Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-93-01855/USCOURTS-caDC-93-01855-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Indiana Michigan Power Company
Intervenor
Indiana Municipal Power Agency
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 7, 1995 Decided June 9, 1995

No. 93-1855

INDIANA MUNICIPAL POWER AGENCY,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

INDIANA MICHIGAN POWER COMPANY,

INTERVENOR

On Petition for Review of an Order of the

Federal Energy Regulatory Commission

Thomas C. Trauger argued the cause for petitioner. With him on the briefs were James N. Horwood,

Daniel I. Davidson, Paul D. Bruner and James R. McClarnon.

Janet K. Jones, Attorney, Federal EnergyRegulatoryCommission, argued the cause for respondent.

Jerome M. Feit, Solicitor, Joseph S. Davies, Jr., DeputySolicitor, and Timm L. Abendroth, Attorney,

Federal Energy Regulatory Commission, were on the brief for respondent.

Edward T. Brady argued the cause for intervenor. With him on the brief was Marvin I. Resnik.

Before: WALD, SILBERMAN and TATEL, Circuit Judges.

Opinion for the court filed by Circuit Judge TATEL.

Dissenting opinion filed by Circuit Judge WALD.

TATEL, Circuit Judge: The Indiana Municipal Power Agency, an association of wholesale

consumers of electric power, petitions this court for review of an order of the Federal Energy

RegulatoryCommission ruling that intervenor Indiana Michigan Power Company did not violate the

Federal Power Act, FERC regulations, or a FERC-approved settlement agreement by including

certain costs arising from its fuel supply contracts in its wholesale electricity rates. Because the

Commission's decision to evaluate the reasonableness of Indiana Michigan's fuel contracts under its

established prudence and market rate standards was wellwithin its discretion, and because substantial

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evidence supports its findings that the coal contracts in question were priced below the weighted

average price for comparable contracts and charged Indiana Michigan solely for coal, we deny the

petition for review.

I.

The Indiana Michigan Power Company, a wholly-owned subsidiary of the American Electric

Power Company, provides electricity to portions of Indiana and Michigan. In the early 1970's, at the

behest of American Electric, Indiana Michigan acquired substantial low-sulfur coalreserves in Utah,

known as the Price River properties, anticipating that this coal would provide the American Electric

subsidiaries with a reliable supply of the "clean" fuel necessary to satisfy new federal and state air

quality standards. Actual demand for the Price River coal, however, fell far below American

Electric's projections, resulting in significant losses for Indiana Michigan over several years.

Indiana Michigan used coal from Price River at one of its generating plants known as the

Tanners Creek 1-3 facility. Several wholesale ratepayers, including members of the petitioner here,

objected to Indiana Michigan's inclusion of the full price of this coal in its wholesale electricity rate,

arguing that coal was available on the market at a significantly lower price and that the company was

passing through the unreasonably high cost of Price River coal to its ratepayers in order to reduce

its losses on Price River. In 1985, following a formal investigation by the FERC, American Electric

and Indiana Michigan signed a settlement agreement with theCommission'strialstaff, the "McDowell

settlement." The settlement established a ceiling on the price per ton of coal that Indiana Michigan

could include in its wholesale electricity rate at Tanners Creek 1-3, thus giving Indiana Michigan an

incentive to purchase coal from other suppliers at the market rate instead of continuing to use and

to charge its ratepayers for the expensive Price River coal. The McDowell settlement also allowed

Indiana Michigan to apply any difference between the actual price of coal used at Tanners Creek 1-3

and the price ceiling towards amortizing a portion of itsinvestment in the Price River mines, but only

up to $75 million, approximately one-third of that amortization expense. Indiana Michigan would

have to recover the remaining two-thirds from another source, most likely a buyer or American

Electric'sshareholders. See Indiana &Mich. Mun. Distribs. Ass'n, 62 F.E.R.C. ¶ 61,189, at 62,228-

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29 [hereinafter FERC Opinion]. Both FERC and the Securities and Exchange Commission approved

the McDowell settlement. Because the cost of the Price River coal exceeded the price ceiling in the

settlement, and because Indiana Michigan apparently had no other customers for this coal, it ceased

production at the Utah mines shortly after agreeing to the settlement. Although it wanted to cut its

losses by selling its interest in the mines, it could not find a buyer willing to pay its breakeven asking

price of approximately $150 million, the two-thirds of the amortization expense it could not recover

from wholesale ratepayers. See Indiana & Mich. Mun. Distribs. Ass'n, 51 F.E.R.C. ¶ 63,019 at

65,083 [hereinafter ALJ Decision ].

In 1985, Indiana Michigan finally found a serious prospect inAMAX, Inc., a corporationwith

mine holdings in several midwestern states. For AMAX, the Price River mines presented an

opportunity to enter the western market. AMAX agreed to lease the mines for an initial period of

twentyyearsfor approximately$160 million, FERC Opinion at 62,229 n.32, an amount that, together

with the $75 million it was permitted to recoup from its wholesale ratepayers under the McDowell

settlement, would allow Indiana Michigan to remove the mines from its books without taking a

charge against earnings. At the same time, Indiana Michigan signed three contracts providing for

AMAX to supply coal from its midwestern mines to three Indiana Michigan generating

facilitiesTanners Creek 1-3, Tanners Creek 4, and Breedfor periods of up to ten years. Id. at

62,229. The current dispute centers on these contracts.

