United States Court of Appeals

For the First Circuit

No. 01-1376

CENTRAL MAINE POWER COMPANY,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

____________________

No. 01-1377

BANGOR HYDRO-ELECTRIC COMPANY, ET AL.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

___________________

No. 01-1541

NSTAR SERVICES COMPANY,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

__________________
*Of the Northern District of California, sitting by

designation.

No. 01-1551

ALTERNATE POWER SOURCE, INC.,

Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

___________________

ON PETITION FOR REVIEW OF ORDERS OF

THE FEDERAL ENERGY REGULATORY COMMISSION

____________________

Before

Boudin, Circuit Judge,

Bownes, Senior Circuit Judge,

and Schwarzer,* Senior District Judge.

Michael E. Small and Harvey Reiter with whom Wendy N. Reed,

Wright & Talisman, P.C., David D'Alessandro, Morrison & Hecker,

LLP, Lisa Fink, State of Maine, Public Utilities Commission,

Kenneth G. Jaffe, Swidler Berlin Shereff Huber Friedman LLP,

Richard M. Lorenzo, Heidi Marie Werntz, Huber Lawrence & Abell,

Stephen L. Teichler, Duane, Morris & Heckscher LLP, and Joseph

W. Rogers, Assistant Attorney General, Office of Attorney

General, were on consolidated brief for petitioners Bangor

Hydro-Electric Company, Maine Public Utilities Commission,

Vermont Department of Public Service, National Grid USA, NSTAR

Services Company, Central Maine Power Company, and intervenors

Attorney General for the Commonwealth of Massachusetts and

Alternate Power Source, Inc.

Stephen G. Ward, Public Advocate, Office of Public Advocate,

and Wayne R. Jortner, Senior Counsel, Office of Public Advocate,

on consolidated brief for Maine Public Advocate, Amicus Curiae.

Beth G. Pacella with whom Kevin P. Madden, General Counsel,
and Dennis Lane, Solicitor, were on consolidated brief for

respondent.

John N. Estes, III with whom Paul Franklin Wight, John S.

Moot, Skadden, Arps, Slate, Meagher & Flom LLP, Richard P.

Bress, Minh N. Vu, Michael J. Gergen, Latham & Watkins, David B.

Raskin, Joseph E. Stubbs, Steptoe & Johnson LLP, Joseph DeVito,

NRG Energy, Inc., James Bertrand, Leonard, Street and Deinard,

P.A., Daniel J. Mitchell, Bernstein, Shur, Sawyer & Nelson,

P.A., Larry F. Eisenstat, George E. Johnson, Michael R.

Engleman, Dickstein Shapiro Morin & Oshinsky, LLP, Jay T. Ryan,

Van Ness Feldman, P.C., James C. Beh, Jeffrey M. Jakubiak,

Donald F. Santa, Jr., Dionne E. Thompson, Troutman Sanders LLP

and Neil H. Butterklee, Consolidated Edison Company of New York,

were on consolidated brief for intervenors PG&E National Energy

Group, Inc., PG&E Generating Company, LLC, USGen New England,

Inc., PG&E Energy Trading-Power, L.P., Sithe New England

Holdings, LLC, PEC Energy Marketing, Inc., Consolidated Edison

Energy, Inc., American National Power, Inc., Power Development

Company, LLC, NRG Power Marketing, Inc., Connecticut Jet Power

LLC, Devon Power LLC, Middletown Power LLC, Montville Power LLC,

Norwalk Power LLC, Somerset Power LLC, Northeast Utilities

Service Company on behalf of the Northeast Utilities Operating

Companies and Select Energy, Inc., Mirant New England, LLC,

Mirant Canal, LLC, Mirant Kendall, LLC, FPL Energy, LLC and

Duke Energy North America, LLC. 

June 8, 2001
1About 130 utilities in New England are members of New

England Power Pool ("NEPOOL"), a voluntary association formed in

1971 to facilitate the pooling of power and the coordination of

construction and maintenance of generating facilities. New Eng.

