Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-01162/USCOURTS-caDC-07-01162-0/pdf.json

Parties Involved:
Albany Engineering Corporation
Petitioner
Federal Energy Regulatory Commission
Respondent
Hudson River-Black River Regulating District
Intervenor

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 12, 2008 Decided November 28, 2008 

No. 07-1162 

ALBANY ENGINEERING CORPORATION, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

HUDSON RIVER-BLACK RIVER REGULATING DISTRICT, 

INTERVENOR

On Petition for Review of Orders 

of the Federal Energy Regulatory Commission 

William S. Huang argued the cause for petitioner. With 

him on the briefs were Frances E. Francis and Rebecca 

Baldwin. 

Lona T. Perry, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent. On the brief 

were Cynthia A. Marlette, General Counsel, Robert H. 

Solomon, Solicitor, and Judith A. Albert, Senior Attorney. 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 1 of 26
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Michael N. McCarty argued the cause for intervenor. 

With him on the brief were John H. Conway and Christian D. 

McMurray. 

Before: BROWN and KAVANAUGH, Circuit Judges, and 

WILLIAMS, Senior Circuit Judge. 

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS. 

Concurring opinion filed by Circuit Judge BROWN. 

WILLIAMS, Senior Circuit Judge: An upstream dam 

typically will render the downstream flow more even and 

predictable, enabling downstream hydropower plants to 

operate at a higher capacity. Farmington River Power Co. v. 

FERC, 103 F.3d 1002, 1004 (D.C. Cir. 1997); see also 18 

C.F.R. § 11.10(a)(2). To enable the upstream firms to recoup 

part of the cost of conferring these “headwater benefits,” 

Congress in § 10(f) of the Federal Power Act (“FPA”), 16 

U.S.C. § 803(f) (2006), directed the Federal Energy 

Regulatory Commission (technically the direction was to its 

predecessor, but the change is of no moment here) to require 

its downstream licensees to reimburse upstream operators “for 

such part of the annual charges for interest, maintenance, and 

depreciation thereon as the Commission may deem 

equitable.” Id. (emphases added). This case presents the 

question whether § 10(f) preempts state law over 

compensation for headwater benefits, or whether, 

alternatively, it allows states to mandate compensation for 

elements of cost other than “interest, maintenance, and 

depreciation.” 

FERC held that § 10(f) preempted state law only insofar 

as the state authorized charges for interest, maintenance, and 

depreciation. Fourth Branch Associates (Mechanicville) v. 

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Hudson River-Black River Regulating District, 117 FERC 

¶61,321 (2006) (“Order”). Thus it left New York (the state in 

question, and of course by extension all other states) free to 

authorize upstream firms to assess FERC licensees for all 

headwater improvement costs not fitting into the “interest, 

maintenance, and depreciation” categories. 

Our review of the text and legislative history of the FPA 

generally and § 10(f) specifically convinces us that § 10(f) 

must, in order to accomplish the full objectives of Congress, 

be understood to preempt all state orders of assessment for 

headwater benefits. See Louisiana Pub. Serv. Comm’n v. 

F.C.C., 476 U.S. 355, 368-69 (1986) (“Pre-emption occurs . . . 

where the state law stands as an obstacle to the 

accomplishment and execution of the full objectives of 

Congress.”); Crosby v. Nat’l Foreign Trade Council, 530 U.S. 

363, 372-73 (2000); Geier v. American Honda Motor Co., 

Inc., 529 U.S. 861, 881 (2000); Armstrong v. Accrediting 

Council for Continuing Educ. and Training, Inc., 168 F.3d 

1362, 1369 (D.C. Cir. 1999). Thus we find that FERC’s 

interpretation of § 10(f) was unreasonable, and we remand the 

case to FERC to consider appropriate remedies consistent 

with our holding. 

* * * 

The Hudson River-Black River Regulating District (the 

“District”) is a New York state agency authorized to operate 

the Conklingville Dam and its related impoundment, Great 

Sacandaga Lake, on the Sacandaga River, a tributary of the 

Hudson. Fourth Branch Associates (Mechanicville) v. 

Hudson River-Black River Regulating District, 119 FERC 

¶61,141, PP 3–10 (2007) (“Order on Rehearing”). In 1992, 

FERC determined that the District must obtain licenses for 

both the Conklingville Dam and Great Sacandaga Lake 

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because the E.J. West Project, a FERC licensee located on the 

Conklingville Dam, used the District’s facilities to generate 

power. FERC issued an original license to the District in 

September 2002. Id. 

Albany Engineering Corporation is the successor to 

Fourth Branch Associates and as such is the FERC licensee 

for the Mechanicville Hydroelectric Project, located 

downstream of Great Sacandaga Lake. Id. New York law 

authorizes the District to recover its capital, maintenance, and

operating costs through assessments against public 

corporations and real estate parcels benefited by the 

construction of dams and reservoirs. N.Y. Envtl. Conserv. 

Law § 15-2121. Under this authority the District has been 

levying annual assessments against downstream FERC 

licensees such as Albany for decades. Order, 117 FERC 

¶61,321 at P 11. 

