In the

United States Court of Appeals

For the Seventh Circuit

No. 99-1770

City of Kaukauna, Wisconsin, Inter Lake

Papers, Inc., and Wisconsin Electric Power Company,

Petitioners,

v.

Federal Energy Regulatory Commission, 

Respondent.

On Petition for Review of Orders of the 

Federal Energy Regulatory Commission.

80 FERC para.para. 62,232, 62,233, 62,234 and 86 FERC para. 61,096.

Argued December 1, 1999--Decided June 6, 2000

 Before Bauer, Cudahy and Flaum, Circuit Judges.

 Cudahy, Circuit Judge. Central Wisconsin and its

medial artery, the Fox River, are a rich source

of history, as this case reveals.

 In this case, the petitioners each operate

hydropower projects at federally owned dams on

the Lower Fox River (the part of the river below

Lake Winnebago). All of these projects are

located downstream of the government-owned dam at

Menasha (the Menasha dam), which controls the

level of Lake Winnebago and regulates the flow of

the Fox River as it leaves the lake. In September

of 1997, the Federal Energy Regulatory Commission

(FERC or the Commission) exercised its power

pursuant to sec. 10(f) of the Federal Power Act

(FPA), 16 U.S.C. sec. 803(f), and assessed the

petitioners a total of $338,984 in charges for

"headwater benefits." These hydropower

enhancements were realized at the petitioners’

projects as a consequence of the more even flow

of the river attributable to the improvement of

the Menasha dam’s storage-and-release capability

in 1937. FERC also required the petitioners to

begin paying annual "headwater benefit" charges.

The petitioners argued to FERC that these charges

were unjustified because they already owned the

rights to "headwater benefits" as a result of a

series of conveyances beginning in the midnineteenth century--starting with a grant from
the United States to the State of Wisconsin in

1848. FERC rejected this argument, and the

petitioners filed for review in this court. We

agree with the petitioners and reverse.

I. The History and Development of the Fox River/1

 In 1634, the French explorer Jean Nicolet

became the first European to set foot in

Wisconsin, claiming it for France. He began his

exploration at Green Bay, where the Fox River

flows into Lake Michigan, and traveled up the Fox

in a southwesterly direction through Lake

Winnebago as far as the site of the present city

of Berlin, Wisconsin. Forty years later, Father

Jacques Marquette and Louis Jolliet traveled

farther up the Fox, eventually reaching the

portage between the Fox and Wisconsin Rivers,

where the two rivers are only about a mile apart.

From that portage--where the city of Portage,

Wisconsin, is now located--the Fox River flows

northeastward into Lake Michigan, and the

Wisconsin River (which Marquette and Jolliet then

followed) runs southwestward into the Mississippi

River. For more than a century after Marquette

and Jolliet discovered it, European fur traders

used the portage as a link in their passage

westward.

 In September of 1828, three companies of the

First United States Infantry arrived at the FoxWisconsin portage to build Fort Winnebago. One of

the main reasons for establishing this strong

point was to prevent the Winnebago Indians from

closing the commercially important trail between

the rivers. This military presence encouraged

settlers to come to the area, and travelers

eventually became dissatisfied with the well-worn

but marshy trail. This path was virtually

impassible during times of high water, and

eventually the idea of a canal gained attention.

Given the recent success of the Erie Canal and

the great interest in canals in this pre-railroad

era, a Fox-Wisconsin canal seemed like a splendid

idea. If the canal and other improvements to the

Fox River were successful, there would be a

continuous waterway from the Atlantic coast to

New Orleans, by way of the Great Lakes. In 1837,

the Winnebago Indians were somehow induced to

give up all their lands in Wisconsin, and a group

of New York and Wisconsin businessmen formed the

Portage Canal Company. Construction of a canal

between the Fox and Wisconsin Rivers began, but

it stalled after the expenditure of $10,000.

Years passed.

 Joel R. Poinsett,/2 President Martin Van

Buren’s Secretary of War, saw military value in

completing the Fox-Wisconsin waterway, and he

urged Congress to appropriate money to complete
its construction. Morgan L. Martin, territorial

delegate from Wisconsin, suggested that money

could be saved by giving land and water rights to

Wisconsin and letting it build the canal and

improve the Fox River. See Ina Curtis, Early Days at

the Fox-Wisconsin Portage 48 (Columbia County Hist.

Soc. 1981). Congress favored Martin’s idea, and

in 1846, Congress passed a law granting to

Wisconsin, upon its becoming a state (which

happened two years later), all public lands and

water rights necessary for the construction of

the canal and the improvement of the Fox River,

including land "on each side of the said Fox

River, and the lakes through which it passes"

from the portage to Green Bay. Act of Aug. 8,

1846, 170 Stat. 83 (1846). On August 8, 1848, the

brand new State of Wisconsin gave its assent to

this Act of Congress, accepting the offer. See

Act of Aug. 8, 1848, 1848 Wis. Laws 58. As part

of its acceptance, Wisconsin declared,

"[W]henever a water power shall be created by

reason of any dam erected or other improvements

made on any of said rivers, such water power

shall belong to the state subject to future

action of the [Wisconsin] legislature." Id. at

sec. 16, 1848 Wis. Laws at 62. Work on the canal

and other improvements began in June of 1849

under the direction of the newly created

Wisconsin Board of Public Works, but progress was

slow because of mix-ups between the Board and its

contractors. In 1851, the first dam was built

across the natural outlet of Lake Winnebago at

Menasha. See Ellen Kort, The Fox Heritage 74 (Windsor

Pub. 1984). The canal between the Fox and the

Wisconsin was completed by May of 1851,/3 but

the State was buckling under the financial

burden./4 Morgan Martin then reentered the

scenario, taking over as a new contractor and

attempting to complete the improvements along the

Fox River from Lake Winnebago to Green Bay. 

