Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-01205/USCOURTS-caDC-08-01205-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
The Empire District Electric Company
Petitioner

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 26, 2009 Decided June 12, 2009 

No. 08-1196 

WESTAR ENERGY, INC., ET AL., PETITIONERS

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

Consolidated with 08-1205 

On Petitions for Review of Orders 

of the Federal Energy Regulatory Commission 

Martin J. Bregman argued the cause for petitioners. With 

him on the briefs were Donald K. Dankner, Raymond B. 

Wuslich, and Margaret H. Claybour. 

Kathrine L. Henry, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent. With her on 

the brief were Cynthia A. Marlette, General Counsel, and 

Robert H. Solomon, Solicitor. 

Before: HENDERSON, TATEL and KAVANAUGH, Circuit 

Judges. 

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 Opinion for the Court filed by Circuit Judge

KAVANAUGH.

 

KAVANAUGH, Circuit Judge: Exercising its statutory 

authority to ensure that rates for the sale of wholesale electric 

power are just and reasonable, the Federal Energy Regulatory 

Commission generally allows wholesale electricity sellers to 

sell at market-based rates – unless the wholesaler possesses 

market power in a particular region, in which case it must 

make sales at cost-based prices. FERC’s approach raises the 

issue at the heart of this dispute: Suppose a wholesaler sells 

energy in a region where it has market power but the energy 

ultimately is used in a region where the wholesaler does not 

possess market power. Because of the difficulty in 

monitoring transactions to determine where energy is 

ultimately used, the Commission has ruled that the dispositive 

factor in those circumstances is whether the wholesaler has 

market power at the point of sale – not where the energy is 

actually used or “sinks.” See Order No. 697, Market-Based 

Rates for Wholesale Sales of Electric Energy, Capacity and 

Ancillary Services by Public Utilities, 72 Fed. Reg. 39,904, 

40,000 (July 20, 2007). 

In this case, the Commission followed the point of sale 

test – not a sink-based test – and ordered two electricity 

wholesalers to make refunds to customers to the extent they 

had previously made sales in areas where they have market 

power at market-based prices. The wholesalers challenge the 

Commission’s decision as arbitrary and capricious under the 

Administrative Procedure Act. We conclude that FERC’s 

decision was reasonable, and we therefore deny the petitions 

for review. 

 

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I 

Electricity generators convert energy from coal, nuclear 

power, natural gas, or other sources into electricity. The 

generators then sell the electricity – either (i) as wholesalers 

to utilities that serve retail customers or (ii) directly to retail 

customers. 

Congress has assigned the Federal Energy Regulatory 

Commission the responsibility to ensure that all rates for 

jurisdictional sales are just and reasonable. 16 U.S.C. § 824d. 

FERC divides the areas served by an electricity wholesaler 

into two categories: mitigated and non-mitigated areas. 

Mitigated areas are those regions where a wholesaler 

possesses market power. Sales in a mitigated area must occur 

pursuant to a cost-based tariff to protect customers from the 

wholesaler’s market power. In non-mitigated areas, the 

wholesaler may make sales under a market-based tariff – that 

is, a tariff that allows the wholesaler to “enter into freely 

negotiated contracts with purchasers.” Morgan Stanley 

Capital Group, Inc. v. Pub. Util. Dist. No. 1, 128 S. Ct. 2733, 

2741 (2008). 

Wholesalers often make “export sales” to utility 

customers who in turn sell energy at retail to end users outside 

of the wholesalers’ mitigated areas. Westar Energy, Inc. and 

the Empire District Electric Company are electricity 

wholesalers that sell to utility customers outside of their 

mitigated areas. 

In May 2005, Westar and Empire filed tariffs that 

proposed (i) cost-based rates for sales to customers serving 

energy needs within their mitigated areas and (ii) marketbased rates for sales to customers when the energy would be 

used outside their mitigated areas. Under their proposals, the 

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location where the energy is ultimately used – or “sinks” – 

would determine whether the sale would be made at market 

rates or cost-based rates. On several occasions between 

November 2005 and March 2006, FERC accepted similar 

sink-based tariffs filed by other wholesalers. See, e.g., 

Carolina Power & Light Co., 113 FERC ¶ 61,130 (2005). 

In March 2006 – before officially accepting petitioners’ 

proposed tariffs – FERC changed course and began rejecting 

the sink-based approach. MidAmerican Energy Co., 114 

FERC ¶ 61,280 (2006). In August 2006, consistent with this 

new policy, FERC denied Empire’s sink-based tariff and 

ordered it to pay refunds for sales made within its mitigated 

area that occurred after May 16, 2005, the earlier established 

refund effective date. In September, the Commission 

followed the same course with Westar, ordering refunds for 

offending sales made after June 7, 2005, previously 

established as Westar’s refund effective date. Both parties 

petitioned for rehearing. 

In July 2007, while those petitions for rehearing were 

pending, the Commission published Order No. 697, MarketBased Rates for Wholesale Sales of Electric Energy, Capacity 

and Ancillary Services by Public Utilities, 72 Fed. Reg. 

39,904 (July 20, 2007). This Order – issued after a noticeand-comment rulemaking – rejected the sink-based test 

because FERC concluded that it “is unrealistic to believe” that 

such sales “can be traced to ensure that no improper sales are 

taking place” and noted the “complex administrative 

problems that would be associated with trying to monitor” 

those sales. Id. at 40,000. 