On July 25, 2006, Albany filed a formal complaint with 

FERC against the District, alleging that since 2002 the District 

had been improperly assessing annual charges for headwater 

benefits. Id. at P 1. Albany argued that § 10(f) vests FERC 

with the exclusive jurisdiction to determine the level of 

reimbursement for costs associated with such benefits. 

Section 10(f) states: 

That whenever any licensee hereunder is directly 

benefited by the construction work of another licensee, a 

permittee, or of the United States of a storage reservoir or 

other headwater improvement, the Commission shall 

require as a condition of the license that the licensee so 

benefited shall reimburse the owner of such reservoir or 

other improvements for such part of the annual charges 

for interest, maintenance, and depreciation thereon as the 

Commission may deem equitable. The proportion of 

such charges to be paid by any licensee shall be 

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determined by the Commission. The licensees or 

permittees affected shall pay to the United States the cost 

of making such determination as fixed by the 

Commission. 

16 U.S.C. § 803(f) (emphases added). 

 FERC found that “there is no question” that the District 

had charged Albany for headwater benefits. Order, 117 

FERC ¶61,321 at P 38. Insofar as New York’s statutory 

scheme covered charges for interest, maintenance, and 

depreciation, it found the scheme preempted by § 10(f). Id. at 

P 44. So far as other costs were concerned, however, FERC 

rejected Albany’s preemption claim. Id. at PP 49-50. In 

reaching this conclusion, it characterized § 10(f) as 

manifesting a single federal interest—that of “ensuring the 

participation of downstream project owners in the financial 

burden incident to the construction of power and storage 

facilities of a river basin.” Id. at P 49. FERC also found that 

it had no authority to require the District to rescind 

assessments made under color of state law or to order refunds 

of amounts already paid. Id. at PP 55–56. 

Albany sought rehearing, which FERC denied. Albany 

now appeals to this court, objecting to all the above rulings 

other than FERC’s finding that § 10(f) did preempt state-law 

mandates for reimbursement of interest, maintenance, and 

depreciation. (The District files no cross appeal on that issue.) 

* * * 

This court generally reviews an agency’s interpretations 

of the statutes it administers under the deferential standard set 

forth in Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984). 

But a recent dissenting Supreme Court opinion has called into 

question whether Chevron deference is appropriate when 

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addressing questions of preemption. In Watters v. Wachovia 

Bank, 127 S. Ct. 1559, 1584 (2007) (Stevens, J., dissenting) 

(joined by Roberts, C.J., and Scalia, J.), the dissent argued that 

“[u]nlike Congress, administrative agencies are clearly not 

designed to represent the interests of the States . . . .” As a 

result, the dissent reasoned that “when an agency purports to 

decide the scope of federal preemption, a healthy respect for 

state sovereignty calls for something less than Chevron

deference.” Id. 

We have in the past rejected the argument that “wherever 

a federal agency’s exercise of authority will preempt state 

power, Chevron deference is inappropriate.” Oklahoma 

Natural Gas Co. v. FERC, 28 F.3d 1281, 1284 (D.C. Cir. 

1994). We reasoned that, “with the exception of negative 

exercises of federal authority, all agency legal interpretations 

have some preemptive effect . . . .” Id. Hence, we rejected 

the application of a “non-deference principle” because it 

would “have to be applied almost universally, overturning 

Chevron.” Id. The context, to be sure, involved an issue—the 

scope of the agency’s jurisdiction—that only implicitly was of 

preemptive effect, not, as here, an express issue of whether 

undisputed FERC authority has preemptive effect. Oklahoma 

Natural Gas Company also of course left open the question of 

whether or not an agency decision that avoids preemption of a 

state law—as is the case with FERC’s decision here—is still 

deserving of Chevron deference. 

Ultimately, this case doesn’t require us to resolve the 

applicability of Chevron to agency preemption decisions, as 

“we would vacate [FERC’s] interpretation even under the 

more deferential Chevron standard.” Port Authority of New 

York and New Jersey v. Dep’t of Transp., 479 F.3d 21, 28 

(D.C. Cir. 2007). In short, we will assume in favor of FERC 

that its conclusion is entitled to Chevron deference. 

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Another framing issue is the familiar presumption against 

preemption. See, e.g., Geier v. American Honda Motor Co., 

Inc., 166 F.3d 1236, 1237 (D.C. Cir. 1999), aff’d, 529 U.S. 

861 (2000). But this presumption may be overcome if, as we 

hold today, the court finds that the preemptive purpose of 

Congress was “clear and manifest.” Geier, 166 F.3d at 1237 

(citing Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)). 

* * * 

 We start with FERC counsel’s concession at oral 

argument that under § 10(f) FERC itself could not impose 

charges for headwater benefits other than “interest, 

maintenance, and depreciation.” Oral Argument Rec. 15:10–

15:27. The concession was surely inevitable. As the certainty 

of other costs was as plain as plain could be, Congress’s 

express provision for three types could hardly leave room for 

a FERC mandate of reimbursement of, say, the operational 

costs in dispute here. The maxim expressio unius est exclusio 

alterius has its limits, but we need not plumb them here. 

 FERC’s position, then, must be that although Congress 

would not allow it to mandate collection of other types of 

costs, it meant to allow the states to do so freely. Neither the 

overall function of the FPA, nor the sense of § 10(f), allows us 

to infer such a meaning. 