The simultaneous closing of the long-termsupply contracts and the Price River lease aroused

the suspicion of petitioner Indiana Municipal Power Agency, an association of municipalities served

by Indiana Michigan whose members had participated in the earlier McDowell settlement

proceedings. The Power Agency filed a complaint with the Commission challenging the legality of

the two AMAX coal contracts covering Tanners Creek 4 and Breed. According to the complaint,

Indiana Michigan entered the long-term coal contracts in order to induce AMAX to purchase the

mines at its breakeven price, a price which no other buyer had been willing to pay. Because of the

interdependence of the two transactions, the Power Agency claimed that Indiana Michigan had no

incentive to negotiate for the lowest possible price for the coal. To the contrary, the Power Agency

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surmised, the higher the price Indiana Michigan wanted AMAX to pay for the mines, the higher the

price it had to agree to pay AMAX for the coal. As a result, the Power Agency claimed that the

contract price for the coal contained a "premium" or a "sweetener" to offset the inflated price AMAX

paid for the troubled mines.

In the initial proceedings before a FERC administrative law judge, the Power Agency

contended that Indiana Michigan's passing the costs of coal under these allegedly "sweetened"

contracts through to its wholesale ratepayers was unlawful on three grounds: it resulted in an unjust

and unreasonable rate in violation of section 205 of the Federal Power Act; it violated FERC's cost

accounting regulations that limit the costs allocable to a utility's Fuel Stock account to the invoice

price of fuel and certain attendant costs; and it violated the cap established in the McDowell

settlement byeffectively passing through more than $75 million ofthe amortization ofthe Price River

investment to the wholesale ratepayers. See ALJ Decision at 65,089-90. Ruling for the Power

Agency on all three grounds, the ALJ found that AMAX would not have agreed to purchase the

mines without the coal contracts, and that the effect of the transaction was to shift a portion of the

Price River amortization expense from Indiana Michigan's shareholders to the wholesale ratepayers

at the Tanners Creek 4 and Breed facilities. In the ALJ's view, this transfer violated the terms of the

McDowell settlement by imposing more than $75 million of the Price River losses on wholesale

ratepayers. Violating the settlement, in turn, amounted to charging the ratepayers an unreasonable

and excessive price in violation of section 205 of the Federal Power Act. Id. at 65,087-88. Finally,

because the sweetenerin the contract price covered an amortization expense associated with the Price

River minesrather than the cost of the coal, the ALJruled that including the full cost of the contracts

in its Fuel Stock account violated FERC's fuel cost accounting regulation. Id. at 65,089.

The FERC granted Indiana Michigan's petition for review and reversed the ALJ's decision.

Instead of beginning its analysis with the McDowell settlement, the Commission ruled that the ALJ

had failed to apply the appropriate legal standard under section 205 of the Federal Power Act, 16

U.S.C. § 824d (1988). See FERC Opinion at 62,237-39. Analyzing the justness and reasonableness

ofthe contracts under the framework established in its prior decisions, theCommission first examined

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the record to determine if the Power Agency had raised a "serious doubt" about Indiana Michigan's

prudence in entering the contracts. Id. at 62,239. Although the Commission found nothing raising

the requisite level of doubt, id., it recognized that the circumstances surrounding these negotiations

could foster something akin to the self-dealing existing in transactions between affiliated companies.

It therefore went on to apply the more stringent market rate standard it usually employsto determine

whether a fuel supply contract between a utility and an affiliated supplier is just and reasonable. Id.

at 62,238, 62,241. Based upon a market study prepared by the Commission's trial staff, the

Commission concluded that the AMAX contract prices were below the weighted average price for

comparable coal contracts and were therefore reasonable as required by section 205. Id. at 62,242,

62,244.

While the ALJ had found that the contracts included a premium to offset the loss AMAX

expected to suffer on the Price River mines, the Commission concluded otherwise, noting that while

the mines were a risky investment for AMAX, they were considerably more valuable to a company

with the marketing and distribution networks AMAX possessed than they were to a utility like

Indiana Michigan. Consequently, the Commission saw no reason to assume that AMAX had to be

"induced" to purchase the mines at Indiana Michigan's breakeven price by including a premium in the

coal contracts. Id. at 62,240. Because the contracts did not contain a premium, the Commission

concluded Indiana Michigan had not violated the FERC accounting regulations. Id. at 62,245.

Regarding the McDowell settlement, the Commission ruled that the Power Agency had not

demonstrated either that it applied to the Tanners Creek 4 and Breed contracts, the only contracts

challenged in its complaint, or, even if it did apply to those facilities, that the settlement had been

violated, since the ratepayers were paying only for coal, not a sweetener or premium, and the price

they were paying was below the average price in the market. Id. at 62,244-45. The Power Agency

petitions this Court for review.

II.

We begin with section 205 of the Federal Power Act, which requires that rates for "the

transmission ... of electric energy subject to the jurisdiction of the Commission ... be just and

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reasonable." 16 U.S.C. § 824d(a) (1988). "Because "issues of rate design are fairly technical and,

insofar as they are not technical, involve policy judgments that lie at the core of the regulatory

mission,' our review of whether a particular rate design is "just and reasonable' is highly deferential."

Northern States Power Co. v. FERC, 30 F.3d 177, 180 (D.C. Cir. 1994) (quoting Town of Norwood

v. FERC, 962 F.2d 20, 22 (D.C. Cir. 1992)). We are concerned only with whether the Commission

has made "a reasoned decision based upon substantial evidence in the record." Town of Norwood v.

FERC, 962 F.2d 20, 22 (D.C. Cir. 1992).