 Still under financial pressure, Wisconsin

decided to "privatize" the project. The Wisconsin

legislature issued a special charter to the Fox

and Wisconsin Improvement Company (Improvement

Company), and on July 6, 1853, Wisconsin

transferred "the works of improvement

[contemplated by the Act of Aug. 8, 1848 and

related acts], together with all and singular

rights of way, dams, locks, canals, water power

. . . to the same extent and in the same manner

that the State now hold[s] . . . ." Act of July

6, 1853, sec. 2, 1853 Wis. Laws 92, 93. Thus, the

State of Wisconsin disposed of its entire

interest in improving the Fox and dumped the

associated financial burdens of improvement by

transfer to the Improvement Company, which

continued the undertaking.

 Carrying on the tradition of difficulty and
failure, the Improvement Company found itself

bankrupt by 1864. In 1866, the property of the

Improvement Company--consisting of the works of

improvement, the water powers and the lands--were

sold to a group of investors from New York at a

court-ordered foreclosure sale. The purchasers

were later incorporated as the Green Bay &

Mississippi Canal Company (Canal Company) with

the mission of expanding the canal and

improvements to make way for much larger craft.

See Act of April 12, 1866, sec. 2, 1866 Wis.

Private & Local Laws 1493, 1494. The Canal

Company operated for several years, but during

that time very little work was done on the Fox

River improvements. Instead, the Canal Company

focused on soliciting assistance from the federal

government. The anomaly of a public waterway’s

being held in private hands created some concern

in the halls of power, and eventually, none other

than Morgan Martin, together with others,

suggested that the rights and franchises of the

Canal Company come full circle and be surrendered

to the United States government. 

 In 1870, Congress authorized the Secretary of

War to enter into arbitration with the Canal

Company to determine what compensation should be

paid for the assets the United States required to

continue the improvements of the Fox River for

the purpose of navigation. See Act of July 7,

1870, 16 Stat. 189, ch. 210 (1870). Wisconsin

authorized the sale, see Act of March 23, 1871,

1871 Wis. Private & Local Laws 973, and the

arbitrators fixed the appropriate compensation at

$325,000 to be paid to the Canal Company. This

sum reflected the following valuations: water

powers, $140,000; personal property, $40,000; and

the improvements, $145,000. The Secretary of War

determined that the Canal Company’s water power

rights and personal property were not necessary

to the maintenance of navigation along the Fox

River and recommended to Congress that it acquire

only the property necessary to maintain

navigation, leaving the water power rights and

personal property in the hands of the Canal

Company. On June 10, 1872, Congress authorized

the purchase of the improvements only,

compensating the Canal Company in the amount of

$145,000--the prescribed $325,000 less the value

of the water power rights and personal property.

The Canal Company deeded the improvements to the

United States in September of 1872, transferring:

All and singular property and right of property

in and to the line of Water Communication between

the Wisconsin River aforsaid and the mouth of the

Fox River, including its locks, dams, canals and

franchises saving and excepting therefrom and

reserving to [the Canal Company] the following

described property right and portion of
franchises, which in the opinion of the Secretary

of War are of Congress and not needed for public

use . . . .

Deed from Green Bay & Mississippi Canal Company

to United States of America (Sept. 8, 1872) at 3

(1872 Deed), J. App. at 18 (emphasis in

original). What was "not needed for public use"--

i.e., not needed for navigation--was thus

reserved by the Canal Company, and the deed

described the reserved property as follows:

[A]ll that part of the franchise of [the Canal

Company] viz. the water power created by the

dams, and by the use of the surpluse [sic] water

not required for the purpose of navigation with

the rights of protection and preservation

appurtenant thereto and the lots, pieces or

parcels of land necessary to the enjoyment of the

same and those acquired with reference to the

same all subject to the right to use the water

for all purposes of navigation . . . .

1872 Deed at 3, J. App. at 18. After the

execution of this deed, the United States owned

all the dams and controlled the waterway under

its paramount interest in navigation. The Canal

Company owned all the water power rights created

by the dams, subject to the United States’s

navigation interest./5 The Canal Company leased

water power to several paper mills along the

Lower Fox River, and the United States maintained

navigation along the entire Fox River. However,

with the advance of the railroads, commerce on

the Fox River above Lake Winnebago dwindled, and

the canal was eventually abandoned. Improvement

along the Lower Fox River (below Lake Winnebago

and the Menasha dam to Green Bay) continued, and

in 1937 the government increased the spillway

capacity of the Menasha dam. This permitted more

effective control of the water level in Lake

Winnebago and, concurrently, stabilized the flow

in the Lower Fox River. Today, the Fox River is

used partly for navigation but mostly for water

power, which since the turn of the century means

hydroelectric power. And hydroelectric power is

a major focus of federal regulation.

II. Regulatory Background

 In 1920, Congress enacted the Federal Water

Power Act (FWPA), 41 Stat. 1063 (1920), in order

to promote "the comprehensive development of the

water resources of the Nation, in so far as it

was within the reach of the federal power . . .

." First Iowa Hydro-Electric Cooperative v.

Federal Power Commission, 328 U.S. 152, 180

(1946). In 1930, Congress created a five-member,

independent Federal Power Commission (FPC) to

exercise licensing authority over dams and other
projects on navigable waters. See Act of June 23,

1930, 46 Stat. 797 (1930). Five years after that,

Congress amended the FWPA to provide for

regulation of wholesale electric power in

interstate commerce, renaming it the Federal

Power Act (FPA). See Public Utility Act of 1935,

49 Stat. 839 (1935). In 1977, the FPC was renamed

the Federal Energy Regulatory Commission. See

Department of Energy Organization Act, Pub. L.