The Supreme Court has extensively analyzed the 

“circumstances which culminated in the passage of the 

Federal Water Power Act in 1920.” First Iowa Hydro-Elec. 

Coop. v. Fed. Power Comm’n, 328 U.S. 152, 180 (1946). It 

found that the Act was “the outgrowth of a widely supported 

effort of the conservationists to secure enactment of a 

complete scheme of national regulation which would promote 

the comprehensive development of the water resources of the 

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Nation.” Id. (emphases added). Congress’s intent was “not 

merely to prevent obstructions to navigation,” but rather to 

“secure enactment of a comprehensive development of 

national resources” through control over the “engineering, 

economic and financial soundness” of hydropower projects. 

Id. at 172, 180–81. It proceeded to find Iowa’s licensing 

scheme preempted: 

A dual final authority, with a duplicate system of state 

permits and federal licenses required for each project, 

would be unworkable. Compliance with the requirements 

of such a duplicated system of licensing would be nearly 

as bad. 

Id. at 168 (internal quotations omitted). Given the 

commitment to comprehensive federal regulation, and 

preclusion of dual licensing authority, it is hard to imagine 

why Congress would have countenanced disparate state 

reimbursement schemes, calculated on different bases and 

potentially imposing severe costs on hydropower firms in 

other states, downstream of the enacting jurisdiction. This 

seems like precisely the sort of heterogeneity and conflict that 

a complete and comprehensive scheme would be expected to 

prevent. 

Of course this does not mean that the FPA precludes 

every state exercise of power marginally related to federal 

hydropower licensees. California v. FERC, 495 U.S. 490, 

496–97 (1990). Thus, we must still examine the specific 

language and legislative history of § 10(f) to determine if 

there is “clear evidence” that Congress intended to preempt 

headwater benefits charges for costs not covered by § 10(f). 

Id. 

As we mentioned earlier, FERC discerned from the text 

and legislative history of § 10(f) a single “federal interest,” 

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namely the interest in “ensuring the participation of 

downstream project owners in the financial burden incident to 

the construction of power and storage facilities of a river 

basin.” Order, 117 FERC ¶61, 321 at P 49. If that federal 

interest were the only one, it would make sense to understand 

§ 10(f) as leaving states free to load up the downstream 

operators with costs outside the three specified categories. 

 But if assuring such a contribution to upstream owners’ 

burdens had been Congress’s sole intent, it is hard to see why 

Congress would have limited FERC’s own authority to 

“interest, maintenance, and depreciation,” as FERC’s own 

concession and the sound application of expressio unius make 

clear it did. FERC advances no argument for why FERC 

would be less well suited than the states to determine 

equitable operating expenses, as opposed to interest, 

maintenance, and depreciation charges. Nor does FERC offer 

any reason Congress would be concerned that FERC set only 

charges it deemed equitable, yet would leave states free to 

collect charges regardless of whether they met FERC’s 

judgment of their equity. 

 FERC’s approach here manifests an interpretative error of 

long standing, one that apparently will never die: to treat a 

statute’s primary or precipitating object as its sole object. As 

the Supreme Court said in Rodriguez v. United States, 480 

U.S. 522, 526–27 (1987), 

But no legislation pursues its purposes at all costs. 

Deciding what competing values will or will not be 

sacrificed to the achievement of a particular objective is 

the very essence of legislative choice—and it frustrates 

rather than effectuates legislative intent simplistically to 

assume that whatever furthers the statute’s primary 

objective must be the law. 

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Id. at 525–26 (emphasis in original). See also Bd. of 

Governors of the Fed. Reserve Sys. v. Dimension Fin. Corp., 

474 U.S. 361, 373–74 (1986); Vencor, Inc. v. Physicians’ 

Mut. Ins., 211 F.3d 1323, 1325–26 (D.C. Cir. 2000). 

The text of § 10(f) clearly reflects just such congressional 

balancing. The limitation on the types of costs recoverable, 

and the insistence that such costs be deemed “equitable” by 

FERC, manifest a deliberate congressional decision to balance 

the goal of compensating upstream owners (and thus 

encouraging their investment) and that of protecting 

downstream ones (and thus encouraging their investment). 

FERC itself, in its own provision for reimbursement under 

§ 10(f), invokes the word “equitable” to support its limitation 

of headwater benefits charges to “85 percent of the value of 

the energy gains.” 18 C.F.R. § 11.11(b)(5). See also Order 

No. 453, 51 Fed. Reg. at 24,314, [1986-1990 Regs. 

Preambles] FERC Stat. & Regs. at 30,310 (addressing issue of 

whether the cap provided downstream operators with adequate 

incentives); 49 Fed. Reg. 1067-01, 1070 [1982-1987 Proposed 

Regs.] FERC Stat. & Regs. at 32,850 (explaining that the 

purpose of a cap on total charges was to avoid the “inequitable 

result” of charges “larger than the value of the gains for a 

project for an individual year”). 

