Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-94-01290/USCOURTS-caDC-94-01290-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Masspower
Intervenor
Western Massachusetts Electric Company
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 2, 1998 Decided January 15, 1999

No. 92-1665

Western Massachusetts Electric Company,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Pittsfield Generating Company, L.P.,

and Masspower,

Intervenors

Consolidated with

Nos. 94-1290 & 97-1726

On Petitions for Review of Orders of the Federal

Energy Regulatory Commission

David B. Raskin argued the cause for petitioner. With

him on the briefs was Frederic Lee Klein.

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Samuel Soopper, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief were Jay L. Witkin, Solicitor, and John H. Conway,

Deputy Solicitor. Edward S. Geldermann, Attorney, entered

an appearance.

Before: Henderson, Randolph, and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Randolph.

Randolph, Circuit Judge: Western Massachusetts Electric

Company--WMECO--petitions for review of six orders of

the Federal Energy Regulatory Commission asserting jurisdiction over certain interconnection agreements and ordering

the cost of grid upgrades associated with the interconnections

to be rolled into WMECO's rate base rather than be borne

exclusively by the interconnecting facilities. For the reasons

that follow, we deny the petitions for review.

I

The Altresco Agreements

Altresco-Pittsfield Limited Partnership1 operates a 165

MW cogeneration plant located adjacent to a General Electric

facility in Pittsfield, Massachusetts. In 1988, the Altresco

plant was certified as a "qualifying facility" under the Public

Utility Regulatory Policies Act of 1978 (PURPA). See 16

U.S.C. ss 824a-3(j) and 796(17) & (18). Altresco's certification as a qualifying facility allows it to compel electric utilities

to purchase the power it generates and to require interconnection with those purchasing utilities in order to facilitate

such sales. See 18 C.F.R. s 292.303(a) & (c).

Beginning in 1989, Altresco entered into a series of contracts with WMECO under which Altresco would interconnect with WMECO's transmission grid. The purpose of the

__________

1 Altresco-Pittsfield is now known as Pittsfield Generating Company, L.P. For the sake of consistency with the Commission's

orders in this case, we will continue to refer to it as Altresco.

interconnection was to enable WMECO to transmit Altrescogenerated power across its grid to the New England Power

Company (NEPCO); WMECO would not itself purchase any

of Altresco's output. The agreements set out the terms and

conditions under which WMECO was to construct, operate,

and maintain the interconnection. The interconnection itself

was to be accomplished by means of a radial line from

Altresco's generating facility to a point on WMECO's grid.

According to studies performed by WMECO, the Altresco

interconnection required certain lines and substations on the

grid to be upgraded in order to preserve the grid's reliability.

Altresco was to bear the $3.9 million2 cost of the interconnection, including the cost of the upgrades to WMECO's grid.

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Believing that the Altresco interconnection agreements

would be subject to state rather than federal regulatory

authority, WMECO filed the agreements with the Massachusetts Department of Public Utilities rather than with the

Commission. In 1989 and 1990, WMECO negotiated transmission service agreements with NEPCO under which

WMECO would wheel Altresco-generated power to NEPCO.

These transmission agreements were filed with the Commission. The Commission responded on April 24, 1992, with an

order setting the transmission rates for hearing and also

asserting jurisdiction over the interconnection agreements

themselves. See Western Massachusetts Elec. Co., 59

F.E.R.C. p 61,091, at 61,343 (1992).

WMECO requested a rehearing on the question of the

Commission's jurisdiction over the interconnection agreements, arguing that PURPA gives state authorities jurisdiction over interconnections between utilities and qualifying

facilities. It further argued that the agreements did not fall

within the Commission's jurisdiction because they involved

facilities rather than services, because they were all preoperational, and because they did not involve the interstate

transmission of power.

__________

2 This figure includes $2.98 million for grid upgrades, $510,000 for

the radial line connecting Altresco to the WMECO grid, and

$450,000 for feasibility and engineering studies.

In a November 1992 order, the Commission rejected

WMECO's arguments and denied its request for rehearing on

the question of jurisdiction. See Western Massachusetts

Elec. Co., 61 F.E.R.C. p 61,182 (1992). The Commission

relied on s 205(c) of the Federal Power Act, 16 U.S.C.

s 824d(c), and on 18 C.F.R. s 292.303, the regulation setting

out the obligation to interconnect. Section 205(c) provides for

Commission jurisdiction over "all contracts which in any

manner affect or relate to [transmission] rates, charges,

classifications, and services, [which are subject to the jurisdiction of the Commission]." 16 U.S.C. s 824d(c). The agreements "relate to" transmission rates, the Commission held,

because the purpose of the interconnection was to facilitate

transmission of Altresco-generated power to NEPCO.