Power Pool, 79 FERC ¶ 61,374, at 62,576 (1997); New Eng. Power

Pool, 50 FERC ¶ 61,139, at 61,419-20 (1990). In 1997, NEPOOL

obtained FERC approval for the creation of an "independent

-4-

BOUDIN, Circuit Judge. The petitions for review in

this case challenge orders of the Federal Energy Regulatory

Commission ("FERC") that have the effect of reinstituting an

earlier charge--the so-called installed capability ("ICAP")

deficiency charge--paid by electric utilities in New England who

fail to meet certain reserve capacity requirements. This court

stayed implementation of all but a small portion of the charge

pending judicial review. The background is complicated but can

be summarized as follows.

In New England, as in other regions of the country,

electrical power is furnished through a grid of interconnected

intercity transmission lines and local distribution lines within

each city or town. Power is generated within the region, or

purchased from outside (e.g., from Canada). Some utilities

engage in all three functions (generation, intercity

transmission, local distribution); but many are local

"retailers" who own only the local distribution facilities

within a town and purchase all of their needs from generating

utilities that have surplus power.1
system operator," ISO New England, Inc. ("ISO-NE"), a non-profit

company that manages New England's power grid and wholesale

electricity marketplace pursuant to a contract with NEPOOL. New

Eng. Power Pool, 79 FERC ¶ 61,374, at 62,577-79.

-5-

Regulation is divided between FERC and state regulatory

commissions, but generally speaking, FERC regulates wholesale

transactions (e.g., between a power-supplying utility with a

surplus and a local municipal utility that retails power). 16

U.S.C. § 824(b)(1) (1994); FPC v. Conway Corp., 426 U.S. 271,

276-77 (1976). In the past, power was provided largely on a

non-competitive basis with regulated rates based upon costs;

but, as in other industries like telecommunications, some power

regulators, including FERC, have been moving in recent years

toward more reliance upon competition. Town of Norwood v. FERC,

202 F.3d 392, 396 (1st Cir.), cert. denied, 121 S. Ct. 57

(2000).

An abiding concern in regulating electricity supply is

the need for adequate reserve capacity. The demand for

electricity varies, depending on weather, economic growth, and

other factors; supply is constrained by the time needed to build

new generating plants and by unexpected breakdowns in generation

or transmission facilities; and electricity cannot economically

be stored for future use in large quantities. To avoid the

extraordinary disruption of blackouts, regulators and utilities
-6-

calculate reserve requirements based on estimates of how much

generating capacity will be needed at the highest point of the

peak load.

Our case concerns the mechanism for assuring that

utilities will have the reserve power needed to satisfy peak

demand. Because the system as a whole must be built to satisfy

peak demand, a good deal of generating capacity is destined to

lie idle at least some of the time. A prudent utility that

retails power to local customers will purchase from a generating

utility a certain amount of reserve capacity--in effect,

capacity that is reserved for that retailer but may be used only

rarely. But it is not certain that under present industry

conditions the retailer has adequate economic incentive to

purchase all the reserve capacity that it needs. And if reserve

capacity is not purchased in sufficient amounts, generating

utilities may lack the incentive to build as much capacity as is

needed to supply peak demand.

The incentive structure in the industry is immensely

complicated and economists take different views on how best

(i.e., cheaply and reliably) to secure adequate reserves. But,

for a number of years prior to 1998, FERC and the New England

utilities under its supervision used the so-called ICAP

deficiency charge as a device to assure that purchasing
2Until 1998, the total ICAP deficiency charge implemented by

the New England Power Pool ("NEPOOL") consisted of an automatic

$6 per kilowatt-month "adjustment charge" and a possible $2.75

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utilities would buy adequate reserve capacity to cover projected

peak load plus a reserve margin. ISO New Eng., Inc., 91 FERC ¶

61,311, at 62,080 (2000); see also Municipalities of Groton v.

