Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01532/USCOURTS-caDC-98-01532-0/pdf.json

Parties Involved:
Central Vermont Public Service Corporation
Petitioner
Federal Energy Regulatory Commission
Respondent
Vermont Department of Public Service
Intervenor

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 2, 1999 Decided June 30, 2000

No. 98-1532

Central Vermont Public Service Corporation,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Vermont Department of Public Service,

Intervenor

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Carmen L. Gentile argued the cause for petitioner. With

him on the briefs were David E. Goroff and James H.

McGrew.

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Larry D. Gasteiger, 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.

Before: Edwards, Chief Judge, Henderson and Tatel,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: For years Central Vermont Public

Service Corporation has sold electricity to its wholly owned

subsidiary, Connecticut Valley Electric Company, which has

resold the electricity to retail customers in New Hampshire.

After ordering Connecticut Valley to terminate its power

purchase agreement with Central Vermont, the New Hampshire Public Utility Commission denied Connecticut Valley's

request to recover stranded costs from its own retail customers. Central Vermont then petitioned the Federal Energy

Regulatory Commission for approval of a transmission rate

surcharge that would permit Central Vermont to recover

stranded costs from Connecticut Valley's retail customers.

Finding the proposed surcharge inconsistent with its stranded cost policy, FERC rejected the surcharge. Because we

find FERC's decision neither arbitrary nor capricious, we

deny the petition for review.

I

In order to stop utilities from discriminatorily denying

other power suppliers access to their transmission lines, the

Federal Energy Regulatory Commission, acting through what

is known as Order 888, required public utilities that own,

control, or operate transmission facilities to file open access

tariffs under which they agree to provide transmission service

according to certain minimum terms and conditions. See

Promoting Wholesale Competition Through Open Access

Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and

Transmitting Utilities, Order No. 888, FERC Stats. & Regs.

p 31,036, 61 Fed. Reg. 21,540 (1996), clarified, 76 FERC

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p 61,009 and 76 FERC p 61,347 (1996), modified, Order No.

888-A, FERC Stats. & Regs. p 31,048, 62 Fed. Reg. 12,274

(1997), order on reh'g, Order No. 888-B, 81 FERC p 61,248,

62 Fed. Reg. 64,688 (1997), order on reh'g, Order No. 888-C,

82 FERC p 61,046 (1998). Recognizing that utilities might

incur transition costs--so-called "stranded costs"--as a result

of former customers' new ability to reach alternate power

suppliers through FERC-mandated open access, as well as

through parallel actions on the state level, Order 888 provides

for both wholesale and retail stranded cost recovery.

Wholesale stranded costs result when wholesale utility

customers (customers who purchase power for resale) take

advantage of Order 888's open access requirement to purchase power from another supplier using their former utility's

transmission lines. Under the pre-open access regulatory

regime, the Commission explained, utilities entered into longterm contracts for the wholesale sale of power to requirements customers. Because wholesale customers had no

source of power supply other than their historic utility, these

contracts were normally extended at the end of their term.

Relying on the expectation of continued service to historic

customers, utilities invested money, built facilities, and entered into long-term fuel purchase contracts. See Notice of

Proposed Rulemaking, Recovery of Stranded Costs by Public

Utilities and Transmitting Utilities, FERC Stats. & Regs.

p 32,507 at 32,863-64, 59 Fed. Reg. 35274 (1994). These costs

will become "stranded" if, before utilities have recovered

them, their long-term requirements customers take advantage of open access and cease purchasing the utilities' power.

Recognizing that FERC "cannot change the rules of the game

without providing a mechanism for recovery of the costs

caused by such regulatory-mandated change," Order 888-A,

p 31,048 at 30,346, Order 888 provides a mechanism for

utilities to recover stranded costs caused by the departure of

wholesale customers.

Retail stranded costs occur when retail customers take

advantage of state-ordered retail "wheeling" (i.e., stateordered transmission of power by utilities for other power

suppliers) to purchase power from suppliers other than their

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historic utilities. Because these costs result from state regulation, FERC agreed to consider utility proposals to recover

stranded costs from retail customers only if the appropriate

state regulatory commission lacks authority to do so under

state law. See Order 888, p 31,036 at 31,824-26.

In Transmission Access Policy Study Group v. FERC, No.

97-1715 (D.C. Cir. 2000), also issued today, we uphold Order

888's stranded cost policy in all respects relevant to this case.

