,789. Thus, in the East Region, New AEP must have ATC

calculated and market monitoring conducted by an independent party. This third party would review generation dispatch information, steps taken to relieve transmission constraints, and the volume and price of energy after relief steps

were taken. FERC stated, "[w]e believe that such data are

necessary to determine whether operations or wholesale

transactions involving Applicants are unduly discriminatory

or preferential or show evidence of the exercise of market

power." Id. Third, although FERC did not expressly identify the consequences of any transgressions of these requirements, the Commission stated that it would use its "authority

under Section 203(b) of the [Federal Power Act] to address

any concerns, and order further procedures as appropriate."

Id. at 61,789-90 (footnote omitted).

Wabash filed a Request for Rehearing on April 14, 2000,

challenging FERC's order approving the merger. The principal points raised by Wabash in its petition for rehearing

were, as follows:

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 8 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

. The Commission identified serious problems with the

merger, expressly recognizing that the merger increased Applicants' ability to foreclose competitors by

strategic manipulation of generation, but approved

the merger without conditioning it in a manner that

even purports to address this significant threat to the

public interest.

. The Commission recognized, but failed to address the

potent arguments of Wabash Valley ... that Applicants' participation in the Alliance RTO, even if that

RTO were to satisfy the Commission's general requirements for FERC approval, would be insufficient

to mitigate the Applicants' merger enhanced market

power.

. The Commission erred by failing to insist upon implementation of Applicants' RTO commitment before

consummation of the merger.

. The Commission failed even to recognize, much less

address, intervenor demonstrations that the merger

would seriously adversely affect transmission availability to others.

. The Commission accepted as "ratepayer protection"

provisions wholly inadequate to hold ratepayers

harmless from the merger.

Request for Rehearing, reprinted in J.A. 370, 373. FERC

denied the request for rehearing on May 15, 2000, 91

F.E.R.C. p 61,129, and Wabash petitioned this court for review on July 7, 2000.

II. Analysis

A. Jurisdiction and Ripeness

FERC initially argues that judicial review is precluded in

this case, because Wabash is not an aggrieved party, the case

is not ripe, and Wabash failed to raise many of its arguments

below, as required by s 313 of the Federal Power Act. We

conclude that Wabash is aggrieved and the case is ripe, but

that many of Wabash's claims have been forfeited because

they were not properly raised with FERC in the first instance.

1. Standing

The Federal Power Act provides that "[a]ny party to a

proceeding ... aggrieved by an order issued by the Commission in such proceeding may obtain a review of such order" by

filing suit within 60 days. 16 U.S.C. s 825l(b). Under

FERC regulations, Wabash, as an intervenor, was a party to

the AEP-CSW merger application proceeding. See 18 C.F.R.

s 385.214 (1999). Parties are "aggrieved" under the Federal

Power Act if they satisfy both the constitutional and prudential requirements for standing. Louisiana Energy & Power

Auth. v. FERC, 141 F.3d 364, 366 (D.C. Cir. 1998) (quoting

Bennett v. Spear, 520 U.S. 154, 167 (1997)). In this case, as a

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 9 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

competitor crying foul, Wabash satisfies prudential standing

requirements. Louisiana Energy, 141 F.3d at 366-67 (stating

"as a competitor and customer [petitioner] comes within the

zone of interests of the Federal Power Act and hence has

prudential standing").

FERC nonetheless argues that Wabash fails to satisfy the

standing requirements imposed by Article III of the Constitution.

This "irreducible constitutional minimum" of standing

requires: (1) that the plaintiff have suffered an "injury in

fact"--an invasion of a judicially cognizable interest

which is (a) concrete and particularized and (b) actual or

imminent, not conjectural or hypothetical; (2) that there

be a causal connection between the injury and the conduct complained of--the injury must be fairly traceable

to the challenged action of the defendant, and not the

result of the independent action of some third party not

before the court; and (3) that it be likely, as opposed to

merely speculative, that the injury will be redressed by a

favorable decision.