FERC, 587 F.2d 1296, 1302 (D.C. Cir. 1978).

In New England, beginning some time before 1990,

wholesale tariffs specified that load serving entities ("LSEs")-

-crudely, electricity retailers--had to pay a charge if they did

not purchase enough reserve capacity. From 1990 onward, the

charge was $8.75 per kilowatt-month; thus, if during a

particular period the reserves purchased by an LSE fell below

its allocated share of all needed reserves, the LSE paid the

specified charge times the amount of its deficiency. Through a

complicated arrangement, most of the money went as extra

compensation to power-supplying utilities, supplementing the

amounts they earned by selling electrical power and committing

reserve capacity.

The theory underlying the $8.75 figure, which prevailed

in New England from 1990 to 1998, was that it approximated the

cost (appropriately amortized) to construct a kilowatt-month of

new generating capacity available for peak demand conditions,

plus an additional "penalty."2 The penalty's theoretical basis
per kilowatt-month "deficiency charge," the latter charge being

waivable if NEPOOL found that a utility's deficiency was beyond

its reasonable control. ISO New Eng., 91 FERC ¶ 61,311, at

62,080 & n.94; New Eng. Power Pool, 50 FERC ¶ 61,139, at 61,420.

The automatic $6 charge was apparently intended to approximate

the cost of an appropriate generator with transmission

facilities, and the discretionary $2.75 charge apparently

represented an added penalty.

-8-

is not crystal clear, but the existence and value of the penalty

are not issues in this case. The key issue is whether FERC,

after allowing the $8.75 charge to be abandoned in New England

in 1998 and 1999, could reinstate it in 2000 in the way that it

did.

In 1998, New England utilities obtained FERC's approval

to abandon the flat ICAP deficiency charge in favor of a socalled auction market for buying additional reserve capacity,

that is, required capacity over and above that acquired through

bilateral contracts (which are common and often long-term).

However, the auction market appears not to have been successful-

-among other things, the prices were thought to have been

subject to manipulation. In March 2000, ISO New England, Inc.

("ISO-NE")--the "independent system operator" that manages power

transactions on behalf of the utilities in the New England Power

Pool--sought FERC's consent to an end to the auction regime.

On June 28, 2000, FERC released a lengthy order ("the

June 28 order") that largely addressed other ISO-NE issues but
-9-

which toward its end addressed the ICAP issue in a few

paragraphs, ISO New Eng., 91 FERC ¶ 61,311, at 62,080-81. In

the order, FERC agreed with ISO-NE that the auction did not

work, but, because ISO-NE had not proposed an alternative means

to ensure that LSEs would purchase adequate reserve capacity,

FERC said that although it would permit an end to the auction as

of August 1, 2000, it would "also require the ISO to revert to

administratively-determined sanctions for failure [of LSEs] to

meet the existing ICAP requirement," i.e., the projected reserve

capacity requirement. Id. at 62,081. ISO-NE was directed to

file tariffs "proposing an appropriate ICAP deficiency charge

within 30 days." Id.

ISO-NE responded with a filing that proposed a charge

of $0.17--a fraction (less than 2 percent) of the charge that

had prevailed from 1990 to 1998; this figure was proffered as an

average price paid for power during 1999 on the now abandoned

auction market. Various utilities who supply surplus power

protested bitterly; they not only challenged the proposal as

unsupported but said that if adopted this minimal figure would

become a de facto cap on prices in the bilateral-contract market

in which much of the reserve capacity is purchased, further

reducing incentives for generating utilities to construct new

plant.
-10-

On December 15, 2000, FERC issued a fourteen-paragraph

order ("the December 15 order") rejecting the proposed $0.17

charge. FERC brushed aside this figure as "a token payment,"

saying that use of the auction average was not appropriate. ISO

New Eng., Inc., 93 FERC ¶ 61,290, at 61,974-75 (2000). FERC

then ordered reinstatement of the original $8.75 figure,

effective August 1, 2000, until ISO-NE proposed some other

adequate regime. FERC said that $8.75 "represents an

approximation of the cost to install a peaking unit and

represents a reasonable basis for setting a level to incent the

construction of new generation." Id. at 61,975.