Therefore the agreements fell within the Commission's jurisdiction under s 205(c).

The Commission also held that the regulation assigning

jurisdiction over interconnections to state authorities did not

apply in this case because WMECO had no obligation to

interconnect under s 292.303. WMECO was providing only

transmission service; it was not purchasing any of Altresco's

output. As the Commission saw it, s 292.303 does not extend

the obligation to interconnect "to utilities located between the

buyer and the seller that provide transmission service." 61

F.E.R.C. at 61,662. When there is no obligation to interconnect, the regulation providing for state regulatory authority

over interconnections, 18 C.F.R. s 292.306(a), does not apply.

The Commission concluded, therefore, that these agreements

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were fully within its jurisdiction.

The Commission's orders of April and November 1992

asserting jurisdiction and denying rehearing are the subject

of WMECO's December 1992 petition for review in this

Court, No. 92-1665.

The Commission ordered an evidentiary hearing before an

administrative law judge to determine the "justness and

reasonableness" of assigning to Altresco all costs associated

with the interconnection agreements. Western Massachusetts Elec. Co., 63 F.E.R.C. p 61,039, at 61,197 (1993). In the

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hearing, WMECO argued that the entire cost, including the

cost of the grid upgrades, was directly related to the interconnection and therefore could properly be assigned to Altresco.

The Commission staff countered that only the $510,000 cost of

the radial line from Altresco's plant to the WMECO grid was

assignable to the interconnection itself. The remaining

amount, in the staff's view, should be allocated to system

upgrades, upgrades that should be rolled into the rate base

and recovered from all WMECO customers.

The ALJ ruled that the statute did not support the Commission's interpretation of what constitutes interconnection

costs. See Western Massachusetts Elec. Co., 64 F.E.R.C.

p 63,028, at 65,127 (1993). According to the ALJ, nothing in

PURPA or in the Commission's regulations implementing

PURPA limits interconnection costs to the cost of radial lines.

Because the local grid upgrades were directly related to the

interconnection, the ALJ concluded that it was just and

reasonable for WMECO to assign to Altresco the entire cost

incurred under the interconnection agreements, including the

cost of the grid upgrades.

In a December 1996 order, the Commission reversed the

ALJ's initial decision with regard to the cost of the grid

upgrades. It agreed with the testimony of staff witness

Tekumalla that the upgrades provided a system-wide benefit

and concluded that, because "the cost of the reinforcements

must be treated as grid-related costs rather than as interconnection costs," it was proper for WMECO to recover the cost

of the upgrades from all customers on the grid through

rolled-in rates. See Western Massachusetts Elec. Co., 77

F.E.R.C. p 61,268, at 62,120 (1996). The Commission denied

a request for rehearing. See Western Massachusetts Elec.

Co., 81 F.E.R.C. p 61,152, at 61,692 (1997). The orders

reversing the ALJ and denying rehearing are the subject of

WMECO's December 1997 petition for review, No. 97-1726.

The Masspower Agreements

Masspower owns a natural-gas-fired cogeneration plant in

Springfield, Massachusetts. The plant is a qualifying facility

under PURPA. In 1991, WMECO agreed to interconnect

Masspower's plant with the WMECO transmission grid. The

interconnection was intended to allow WMECO to purchase a

portion of Masspower's output and to wheel the rest of it

across its transmission grid to other purchasers. As with the

Altresco agreements, the Masspower agreements included

upgrades to the transmission grid and required the qualifying

facility to bear all the costs associated with the interconnection, including the cost of the upgrades. Because, in the

Altresco proceedings, the Commission had already asserted

jurisdiction over agreements similarly involving the transmission of qualifying-facility energy to other producers, WMECO

filed the Masspower agreements and proposed transmission

rates with the Commission, rather than with the state regulatory authority.

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In support of its cost assignment to Masspower, WMECO

argued that the grid upgrades were necessitated by the

interconnection and that they were actually less expensive

than a radial line would have been. The agreements assigned

all interconnection and grid reinforcement costs to Masspower, and the proposed transmission rates included additional

charges for customers receiving Masspower energy. Such a

plan, the Commission held, would result in the over-collection

of costs, contrary to the Commission's transmission pricing

guidelines. Accordingly, the Commission ordered WMECO

to file revised charges assigning the costs of the interconnection--but not of the grid upgrades--to Masspower. The

Commission denied WMECO's request for rehearing in February 1994. See Western Massachusetts Elec. Co., 66

F.E.R.C. p 61,167 (1994). The order to file revised charges

and the order denying rehearing are the subject of

WMECO's April 1994 petition for review, No. 94-1290.