The legislative history of § 10(f) is consistent with this 

interpretation. Several representatives speaking in support of 

§ 10(f) stressed that § 10(f) was meant to provide for limited 

reimbursement. Representative Dill, speaking in favor of the 

§ 10(f) amendment, explained: 

Take the Columbia River power sites and the power sites 

on the streams that flow into it. If a dam is built to 

establish a reservoir for water to furnish power on one of 

these streams, it furnishes water for all dams below it and 

whoever may happen to build a dam on a power site 

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below should contribute to the cost of the reservoir dam 

in proportion to the benefits received. This amendment 

provides that very thing, and I most earnestly hope it will 

be adopted. 

56 Cong. Rec. 9,916 (1918) (emphases added). 

Representative Raker, also speaking in support of the 

amendment, stated that § 10(f) would require downstream 

licensees to contribute to the cost of an upstream project “to 

the expense [sic; “extent”?] that the subsequent works are 

benefited by virtue of the original work.” Id. 

 FERC’s reasoning in its orders here observed none of 

these signs of careful congressional balancing. Rather, the 

Commission simply stated that “the legislative history of 

section 10(f) is sparse and does not otherwise reveal 

Congress’s reasons for limiting reimbursable costs to interest, 

maintenance and depreciation.” Order, 117 FERC ¶61,321 at 

P 45. Consequently, FERC could see no reason to prevent the 

District from collecting for charges other than interest, 

maintenance, and depreciation, since preventing that 

collection would, it thought, be “disruptive” to the District’s 

current assessment scheme. Id. at P 50. FERC emphasized 

that the District “has expenses that do not fall within the 

categories specified by section 10(f),” and if it were unable to 

assess such costs the District would have difficulty 

“administering a storage project that affects a variety of 

downstream uses within that state.” Id. 

FERC evidently believes that the legislative history’s 

failure to mention “disruption” of the sort it espies here 

renders its interpretation of § 10(f) reasonable. But it is 

simply “not the law that a statute can have no effects which 

are not explicitly mentioned in its legislative history.” 

Pittston Coal Group v. Sebben, 488 U.S. 105, 115 (1988). 

Moreover, “The relative importance to the State of its own 

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law is not material when there is a conflict with a valid federal 

law, for the Framers of our Constitution provided that the 

federal law must prevail.” Arizona v. Bowsher, 935 F. 2d 

332, 335 (D.C. Cir. 1991) (quoting Fidelity Federal Savings 

& Loan Ass’n v. De La Cuesta, 458 U.S. 141, 153 (1982)). 

Though FERC found that the District was assessing 

charges for headwater benefits, Order on Rehearing, 119 

FERC ¶61,141 at P 15, it repeatedly stressed the “unusual” 

nature of the “situation here, in which an upstream storage 

reservoir is owned by a state and is dependent on stateauthorized assessments to cover its operations costs,” id.. at P 

41. See also Order, 117 FERC ¶61,321 at P 38; Order on 

Rehearing, 119 FERC ¶61,141 at P 32. But § 10(f) by its 

terms applies “whenever any licensee hereunder is directly 

benefited”—thus in all cases when licensees receive 

headwater benefits from the construction efforts of upstream 

licensees. The Commission’s attempted distinction between 

public and private ownership is thus irrelevant to the question 

of whether or not § 10(f) preempts state laws mandating 

compensation for headwater benefits. If § 10(f) preempts 

state charges for headwater benefits, then it does so for both 

private and public actors equally. 

Besides disrupting Congress’s intended balance between 

provider and recipient interests, the Commission’s 

understanding of § 10(f) would generate complex issues of 

meshing state charges with FERC-approved ones. FERC, in 

the absence of agreement between the parties, uses its 

Headwater Benefits Energy Gains model to allocate the 

interest, maintenance, and depreciation to downstream 

beneficiaries in proportion to the value of the energy gains 

each beneficiary enjoys, calculated as “the cost of obtaining 

an equivalent amount of electricity from the most likely 

alternative source,” and of course subject to the cap of 85% of 

that value. 18 C.F.R. § 11.11(b)(5). 

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The District’s methodology is rather different. Using a 

1925 benefits study under which hydropower owners pay for 

95% of the District’s costs, it appears to apportion them 

among hydropower project owners on the basis of a mixture 

of private settlement agreements with E.J. West and a pro rata 

charge based on the amount of head at the individual 

downstream property as a percentage of the total head on the 

waterway. Answer of Hudson River-Black River Regulating 

District to Compl. by Fourth Branch Associates 

(Mechanicville), 7–8 (filed Sept. 25, 2006); Joint Appendix 

(“J.A.”) 258–59. 

As FERC acknowledged, “There is no doubt that these 

differences between the assessment schemes exist.” Order on 

Rehearing, 119 FERC ¶61,141 at P 33. Even in light of these 

differences, however, FERC argued that because the “New 

York scheme assesses charges for other expenses, based on a 

different method of determining benefits,” the administration 

of both the New York law and § 10(f) would not be 

problematic. Id. at P 33. 

But such a dual authority over headwater assessments, 

especially ones based on different methodologies, would 

result in a morass of issues that would undermine the 

congressional intent to create a comprehensive scheme of 

hydropower development. Two such issues are worth 

discussing here. First, FERC is quite naive in its assumption 

that because States would purportedly charge only for “other” 

costs (i.e., costs other than interest, maintenance, and 

depreciation) there could be no conflict with FERC authority. 