Petitions for rehearing followed, and FERC deferred the

$8.75 charge pending their disposition. On March 6, 2001, FERC

issued a decision on reconsideration ("the March 6 order"),

rejecting the petitions with one qualification. ISO New Eng.,

Inc., 94 FERC ¶ 61,237, at 61,846-47 (2001). After elaborating

on its reasons for disallowing the $0.17 charge and requiring a

return to the $8.75 level, FERC said that it would make the

higher charge effective only from April 1, 2001, onward; because

of intervening reliance on the $0.17 figure, it would be used

for payments from August 1, 2000, through March 31, 2001. Id.

Various utilities then petitioned for review in this

court, and other utilities intervened on both sides. 16 U.S.C.
3The conventional rule is that general issues of law are

considered de novo. Boston Edison Co. v. FERC, 856 F.2d 361,

363 (1st Cir. 1988). Agency reasoning or lack of it is tested

under the arbitrary and capricious standard, 5 U.S.C. §

706(2)(A) (1994); and raw findings of fact are sustained if

supported by substantial evidence, 16 U.S.C. § 825l(b); accord

5 U.S.C. § 706(2)(E). Boston Edison Co. v. FERC, 885 F.2d 962,

964 (1st Cir. 1989). Variations exist under some schemes, and

numerous subordinate rules of administrative law bear on review.

E.g., SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).

-11-

§ 825l(b). This court then granted petitioners' motion to stay

the $8.75 charge pendente lite and expedited briefing. As the

stay order permitted, FERC then ordered the $0.17 charge to

continue in effect pending this court's review. Briefing and

oral argument in this court followed. In this court,

petitioners and others who support them principally attack the

adoption of the $8.75 charge and, secondarily, the rejection of

ISO-NE's proposed $0.17 charge. The standard of review varies,

of course, with the particular claim of error.3

On review, petitioners’ main assault is on FERC’s

imposition of the $8.75 charge. They do not contest FERC’s

statutory power to adopt an ICAP charge pursuant to its

authority to set just and reasonable rates for wholesale power,

16 U.S.C. §§ 824(b)(1), 824e(a) (1994); but they say that the

$8.75 charge is not supported by substantial evidence. We begin

with this claim and consider, in later sections, related claims

that FERC failed to consider reasonable alternatives and that
-12-

the orders are procedurally flawed (above all, by the lack of an

evidentiary hearing).

The Basis for the $8.75 Charge. Although petitioners'

caption refers to a lack of substantial evidence for adopting

the $8.75 charge, their attack is actually a multi-faceted

challenge to FERC’s reasoning, substantive judgments, alleged

misstatements and asserted failures to discuss issues or

evidence. There is, indeed, a good deal to criticize in FERC's

orders, and we conclude that further proceedings are necessary.

However, the criticisms can be understood and assessed only

against the background of FERC’s basic rationale for adopting

the $8.75 charge, and it is useful to set forth at the outset

our understanding of what FERC did and why it did it.

As already noted, FERC long ago approved an ICAP charge

for the New England area to cope with what it conceives to be a

need to assure adequate plant construction and margin of

reserves. Such ICAP charges are used in the New York region and

in the Pennsylvania-New Jersey-Maryland area; how the matter is

handled away from the east coast is less clear. See note 5

below. FERC has been moving federal energy regulation toward

more competition, but the transition is far from complete, and

no one knows for certain whether special incentives will be

needed indefinitely or what kind would work best.
-13-

Against this background, FERC has insisted that reserve

requirements be maintained but, in 1998 and 1999, it allowed

ISO-NE to substitute a short-term auction market as an

enforcement device. That scheme, it appears, did not work and

petitioners do not contend otherwise. So FERC simply restored

the pre-existing $8.75 ICAP charge for the time being while

making clear that it was open to other proposals from ISO-NE or

others for a better way to assure adequate reserves. In the

abstract, there is nothing in this rationale that is startling,

let alone irrational; but the devil, as usual, is in the

details.