Applying these standards, we conclude that the Commission was well within its discretion in

rejecting the ALJ's reliance on the McDowell settlement and his finding that the contracts contained

a premiumasthe touchstone for determining compliance with section 205. The Commission has long

used its prudence and market rate tests to enforce the just and reasonable rate provision of section

205, see, e.g., Ohio Power Co., 39 F.E.R.C. ¶ 61,098 (1987), and we can find no reason why it was

not fully justified in relying on them in this case as well. Indeed, had petitioner limited its challenge

to section 205 of the Power Act, we would look no further than the Commission's market rate

analysis. Since the Commission's obligation under the Power Act is to ensure that consumers pay no

more than a reasonable rate, if the market price study demonstrates that the coal contracts are

reasonably priced our task is at an end, regardless of whether the contract rate includes a premium

of some kind.

Our dissenting colleague takes us to task for adopting an interpretation of section 205 that,

in her view, the Commission itself has not proposed. See Dissent at 1-2. While we agree that neither

the Commission's brief nor its oral argument were entirely clear on this issue, its opinion was, and it

is opinions, not oral arguments or briefs, that we review. See Motor Vehicles Mfrs. Ass'n v. State

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 50 (1983); North Carolina Utils. Comm'n v. FERC, 42 F.3d

659, 663 (D.C. Cir. 1994). The Commission found that the Trial Staff's market study demonstrated

that "under the comparable market price test, the prices [Indiana Michigan] paid for AMAX coal

were not excessive, and thus the costs for this coal passed on to ratepayers through the Company's

rates were not unjust or unreasonable." FERC Opinion at 62,242. The Commission went on to note

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that "[t]he market test is an objective test," FERC Opinion at 62,245 (quoting Public Service of New

Mexico, 23 F.E.R.C. ¶ 61,218 at 61,457-58 (1983)), and accordingly "if the price paid by the utility

does not exceed the market price, it does not matter what the particular components of the cost paid

by the utility are. As Opinion No. 164 (Public Service of New Mexico ) makes clear, under the

market price test, a utility'sfuel costs are always examined using a standard of reasonableness which

allows the utility to recover the market price." Id.

The Power Agency, however, did not limit its challenge to section 205 of the Power Act; it

also alleged that the contracts violated FERC accounting regulations and the McDowellsettlement.

Resolution ofthese claims, as we shallsee in section III, doesturn on whetherthe coal contract prices

contain the alleged "sweetener." Because the Commission made its findings regarding the alleged

premium in the context of its prudence analysis, we must review FERC's application of its prudence

standard as well as that of its market price test.

We thus begin, as did the Commission, with the prudence standard. It requires a complainant

alleging that some aspect of a utility's rate or practice is unjust or unreasonable to present evidence

sufficient to raise serious doubt that a reasonable utility manager, under the same circumstances and

acting in good faith, would not have made the same decision and incurred the same costs. New

England Power Co., 31 F.E.R.C. ¶ 61,047, at 61,084 (1985), aff'd sub. nom. Violet v. FERC, 800

F.2d 280 (1st Cir. 1986); Minnesota Power & Light Co., 11 F.E.R.C. ¶ 61,312, at 61,645 (1980).

If the petitioner clears this initial hurdle, the utility has the burden of presenting evidence sufficient

to dispel those doubts. Minnesota Power & Light Co., 11 F.E.R.C. at 61,645. If it cannot, the

complainant wins.

The Power Agency's argument that entering the AMAX coal contracts was not prudent rests

on the assertion that the contracts contained a premium to compensate AMAX for purchasing the

mines. The premise underlying that assertion is that AMAX did not think the mines were worth

Indiana Michigan's asking price. To support this proposition, the Power Agency relied on figures

taken from a management presentation to the AMAX board which included projections of the cash

flow AMAX expected to receive from both the Price River mines and the coal contracts. FERC

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Opinion at 62,239. In these projections, AMAX's management had assigned a negative net present

value to the mines, which, according to the Power Agency, showed that AMAX did not expect to

make as much money from the mines as it was paying for them. See Memorandum from J.A. Olsen

to AMAX Management, at 13 (September 3, 1985) [hereinafter Management Presentation] in Joint

Appendix (J.A.) 322, at 355.

The ALJ found this evidence persuasive, but the Commission did not. Considering the

projected earnings figures in the context of the whole presentation, the Commission concluded that

the AMAX present value figuresreflected an intentionally conservative scenario. For example, while

the Price River properties contained reservessufficient to support production for more than 35 years,

the exhibit cited by petitioners included earnings for just 20 years. Id. Under the terms of its lease,

AMAX acquired control of the Price River reserves for up to 80 years. See Management

Presentation at 9, in J.A. at 331. In addition, the management presentation observed the "significant

upside potential" of the properties, stating that "[p]rojected operating costs and realizations are felt

to be realistic, and could be surpassed." Memorandum from J.A. Olsen to R.B. Meschke (September

26, 1985) in J.A. at 370, 371; Management Presentation at 4, in J.A. at 326. The presentation

ultimately recommended that the Board go forward with the lease, anticipating that the Price River

acquisition would solidify AMAX's midwest operations during periods of market uncertainty and

provide an opportunity for AMAX to "diversify and expand into a new coal production area where

earnings potential is sound and competitive advantage can be gained." Id. at 2, 14 in J.A. at 324,

336. On the basis of this evidence, the Commission concluded that AMAX's management believed

that leasing the Price River properties at Indiana Michigan's asking price was an attractive business

opportunity with an acceptable level of risk.

Petitioner pointed to other internal AMAX documents analyzing the proposed lease and the

supplycontracts as additional evidence that the coal contractsincluded a premium. These documents

made frequent reference to the "margin," "net revenues," and "add ons" included in the coal supply

contracts. The terms "margin" and "net revenue," the Power Agency claimed, described the premium

included in the contracts to compensate AMAX for purchasing the mines at the breakeven asking

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price. According to the Power Agency, other documents and financial worksheets indicated that

American Electric had determined how much to charge for the supply contracts based upon the

amount it had to pay for the mines and that a lower price for the mines would lead to a lower contract

price. See Brief for Petitioner at 27, 29-32.