No. 95-91, 91 Stat. 565 (1977).

 Under the FPA, now codified at 16 U.S.C. sec.

791a et seq., a private party cannot build or

operate a dam or reservoir on navigable waters of

the United States for the purpose of developing

electric power without first obtaining a license

from FERC. See 16 U.S.C. sec. 817. Nor can an

unlicenced hydropower project use the "surplus

water" or "water power" from a governmentoperated dam. See id. The Commission issues

licenses to parties, like the petitioners, that

have hydropower projects at government dams under

sec. 4(e) of the FPA./6 See 16 U.S.C. sec.

797(e). Section 10(e) of the FPA authorizes FERC

to charge licensed hydropower projects annual

fees for the occupancy and use of government dams

or other structures. See 16 U.S.C. sec.

803(e)./7

 At issue in the present case, however, is

FERC’s power under sec. 10(f) of the FPA. See 16

U.S.C. sec. 803(f)./8 Section 10(f) authorizes

the Commission to charge appropriate fees to any

hydropower project, whether licensed or not, if

the project is benefitted by an upstream dam or

other upstream improvement. Congress enacted sec.

10(f) as a means of requiring power projects--

like the petitioners’ projects--to compensate

upstream dam owners for "headwater benefits"

conferred as a result of "a storage reservoir or

other headwater improvement." 16 U.S.C. sec.

803(f). As the Tenth Circuit has explained:

The term "headwater benefits" refers to the

situation in which an upstream reservoir, through

a program of water storage and subsequent

controlled release, alters the natural flow of a

river in such a way as to allow a downstream

hydroelectric facility to generate more electric

power than would otherwise be possible. This is

accomplished primarily by augmenting the natural

flow of the river with released storage water

during seasons when the natural flow would

otherwise not be sufficient to allow the

downstream facility to operate at full capacity.

Public Service Co. of Colorado v. FERC, 754 F.2d

1555, 1561 (10th Cir. 1985). See also 18 C.F.R.

sec. 11.10(a)(2) (defining "headwater benefits").

The system of assessing fees for "headwater
benefits" ensures that downstream power stations

"participate in the financial burden" shouldered

by upstream projects whenever storage-and-release

programs, that provide benefits to downstream

owners, are created or improved. In re Southern

California Edison Co., Ltd., 1 FPC 567, 574

(1939). See also Farmington River Power Co. v.

FERC, 103 F.3d 1002, 1004 (D.C. Cir. 1997). 

 While FERC clearly has authority to assess

water-power-related charges under both sec. 10(e)

and sec. 10(f) of the FPA, this authority is not

without limit. The FPA states that it is not

intended "in any way to interfere with the laws

of the respective States relating to the control,

appropriation, use, or distribution of water . .

. or any vested right acquired therein." 16

U.S.C. sec. 821. Thus, FERC cannot assess charges

for the use of water or water rights to which a

party has a vested right under state law. See

Public Service Co. of Colorado, 754 F.2d at 1566.

III. Headwater Benefits Assessment

 In 1992, FERC informed the petitioners that it

would be conducting a "headwater benefit" study

on the Lower Fox River and would then assess

charges for benefits realized by projects

downstream of the government-owned dam at

Menasha, Wisconsin. As has been noted, the

Menasha dam is located where the Fox River leaves

Lake Winnebago and regulates the river’s flow as

it has done since its construction in 1851. All

of the petitioners’ hydropower projects are

located below the Menasha dam. Since 1937, when

its spillway capacity was increased, that dam has

provided "headwater benefits" to these downstream

projects through its storage-and-release

program./9 In 1994, FERC’s Office of Hydropower

Licensing issued a report suggesting that a total

"headwater benefit" fee of $338,984 be assessed

for past benefits/10 with additional charges

to be assessed in the future. The Director of the

Office of Hydropower Licensing, over the

petitioners’ objections, accepted this

suggestion, and on September 12, 1997, issued an

order imposing charges. See Wisconsin Electric

Power Co., 80 FERC para. 62,232, 64,399-400

(1997); City of Kaukauna, 80 FERC para. 62,233,

64,405 (1997); Repap Wisconsin Inc., 80 FERC

para. 62,234, 64,409-10 (1997). The Director

found that the petitioners were exempt from

"headwater benefit" charges prior to 1937, but

that their rights under the 1872 Deed did not

cover the incremental generation attributable to

the 1937 improvements to the Menasha dam. See

Wisconsin Electric Power Co., 80 FERC at 64,399;

City of Kaukauna, 80 FERC at 64,404; Repap

Wisconsin, 80 FERC at 64,409. The petitioners

sought a rehearing on the ground that, as
successors in interest to the Canal Company, they

already owned, even after 1937, all rights to

"water power" and "surplus water" not required

for navigation and employed in power production

at any dam or other improvement on the Fox River.

 In its Order on Rehearing, the full Commission

rejected the petitioners’ argument. In making

this determination, FERC did not adopt the

Director’s reliance on the recent vintage of the

1937 improvements to the Menasha dam. Instead,

the Commission relied on three arguably

independent justifications: (1) the right to

"surplus water" and "water power" reserved in the

1872 Deed applied only to the "water power"

available at the individual dam sites where the

petitioners’ projects are located and therefore

did not extend to the upstream Menasha Dam; (2)

under the FPA, the petitioners’ rights to "water

power" and "surplus water" did not include

benefits attributable to the storage and release

of water from an upstream project; and (3) the

Canal Company did not in fact own any water power

rights at the Menasha Dam, and therefore could

not have assigned such rights to its successors.