First, petitioners attack FERC’s statement that $8.75

"represents an approximation of the cost to install a peaking

[generating] unit." In fact, say petitioners, FERC has not

cited "even one iota of evidence in support of this factintensive assertion" and the highest figure that "even the

proponents of the $8.75 charge could muster [in affidavits] . .

. was $5." Petitioners may be correct on the numbers, but the

problem is with FERC’s verbal sloppiness rather than any more

fundamental defect.

As petitioners know perfectly well, the $8.75 figure

was, even when adopted years ago, an overstatement of the cost

of a peaking unit; the record before FERC in these proceedings
4Before the creation of ISO-NE, the further penalty was not

even paid to the sellers of power to encourage further

construction but was paid to the New England Power Pool to

defray its operating expenses. New Eng. Power Pool, 50 FERC ¶

61,139, at 61,420 (1990).

-14-

established that in 1990 the peaking unit cost was estimated at

about $5 and the balance, and certainly the balance above $6,

see note 2 above, therefore represented a further "penalty"

charge with a different rationale, see New Eng. Power Pool

Agreement, 56 FPC 1562, 1599-1600 (1976), petition for rev.

denied sub nom. Municipalities of Groton v. FERC, 587 F.2d 1296

(D.C. Cir. 1978).4 Petitioners do not even explicitly address,

let alone challenge, the rationale for the additional "penalty"

charge.

Thus, it is apparent that when FERC called the $8.75

charge "the cost" of a peaking unit, it was adopting the

original rationale as well as the original figure, but

carelessly simplifying the rationale. This is a venial sin

except so far as it symbolizes FERC’s broader failure to address

carefully and fully objections to a rate change--the forced readoption of the original $8.75 charge--that might increase

local electrical rates in New England by many millions of

dollars annually.

Admittedly, the actual impact of the $8.75 charge on

retail electric rates in New England is not certain--despite
-15-

dire predictions from retailing utilities. The ICAP charge is

paid only if an LSE fails to buy adequate reserve capacity in

advance; the charge, including the penalty, is the spur to do

so. So if LSEs comply with their obligations through bilateral

contracts, there remains a question as to how much the

background ICAP charge will drive up retail prices in New

England. In any event, FERC's description of $8.75 as an

approximation of generation costs is not a serious problem,

unless actual peaking costs are shown to have fallen (an issue

to which we return below). 

Petitioners' second claim of error is more basic.

Petitioners point to FERC’s central determination that $8.75

represents "a reasonable basis for setting a level to incent

[i.e., create the incentive for] the construction of new

generation." They then say that ISO-NE showed that there was

enough planned construction in New England to provide adequate

reserves without the charge; that FERC did not respond to

affidavit showings by opponents that the charge was unnecessary;

that there is nothing to show that a charge above $0.17 is

needed; and that merely to point to the prior $8.75 charge is

insufficient given the lapse in time and changes in the

industry.
-16-

These contentions have more force than FERC admits but

less than petitioners pretend. As to whether any charge is

needed, FERC says on appeal that this issue is not properly

presented because it was decided by FERC in its June 28 order

and judicial review from that order has not been sought. But

the reason review has not been sought is that petitions for

rehearing were filed at FERC and FERC has still not acted upon

them. We doubt that an agency can use a prior order as a

premise for a drastic second step--a possibly multimillion

dollar rate increase--but insulate the premise from review by

failing to act on rehearing petitions. Cf. Competitive

Telecomms. Ass'n v. FCC, 87 F.3d 522, 531 (D.C. Cir. 1996).