Acknowledging that "there may have been a linkage" between the transfer of the Price River

properties and the coal supply contracts, FERC Opinion at 62,237, the Commission observed that

"AMAX's and Indiana Michigan's intentions in selecting the prices they agreed to do not establish

whether the prices were just and reasonable." Indiana & Mich. Mun. Distribs. Ass'n, 65 F.E.R.C.

¶ 61,087 at 61,527 n.21 [hereinafter FERC Order Denying Rehearing]. Instead, the Commission

relied on FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944), in which the Court stated that

"[u]nder the statutory standard of "just and reasonable' it is the result reached not the method

employed which is controlling." Id.; see FERC Order Denying Rehearing at 61,527 n.21. Focusing

its attention on the results here, the Commission found nothing in the documents cited by the Power

Agency which raised serious doubt that the contract prices were exorbitant or unreasonable. To the

Commission, the final management presentation relied upon by the Power Agency to support its

contention that the contract price included a premium offered anotherand perfectly

properexplanation for AMAX's use ofthe terms "premium" and "margin." That presentation listed

three figuresfor each ofthe challenged supply contracts: the "base price," the "alternative price," and

the "net revenue increase." Management Presentation at 7-8 in J.A. at 329-30. According to the

Commission, the text surrounding these figures indicated that for the contracts in question, the

"alternative price" represented AMAX's estimation of the price it would have received for the coal

in question for short-term or immediate sale on the spot-market over the life of the contracts. The

"net revenue increase" in the presentation, the Commission observed, was simply the difference

between the long-term contract price and this estimated spot-market price. The Commission thus

concluded that AMAX's use of the terms "premium" or "margin" in its other documents described

nothing more than the difference between the price under the long-term contracts and the price on

the spot-market. Id.

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We are satisfied that the Commission's application of its prudence standard in this case is not

arbitrary and is supported by substantial evidence. It "examined the relevant data and articulated a

satisfactory explanation for its action including a rational connection between the factsfound and the

choice made." City of Mesa v. FERC, 993 F.2d 888, 895 (D.C. Cir. 1993) (quoting Motor Vehicles

Mfrs. Ass'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43 (1983)). This is all we require.

Once assured the Commission has engaged in reasoned decisionmaking, it is not for us to reweigh

the conflicting evidence or otherwise to substitute our judgment for that of the Commission. See id.

We are equally satisfied with the Commission's application ofits market rate standard. Under

that standard, the Commission gives "specialscrutiny" to fuelsupply contracts between a utility and

its subsidiary or an affiliated company by comparing the price of the challenged contract to other

contractsin the relevant market. See Public Service Co. of New Mexico, 832 F.2d at 1212-14. This

comparison serves as "an objective test that preventsrate manipulation" by "provid[ing] a substitute

for the arms-length negotiationsthat provide objectivityand fair dealing in non-affiliate transactions."

Ohio Power Co., 39 F.E.R.C. ¶ 61,098 at 61,279 (1987) (internal punctuation and citation omitted).

Indiana Michigan and AMAX are not affiliates. But in light of the allegations that the coal contracts

here were negotiated at something less than arm's length, the Commission, after examining the

contracts under the prudence standard, went on to evaluate the contracts using the market rate test.

The study prepared by the Commission'strialstaff revealed that the prices in both challenged

AMAX contracts were lower than the weighted average price of the comparable coal supply

contracts surveyed in the two relevant markets. To the Commission, this was conclusive evidence

that the AMAX contract prices were reasonable. After all, Indiana Michigan could arguably maintain

that any price between the lowest and the highest comparable contract prices in each market should

be deemed reasonable. The AMAX prices were not only within that high-low range but in the lower

half. See FERC Opinion at 62,241-42. In addition, the Commission found it highly unlikely that

AMAX could charge a premium on top of its bona fide costs and still provide coal at a price below

the weighted average in the market. Id. at 62,244.

The Power Agency maintainsthat the Commission's decision to rely on the FERC study was

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arbitrary. We disagree. The Commission explained that the trial staff study, based upon actual data

reported to FERC on a monthly basis, accounted for differing coal quality, the age and duration of

the contracts, and the contract size. Id. at 62,242. In contrast, the study submitted by the Power

Agency's expert relied on unverifiable estimates ofmining and transportation costs. See FERC Order

Denying Rehearing at 61,529. The Power Agency points out that most of the comparable contracts

included in the FERCstudyhad been renegotiated rather than initially formed during the relevant time

period, but the Commission reasonably concluded that these renegotiated contracts provided a

meaningful comparison since the negotiating parties could be expected to reach a price near the

market price at the time of renegotiation. See FERC Opinion at 62,243.

In sum, the Commission considered the Power Agency's criticisms and explained why,

notwithstanding petitioner's concerns, it found the FERC study to be reliable evidence that these

contracts were reasonably priced. The Commission's choice is in no way arbitrary, and is precisely

the kind of exercise of discretion to which we defer. We therefore affirm the Commission's finding

that Indiana Michigan did not violate section 205 of the Power Act by entering the AMAX coal

contracts and passing through the full cost of those contracts to its ratepayers.

III.

This brings us, then, to the two issuesthat do turn on the existence of a premium: petitioner's

challenges under FERC's accounting regulation and the McDowell settlement. With respect to the

former, the Power Agency contends that Indiana Michigan violated the FERC regulation governing

a utility's "Fuel Stock" accountknown as "Account 151"which is designed to capture certain

designated expenditures on fuel used to power the utility's generating facilities. See 18 C.F.R. pt.