Bennett, 520 U.S. at 167 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). FERC contends in particular that Wabash lacks standing because the harm that it

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 10 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

alleges is based only on injuries that might arise from New

AEP's exercise of market power in the future. In other

words, according to FERC, the injuries asserted by Wabash

are merely speculative. We disagree.

Parties suffer cognizable injury under Article III when an

agency "lift[s] regulatory restrictions on their competitors or

otherwise allow[s] increased competition." Louisiana Energy, 141 F.3d at 367. Wabash asserts that it will be injured by

New AEP's market power which FERC has allowed by

approving a merger with inadequate conditions. This claim

satisfies the "injury" prong of Article III standing. See

Associated Gas Distribs. v. FERC, 899 F.2d 1250, 1259 (D.C.

Cir. 1990) (finding standing when "the challenged action

authorizes allegedly illegal transactions that have the clear

and immediate potential to compete with the petitioners' own

sales"). Wabash likewise meets the remaining two prongs of

the constitutional standing inquiry. Its competitive injury is

fairly traceable to FERC's decision to approve the merger.

See America's Cmty. Bankers v. FDIC, 200 F.3d 822, 827

(D.C. Cir. 2000). And a favorable decision by this court could

result in a remand to FERC which, in turn, might impose

conditions that more severely limit New AEP's exercise of

market power. This possibility, even though far from certain,

satisfies the redressability requirement. Northeast Energy

Assocs. v. FERC, 158 F.3d 150, 154 (D.C. Cir. 1998). Wabash, therefore, has Article III standing to seek judicial

review.

2. Ripeness

Ripeness requires the evaluation of "the fitness of the

issues for judicial decision and the hardship to the parties of

withholding court consideration." Whitman v. Am. Trucking

Ass'ns, Inc., 121 S. Ct. 903, 915 (2001) (quoting Abbott Labs.

v. Gardner, 387 U.S. 136, 149 (1967)). A case is ripe "when it

presents a concrete legal dispute and no further factual

development is essential to clarify the issues and there is no

doubt whatever that the challenged agency practice has crystallized sufficiently for purposes of judicial review." Rio

Grande Pipeline Co. v FERC, 178 F.3d 533, 540 (D.C. Cir.

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 11 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

1999) (citations and internal quotation marks omitted). This

dispute meets these criteria.

Wabash seeks review of a specific agency decision to allow

the merger of AEP and CSW. FERC made its decision after

a lengthy hearing before an ALJ in which Wabash and

numerous other intervenors put on extensive evidence challenging the merger. It does not matter that the merger

occurs at a time when the regulatory regime is changing.

What matters is that the decision approving the merger is

final and the standards for assessing the Commission's judgment are clear and easy to apply.

3. Wabash's Failure to Present Certain Claims to FERC

in the First Instance

Petitioners seeking review of a FERC order must first

"petition for rehearing of those orders and must themselves

raise in that petition all of the objections urged on appeal."

Platte River Whooping Crane v. FERC, 876 F.2d 109, 113

(D.C. Cir. 1989) (citing 16 U.S.C. s 825l(b) and ASARCO, Inc.

v. FERC, 777 F.2d 764, 774 (D.C. Cir. 1985)). Section 825l(b)

commands that "[n]o objection to the order of the Commission shall be considered ... [unless] urged before the Commission in the application for rehearing." 16 U.S.C.

s 825l(b). This is an unusually strict requirement that will

not be ignored by the courts. Asarco, 777 F.2d at 774. And

"[n]either FERC nor this court has authority to waive these

statutory requirements." Platte River Whooping Crane, 876

F.2d at 113. Therefore, the failure of FERC to challenge a

petitioner's objection on the ground that it was not raised

below does not remove this court's independent obligation to

determine whether, in fact, the argument is properly before

us.

Many of the objections raised by Wabash in its petition for

review were not raised in the first instance in an application

for rehearing to FERC. The court therefore has no jurisdiction to consider these objections. In particular, Wabash did

not seek rehearing on its claims that FERC failed to make

essential findings of fact, adequately explain its decision,

define the relevant markets, account for potential competition

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 12 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

between AEP and CSW, and defer approval of all mergers

until RTO performance could be evaluated.