See Wisconsin Electric Power Co., 86 FERC para.

61,096 (1999). The petitioners seek review in

this court.

IV. Discussion

 When we review a FERC order, we must ordinarily

determine "(1) whether the Commission abused or

exceeded its authority; (2) whether each

essential element of the Commission’s order is

supported by substantial evidence; and (3)

whether the Commission has given reasoned

consideration to each of the pertinent factors in

balancing the needs of the [regulated parties]

with relevant public interests." Central Illinois

Pub. Serv. Co. v. FERC, 941 F.2d 622, 627 (7th

Cir. 1991) (quoting Peoples Gas Light and Coke

Co. v. FERC, 742 F.2d 1109, 1111-12 (7th Cir.

1984)). A Commission order should not be reversed

if FERC has provided "a sound, well-reasoned

justification, based upon the evidence in the

record, for its action." Central Illinois Pub.

Serv. Co., 941 F.2d at 627 (quoting Northern

Indiana Pub. Serv. Co., 782 F.2d 730, 746 (7th

Cir. 1986)). Our review is usually quite

deferential, but, when asked to review FERC’s

interpretation of a contract as we are here,

focusing on the nineteenth-century conveyances,

we review with less deference. See Amoco Prod.

Co. v. FERC, 765 F.2d 686, 690 (7th Cir. 1985).

Thus, we will affirm FERC’s order only if we find

its "interpretation of the [conveyances] was

reasonable and in full conformance with law." Id.

(citing Texas Gas Transmission Corp. v. Shell Oil
Co., 363 U.S. 263, 268-69 (1960)). 

 The petitioners make the same argument before

us as they did before FERC. This argument, at its

core, is very simple: they claim without dispute

that they are the successors in interest of the

Canal Company and then argue that they already

own the water rights for which FERC has charged

them. Nothing in the language of the relevant

conveyances, they continue, supports the

Commission’s narrow constructions of the terms

"water power" and "surplus water." To the

contrary, say petitioners, the plain language of

the conveyances reserved to the Canal Company all

actual and potential water power interests along

the Fox River, including those that would later

be labeled "headwater benefits" in accordance

with sec. 10(f) of the FPA. In 1872, the

"headwater benefits" created by the Menasha

improvements were potential only, but, whenever

created, came within the applicable language of

the conveyances.

 The petitioners’ thesis is that the "headwater

benefits" for which FERC charged them are merely

part of the "water power" and "surplus water"

they own as a result of the reservation in the

1872 Deed. To elaborate, their argument goes like

this: the State of Wisconsin claimed "water

power" "created by reason of any dam . . . or

other improvement" along the Fox River; then the

Improvement Company received the State’s entire

interest, including rights to "water power;" then

the Canal Company got the Improvement Company’s

entire interest, again including the rights to

"water power;" and finally, when transferring the

improvements to the United States, the Canal

Company kept the rights to "water power." Thus,

the petitioners conclude, because the Canal

Company’s interest in "water power" derives from

the State’s original claim over "water power"

"created by reason of any dam," the "water power"

(and "surplus water") reserved by the Canal

Company--and later acquired by the petitioners--

includes what has at some point in the evolution

of the river been labeled "headwater benefits." 

 The petitioners have a very strong argument.

Beginning with the grant of land from the United

States to the State of Wisconsin in 1848, the

State validly claimed ownership of all "water

power [that] shall be created by reason of any

dam erected or other improvements made on any of

said rivers." Act of Aug. 8, 1848 sec. 16, 1848

Wis. Laws 58, 62. See Kaukauna Water Power Co. v.

Green Bay & Mississippi Canal Co., 142 U.S. 254,

276 (1891) (holding, when asked to determine the

validity of the 1848 Act, that "we think it

within the power of the state to retain within

its immediate control such surplus as might
incidentally be created by the erection of the

dam"). Wisconsin later validly transferred its

entire interest to the Improvement Company. See

Green Bay & Mississippi Canal Co. v. Kaukauna

Water-Power Co., 35 N.W. 529, 531 (Wis. 1887)

(describing transfer). Then, in 1866, the Canal

Company acquired the Improvement Company’s entire

interest through a foreclosure sale. See Green

Bay & Mississippi Canal Co. v. Patten Paper Co.,

172 U.S. 58, 74 (1898) (describing transfer as

including "the property of [the Improvement

Company], consisting of the works of improvement,

lands and water powers"); Green Bay & Mississippi

Canal Co., 35 N.W. at 532. Thus, in 1866, the

Canal Company held the same property and rights

along the Fox River as the State had claimed

under its Act of August 8, 1848.

 The crucial conveyance is the transfer

memorialized in the 1872 Deed. By that document,

the Canal Company "transferred and conveyed the

works of improvement to the United States,

reserving to itself the personal property and the

water powers . . . ." Patten Paper, 172 U.S. at

75. Specifically, recall that the United States

wanted only property necessary "for the purpose

of navigation" and that the deed reserved "the

water power created by the dams, and by the use

of surpluse [sic] water not required for the

purpose of navigation." 1872 Deed at 3, J. App.

at 18. See also Patten Paper, 172 U.S. at 75

(quoting deed and discussing the transaction).