101, Account 151 (1994). Like its statutory argument, the Power Agency's Account 151 claim rests

on the proposition that the coal contract prices included a premium to offset the allegedly

unreasonablyhigh asking price for the Price River mines. Such a premium, the Power Agency argues,

is not among the items identified as a permissible allocation to this account.

One answer the Commission gives to this argument is the same as its response under section

205 of the Power Act, namely, that even a contract price proven to contain a premium would not

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violate the Account 151 regulation so long as the price was reasonable under the market rate

standard. See FERC Opinion at 62,245-46. But whether an expense was prudently or reasonably

incurred undersection 205 and can therefore be recovered froma utility'sratepayers and whether that

expense may be included in Account 151 are different questions. Thus there are expenses which

"while related to fuel and properly recoverable through the ratemaking processif prudently incurred,

are not mentioned inAccount 151 and therefore not properly assigned to that account." Indianapolis

Power & Light Co., 48 F.E.R.C. ¶ 61,040, at 61,201 (1989); Minnesota Power & Light Co. v.

FERC, 852 F.2d 1070, 1072-73 (8th Cir. 1988). For example, the Commission has refused to allow

utilities to allocate several types of prudently incurred expensesto Account 151, including attorneys

fees and litigation costs arising from efforts to reduce fuel supply costs; limestone used to reduce

pollution from burning coal; audit fees incurred evaluating a coal supplier's annual invoice; and an

adjustment related to a utility's acquisition of a fifty percent interest in rail cars used to transport fuel.

See City of Bangor v. FERC, 922 F.2d 861, 863-64 (D.C. Cir. 1991) (citing Electric Coops. of

Kansas, 14 F.E.R.C. ¶ 61,176 (1981); Minnesota Power &Light Co., 39 F.E.R.C. ¶ 61,192 (1987);

Indianapolis Power &Light Co., 48 F.E.R.C. ¶ 61,040 (1989); Kansas City Power &Light Co., 42

F.E.R.C. ¶ 61,249 (1988)). In light of these precedents, we do not believe that a utility could assign

to its Fuel Stock Account the full price of a contract which contained a "premium" to cover the cost

of, for example, its acquisition of rail cars, even if that contract were priced reasonably near the

relevant market rate for coal, without violating the Account 151 regulation. The Commission's broad

pronouncement in this case that any invoice price within a reasonable range of the relevant market

can be allocated to Account 151, however, would seem to allow just such a result.

Had the Commission relied on this proposition alone, we would have no choice but to remand

for a more reasoned and thorough discussion of this departure from Commission precedent. But the

Commission also rested its decision on its conclusion that the contracts did not contain a premium,

a conclusion that, as we note above, issupported by substantial evidence. While the dissent maintains

that the Commission failed to take into account evidence in the record that could be read to support

the existence of a premium, we are satisfied that the Commission considered the entire record and

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that its finding is supported by substantial evidence, particularly in light of the market study showing

that the contracts were priced below the weighted average price of comparable contracts. Because

we will "sustain an agency decision resting on several independent grounds if any of those grounds

validly supports the result, unless there is reason to believe the combined force of the[ ] otherwise

independent groundsinfluenced the outcome," Carnegie Natural Gas Co. v. FERC, 968 F.2d 1291,

1294 (D.C. Cir. 1992), and because we have no evidence that the latter occurred, we affirm the

Commission's finding that Indiana Michigan did not violate the Account 151 regulation.

We turn finally to the McDowellsettlement. According to the Commission, the only Indiana

Michigan generating facility expressly covered by the settlement agreement isthe Tanners Creek 1-3

facility, the one contract the Power Agency did not challenge in its complaint. However, perhaps

because the Commission was not entirely certain that the settlement's $75 million cap on the amount

of the Price River amortization chargeable to wholesale ratepayers did not apply to ratepayers at

Tanners Creek 4 and Breed, it went on to rule that even if the McDowellsettlement did apply to the

Tanners Creek 4 and Breed facilities, petitioner had not demonstrated a violation. FERC Opinion

at 62,244-45. We sustain that ruling for the same reason that we affirmed the Commission's ruling

on the fuel account regulations: the Commission's finding that the contract did not include a premium

to offset the price paid for the mine is supported by substantial evidence.

For the foregoing reasons, we deny the petition for review.

So ordered.

WALD, Circuit Judge, dissenting: Mindful of significant deference owed the Commission on

the inferences to be drawn from disputed evidence, I nonetheless remain deeply troubled by the

Commission's cursory treatment of a substantial amount of record evidence supporting the Power

Agency's charges that Indiana Michigan entered into long-term coal supply contracts with AMAX

at inflated prices in order to induce AMAX to purchase the Price River mines at their book value.

Thus, I would remand the case to the Commission for more adequate explanation of what I consider

to be glaring pieces of evidence that point in the direction of the alleged "sweetened" contracts.

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1The majority does not contend that the statutory requirement that rates be "just and

reasonable" plainly means that a market price study is the final arbiter of rates. 

The gravamen of the Power Agency's charge is that Indiana Michigan included "sweeteners"

in its long-term coalsupply contracts with AMAXand passed these costs along to ratepayersin

order to induce AMAX to buy the Price River mines at their book value. I first discuss the legal

standard governing the alleged sweeteners. The Power Agency argues that such sweeteners, if

proved, would violate the statutory requirement that rates be "just and reasonable," Federal Power

Act § 205, 16 U.S.C. § 824d (1988), FERC's accounting standards, and the McDowell settlement.