II

The consolidated petitions present two central questions.

The first is whether the Commission's assertion of jurisdiction

over the Altresco and Masspower interconnection agreements

was "inconsistent with the regulation" or was a "plainly

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erroneous" interpretation of the Commission's regulations.3

See Auer v. Robbins, 117 S. Ct. 905, 911 (1997) (citing Bowles

v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)); see

also Robertson v. Methow Valley Citizens Council, 490 U.S.

332, 359 (1989); United States v. Larionoff, 431 U.S. 864,

872-73 (1977). The second is whether the Commission properly determined that WMECO may not assign the cost of the

grid upgrades to the qualifying facilities.

A

As to the jurisdictional question, three regulatory provisions must be considered: the provision governing a utility's

obligation to purchase power from a qualifying facility; the

provision governing indirect purchases from a qualifying facility; and the provision governing a utility's obligation to

interconnect with a qualifying facility.

The purchase obligation, as contained in s 292.303(a),

states that "Each electric utility shall purchase ... any

energy and capacity which is made available from a qualifying

facility: (1) Directly to the electric utility; or (2) Indirectly to

the electric utility in accordance with paragraph (d) of this

section." 18 C.F.R. s 292.303(a).

Paragraph (d) of s 292.303 governs indirect purchases from

a qualifying facility. It states:

__________

3 WMECO challenges not only the Commission's jurisdiction over

the Altresco agreements, but also its jurisdiction over the Masspower agreements. Although WMECO "reserve[d] its rights to contest

jurisdiction as may be necessary and appropriate," the orders in the

Masspower proceedings do not indicate that the company actually

contested the Commission's jurisdiction. See, e.g., Western Massachusetts Elec. Co., 63 F.E.R.C. p 61,222, at 62,612 n.4 (1993);

Western Massachusetts Elec. Co., 66 F.E.R.C. p 61,167, at 61,333

(1994). Whether WMECO thereby waived the jurisdictional argument is, however, unnecessary to decide. Because the interconnections facilitate WMECO's wheeling of qualifying-facility output, the

analysis is the same for the Altresco and the Masspower agreements. If the Commission had jurisdiction over the Altresco agreements, it also had jurisdiction over the Masspower agreements.

If a qualifying facility agrees, an electric utility which

would otherwise be obligated to purchase energy or

capacity from such qualifying facility may transmit the

energy or capacity to any other electric utility. Any

electric utility to which such energy or capacity is transmitted shall purchase such energy or capacity under this

subpart as if the qualifying facility were supplying energy or capacity directly to such electric utility....

18 C.F.R. s 292.303(d).

The obligation to interconnect is contained in paragraph (c)

of s 292.303. This critical provision states: "[A]ny electric

utility shall make such interconnections with any qualifying

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facility as may be necessary to accomplish purchases or sales

under this subpart." 18 C.F.R. s 292.303(c) (emphasis added).

WMECO contends that the Commission ignored the full

significance of the italicized language in paragraph (c) when it

asserted jurisdiction over the Altresco agreements. According to WMECO, the obligation to interconnect applies to all

"purchases or sales under this subpart," which includes indirect sales under paragraph (d)--that is, situations in which

the interconnecting utility only provides transmission service

and does not purchase any of the qualifying facility's output.

Thus, it concludes, the Altresco and Masspower interconnections should be subject to state, rather than federal, regulatory jurisdiction, even though they involve transmission, rather

than purchase, by the interconnecting utility.

Whatever force one may ascribe to WMECO's reading, it

has not shown the Commission's interpretation to be "plainly

erroneous" or "inconsistent with the regulations." Auer, 117

S. Ct. at 911. In "a competition between possible meanings

of a regulation, the agency's choice receives substantial deference" so long as it is "logically consistent with the language of

the regulation" and "serves a permissible regulatory purpose." Rollins Envtl. Servs. (NJ), Inc. v. EPA, 937 F.2d 649,

652 (D.C. Cir. 1991). The Commission read the interconnection obligation in s 292.303(c)(1) to be contingent on the

obligation to purchase in s 292.303(a). The obligation to

interconnect applies to any electric utility that is purchasing

all of the output of a qualifying facility. It does not apply, the

Commission believed, when that utility transmits the energy

to another utility. WMECO is not purchasing energy from

Altresco, and although it is purchasing some of Masspower's

output, it is transmitting the remainder of that output to

other purchasers. The Commission reads s 292.303(c) as if it

read "any electric utility shall make such interconnections

with any qualifying facility as may be necessary to accomplish

purchases or sales [to it] under this subpart." The "to it" is

inferred, but properly so, and the Commission's explanation

offered when it promulgated the regulation demonstrates

why.