States could use different methods of accounting for costs, 

arbitrarily minimizing any characterization of costs as interest, 

maintenance, or depreciation. This would invite either 

duplicate collection from downstream owners or the creation 

of an accounting mess that some institution—FERC or a 

court—would have to sort out. This case illustrates precisely 

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such a problem. After FERC’s initial Order was handed 

down, the District adopted a resolution to apply funds it 

received from Erie for the E.J. West Project against the 

District’s full costs for interest, maintenance, and 

depreciation. Resolution to Establish an Accounting Policy 

for the Application of E.J. West Water Fees, J.A. 498–500. 

As a result, as the District sees it, all assessments to Albany 

are now for costs other than interest, maintenance and 

depreciation. Id. at 500. The resolution further provides that 

this change “shall have no financial or economic impact” on 

cost apportionment to Albany and others. Id. at 499. Thus, 

even though Albany currently pays the exact same amount as 

it did before this change in District policy, it will have to take 

on the expense of proving that the district’s charges are at 

least in part “really” for interest, maintenance, and 

depreciation; given the potential elasticity of cost-accounting 

in such a context, the burden would likely be heavy—far 

beyond anything one can suppose Congress might have 

approved. 

Second, even if the cost characterization issue could be 

easily resolved, FERC’s interpretation of § 10(f) would allow 

states to apportion costs between downstream operators in a 

manner that results in charges far in excess of the actual 

benefits received (not to mention the 85% cap). Albany 

argues that this issue is present in this case as well. A 

District-commissioned report from 2003 concluded that the 

Mechanicville project receives only 0.11% of the benefits of 

the District’s operations. J.A. 89 (Report of Gomez and 

Sullivan Engineers, P.C.). Yet, the District continues to 

assess Mechanicville at a rate of approximately 2.7% of the 

District’s budget. J.A. 304–309 (Hudson River-Black River 

Regulating District Annual Assessments of Statutory 

Beneficiaries for the Fiscal Years 2003–2007, parcel 2 

entries). 

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Regardless of whether one accepts the findings of the 

District-commissioned report, the point remains that FERC’s 

holding would enable states to charge operators in excess of 

the benefits received, and thus necessarily in excess of 

FERC’s 85% cap. Possibly FERC might respond creatively 

by reducing the “equitable” charge for interest, maintenance, 

and depreciation charges in response to state action. But there 

might well be instances where reduction to zero was not 

enough to hold the charge below 85% of FERC-computed 

benefits. Even where FERC could thus meet the statutory 

requirement that the charge be one deemed “equitable” by 

FERC, the exercise would entail costly dispute resolution.

Thus, FERC’s holding would undermine Congress’s clear 

intent to limit the total amount of charges imposed on 

downstream operators. Breach of that limit, combined with 

the cost-characterization issues (and perhaps others), leads to 

the conclusion that FERC’s interpretation of § 10(f) would 

conflict with the FPA’s purpose to provide for a 

comprehensive legislative scheme to govern the nation’s 

hydropower development. 

* * * 

We do not reach FERC’s decision to neither order 

refunds for Albany’s past payments to the District nor 

convene a settlement conference. FERC reasoned that § 10(f) 

does not grant it the “authority to address independent actions 

taken by an upstream licensee to collect charges under color 

of state law” absent a headwater benefits investigation. Order 

on Rehearing, 119 FERC ¶61,141 at P 55. And, though 

FERC plainly had authority to order a settlement conference, 

it reasoned that such a conference would be “more 

productive” in the context of a headwater benefits 

investigation. Id. at P 58. 

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Our holding that § 10(f) preempts all state headwater 

benefits assessments materially changes the context for 

FERC’s consideration of both these issues. Whereas FERC 

and the District formerly believed that the District was free to 

assess charges for certain costs under the authority of state 

law, our holding makes clear that the District never had such 

authority to exact any compensation from Albany for 

headwater benefits. Albany’s incentives to seek a headwater 

benefits investigation, the cost of which is shared among all 

parties, id. at P 58 n.34, are materially increased by our 

holding, since the District can no longer avoid or offset an 

adverse outcome by classifying costs as operational. 

Furthermore, FERC based its decision not to order a 

settlement conference in part on the District’s opposition to 

such a proceeding. Id. at P 58. But just as Albany’s 

incentives are changed by our preemption holding, so too are 

the District’s, as it can no longer expect to recover its 

operating costs from Albany, with or without a headwater 

benefits investigation. In light of these changed 

circumstances, we find it appropriate to remand to FERC to 

consider the scope of its authority to craft appropriate 

remedies. See, e.g., 18 C.F.R. § 385.601 (“The 

Commission . . . may convene a conference of the participants 

in a proceeding at any time for any purpose related to the 

conduct or disposition of the proceeding”); FPA § 309, 16 

U.S.C. § 825h (“The Commission shall have power to 

perform any and all acts, and to prescribe, issue, make, 

amend, and rescind such orders, rules, and regulations as it 

may find necessary or appropriate to carry out the provisions 

of this chapter.”). 