The majority concludes that while the alleged sweeteners would violate FERC's accounting

regulations, and possibly the McDowellsettlement, Majority Opinion ("Maj. op.") at 14-15, they are

completely irrelevant to the Power Agency's statutory challenge: "if the market price study

demonstratesthat the coal contracts are reasonably priced our task is at an end, regardless of whether

the contract rate includes a premium of some kind." Maj. op. at 7. In so doing, the majority takes

the astonishing step of announcing an interpretation of the Commission's organic statutewith

implicationsfar beyond this casethat the Commission itself declined to adopt, turning the principle

of deference to administrative agencies on its head. "[A] reviewing court, in dealing with a

determination or judgment which an administrative agency alone is authorized to make, must judge

the propriety of such action solely by the grounds invoked by the agency. If those grounds are

inadequate or improper, the court is powerlessto affirmthe administrative action bysubstituting what

it considersto be a more adequate or proper basis. To do so would propel the court into the domain

which Congress has set aside exclusively for the administrative agency." Securities & Exchange

Comm. v. Chenery Corp., 332 U.S. 194, 196 (1947). By the same token, courts cannot use the

review of an agency decision as an occasion to announce a rule of law not adopted by the

Commission. Under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984), unless we are dealing with the plain meaning of a statute, which we are plainly not,1 we must

defer to the agency's own reasonable interpretation, not announce our own. See 467 U.S. at 843.

Contrary to the majority, I am unable to discern from the Commission's opinion the position

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2The Commission's application of the prudence standard, in turn, reveals that proof of the

alleged sweeteners would violate that standard. Although the Commission mentions that Indiana

Michigan's "intentions" in setting the coal prices are not dispositive to the prudence analysis, 65

F.E.R.C. ¶ 61,087 at 61,527 n.21, it devotes considerable energy to explaining that the repeated

references by AMAX to "premiums" are "long-term" premiums rather than the inducement

payments alleged by the Power Agency. This exercise, of course, would be entirely unnecessary if

the alleged premiums met the prudence standard. 

that the market price test would trump actual evidence of the alleged sweeteners. The logic of the

Commission's opinion points in completely the opposite direction: the Commission determined that

Indiana Michigan's coal purchase price withstood the Power Agency'sstatutorychallenge only on the

basis of its findings that that price passed both the market price and prudence test. See, e.g., 65

F.E.R.C. ¶ 61,087 at 61,526 (the "contract price was not excessive when considered under either of

these standards") (emphasis added). Thus, although the Commission undoubtedly placed great

reliance on the market test, that reliance was never exclusive. Indeed, the Commission explained its

understanding of the interrelation of the two tests quite clearly: "[I]f the price paid by the utility falls

within the range of market prices for comparable goods ..., it becomes especially difficult for the

complainants to demonstrate imprudence." 62 F.E.R.C. ¶ 61,189 at 62,238 (emphasis added). It

does not, however, per the Commission, become impossible to demonstrate imprudence. The

Commission's prudence standard, in turn, is not mere surplusage; under settled Commission

precedent, that standard is a direct interpretation of the statutory "just and reasonable" requirement.

See Michigan Power & Light Co., 11 F.E.R.C. ¶ 61,312 at 61,644-45; see also Kentucky Utilities

Co., 62 F.E.R.C. ¶ 61,097 at 61,197. Under the approach taken by the Commission in its opinion,

then, Indiana Michigan's coal purchase contracts cannot pass the statutory "just and reasonable"

standard without passing the prudence test.2

Indeed, the Commission's own defense of its decision in briefs and at argument contradicts

the majority's reading. At oral argument, Commission counsel repeatedly declined to take the

position now adopted by the majority, instead characterizing the charges as "very, very serious." The

court asked Commission counsel point blank:

If we had absolute gold-plate proof that ... there was a sweetener in this particular

deal ... but [the final price] somehow satisfie[d] the market price ... would there be

any violation of ratemaking principles?

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3Although we have consistently accorded the Commission a high degree of deference in the

economic modelling underlying its rates, see Federal Power Commission v. Hope Natural Gas

Co., 320 U.S. 591, 602 (1944), I have found no decision by the Commission or any court in

which a market price analysis was found to trump actual evidence that wholly extraneous costs

were allocated to a utility's supply purchase. When the 10th Circuit affirmed FERC's use of the

market-price standard to evaluate whether transactions between affiliates are arms-length

transactions, it did so only on "the record before us" in which the Administrative Law Judge

"found ... no evidence suggesting anything improper." Public Service Co. v. FERC, 832 F.2d

1201, 1213-14 (10th Cir. 1987) (internal quotations omitted). 

4Of course, this factual question is equally critical to the majority's disposition of the Power

Agency's challenges based on FERC's accounting standards and the McDowell settlement. 

5At the time of the Commission's decision, some of the evidence was under seal. The

Commission assured that it "reviewed protected portions of the record and f[ound] that they do

not advance the Power Agency's cause," 65 F.E.R.C. ¶ 61,087 at 61,525. I realize that

constraints on disclosure may have prevented the Commission from fully discussing some of the

evidence identified by the Power Agency. Accordingly, as detailed below, I consider the

Commission's discussion in briefs as well as in its published decision. (The relevant information

has since been made public, and the Commission faced no constraints on its disclosure in brief.) 

In response, as one member of the panel noted, counsel "filibuster[ed]," and, in the end, confirmed

that the Commission required the contract prices to pass two separate teststhe prudence test and

the market price studybefore deeming them "just and reasonable":

You've got ... one standard which basically did not in itself involve a market price

analysis. And you know it's a loose standard. The Commission used that. It looked

at ... the evidence of a sweetener. And then you use market price analysis in that

context as corroboration.

In sum, without considering whether the Commission is required to hold utilities to the

prudence standard when it determines whether its rates are "just and reasonable,"3it is enough for

the moment that theCommission does hold utilitiesto thisstandard. It is, accordingly, the application

of this standard to Indiana Michigan that we must review.