The statute--PURPA--did not by its terms impose upon

electric utilities an obligation to interconnect with qualifying

facilities; the explicit obligation imposed by statute was to

purchase their output. See 16 U.S.C. s 824a-3(a). When the

Commission promulgated regulations to implement PURPA,

it derived an obligation to interconnect. Without an interconnection obligation, the Commission reasoned, a qualifying

facility seeking to interconnect with an unwilling utility would

have to obtain an interconnection order from the Commission,

after going through the potentially time-consuming and costly

hearing procedures of s 210 of the Federal Power Act. See

16 U.S.C. s 824i. The Commission designed s 292.303(c) to

avoid this problem and thereby reduce the burden on small

power producers. See Small Power Prod. & Cogeneration

Facilities; Regulations Implementing Section 210 of the

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Public Utility Regulatory Policies Act of 1978, Order No. 69,

F.E.R.C. Stats. & Regs. (CCH Transfer Binder, Regulations

Preambles 1977-1981) p 30,128, at 30,873 (1980) ("Order No.

69"). In its order denying rehearing here, the Commission

made note of this history. See 61 F.E.R.C. at 61,662 n.17

(citing Order No. 69, at 30,873). It is therefore not plainly

erroneous or inconsistent with the regulation to infer that

s 292.303(c)(1) applies only to purchasing utilities, as

s 292.303(a) clearly does. The Commission had a solid basis

for its interpretation of the regulations. The Commission's

reading of s 292.303(c) is also consistent with s 205 of the

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Federal Power Act. It places the charges for transmission

under the Commission's jurisdiction, rather than under the

jurisdiction of the state agency. The Commission also made

this clear when it promulgated s 292.303(d) in 1980. See

Order No. 69, at 30,872.

WMECO asserts that none of the Altresco agreements

provides for the transmission of energy, that they are all preoperational, and that this defeats the Commission's jurisdiction under s 205(c) of the Federal Power Act. The argument

fails to account for the language of s 205(c), which gives the

Commission jurisdiction over any contract that "relates to"

rates and charges for the transmission of electric energy--as

the Altresco and Masspower agreements surely do. Nor do

the Commission orders WMECO cites--Coso Energy Developers, 48 F.E.R.C. p 61,044, at 61,213 (1989), and Gamma

Mariah, Inc., 44 F.E.R.C. p 61,442, at 62,399 (1988)--provide

any support for its reading of s 205(c). In both of those

proceedings, the Commission declined to assert jurisdiction

because the agreements involved the inclusion of transmission

facilities as part of the qualifying facilities themselves, rather

than as part of the interconnecting public utilities. See 61

F.E.R.C. at 61,664. Those orders therefore do not control

the Commission's jurisdiction over the Altresco and Masspower agreements, in which the disputed line upgrades will be

part of WMECO's grid. Cf. American Municipal PowerOhio, Inc., 57 F.E.R.C. p 61,358, at 62,161 (1991).

B

The second question is whether the Commission properly

required WMECO to roll the cost of the Altresco and Masspower grid upgrades into its transmission rates.

With regard to the Altresco agreements, the Commission

accepted the position of staff witness Tekumalla, who testified

that any enhancement of an integrated grid system--such as

the upgrades at issue here--performs a system-wide function

and provides benefits to all customers on the grid. Having

considered all the upgrades planned by WMECO and having

performed a loadflow analysis, Tekumalla provided at least

three reasons why the upgrades would provide a benefit to all

users of the transmission grid and not just Altresco. First,

the physical configuration of the upgrades makes it clear that

their purpose is not merely to provide a power path from the

Altresco facility to the WMECO grid--which would benefit

Altresco alone--but to enhance a system used by many

customers. Second, the loadflow over the upgraded grid

facilities will not remain constant. When the flow from

Altresco is lower than expected, then other grid customers

will be making use of the upgraded grid facilities. Third, it

cannot be determined for sure that the upgrades would

merely restore the transfer capability of the WMECO grid to

the precise level that existed prior to the Altresco interconnection. In addition, Tekumalla considered the testimony of

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tion that only Altresco would benefit from the upgrades relied

upon a level of precision in planning that would have been

difficult to achieve, given the variability of loadflow conditions

and modeling techniques.