Our separately concurring colleague argues that FERC 

“intended its remedies determination to be independent from 

its preemption determination,” and as a result, “for purposes 

of judicial economy” we need not decide the scope of 

preemption. Concurring Op. at 1, 7. The concurrence bases 

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this conclusion on a topic sentence in FERC’s order in which 

FERC stated that “even to the extent that it is preempted by 

section 10(f), we have no authority over the District’s 

actions.” Order on Rehearing, 119 FERC ¶61,141 at P 55. 

The very next sentence, however, illustrates that FERC could 

not have meant that it had literally no authority, as FERC goes 

on to detail what it might require the District to do. Id. The 

concurrence observes that FERC’s claim that it has “no 

authority” would, if read literally, be “obviously ridiculous.” 

Concurring Op. at 1. 

Further, FERC asserted that §10(f) “does not give us 

authority to address independent actions taken by an upstream 

licensee to collect charges under color of state law, even if we 

determine that the law is, in part, preempted by the FPA.” 

Order on Rehearing, 119 FERC ¶61,141 at P 55 (emphasis 

added). This language would seem to leave open the 

possibility that where charges may not be made under color of 

state law, because state law is in fact preempted in its entirety,

§ 10(f) may grant FERC some authority over the District’s 

actions. 

Even if our colleague is correct that on remand FERC 

may simply clarify that its holding on remedies was in fact 

meant to be independent, FERC’s current reasoning on 

remedies explicitly references the District’s actions under 

color of state law as at least a partial reason for FERC’s 

finding that it has no remedial authority. Concerns over 

judicial economy do not dictate that we avoid FERC’s 

preemption determination even if it later may find a different 

justification to deny relief, for “[i]f a reviewing court agrees 

that the agency misinterpreted the law, it will set aside the 

agency’s action and remand the case—even though the 

agency (like a new jury after a mistrial) might later, in the 

exercise of its lawful discretion, reach the same result for a 

different reason.” Federal Election Commission v. Akins, 524 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 17 of 26
18

U.S. 11, 23 (1998) (citing SEC v. Chenery Corp., 318 U.S. 80 

(1943)). This analysis seems especially fitting here, where the 

incentives of the parties to seek a headwater benefits 

investigation—which the concurrence claims is the basis for 

reading FERC’s remedies analysis as independent—are 

materially affected by FERC’s misinterpretation of the FPA. 

Before closing, a few points on cases the parties have 

invoked on FERC’s power to order refunds: First, FERC’s 

reliance on Transmission Agency of Northern California v. 

FERC, 495 F.3d 663 (D.C. Cir. 2007), is misplaced. There 

we addressed the issue of whether FERC had authority to 

order refunds from the City of Vernon for overcollection of its 

transmission revenue requirement. Id. at 665. We held that 

FERC did not have such authority because municipalities such 

as the City of Vernon were explicitly exempted from FERC’s 

refund authority under FPA § 201(f), 16 U.S.C. § 824(f). Id. 

at 674. No such exemption appears present here. As a FERC 

licensee the District is subject to FERC’s full FPA Part I 

jurisdiction. 16 U.S.C. § 799. 

Equally misplaced is Albany’s reliance on California ex 

rel. Lockyer v. FERC, 383 F.3d 1006 (9th Cir. 2004). There 

the Ninth Circuit addressed rates that purportedly complied 

with the FERC-approved “market-based tariff system,” but 

which, California alleged, actually manifested “artificial 

manipulation on a massive scale.” Id. at 1012, 1014. Under 

such a scenario, the court understandably saw FERC’s 

authority to enforce the filed-rate doctrine as enabling it to 

order refunds to remedy the alleged de facto violation of the 

doctrine. Id. at 1015–16. The decision by no means compels 

a finding that FERC can order refunds of rates collected under 

the authority of a state law that is preempted by a federal 

statute. 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 18 of 26
19

Thus we leave the issue of an appropriate remedy for 

FERC to resolve on remand, in light of the much broader 

preemption that we find compared to what FERC assumed. 

* * * 

FERC’s judgment below is therefore reversed in part and 

remanded for further proceedings not inconsistent with this 

judgment. 

 So ordered.

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 19 of 26
BROWN, Circuit Judge, concurring in the judgment: I am 

loath to write separately from the majority’s well-penned 

opinion, particularly given the oft-befuddling pleadings and 

record in this case. But it is because of that confusion that I 

am writing separately. FERC has not adequately explained 

what it has wrought. Thus, like the majority, I believe a 

remand is in order, but I am not yet willing to say that 

FERC’s orders are irredeemable, or that at this time we need 

resolve the scope of § 10(f)’s preemption. Instead, I think we 

should remand and let FERC better explain itself before we 

decide anything more. 

The deep problem is that there is a logical disconnect 

between the front and back ends of FERC’s orders. The 

reasoning underlying the two parts seem to be in conflict. In 

particular, FERC (1) set forth a lengthy preemption analysis, 

but (2) then explained that “even to the extent that [the 

District’s assessment system] is preempted by section 10(f), 

[FERC] ha[s] no authority over the District’s actions.” Order 

on Rehearing, 119 FERC ¶61,141 at P 55. If by this 

explanation FERC meant that it lacks authority to compel its 

licensees to follow the Federal Power Act, then that is 

obviously ridiculous. But if FERC meant something more 

subtle, which it very well might have, then it has not 

adequately explained itself. 