In this case, Central Vermont seeks to use Order 888 to

recover stranded costs from the retail customers of its wholesale requirements customer, Connecticut Valley. A wholly

owned subsidiary of Central Vermont, Connecticut Valley

purchases power from Central Vermont pursuant to a wholesale requirements contract (the "RS-2 contract") and then

resells the power to retail customers in New Hampshire. As

part of state-wide electric utility restructuring, the New

Hampshire Public Utility Commission ("NHPUC") ordered

Connecticut Valley to terminate the RS-2 contract so that its

customers could take advantage of state-ordered retail wheeling to reach other power suppliers. In response, Connecticut

Valley petitioned the NHPUC to recover its stranded costs

from its retail customers in New Hampshire. Concluding

that Connecticut Valley was in part responsible for these

costs because it had imprudently declined to terminate the

RS-2 contract when the retail restructuring program was

enacted into law in 1996, the NHPUC denied its request.

Central Vermont then filed with FERC a notice of cancellation of the RS-2 contract. Claiming that cancellation of the

contract would produce $44.9 million of stranded costs, and

relying on Order 888, Central Vermont sought to recover

those costs through a surcharge to the transmission rate

charged to customers who use Central Vermont's transmission system to deliver power to customers in Connecticut

Valley's service area. In other words, the surcharge collected

by Central Vermont would be paid by Connecticut Valley's

retail customers and the entities transmitting power to them.

Central Vermont explained: "In this way, the stranded costs

would be paid by the same persons who caused the cost

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stranding to occur by displacing, through use of Central

Vermont's transmission system, Central Vermont power with

power acquired from a different supplier."

Without holding a hearing, FERC rejected Central Vermont's proposed transmission surcharge, explaining that Order 888 permits utilities to recover stranded costs only from

wholesale customers--in this case Connecticut Valley--not

from retail customers of their wholesale customers. Central

Vermont Public Service Corp., 81 FERC p 61,336 at 62,541-

42 (1997). FERC recommended that Central Vermont seek

recovery of its stranded costs directly from Connecticut Valley through an exit fee amendment to the RS-2 contract. See

id. at 62,542. Although Central Vermont followed that advice

and filed a proposed exit fee amendment--a hearing on that

proposal is pending, see Central Vermont Public Service

Corp., 82 FERC p 61,237 (1998)--it also sought rehearing,

claiming that an exit fee would be unsatisfactory and challenging FERC's rejection of its surcharge proposal. See

Central Vermont Public Service Corp., 84 FERC p 61,295

(1998). In the alternative, asserting that FERC's rejection of

the surcharge rendered its transmission rates confiscatory, it

argued that FERC should have either treated its surcharge

proposal as a section 205 rate increase filing or waived its

stranded cost regulations altogether. FERC rejected Central Vermont's challenges, finding the last two unripe in light

of the pendency of Central Vermont's exit fee proposal. See

id.

Central Vermont now petitions for review. It argues that

its transmission surcharge proposal fits within three situations in which FERC agreed to consider proposals for stranded cost recovery on a case-by-case basis. First, it claims that

its proposal is analogous to the "retail-turned-wholesale" scenario, in which Order 888 permits utilities to recover stranded

costs from newly formed municipalities who serve the utilities' former retail customers. See Order 888, p 31,036 at

31,818. Second, asserting that the RS-2 contract contains a

reserve equalization formula, Central Vermont argues that

FERC should have permitted it to recover stranded costs

pursuant to Order 888's provisions concerning situations

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where costs are shifted across state lines. See id. at 31,826.

Finally, it invokes Order 888's provisions for the recovery of

stranded costs that result from restructuring, see id. at

31,845-46; according to Central Vermont, it is voluntarily

restructuring in response to NHPUC-ordered retail wheeling.

Central Vermont also claims that FERC's refusal to treat its

filing as a section 205 rate increase filing or to waive its

regulations was arbitrary and capricious.

II

We review FERC's orders under the APA's familiar arbitrary and capricious standard. See 5 U.S.C. s 706(2)(A);

Williams Field Services Group, Inc. v. FERC, 194 F.3d 110,

115 (D.C. Cir. 1999). Of particular importance to this case,

we "afford substantial deference to the Commission's interpretations of its own regulations, deferring to the agency

unless its interpretation is plainly erroneous or inconsistent

with the regulation." Bluestone Energy Design, Inc. v.

FERC, 74 F.3d 1288, 1292 (D.C. Cir. 1996) (internal quotation

marks omitted).

At oral argument, counsel for Central Vermont emphasized

that Central Vermont relies not on Order 888's implementing

regulations, see 18 C.F.R. s 35.26, but rather on Order 888

itself, which identifies certain situations not covered by the

regulations in which FERC will consider proposals for

stranded cost recovery on a case-by-case basis. This was a

wise strategy, for Central Vermont's transmission surcharge

proposal does not conform to the Order 888 regulations,

which authorize recovery of stranded costs from wholesale

requirements customers (in this case, Connecticut Valley), not

those customers' retail customers. The regulations provide

that FERC will consider proposals for recovery of stranded

costs from a utility's retail customers, but only when the state

regulatory commission lacks authority to do so. See id.

s 35.26(d)(1). Not only does the NHPUC have authority to

address stranded costs (and did in fact do so), but the retail

customers from whom Central Vermont seeks recovery are

not its customers--they're Connecticut Valley's.