The critical question, then, is the factual one whether the long-term contracts included

premiumsto induce AMAX to complete the Price River mines purchase at Indiana Michigan's asking

price.4 The Commission points to selective evidence in the record to conclude that the only

"premiums" involved in thistransaction were premiums commonly included in long-term coalsupply

contracts over the spot market. To reach this conclusion, however, the Commission turns a blind eye

to a great deal of evidence that the "premiums" in the long-term contracts were, in fact, designed to

offset the inflated cost of the Price River mines.5

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First, I find unconvincing the Commission's treatment of AMAX's own assessment of the

transactionsin its Management Presentation to the board. AMAX's presentation, based on "detailed

feasibility studies and a comprehensive market evaluation ofthe Price River properties," 65 F.E.R.C.

¶ 61,087 at 61,526, concludesthat the Price River mines component ofthe transaction has a negative

net present valuethat the expected income is less than half of the cost. Memorandum from J.A.

Olsen to AMAX Management, Attachment 1, at 1 (September 3, 1985) ("Management

Presentation"), reprinted in 2 Joint Appendix ("J.A.") 322, at 323. The presentation nevertheless

recommendsto AMAX's board that it enter the linked Price River mines and coalsupply transactions

on the basis ofits "Summary ofTransactions," in which it offsetsthe negative value ofthe Price River

mines purchase with the positive present value of the long-term coal supply contracts. Id.

The Commission discountsthis negative valuation of the Price River mines by AMAX's own

management by noting that the negative valuation "reflects only 20 years of cash flow from the Price

River mining operation, even though the evidence shows that the Price River reserve would support

more than 35 years of mining. This fact led AMAX to conclude that the Price River properties

contained "significant upside potential', so much so that AMAX even considered mining a second

seam at Price River." 65 F.E.R.C. ¶ 61,087 at 61,526 n.18.

This reading of AMAX's valuation equation is a strained one indeed. In the course of its

analysis of the transactions, AMAX's Management Presentation notesthe possibilities mentioned by

theCommissionthat production could continue longer and more coal be exploitedand statesthat

the projected earnings from the mines "could be surpassed." But it also expressly finds it

"conceivable ... that [AMAX] could be unsuccessful in its attempts to profitably reactivate the Price

River Mine," i.e., it could end up with a totally worthless mine. Management Presentation at 4,

reprinted in 2 J.A. at 326. Thus, AMAX recognized that, like any business investment, this one could

do better or worse than expected. In the end, however, AMAX chose those "[p]rojected operating

costs and realizations" for the mines that it "felt to be realistic" to arrive at the final values presented

in its "Summary of Transactions." Id. And in this final analysis, AMAX concluded that the Price

River mines purchase had a negative value. FERC's suggestion that AMAX actually decided to

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6

Indeed, FERC identifies as one source of the possible "upside potential" the fact that the

mines could produce for 35 years rather than 20. Even if the projected income stream from year

20 to year 35 were included, it would not raise the value of the mines above their cost. The

present value of the income from those later years of production would be significantly less than

the present value of the first 20 years of production because it would be far more heavily

discounted. As the present value of the first 20 years of income is itself less than half the present

value of the cost of the mines ($26.7 million of $55.2 million in pre-tax dollars), inclusion of the

next 15 years could not even approach making up the deficit. 

7AEP is the parent company of Indiana Michigan. 

consummate the transaction on the basis of an unquantified and speculative "upside potential" that

might bring the mines marginally closer to the black defies common sense.6 The Management

Presentation's recommendation that AMAX enter the transaction is based on the final analysis

presented in the "Summary," under which the Price River Mines component of the transaction has

a negative present value, offset only by the positive present value of the Coal Supply Agreements.

It takes no law and economics maven to conclude that a business would not enter into a transaction

assessed at a negative value absent countervailing benefits. In this case, the Power Agency argues

that it was premiumsin the linked, long-termcontractsthat made the transaction worthwhile, and the

Commission has provided no persuasive alternative.

Second, FERC's response to statements in the record made by certain of the negotiators of

the deal involving the PriceRiver mines and the coalsupplycontractsis equallydiscomfiting. Internal

AMAX documents stating in no uncertain terms that the long-term coal supply contracts are set at

a level to offset the cost of the Price River Mines purchase pepper the record. One AMAX review,

for instance, identifies possible questions and answers for the presentation of the proposal to the

Board. In response to an anticipated question that the price of the mining property "seems awfully

high," the memo suggests the following answer:

First, the $175 million isto be paid over 20 years, so that its present value is near $50

milliona price not unreasonable when compared with other Utah properties that

have sold recently. Second, insofar as AEP [7]is concerned, thistransaction hastwo

aspects, the Utah acquisition and the coal supply agreements; any change in value

for one would therefore be reflected in an offsetting change in the value for the

other. Thus, a lower price for Utah would result in lower contract pricing.

Memorandum from R.B. Meschke to W.R. Wahl, Attachment 2, at 1 (September 26, 1985),

reprinted in 2 J.A. 361, at 368 (emphasis added). 

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8Some of these documents describe earlier versions of the deal, but describe the same

fundamental transactions. No party has suggested that the nature of the premiums shifted over

the course of the negotiations. 

9FERC responds to this statement by singling out the assertion that the properties are "worth

considerably less than $140 million," and concluding that this assertion does not support the

conclusion that the properties are overpriced "because there is no indication whether that figure

was premised on a direct sale, lease, or other financial arrangement." FERC Brief at 36. This

response sidesteps entirely the point of the statementmade after the transaction was in its final

formwhich is that because the properties are overpriced, Indiana Michigan will include the

long-term contracts. 