As I read the record, I conclude FERC intended its 

remedies determination to be independent from its preemption 

determination. I simply do not know how else to read 

FERC’s Order on Rehearing. In it, FERC frankly 

acknowledged it found the “District’s assessment system” not 

“entirely compatible with section 10(f),” but nonetheless 

denied Albany any relief, even for that acknowledged 

incompatibility. Id. The majority remands, believing its 

holding that § 10(f) requires total preemption materially 

changes this case’s context, but that interpretation of FERC’s 

orders does not comfortably jibe with what FERC said: 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 20 of 26
2 

“[E]ven to the extent that [the District’s assessment system] is 

preempted by section 10(f), [FERC] ha[s] no authority over 

the District’s actions.” 

I have struggled to understand what FERC meant by 

saying preemption does not matter, and this is what I believe 

FERC might have intended: § 10(f) requires headwater 

benefits assessments paid from downstream licensees to 

upstream licensees for “interest, maintenance, and 

depreciation,” to be equitable. However, without a headwater 

benefits determination or settlement, FERC does not know 

what fees are appropriate under § 10(f), as it does not know 

how much the downstream beneficiary is benefited. A 

headwater benefits investigation—and thus determination—

only can occur if a licensee requests it. Without a request, 

there is no determination; without a determination, FERC has 

no authority to forbid an upstream licensee from charging fees 

on a downstream licensee, because it does not know whether 

fees repugnant to § 10(f) are being assessed, and consequently 

the question of preemption is premature until FERC has 

determined headwater benefits. Thus, FERC said it had “no 

authority to prevent a storage project from attempting to 

assess charges from downstream projects under color of state 

law and in the absence of a Commission headwater benefits 

determination.” Order, 117 FERC ¶61,321 at P 55. 

(emphasis added).

Laying aside for the moment the question of whether this 

proposed logic is actually FERC’s position (or if it is, whether 

it is reasonable), for this analysis to be internally credible, a 

couple of things must be true. First, it does not matter how an 

upstream licensee labels a headwater benefits charge, but only 

the amount. In other words, if the District sends a “headwater 

benefits” bill to Albany for only “operations” costs, but the 

District is entitled under § 10(f) to the exact same amount of 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 21 of 26
3 

money for “interest, maintenance, and depreciation,” then 

there would be no factual need to discuss preemption. It is 

only when a fee—assessed under color of state law—is 

greater in amount than what is required by § 10(f) that a 

question of preemption must be resolved. 

Second, FERC need not conduct a headwater benefits 

investigation on its own accord. This clearly is FERC’s 

position, but it is a curious one under the statute.1

 

Nonetheless, no one in this case has challenged FERC’s 

narrow interpretation of its role, and it is likely that no 

licensee ever will. After all, if the expected benefit of a 

headwater benefits investigation is greater than the expected 

costs, a licensee will request one. But if not, no licensee will 

want one. 

 1

 Section 10(f) says “whenever any licensee . . . is directly 

benefited by the construction work of another licensee . . . the 

Commission shall require as a condition of the license that the 

licensee so benefited shall reimburse the owner of such reservoir 

. . . for interest, maintenance, and depreciation . . . as the 

Commission may deem equitable.” Then, “[t]he proportion of such 

charges . . . shall be determined by the Commission. The licensees 

. . . shall pay to the United States the cost of making such 

determination as fixed by the Commission.” Id. 

Three times this short statute says “shall.” Thus, § 10(f) seems 

to requires that if a downstream licensee receives headwater 

benefits from an upstream licensee, FERC must, as a condition to 

licensing that downstream beneficiary, ensure that the upstream 

licensee is equitably compensated, with the licensees paying FERC 

for the costs of any requisite headwater benefits investigation. But 

FERC reads for itself a passive role. Unless one of the licensees 

requests a headwater benefits investigation, FERC does ... nothing, 

even when the licensees are in conflict as to the equitable 

assessment. See Order, 117 FERC ¶61,321 at P 55 (“[W]e do not 

undertake a headwater benefits determination for benefits from a 

non-federal storage project in the absence of a request to do so.”). 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 22 of 26
4 

 An interesting thing happens, however, when FERC 

does not conduct a headwater benefits investigation, but 

instead allows the licensees to negotiate a settlement, with 

FERC only conducting an investigation if one of the licensees 

requests it. A “windfall” is created, which must go to either 

the upstream or the downstream licensee. Who receives the 

windfall depends on which licensee is benefited by the status 

quo. 

To illustrate, consider this hypothetical. Assume a river 

on which there is only one upstream licensee, and one 

downstream licensee, and they both have perfect information 

about each other, and about how much a headwater benefits 

investigation will cost.2

 Assume further that a downstream 

licensee is, and will be in perpetuity, benefited $20,000 a year 

from the upstream licensee’s expenditures on “interest, 

maintenance, and depreciation”—costs clearly covered by 

§ 10(f)—but that a headwater benefits investigation will cost 

the upstream and downstream licensees $250,000 each. For 

simplicity, assume under § 10(f) that the “equitable” rate of 

compensation between downstream and upstream licensees 

for headwater benefits is 100% (in fact, the percentage is 

lower, but that is of no consequence). Next assume that the 

interest rate is 10%, and that state law permits the upstream 

licensee to assess benefits from the downstream licensee. 