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Central Vermont's attempts to fit its transmission surcharge proposal into Order 888 rest on a misunderstanding of

the order. Take, for example, Central Vermont's effort to

analogize its plight to situations where a municipality condemns a utility's distribution plant, becomes a wholesale

customer of the utility, and utilizes open access transmission

to purchase power on the competitive market. In that scenario, known as retail-turned-wholesale, FERC reasoned that

the municipality, as a new wholesale customer, stands in the

shoes of former retail customers for purposes of obtaining

transmission access and new power supplies. Because of this

direct link between former retail customers and the municipality, FERC agreed to consider utility proposals for recovery of stranded costs from the municipality itself. Order

888-A, p 31,048 at 30,408-10.

According to Central Vermont, Connecticut Valley's former

retail customers, like newly created municipalities, are not

technically former wholesale customers, but are using Central

Vermont's transmission system to supply the very loads for

which Central Vermont incurred the now-stranded costs.

That analogy doesn't work. In the retail-turned-wholesale

situation, retail customers were former customers of the

utility seeking recovery. Here, the retail customers from

whom Central Vermont seeks recovery are former customers

of Connecticut Valley. Under the retail-turned-wholesale

analogy, Connecticut Valley, not Central Vermont, would be

seeking recovery from these customers. Moreover, because

Connecticut Valley's customers remain retail customers, the

proper forum for stranded cost recovery is, as Connecitcut

Valley seems to have recognized, the NHPUC, not FERC.

Not until the NHPUC denied Connecticut Valley's original

request for stranded cost recovery did Central Vermont turn

to FERC.

Equally unsuccessful is Central Vermont's effort to fit itself

into Order 888's stranded cost provisions for multi-state and

restructuring situations. Its arguments amount to little more

than attempts to fit square pegs into round holes, for in

neither circumstance did FERC agree to consider proposals

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to recover stranded costs from retail customers of a utility's

wholesale customer.

We begin with the multi-state exception. Concerned that

the "denial of retail stranded cost recovery by a state regulatory authority could, through operation of the reserve equalization formula in a Commission-jurisdictional intra-system

agreement, inappropriately shift the disallowed costs to affiliated operating companies in other states," FERC agreed to

consider stranded cost recovery in such situations on a caseby-case basis. Order 888, p 31,036 at 31,826. Claiming that

its RS-2 contract with Connecticut Valley contains just such a

"reserve equalization formula," Central Vermont argues that

its inability to recover stranded costs from Connecticut Valley's New Hampshire retail customers will, through the formula's operation, shift costs to its Vermont customers.

FERC rejected this claim, concluding that the RS-2 contract

in fact contains no reserve equalization formula.

At oral argument, the parties continued to disagree about

whether the RS-2 contract actually contains a reserve equalization formula. Insisting that it does, counsel for Central

Vermont pointed us to the contract's "capacity charge formula." Counsel for FERC told us that the capacity charge

formula is not the same as a reserve equalization formula; to

illustrate his point, he simply referred us to an inter-system

agreement (not in the record of this proceeding) that he says

contains such a formula.

Fortunately, we can decide this case without resolving this

debate, for even if the RS-2 contract contains a reserve

equalization formula, FERC did not err in concluding that

Central Vermont's surcharge proposal did not fit within the

multi-state exception. Order 888's sole method for avoiding

the automatic shifting of costs across state lines is a contract

amendment. See Order 888, p 31,036 at 31,826; Order 888-A,

p 31,048 at 30,420. See also Central Vermont, 84 FERC at

62,371 ("[T]he remedy for preventing automatic shifting of

retail stranded costs was to amend the jurisdictional contract

on file with the Commission."). Central Vermont seeks not to

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amend the RS-2 contract, but rather to recover stranded

costs from its customer's customers.

For its final effort to fit its surcharge proposal into Order

888, Central Vermont relies on provisions permitting recovery

of stranded costs resulting from voluntary restructuring.

Order 888 said little more than this about voluntary restructuring:

[T]he functional unbundling of wholesale services does not

require corporate unbundling (such as disposition of assets

to a non-affiliate, or establishing a separate corporate affiliate to manage a utility's transmission assets). At the same

time, we indicated that some utilities may ultimately choose

some form of corporate unbundling. We reaffirm in this

Final Rule that we are willing to consider case-specific

proposals for dealing with stranded costs in the context of

any restructuring proceedings that may be instituted by

individual utilities.