There is one claim that has been raised by Wabash that

may be considered by the court even though it was not raised

below. Wabash contends that FERC's merger was inconsistent with a subsequently released staff report. Though not

raised in the application for rehearing by Wabash, this argument may be properly considered by this court because the

Federal Power Act allows consideration of arguments raised

for the first time on appeal if "there is reasonable ground for

failure" to raise objections in the request for rehearing. 16

U.S.C. s 825l(b). Because this report was issued on November 1, 2000, several months after Wabash's rehearing request,

this court has jurisdiction to review this challenge by Wabash.

Finally, there is one argument raised by Wabash on appeal

that is hard to characterize. In its petition for rehearing to

FERC, Wabash argued that, although the Commission had

"expressly recogniz[ed] that the merger increased Applicants'

ability to foreclose competitors by strategic manipulation of

generation," the merger conditions did not "address this

significant threat to the public interest." Request for Rehearing, reprinted in J.A. 374. On appeal, Wabash argues that

"FERC completely ignored ... crucial evidence" of New

AEP's "ability to manipulate 'imperfections' in the pertinent

markets to their advantage." Petitioner's Br. at 37. How

one assesses these two claims depends upon how one construes the reference to "crucial evidence." Wabash's two

claims are not inconsistent if Wabash's argument to the court

is meant to claim that FERC failed adequately to address a

recognized threat to the public interest because it failed to

consider crucial evidence. The claims are inconsistent, however, if Wabash's argument to this court is meant to say that

FERC completely ignored the fact that the merger increased

Applicants' ability to foreclose competitors by strategic manipulation of generation. We give Wabash the benefit of the

doubt and accept the issue as raised, because the first construction seems more plausible. We must therefore address

on the merits the staff report claim, the crucial evidence

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 13 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

claim, and two other claims Wabash raised in its petition for

rehearing.

B. Standard of review

We review FERC's order under the familiar arbitrary and

capricious standard. Sithe/Independence Power Partners,

L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999). Under

s 203 of the Federal Power Act "FERC may approve a

merger only if it 'will be consistent with the public interest.' "

Envtl. Action, Inc. v. FERC, 939 F.2d 1057, 1061 (D.C. Cir.

1991) (quoting 16 U.S.C. s 824b(a)). "Public interest" encompasses "both the preservation of economic competition, as

expressed in the antitrust laws of general application, and the

various policies reflected in the statutes specific to energy

regulation." Envtl. Action, 939 F.2d at 1061 (citations omitted). The principal public interest reflected in the Federal

Power Act is "to encourage the orderly development of

plentiful supplies of electricity and natural gas at reasonable

prices." NAACP v. FPC, 425 U.S. 662, 669-70 (1976) (footnote omitted).

C. Wabash's claims

Wabash claims that FERC's approval was arbitrary and

capricious because: FERC improperly conditioned the merger on the future participation of New AEP in an RTO;

FERC completely ignored crucial evidence of New AEP's

ability to manipulate imperfections in the pertinent markets

to their advantage; the merger is inconsistent with a recent

FERC staff report; and the merger does nothing to eliminate

rate pancaking, a type of rate inefficiency. These claims all

fail.

First FERC did not condition the merger solely on future

participation in an RTO. Rather, FERC also required interim measures that emulated the information-sharing features

of an RTO to limit New AEP's ability to exercise its market

power. See Am. Elec. Power Co., 90 F.E.R.C. p 62,171, at

61,789. These measures - market monitoring and calculation

of ATC by independent parties - do not have any enforcement mechanisms attached. FERC can use its regulatory