The Commission does not even try to explain away this express understanding by AMAX's

management officials that the price of the mines and the long-term coal supply contracts move in

tandem. Instead, it simply dismisses the memorandum as the "statement of only one negotiator,"

which can "hardly [be] dispositive." FERC Brief at 37. Though certainly not "dispositive," this

memorandum designed for the board's understanding of the deal deserves more than the

Commission's cursory dismissal when there is an absence of any evidence advancing a different

explanation.

Indeed, the Power Agency has pointed to not one but a string of internal analyses AMAX

prepared over the course of negotiations with Indiana Michigan, all characterizing the long-term

contract "premiums" as offsets to the cost of the Price River Mines, rather than the "premiums" for

long-term coal supplies suggested by the Commission.8 AMAX's "Mine Feasibility Study" of

September, 1985, says:

AEP recognizes that on a fair market value basis [Price River Mines] worth

considerably less than $140 million; therefore willing to include long term contracts

as an offset to the consideration received from a purchase.

Memorandum from J.A. Olsen to W.R. Wahl, Attachment 1, at 1 (September 26, 1985), reprinted

in 2 J.A. at 375.9

AMAX's review of December, 1985, states:

AEP would pay AMAX a permium [sic] on both midwest and compliance coal to

cover the cost ofthe Price River lease. Premium payments and lease payments would

be equated on a present value basis.

Memorandum from J.E. Schroder to R.B. Meschke at 1 (December 4, 1984), reprinted in 2 J.A. at

437.

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10Further, when the total tonnage for Tanners Creek 1-3 changed from 600,000 to 800,000,

AMAX stated: "On our calculation we must figure what we have to charge for this coal in order

And AMAX's transaction analysis of June, 1984, explains:

Coal Prices will be structured to include premium sufficient to reimburse AMAX and

South East for plant, equipment, and reserve lease payments.

Memorandum from D.E. Coovert to R.B. Detty at 4 (June 1, 1984), reprinted in 2 J.A. at 417.

The Commission's only reply to this evidence is that "there is nothing at all unusual about a

business anticipating profitsfrom one of itstransactionsto pay for another transaction." FERC Brief

at 40. But the cited memoranda suggest far more than AMAX's anticipation that "profits from one

of itstransactions[will] pay for another"; they state that the deal is being "structured" to accomplish

thisresult through the use of premiums. These repeated and uncontradicted statements that the coal

supply "premiums" are designed to offset the cost of the Price River Mine Purchase demand more

than the casual attention given them by the Commission.

Finally, FERC's finding that all of the "premiums" were simply long-term premiums is flatly

contradicted by concrete record evidence. The Commission's decision "find[s]" categorically "that

the "premiums' or "net revenues' mentioned in the AMAX documentssimply refer to how much more

money AMAX would earn by selling the coal to [Indiana Michigan] on a long-term contract basis

rather than selling the coal on the spot market." 65 F.E.R.C. ¶ 61,087 at 61,527.

As to some of these "premiums," however, the Commission is clearly wrong. The "

"premiums' or "net revenues' mentioned in the AMAX documents" were included in long-term

contracts at Breed, Tanners Creek 1-3, and Tanners Creek 4. Although the Power Agency does not,

in the end, challenge the pricing at Tanners Creek 1-3, it has pointed to record evidence that for these

contracts AMAX expressly calculated the "net revenue"the premiumfrom the baseline of a

long-termcontract. Under the mutual arrangements for the Tanners Creek 1-3 long-term coal supply

contracts, AMAX buys coal from a third party on a long-term contract and then turns around and

sellsit to Indiana Michigan on a long-term contract. See Management Presentation at 6-7, reprinted

in J.A. at 328-29. The calculated premium is between these two long-term contracts and most

definitely not between a long-term and a spot market contract. See id.10

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to obtain the same value that we previously calculated at 600,000." Memorandum from P.M.

Garson to T.M. Blangiardo and R.B. Meschke at 1 (March 8, 1985), reprinted in J.A. at 474. 

This statement that the premium would remain constant regardless of the amount of coal

delivered conflicts with FERC's conclusion that the premium is long-term v. spot market

premium. 

FERC does not dispute this analysis of the premiumsin the Tanners Creek 1-3 contracts, but

providesthe "simple answer" that the Tanner's 1-3 premiums are "irrelevant" because those contracts

are not challenged by the Power Agency. FERC Brief at 39. Though the Tanners Creek 1-3

contracts are assuredly not "directly at issue," id., they are part of the same transaction between

AMAX and Indiana Michigan andin combination with the other evidencestrongly suggest

inferences about the intent underlying the related "premiums" in the Breed and Tanners Creek 4

contracts. The Commission's disposal of this uncontradicted evidence that the premiums in the

Tanners Creeks 1-3 contracts were not long-term premiums is far too breezy.

As we have often repeated, "[t]he substantiality of evidence must take into account whatever

in the record fairly detracts from its weight." Universal Camera Corp. v. NLRB, 340 U.S. 474

(1951). In concluding that the only "premiums" in the deal between Indiana Michigan and AMAX

were premiums for long-term coal, the Commission has failed utterly to take into account large

portions of the record "detract[ing] from [the] weight" of this conclusion and pointing strongly

toward a contrary conclusion that the deal did indeed involve inducement premiums for the sale of

the mines as alleged by the Power Agency. Given the force of this counter evidence, I believe the

Commission had an obligation to answer it directly and, if it could not, to change its own result and

hold for the Power Agency. On the ground that the record in its present state does not in the end

provide the "substantial evidence" necessary to validate the Commission's decision, I respectfully

dissent.

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