Thus, under the reservation clause in the 1872

Deed, "whatever title the Canal Company had to

such water power and such surplus water at the

time of the conveyance, it kept . . . ." Kaukauna

Water Power Co., 142 U.S. at 278. As we have

noted, the Canal Company had title to "water

power . . . created by reason of any dam . . . or

other improvements" along the Fox River. Act of

Aug. 8, 1848, 1848 Wis. Laws 58, 62 (emphasis

added). The sheer breadth of the rights reserved

in the 1872 Deed suggests that the petitioners

already own all water-power-related rights along

the Lower Fox River. And it is noteworthy that

the United States, in 1872, took only property

necessary for the purpose of navigation. The

Commission has not argued that the energy-related

benefits of the storage-and-release program at

the Menasha dam are necessary for the purpose of

navigation. 

 The view that what are now known as "headwater

benefits" as recognized by the FPA remained with

the Canal Company in 1872 is buttressed by the

absence from the record before us of any

indication that at the time of the nineteenthcentury conveyances a discrete water power

interest called "headwater benefits" was

recognized or that there was recognition then, by
some other name, of a separate interest in what

is now described as "headwater benefits." Neither

party specifically addressed this question, but

so far as anything before us discloses, what have

now been separately identified as "headwater

benefits" were in 1872 part and parcel of the

larger category of "water power" and "surplus

water." This is not surprising since the

stabilization of flow that constitutes a

"headwater benefit" achieves its only actual

energy impact in making available a net increase

in "water power" at the various downstream dams.

A "headwater benefit" is therefore essentially an

enhancement of what is conventionally referred to

as "water power" at the various dams. In 1920,

sec. 10(f) of the FPA apparently carved out

"headwater benefits" as a separate

interest./11

 FERC presents three arguments to challenge the

petitioners’ ownership of the "headwater

benefits." We will address them in turn. First,

the Commission found that the reservation clause

in the 1872 Deed applied only to "water power"

and "surplus water" developed at the petitioners’

individual dam sites. See Wisconsin Electric

Power Co., 86 FERC at 61,346. Although FERC

concedes that the 1872 Deed did reserve to the

petitioners "water power" and "surplus water"

rights at their individual dam sites, it in

addition believes that the "water power" and

"surplus water" rights are limited to these

particular dam sites. FERC argues that, based on

"historic origins and usage," both of the terms

"water power" and "surplus water" refer to the

"head and flow that a dam makes available at the

dam site."/12 Id. In support of this finding,

FERC cites Chemehuevi Tribe of Indians v. Fed.

Power Comm’n, 420 U.S. 395 (1975), which states

that "[t]he phrase ’surplus water or water power

from any Government dam’ had its origins in

legislation enacted in the late 19th and early

20th centuries, conferring on the Secretary of

War the authority to lease at individual dam

sites excess water for power development." Id. at

414. FERC quotes the Supreme Court’s language in

dicta accurately, but, of course, the context of

the quotation from Chemehuevi is entirely

different from that in which we address the

present issue; Chemehuevi discussed legislation

that was by its own terms site-specific, and

there was no room in the Chemehuevi discussion to

consider the enhancement of "surplus water" or

"water power" by systemic improvements. The

legislation analyzed in Chemehuevi involved

"surplus water" and "water power" that was

identified as being at dams, with no focus on the

enhancement of these interests by upstream

improvements. See, e.g., H.R. 16053, 63d Cong.,

2d Sess., sec. 14 (1914) (proposed amendment to
Dam Act referring to "the right to develop power

from the surplus water . . . at any navigation

dam") (emphasis added); S. 3331, 64th Cong., 1st

Sess., sec. 10 (1915) ("right to utilize the

surplus water-power . . . at any navigation dam)

(emphasis added); H.R. Rep. No. 404, 64th Cong.,

1st Sess., at 6 (1915) ("for the use of surplus

water and water power generated at dams . . . .")

(emphasis added). 

 But in all its discussion of how the terms

"surplus water" and "water power" were typically

used, FERC never directly addresses the fact that

the conveyances relevant to this case used

markedly different language than the proposed

legislation referred to by Chemehuevi. Here,

Wisconsin did not claim rights at a particular

dam or even rights at all dams along the Fox

River. The State claimed ownership of "water

power" created "by reason of any dam . . . or

improvement." Act of Aug. 8, 1848 sec. 16, 1848

Wis. Laws 58, 62 (emphasis added). "Water power"

created by reason of any dam or improvement

suggests a more expansive category than merely

"water power" at particular sites, as FERC would

have it; instead, "by reason of" seems to denote

a claim on "water power" as a systemic concept. 

 This conclusion is reinforced by the elementary

physics of water power. Water power, in the

physical sense, is the "[p]ower developed from

movement of masses of water . . . through the

force of gravity." McGraw-Hill Encyclopedia of Science &

Technology, vol. 19 at 396 (8th ed. 1996). At a

hydropower station, "potential energy from the

weight of water falling through a vertical

distance is converted to electrical energy." Id.,

vol. 6 at 34. The amount of power (usually

measured in kilowatts or megawatts) varies

directly with the "runoff" and the "head" at a

particular dam. See id., vol. 19 at 398. The "runoff"

is, quite simply, the volume of water that flows

past a point during a given period of time. See

id., vol. 6 at 34. The "head" is, again in simple

terms, the height of the dam from which the water

falls. See id. Thus, the "water power" at a

particular dam is the product of the dam’s height

and the rate of flow of the water./13 FERC has

already conceded that the petitioners own the

right to use the "head" created by the federal

dams at which they have projects. See note 8,

supra. But FERC overlooks something when it

suggests that "water power" and "surplus water"

only concern the energy produced by the head at

a particular dam site. 