Relying on Order No. 697 and its recent precedents, 

FERC affirmed the Empire and Westar decisions on 

rehearing. In this Court, the petitioners now contend that 

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those orders are arbitrary and capricious under the 

Administrative Procedure Act. Our review under that test is 

of course deferential. 

II 

Petitioners advance a variety of arguments assailing 

FERC’s actions in this case. 

First, petitioners suggest that FERC acted unreasonably 

by imposing and applying a point of sale test rather than a 

sink-based test. But in Order No. 697, FERC thoroughly 

explained the problem with a sink-based test, noting the 

“complex administrative problems that would be associated 

with trying to monitor” that regime and concluding that it “is 

unrealistic to believe that” such sales “can be traced to ensure 

that no improper sales are taking place.” Order No. 697, 

Market-Based Rates for Wholesale Sales of Electric Energy, 

Capacity and Ancillary Services by Public Utilities, 72 Fed. 

Reg. 39,904, 40,000 (July 20, 2007). FERC reiterated that 

analysis in its orders in this case. Petitioners do not provide 

any convincing reason to doubt the legitimacy of FERC’s 

monitoring concern. We thus find no basis for disturbing 

FERC’s reasoned decision to apply a point of sale test rather 

than a sink-based test to petitioners’ market-based tariffs. 

In that regard, it bears mention that a wholesaler such as 

Westar or Empire can easily comply with the FERC rule and 

still make sales into other regions at market-based rates. A 

wholesaler simply needs to ensure that title passes at or 

beyond the metered boundary between the mitigated and nonmitigated areas, instead of inside a mitigated area. See Tr. of 

Oral Arg. at 6 (petitioners’ counsel: “when Westar became 

aware of the MidAmerican case in March of 2006, we fairly 

quickly implemented that approach, and it was very easy to 

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do that because all we had to do was to change where title 

passed”). 

Second, petitioners alternatively contend that FERC did 

not sufficiently explain its March 2006 policy change from a 

sink-based test to a point of sale test. But as already noted, 

FERC carefully explained its reasoning in Order No. 697 and 

its orders in this case, and that explanation was more than 

adequate under the arbitrary and capricious test. The fact that 

FERC changed its approach required no additional or special 

explanation. Cf. FCC v. Fox Television Stations, Inc., 129 S. 

Ct. 1800, 1810 (2009) (“We find no basis in the 

Administrative Procedure Act or in our opinions for a 

requirement that all agency change be subjected to more 

searching review.”); id. (State Farm did not hold or imply that 

every “policy change must be justified by reasons more 

substantial than those required to adopt a policy in the first 

instance”); id. at 1811 (agency’s reasoning is sufficient if it 

shows that a new policy “is permissible under the statute, that 

there are good reasons for it, and that the agency believes it to 

be better”); id. at 1823 (Kennedy, J., concurring) (“The 

question in each case is whether the agency’s reasons for the 

change . . . suffice to demonstrate that the new policy rests 

upon principles that are rational, neutral, and in accord with 

the agency’s proper understanding of its authority.”). 

Third, petitioners argue that FERC’s decision to order 

retroactive refunds was arbitrary and capricious because, in 

their view, they were entitled to rely on FERC’s acceptance of 

the sink-based test at least until March 2006 when FERC 

changed course. As a result, petitioners argue that FERC 

could not order them to pay refunds for sales made between 

mid-2005 (their FERC-established effective refund dates) and 

March 17, 2006. 

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This argument is unavailing. After filing their tariffs, 

petitioners knew that any sales at unjust or unreasonable rates 

before the Commission’s approval of their tariffs might be 

subject to refund liability retroactive to the refund effective 

date. See Empire Dist. Elec. Co., 110 FERC ¶ 61,214, at 

61,806 (2005); Westar Energy Inc., 110 FERC ¶ 61,316, at 

62,231 (2005). So FERC’s decision to impose refund liability 

did not impermissibly upset any settled expectations. Indeed, 

one purpose for establishing a refund date is to eliminate the 

need to consider reliance-based arguments such as this. 

Petitioners’ argument blinks that reality. 

Fourth, petitioners contend that FERC acted 

unreasonably by declining to exercise its authority to waive 

their refund liability. Our review of an agency’s denial of a 

waiver request is “extremely limited.” San Diego Gas & 

Elec. Co. v. FERC, 904 F.2d 727, 731 (D.C. Cir. 1990). 

FERC’s general practice is to order refunds when it concludes 

that a wholesaler with market power has been selling energy 

at unjust or unreasonable rates. See AEP Power Mktg., Inc., 

108 FERC ¶ 61,026, at 61,135 (2004). And FERC has not 

waived refund liability for any wholesaler similarly situated to 

petitioners here. See MidAmerican Energy Co., 123 FERC ¶ 

61,013, at 61,052 (2008); Okla. Gas & Elec. Co., 123 FERC ¶ 

61,012, at 61,046 (2008); Carolina Power & Light Co., 114 

FERC ¶ 61,294, at 62,046 (2006). We therefore find nothing 

unreasonable about the Commission’s adhering to its standard 

approach in denying petitioners’ waiver request. Petitioners 

point to FERC’s decision in South Carolina Electricity & Gas 

Co., 121 FERC ¶ 61,263 (2007), as an example of the 

Commission declining to impose refund liability on a 

similarly situated wholesaler. There, however, the wholesaler 

represented to FERC that it had not made any offending sales 

under its sink-based tariff. Because FERC accepted this 

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representation, it had no occasion to address the issue of 

refund liability. 

* * * 

We deny the petitions for review. 

So ordered. 

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