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 14 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

powers, however, to penalize noncompliance. Under s 205 of

the Federal Power Act, FERC reviews all electricity transmission and sales to ensure that the rates are "just and

reasonable." 16 U.S.C. s 824d(a). FERC, in some circumstances, allows electric utilities to engage in market-based

pricing in lieu of the traditional cost plus reasonable rate of

return rate calculation. See, e.g., Cajun Elec. Power Coop.,

Inc. v. FERC, 28 F.3d 173, 176. (D.C. Cir. 1994). If, however,

FERC finds that a rate charged is "unjust, unreasonable,

unduly discriminatory or preferential, the Commission shall

determine the just and reasonable rate ... and shall fix the

same by order." 16 U.S.C. s 824e(a). Thus, if the information disclosed by New AEP under the interim mitigation

measures indicates a violation of the antitrust laws or the

Federal Power Act, New AEP faces antitrust liability and the

possibility of FERC setting its rates. These safeguards

render the requirement of disclosure effective to limit New

AEP's exercise of strategic behavior to circumvent FERC's

merger conditions.

Wabash is also wrong in its claim that FERC completely

ignored crucial evidence of New AEP's ability to manipulate

imperfections in the pertinent markets to their advantage.

As noted above, Wabash's petition for rehearing to FERC

expressly acknowledges that the Commission did not ignore

the problem of the potential for market manipulation. Therefore, the only question here is whether FERC's action was

arbitrary and capricious for lack of consideration of some

"crucial evidence" related to the issue. The "crucial evidence" to which Wabash refers is "the merging parties' intent

to improperly exert their market power." Petitioner's Br. at

37. This is a specious claim. First, it is clear that FERC

understood that it was too easy for parties to engage in

market manipulation under the Orders that preceded Order

No. 2000 - indeed, that was a principal reason for the

adoption of Order No. 2000. Second, FERC addressed the

problem of possible manipulations by imposing conditions on

the merger. It is unclear what other "crucial evidence" was

before FERC that warranted consideration. Maybe Wabash

means to suggest that officials in charge of New AEP had

devious, albeit unannounced, intentions to defy the law withUSCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 15 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

out regard to FERC's regulatory requirements. If so, this

surely is no basis upon which to grant the petition for review.

If New AEP acts in violation of the law in the future it will

face regulatory sanctions.

Wabash next claims that FERC's decision does nothing to

eliminate rate pancaking. Pancaked rates arise when a

transmission travels over the transmission systems of more

than one system that each charge separate fees, much like

the total tolls paid when driving on a route that includes both

the Pennsylvania and New Jersey turnpikes. Though the

mere existence of different owners of different parts of a

transmission system does not necessarily lead to inefficient

transmission, FERC found that one of the main benefits

offered by RTOs would be "increased efficiency through

regional transmission pricing and the elimination of rate

pancaking." Order No. 2000, 65 Fed. Reg. at 829. Whether

the AEP-CSW merger eliminated rate pancaking was not a

discrete issue under consideration by FERC, because s 203

of the Federal Power Act merely mandates the determination

of whether the merger is consistent with the public interest.

By forcing New AEP to transfer its transmission assets to a

RTO, FERC, in fact, significantly reduced rate pancaking.

Absent a mechanism creating national transmission pricing, it

is hard to understand how any merger could, by itself,

eliminate all rate pancaking. In any event, that other

changes to FERC policy might also improve the public interest is simply irrelevant to the validity of the merger decision.

And it certainly was not arbitrary and capricious for FERC

to find that a merger that did not fully eliminate rate

pancaking was nonetheless in the public interest.

Finally, Wabash claims that the decision to approve the

merger is arbitrary and capricious because it is inconsistent

with a staff report produced by FERC on November 1, 2000.

This claim fails under the holding of Union Pac. Fuels, Inc. v

FERC, 129 F.3d 157, 164 (D.C. Cir. 1997). Only when

"FERC has formally altered its policy after issuing an order

challenged before us" does this court consider the change.

Id. A staff report following the issuance of a Commission

order is not a superceding order; therefore, the issuance of

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 16 of 17
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

such a report "play[s] no role in our determination of the

order['s] legality." Id.

III. Conclusion

For the foregoing reasons, Wabash's petition for review is

denied.

So ordered.

USCA Case #00-1297 Document #636029 Filed: 11/02/2001 Page 17 of 17