 For the 1872 Deed, which incorporated the

State’s claim to all "water power" created "by

reason of any dam . . . or improvement," did not

limit "water power" to the energy output
attributable only to the head at a particular

run-of-the-river dam. In addition to the head,

there, of course, needs to be water flowing at

that site, and the water flow is partly a

function of the storage-and-release program

upstream. By increasing the flow in the Lower Fox

River during dry periods, the Menasha dam’s

storage-and-release program augments the water

power available at all the individual downstream

sites, without a commensurate decrease during wet

periods,/14 thus producing a net gain in

"water power" annually. This effect on water

flow, which is evident at each of the dams,

strongly supports the petitioners’ interpretation

that the term "water power," as used in the 1872

Deed and in the other conveyances, includes an

enhancement of flow as well as the energy

contribution of the corresponding head. We

conclude that FERC’s attempt to limit the meaning

of "water power" to exclude this enhancement of

flow at the various dam sites is an unreasonable

interpretation of the reservation in the 1872

Deed./15

 Another way of looking at the problem is, as we

have suggested, to recall that in 1872 there was

apparently no recognition of something called

"headwater benefits" (or a variant of the term)

as a separate interest. This is not surprising.

The stabilization of flow resulting from the

storage-and-release at the Menasha dam does not

produce capturable water power except as it

affects the water flow at the individual

downstream dam sites. The fact that "headwater

benefits" were later identified as a discrete

concept and separated from the comprehensive

notion of "water power" (at least in the drafting

of the FPA) does not undermine the effect of

conveyances made many years before its enactment.

 The Commission argues, however, that based on

the interaction of sec. 4(e), sec. 10(e), sec.

10(f) and sec. 23(b) of the FPA "headwater

benefits" cannot be part of the "water power" or

"surplus water" rights held by the

petitioners./16 This is a difficult argument

because, as we have noted earlier, we are not

aware of any recognition in 1872 of something

called "headwater benefits" as an interest

separate from "water power." Nonetheless, FERC

says that, if we adopt the petitioners’ expansive

definitions, we create anomalous results in

interpreting the FPA. "Headwater benefits," FERC

explains, concern the "distinct energy benefits

to downstream projects of regulating the river

flow so that it remains even and predictable."

Respondent’s Br. at 14. See also Wisconsin

Electric Power Co., 86 FERC at 61,347. This, it

is contended, is somehow different from "water

power" which FERC defines as "hydroelectric power
created by the Government dam." Respondent’s Br.

at 5. FERC further argues that the petitioners’

attempt to conflate these two distinct concepts

is inconsistent with the FPA’s statutory scheme.

Making "headwater benefits" part of "water power"

or "surplus water," as the petitioners’ propose,

would violate congressional intent with respect

to the licensing scheme in the FPA. FERC

explains:

A more expansive interpretation of these terms

would in fact extend the jurisdiction of this

Commission beyond its accepted limits. If a

downstream project receiving headwater benefits

from an upstream government storage dam were said

to be using surplus water or water power from

that dam, the project would be required to be

licensed pursuant to Section 23(b)(1) of the FPA.

Yet the Commission has never required the

licensing of such projects on that basis, and

some projects receiving headwater benefits from

federal dams are in fact unlicenced. Indeed, in

the 1935 amendments to the Federal Water Power

Act, Congress found it necessary to adopt a

specific provision in Section 10(f) for charging

unlicenced projects for headwater benefits. Thus,

it is clear that Congress did not consider the

use of "surplus water or water power" to include

the mere receipt of headwater benefits by a

project.

Wisconsin Electric Power Co., 86 FERC at 61,347

(footnotes omitted). 

 We are quick to recognize FERC’s expertise in

interpreting the FPA, and we respect its concerns

about jurisdictional limitations, but we think

that this argument is misplaced. We are not

interpreting the FPA. What Congress intended in

the FPA and the scope of FERC’s jurisdiction

under that statute are not our concern here

because we are interpreting the 1872 Deed and

related conveyances, not the FPA. If we were

interpreting the FPA, or perhaps even a post-FPA

conveyance, there would be some force to FERC’s

argument. For if, under the statute, the receipt

of "headwater benefits" were to constitute the

use of "water power" or "surplus water," all

downstream projects receiving such benefits would

presumably require a license. This licensing

requirement would make FERC’s authority under

sec. 10(f) of the FPA to charge unlicensed

facilities for "headwater benefits" redundant. If

we were construing the FPA, this would be a

problem. But instead we are construing the 1872

Deed executed at a time, so far as we know,

before "headwater benefits" were separately

thought of or given a name. There is nothing in

the record indicating that the terminology used

in the FPA was current in 1872. The FPA was

enacted long after the 1872 Deed was executed,
and there is no reason to believe that usage

under the FPA controls the much earlier

instrument. See Florida E. Coast Ry. Co. v. CSX

Transp. Inc., 42 F.3d 1125, 1130 (7th Cir. 1994)

("Whereas the law in effect at the time of

execution sheds light on the parties’ intent,

subsequent changes in the law that are not

anticipated in the contract generally have no

bearing on the terms of their agreement.").

 Finally, FERC argues that the 1872 Deed could

not have transferred "water power" rights at the

Menasha dam because those rights belonged to the

private owners of that dam in 1855. The Canal

Company, FERC argues, could not have conveyed

what it did not own. In support of this, FERC

cites a 1922 report from the Army Corps of

Engineers to the House of Representatives that

discusses the history of the Fox River and its

projects. See H. Doc. No. 146, 67th Cong. (1922).