If, in this hypothetical, the status quo favors the 

downstream beneficiary (i.e., by not allowing any charges 

until a headwater benefits investigation has happened or the 

 

2

 Of course, in real life, there is imperfect information. But unless 

there is cause to believe that either the upstream or downstream 

licensee has a systematic advantage in obtaining accurate 

information, then this may not be much of a problem: if the same 

uncertainty is built into both sides of the equation, it cancels out. 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 23 of 26
5 

licensees have settled), then a rational upstream licensee will 

not request a determination. By investing that $250,000, the 

upstream licensee will receive annual payments of $25,000, 

more than it would receive if it requested a determination. 

The downstream licensee will know this, and thus, in 

settlement conversations, will agree to pay nothing, because it 

will know the upstream licensee has no credible threat. The 

result is a windfall for the downstream licensee: it does not 

have to compensate the upstream licensee at all. 

If the status quo is reversed (i.e., by allowing any charges 

until a headwater benefits investigation has happened or the 

licensees have settled), then the upstream licensee receives 

the windfall: it will request something less than $45,000 a 

year—say, $44,000—from the downstream licensee (the 

$20,000 in headwater benefits, plus a share of the cost of a 

headwater benefits determination). If the request is greater 

than that, the downstream licensee will seek a determination. 

But as long as the amount charged is less than that, the 

upstream licensee will know that any threat by the 

downstream licensee to go to FERC for an investigation is 

empty. It would not be economically rational. Thus, the 

upstream licensee gains the windfall: the amount above the 

actual benefits. 

 Assuming that FERC need not undertake a headwater 

benefits investigation on its own accord, which again no party 

has contested, then which placement of the status quo is more 

reasonable under federal law? If a downstream licensee is 

favored by the status quo, then it would be “directly benefited 

by the construction work of another licensee,” but “the 

licensee so benefited” would not “reimburse the owner of 

such reservoir” for those benefits, contrary to § 10(f). If the 

status quo preference is reversed, the upstream licensee 

receives the windfall. But, importantly, that result is 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 24 of 26
6 

preferable for the downstream licensee as compared to the 

alternative possibility of universal headwater benefits 

determinations. And because the upstream licensee is the 

creator of the benefit, it makes some intuitive sense that the 

windfall goes to it. Or at least that might be a reasonable 

reading of the statute. After all, if a downstream licensee 

receives headwater benefits, then every day the upstream 

licensee is not compensated is a violation of federal law. 

So, back to the case at hand, what if FERC had responded 

to Albany’s complaint by saying something really simple? 

“Even if Albany is right that these charges may in fact be 

preempted, we will not get involved until Albany has 

requested a headwater benefits investigation, because we do 

not know for certain how much the District is entitled to 

under § 10(f). Without knowing how much the District is 

entitled to under § 10(f), we do not know whether there are 

even any charges beyond those the District is already entitled 

to, so, as a factual matter, there may be no need to discuss 

preemption at all.” On review, we would not rule on 

preemption. My understanding of the record is that FERC 

may have said essentially what I have just outlined, with the 

only difference being that instead of holding its tongue on 

preemption, FERC gave its view. Unfortunately, in giving its 

view on preemption in the front-end of its orders, FERC 

undermined the logic of its back-end analysis: that preemption 

is premature. 

For instance, instead of saying that it is irrelevant how an 

upstream licensee labels its headwater benefit fees because it 

only matters whether the amount is greater than what is 

actually due under § 10(f), FERC expounded at length on 

preemption, treating operations costs as different than those 

for “interest, maintenance, and depreciation,” and explaining 

why operation costs are not preempted. In other words, 

USCA Case #07-1162 Document #1151408 Filed: 11/28/2008 Page 25 of 26
7 

FERC actually answered the question it need not have 

answered, and it did so in a way that contradicted the most 

plausible reason why an antecedent headwater benefits 

determination might have mattered. That is incoherence. 

Next, instead of explaining why a headwater benefits 

determination was required before it would intervene on 

Albany’s behalf, FERC offered nothing but the most cursory 

of analysis. I have pieced together what I believe may have 

been FERC’s rationale, but I am not confident enough even to 

say “the agency’s path may reasonably be discerned.” 

Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 

U.S. 281, 286 (1974). Instead, while I believe FERC meant 

something when it said that preemption did not matter to its 

decision to deny Albany relief, and while I may be able to 

hazard an educated guess, I do not feel comfortable in saying 

this is what FERC must have meant. Pablo Picasso 

purportedly said “If I spit, they will take my spit and frame it 

as great art.” Likewise here, I do not know if FERC has 

offered a plausible argument, or a Rorschach inkblot. 

And it matters what FERC meant. If FERC intended to 

say that preemption was irrelevant without a headwater 

benefits determination because until there is that 

determination, no one knows whether the District has 

requested fees it is not entitled to under § 10(f), then there 

might be no need for this court to decide whether FERC erred 

in denying Albany’s requested relief because its preemption 

analysis went awry. Instead, it would be as if FERC said 

nothing at all about preemption. Thus, for purposes of 

judicial economy I would remand without deciding the scope 

of preemption, to let FERC explain itself anew, and better. 

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