Order 888, p 31,036 at 31,845-46 (footnote omitted).

Citing New Hampshire's restructuring of the retail electricity market and its own "inevitable" need to divest generation

assets, Central Vermont claims that FERC should have approved its surcharge proposal as arising in connection with a

voluntary restructuring. FERC refused to do so, finding that

Central Vermont had not demonstrated that it was pursuing

corporate unbundling of the type contemplated by Order 888.

Participation in state-wide restructuring, FERC reasoned,

was insufficient to constitute a "voluntary restructuring."

See Central Vermont, 84 FERC at 62,372. Indeed, in the

only two proceedings cited by the parties in which FERC has

set hearings to consider stranded cost proposals in the restructuring context, utilities had proposed to sell off specific

assets and to modify their contracts with wholesale requirements customers. See Montaup Electric Co., 79 FERC

p 61,386 (1997); New England Power Co., 78 FERC p 61,080

(1997). Central Vermont has said only that it will "inevitably" divest assets. More fundamentally, the stranded cost

proposals at issue in the two cited cases required recovery

from wholesale customers, not from retail customers of

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wholesale customers. Were we to accept Central Vermont's

claim, then every utility denied stranded cost recovery in

connection with state-ordered restructuring could seek relief

from FERC. Yet Order 888 emphatically and repeatedly

states that "[t]he only circumstance in which we will entertain

requests to recover stranded costs caused by retail wheeling

is when the state regulatory authority does not have authority

under state law to address stranded costs when the retail

wheeling is required." Order 888, p 31,036 at 31,825 (footnote

omitted).

To sum up, we see no basis for questioning FERC's

rejection of Central Vermont's surcharge proposal, much less

for finding the agency's action arbitrary or capricious. As we

read the record in this case, Central Vermont simply did not

like the consequence of Order 888's deference to state agencies--the NHPUC's denial of Connecticut Valley's retail

stranded cost recovery proposal--and now seeks from FERC

what the state agency denied. Nothing in Order 888 permits

such an end run around FERC's decision to defer to state

agencies' assessments of retail stranded cost recovery. Order 888 allows Central Vermont to recover stranded costs

only from a wholesale requirements customer--here, its wholly owned subsidiary Connecticut Valley--just the course it is

now pursuing in another proceeding.

III

This brings us finally to Central Vermont's alternative

claim that without stranded cost recovery, its current transmission rates are confiscatory and that FERC should therefore have either treated its transmission surcharge filing as a

section 205 rate increase filing or waived its stranded cost

regulations and approved the proposed surcharge. Citing the

pendency of the exit fee amendment hearing, FERC rejected

both claims. See Central Vermont, 84 FERC at 62,369 & n.7.

FERC now contends that Central Vermont's claims are

unripe, relying on the familiar two-part test of ripeness:

courts must "evaluate both the fitness of the issues for

judicial decision and the hardship to the parties of withholdUSCA Case #98-1532 Document #526856 Filed: 06/30/2000 Page 10 of 11
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ing court consideration." Abbott Laboratories v. Gardner,

387 U.S. 136, 149 (1967). "A claim is not ripe for adjudication," the Supreme Court recently explained, "if it rests upon

contingent future events that may not occur as anticipated, or

indeed may not occur at all." Texas v. United States, 523

U.S. 296, 118 S. Ct. 1257, 1259 (1998) (internal quotation

marks and citations omitted). Central Vermont's challenge to

FERC's refusal to treat its filing as a section 205 rate

increase filing or to waive its regulations depends on no

future events, contingent or otherwise. To resolve its challenge, we need only examine the record before us and assess

FERC's rationale. To be sure, FERC's own decision may

have rested in part on the existence of contingent events--

namely, the resolution of the pending exit fee amendment

proposal--but that does not make Central Vermont's challenge unripe in this court.

On the merits, we can easily dispose of Central Vermont's

arguments. We see no basis for questioning FERC's judgment that whether and to what extent to permit Central

Vermont to increase its rates in a section 205 proceeding

depend on the outcome of the exit fee proposal. After all, if

Central Vermont recovers its full stranded costs through the

exit fee, it will have no need to increase its rates. Moreover,

FERC made its decision "without prejudice to Central Vermont making a filing in the future seeking recovery of nonopen-access-related costs." Central Vermont, 84 FERC at

62,369 n.8. If Central Vermont is unhappy with the outcome

of the exit fee hearing, it may renew its claim.

We have the same reaction to Central Vermont's argument

that FERC should have waived the Order 888 regulations.

Given the possibility that Central Vermont may recover its

full stranded costs through an exit fee--a method perfectly

consistent with the regulations--FERC's refusal to waive its

regulations is hardly arbitrary or capricious.

IV

The petition for review is denied.

So ordered.

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