One element of reasoned decisionmaking is a demonstrable

link between the facts found and the choice. See Public

Utils. Comm'n of New York v. FERC, 813 F.2d 448, 451 (D.C.

Cir. 1987). Tekumalla's testimony provides the link. Tekumalla's characterization of the upgrades was based on identifying the beneficiary of the upgrades. The facts he cited

demonstrate that customers other than Altresco will make

use of and benefit from the grid upgrades. The choice made

by the Commission links up with those facts because it

requires the beneficiaries of the upgrades to bear the costs.

The Commission's position with regard to assignment of

costs is, so far as we can tell, part of a consistent policy to

assign the costs of system-wide benefits to all customers on

an integrated transmission grid. We have approved the

underlying rationale of this policy. When a system is integrated, any system enhancements are presumed to benefit

the entire system. See, e.g., Maine Pub. Serv. Co. v. FERC,

964 F.2d 5, 8-9 (D.C. Cir. 1992); City of Holyoke Gas & Elec.

Dep't v. FERC, 954 F.2d 740, 742-43 (D.C. Cir. 1992). Before

the Commission, WMECO did not dispute the fact that its

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transmission grid was integrated. Rather, it attempted to

demonstrate why the grid upgrades provided no benefit to

any customer except Altresco. The Commission instead accepted staff witness Tekumalla's testimony. As we have said,

he testified that WMECO's assumptions about the allocation

of benefits required a level of precision in planning that would

be difficult to achieve. The Commission's presumption of a

system-wide benefit was, in short, based on substantial evidence.

WMECO argues that the Commission failed to consider the

cost-shifting effects of its order to roll in costs of the system

upgrades. It claims that requiring all grid customers to bear

the cost of the upgrades unfairly shifts costs properly borne

by the qualifying facility--which in turn will reap a windfall

as a result. It also claims that the Commission's decision

creates perverse incentives for qualifying facilities to ignore

economic efficiency in locating their plants because they know

that the grid customers will foot the bill.

The Commission did consider the potential for cost shifting,

however, and found it not to be present in this case. As this

court has often noted, "we are obliged to defer to [the

Commission's] technical ratemaking expertise so long as it

has supplied sufficient reasoning backed up by substantial

evidence." Pennsylvania Elec. Co. v. FERC, 11 F.3d 207,

211 (D.C. Cir. 1993) (quoting Alabama Power Co. v. FERC,

993 F.2d 1557, 1560 (D.C. Cir. 1993)) (internal quotation

marks omitted). We think that the Commission's rejection of

WMECO's cost-shifting argument was adequately supported

by logic and evidence. In any event, WMECO's arguments

about cost-shifting and perverse incentives are mistaken. If

a qualifying facility seeking interconnection for transmission

purposes located its plant far from the utility's lines knowing

that the interconnection costs would be spread among the

utility's customers, the utility could simply refuse to transmit

the power. Although the utility would still have an obligation

to purchase the qualifying facility's output, see 18 C.F.R.

s 292.303(a), the qualifying facility, rather than the utility's

customers, would wind up paying for the interconnection. A

qualifying facility could not afford to take that risk and

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therefore would do all it could to keep the costs of interconnection to a minimum. Of course, a cogenerator such as

Altresco would not have much of a choice about where to

locate its facility because cogenerators need to be near their

hosts anyway.

As to the question of cost assignment in the Masspower

case, we also view the Commission's order as reasonable.

The Commission found that, in addition to assigning all

interconnection costs to Masspower, WMECO also intended

to charge grid customers an increased rate for transmitting

Masspower's output. The Commission believed that such a

cost-recovery scheme would have resulted in over-collection of

costs, contrary to the Commission's transmission pricing

guidelines. In its request for rehearing, WMECO raised the

same objection to the Commission's order as it did in the

Altresco proceeding: the grid upgrades do not benefit the

entire system but only restore the grid's reliability to the

status quo. The Commission was not persuaded to deviate

from its current policy regarding integrated systems. See

Appalachian Power Co., 63 F.E.R.C. p 61,151, at 61,978,

supplemental order, 64 F.E.R.C. p 61,327 (1993). In light of

our holding with regard to the Altresco agreements, we

cannot say that the Commission erred in applying its policy to

the Masspower agreements.

For the foregoing reasons, the petitions for judicial review

are denied.

So ordered.

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