We agree with FERC, at least for present

purposes, that the Canal Company did not own any

"water power" rights at the Menasha dam,/17

but we believe that FERC draws an incorrect

conclusion from this circumstance. As we have

earlier made clear, we are not concerned with

"water power" at the Menasha dam site but rather

with "water power" "created by reason of" the

Menasha dam. The petitioners’ argument is not

that they own "water power" created by the head

and flow at the Menasha dam but that, when the

Menasha dam releases stored water, it creates

additional power potential at their downstream

hydropower projects, and the consequent

incremental energy belongs to them./18 This is

what FERC refers to as "headwater benefits" under

sec. 10(f) of the FPA, but this usage does not

detract from the concept that the increased

generation of power realized by petitioners’

projects is correctly considered "water power"

"created by reason of [the Menasha] dam." The

increase is an enhancement of the "water power"

available at the various dams downstream and was

reserved by the 1872 Deed. Therefore, the

petitioners already own the rights to that "water

power," and we find that FERC’s reliance on the

ownership of "water power" rights at the Menasha

dam is unreasonable as well./19

V. Conclusion

 For the foregoing reasons, we find FERC’s

interpretation of the petitioners’ rights under

the 1872 Deed and other conveyances--as

successors in interest to the Canal Company--to

be unreasonable. The United States could hardly

foresee the FPA and its requirements when it

entered into the 1872 Deed with the Canal

Company. However, it did not bargain then for

"headwater benefits" (or rights to incremental
power attributable to a storage-and-release

program of a government-owned dam, however

designated), and we are only holding it to its

agreement. Therefore, we Vacate the Commission’s

Order on Rehearing, and Remand for the entry of an

order consistent with this opinion.

/1 When preparing this history section, we consulted

the briefs of both parties as well as several

historical resources. These sources included: The

Attainment of Statehood (Milo M. Quaife, ed., State

Hist. Soc. of Wis. 1928); Ina Curtis, Early Days at the

Fox-Wisconsin Portage (Columbia County Hist. Soc.

1981); August Derleth, The Wisconsin: River of a Thousand

Isles (Rinehart & Co. 1942); Thomas Huhti, Wisconsin

Handbook (Moon Pub. 1st ed. 1997); Ellen Kort, The Fox

Heritage (Windsor Pub. 1984); Wisconsin’s Past and

Present: A Historical Atlas (Univ. Wis. Press 1998);

Samuel Mermin, The Fox-Wisconsin Rivers Improvement: An

Historical Study in Legal Institutions and Political Economy

(Bd. of Regents Univ. Wis. 1968); Prairie, Pines and

People: Winnebago County in a New Perspective (James I.

Metz, ed., Oshkosh Northwestern Co. 1976); Joseph

Schafer, The Winnebago-Horicon Basin: A Type Study in Western

History (State Hist. Soc. of Wis. 1937); Some Laws and

Documents Relating to Hydraulic Power of Fox or Neenah River

(Moses Hooper, ed., Sarau & Weidner 1881); John N.

Vogel, et al., Lower Fox Corridor Study (State Hist. Soc.

of Wis. 1992). Specific citations to individual

sources will be provided only for facts unique to

that source.

/2 Mr. Poinsett was immortalized by his introduction

of poinsettia plants into the United States from

Mexico. See Curtis, supra note 1, at 48 n.1.

/3 The first vessels appeared on the canal on May

24, 1851. The River Times described the event:

"The beautiful steamer, John Mitchell, near

accomplished the feat of passing through the

canal at this place on Saturday last. She came up

as far as Main Street. As the John Mitchell came

up the canal, the Enterprise came up the

Wisconsin River to the head of the canal. The

blustering rivalry between the inhabitants of

different waters (the throat of each giving its

best pull and whistle alternately) was quite

exhilarating, and called out a large concourse of

citizens to gaze upon the scene presented and

make predictions for the future. After a short

time boats and citizens withdrew, amid strains of

music and the noise and confusions were over." In

the years that followed, the canal became an

important, and better coordinated, artery for

traffic. See Derleth, supra note 1, at 162-63.

/4 The Wisconsin Constitution prohibited the
creation of a debt of any size for internal

improvement, and funds from the sale of lands

were running out. See Schafer, supra note 1, at

103-04, 104 n.12.

/5 The United States maintains dams along the Fox

River only for public purposes like navigation

and flood control. Any other use of those dams is

incidental: the United States’s only obligation

is to public purposes. If the government decides

to undertake an action in the interest of

navigation and that action harms a party that is

using the water power--like the petitioners here-

-that user has no recourse: "The government may

lower the dam and embankment, or may remove the

same and destroy the water-power entirely, and

the plaintiff cannot prevent it." Green Bay &

Mississippi Canal Co. v. Kaukauna Water-Power

Co., 35 N.W. 529, 537 (Wis. 1887), aff’d Kaukauna

Water-Power Co. v. Green Bay & Mississippi Canal

Co., 142 U.S. 254 (1891). But, so long as the

United States maintains a dam for navigation

purposes, the water-power user may carry on its

use. See id. 

/6 The exception is Wisconsin Electric’s project at

Appleton, which operates under a pre-1920 permit.

Wisconsin Electric’s other projects are federally

licensed, and, in any event, our ruling here does

not turn on whether a particular project is

licensed, so we need not distinguish between

petitioners’ licensed and unlicensed projects.

/7 The Commission has never charged the petitioners

that operated licensed hydropower projects

located at government dams annual fees under sec.

10(e) because, as FERC explains, the Commission

recognizes that the petitioners’ rights under the

1872 Deed exempt them from such charges for the

use of "surplus water" or "water power" at the

federal dams at which they are located. See,

e.g., City of Kaukauna, Wisconsin, 12 FERC para.

62,130 (1980).

/8 Section 10(f) of the FPA, 16 U.S.C. sec. 803(f),

reads, in full, as follows:

(f) Reimbursement by licensee of other

licensees, etc. 

 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 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. 

 Whenever such reservoir or other improvement is

constructed by the United States the Commission

shall assess similar charges against any licensee

directly benefited thereby, and any amount so

assessed shall be paid into the Treasury of the

United States, to be reserved and appropriated as

a part of the special fund for headwater

improvements as provided in section 810 of this

title. 

 Whenever any power project not under license is

benefited by the construction work of a licensee

or permittee, the United States or any agency

thereof, the Commission, after notice to the

owner or owners of such unlicensed project, shall

determine and fix a reasonable and equitable

annual charge to be paid to the licensee or

permittee on account of such benefits, or to the

United States if it be the owner of such

headwater improvement. 

/9 The petitioners do not dispute that their

projects, in fact, receive benefits from the

Menasha dam: the storage-and-release program,

which stabilizes the flow of the river, allows

the petitioners’ projects to generate more

electricity than otherwise would be available. It

is significant that all of the petitioners’

projects operate on a "run of the river" basis,

meaning that they do not alter the flow of the

river but merely take advantage of the water as

the Fox River flows from Lake Winnebago to Green

Bay. This means that none of the petitioners’

projects located closer to the Menasha dam

provides any "headwater benefits" to those

farther downstream. Thus, the only "headwater

benefits" at issue in this case are those

provided by the Menasha dam.

/10 The suggested fees cover the period from 1966.

The length of the assessment period was based on

the Commission’s policy of limiting retroactive

assessments to a period of 25 years, even though

the Commission asserts that it has the authority

to assess "headwater benefit" charges as far in

the past (after the passage of the FWPA in 1920)

as those benefits were received. See Louisville

Gas and Elec. Co., 58 FERC para. 61,338 (1992).

See also Wisconsin Electric Power Co., 86 FERC

para. 61,096, 61,344 at n.3.

/11 The term "headwater benefits," or some variant of

it, might have been in use somewhere before 1920,

but no such usage has been called to our
attention--certainly not a use in or before 1872.

/12 The "head" refers to the height from which water

falls, i.e. the height of the dam. The "flow"

obviously enough, refers to the quantity of water

that passes over the dam in a stated period of

time. More on this later. See, pages 19-20,

infra.

/13 This relationship is analogous to a like

relationship in electricity where electric power

in watts is the product of the electric potential

in volts (analogous to the height of the dam) and

the rate of flow of electric current in amperes.

/14 Of course, during wet periods, the Menasha dam’s

storage program decreases the natural flow of the

Fox River. But apparently the loss of this flow

does not result in a hydroelectric power loss, if

any, equaling the gain in dry periods. Hence, the

more uniform flow produces a net gain in

available power.

/15 We also note that this logic applies equally

strongly to the "surplus water" reserved by the

1872 deed. As the terms of the 1872 Deed imply,

"surplus water" refers to water not needed for

the government’s navigation uses. See 1872 Deed

at 3, J. App. at 18 (reserving the "surpluse

[sic] water not required for the purpose of

navigation"). FERC does not now nor, to our

knowledge, has it ever claimed that the Menasha

dam’s storage-and-release program modifies the

water flow in a way important for "the purpose of

navigation." Instead, the Menasha dam stores and

releases water in order to maintain an

appropriate water level in Lake Winnebago. See

Wisconsin Electric Power Co., 86 FERC para.

61,096, 61,344 (1999). In fact, this is the

purpose for which the spillways at that dam were

improved in 1937. See id. Although our

understanding of the scope of the term "water

power" supports our holding that the water

released from the Menasha dam creates and

enhances "water power," we also believe that the

water released is properly considered "surplus

water" within the meaning of the 1872 Deed. 

/16 To support this conclusion, FERC cites its

decision in Pyramid Lake Pauite Tribe v. Sierra

Pacific Power Co., 1 FERC para. 63,035 (1977).

But, because Pyramid Lake was decided using

definitions of "water power," "surplus water" and

"headwater benefits" developed under the FPA, we

do not find this persuasive. As we presently

discuss, usage in the after-adopted FPA is not

determinative of usage in the 1872 Deed.

/17 FERC’s cited support for this point is ambiguous

at best, but we have found several historical
sources that confirm this fact. See, e.g., Some

Laws and Documents, supra note 1, at 161-64; Mermin,

supra note 1, at 140.

/18 The petitioners point to Kaukauna Water Power Co.

v. Green Bay & Mississippi Canal Co., 142 U.S.

254 (1891), in which the United States Supreme

Court held that the Kaukauna Water Power Company

could not divert water from a United States owned

dam (at which the Canal Company had a power

generation facility) because this would deprive

the Canal Company of its rights to all water

power created by the dam. This holding supports

the conclusion that "water power" includes the

flow approaching the dam.

/19 Although the Commission did not adopt the

Director’s conclusion that the petitioners did

not have rights to "headwater benefits" created

by the 1937 improvements at the Menasha dam but

that they did have rights in such benefits

existing prior to the date of the improvements,

we believe that the Director’s conclusion was

also unreasonable. This is so because the

petitioners’ rights are not limited to "surplus

water" or "water power" created on or before a

specific date. Wisconsin originally claimed all

"water power" rights created or to be created by

dams or improvements along the Fox River

regardless of when those dams or improvements

were made. See Act of Aug. 8, 1848, sec. 16, 1848

Wis. Laws 58, 62 ("Whenever a water power shall

be created by reason of any dam erected or other

improvement made on any of said rivers, such

water power shall belong to the state subject to

future action of the [Wisconsin] legislature.")

(emphasis added). Therefore, just as the

petitioners are exempt from sec. 10(e) charges

for the use of "water power" at dam sites (even

though those dams have been improved or rebuilt

since 1872), they are also exempt from sec. 10(f)

charges for "headwater benefits" even though the

Menasha dam was improved in 1937.