In all events, the question whether any charge is

needed overlaps with the further questions whether a substantial

charge is needed and whether $8.75, $0.17 or some other figure

should be used. This last question, at least, was not decided

in the June 28 order; indeed, it arose in response to that

order. Nor did FERC make in the June 28 order any detailed

findings of a kind that might control at the second stage, the

setting of an interim charge. In short, FERC’s "jurisdictional"

objection to our consideration of the claimed error is hollow.

On the other hand, petitioners’ own claims on the

merits are overstated. That ISO-NE says reserves are adequate
-17-

without a charge proves little: it appears that most of the

utilities served by ISO-NE are net buyers and have a selfinterested incentive to object to a charge. And even if present

"plans" promise ample new construction, FERC's orders (bolstered

by affidavits presented below) apparently reflect the reasonable

view that plans are only that and can easily be affected by the

prospect that reserve requirements for buyers will or will not

have teeth. If a buying utility can purchase below its reserve

requirement without penalty, it may find it worthwhile to do so

most of the time--while counting on the system to bail it out in

a crisis.

The more difficult question concerns FERC’s failure to

discuss in any detail the extensive affidavit filings by

objectors who claim that--given the current state of the

industry and conditions in New England--no substantial charge or

at least none greater than $0.17 is needed. Some of these

filings are by recognized experts and are substantial and

detailed; and although there are counter-affidavits from

utilities who are presumably net sellers, this is the kind of

material that one would normally expect an agency to analyze

seriously in its decision before making drastic changes,

especially where millions of dollars may ride on the outcome.

E.g., Noram Gas Transmission Co. v. FERC, 148 F.3d 1158, 1162-65
-18-

(D.C. Cir. 1998); K N Energy, Inc. v. FERC, 968 F.2d 1295, 1302-

04 (D.C. Cir. 1992).

Yet this case is not the typical one in which something

drastic is being done for the first time. The reserve

requirements have long existed in New England and are not

directly challenged by petitioners. And enforcement through a

substantial ICAP charge (indeed, from 1990 on with the precise

$8.75 figure) had been standard practice in New England for over

a decade before the temporary use of an auction in 1998 and 1999

which was either a failure (as FERC found) or at least not

successful enough for petitioners to defend in this court. So

FERC’s best answer is that the real status quo ante is the $8.75

figure and that the burden was really upon petitioners to

justify a departure (i.e., no charge or something less than

$8.75).

No one has cited any case law closely in point, but

common sense suggests the answer. FERC did not in the first

instance have to provide additional justification either for the

need for a substantial charge or for the $8.75 figure; but given

the detailed arguments in opposition and the possible dollar

impact of reinstatement of the $8.75 charge, it owed petitioners

(and the public who will likely pay some of any ICAP charge

through passed-on retail rate increases) some explanation as to
5The "installed capacity" deficiency charge in the New York

market was $12.50 per kilowatt-month in the year 2000, although

for the summer of 2000 the value of the charge was effectively

reduced to $8.75 per kilowatt-month by a rebate of up to $3.75

per kilowatt-month. N.Y. Indep. Sys. Operator, Inc., 93 FERC ¶

61,034, at 61,077-78 (2000). In the Pennsylvania-New JerseyMaryland market ("PJM"), where no penalty is added to the

estimated cost of adding generation capacity, the charge is

substantially lower; it was apparently $4.87 per kilowatt-month

in 1997, Pa.-N.J.-Md. Interconnection, 81 FERC ¶ 61,257, at

62,276 n.197 (1997) (amended Feb. 4, 1998), and, according to

the record on appeal, $5.25 per kilowatt-month in 2000.

-19-

why FERC was not persuaded by petitioners’ efforts to discredit

the notion of a substantial charge in general or the $8.75

charge in particular.

Undoubtedly FERC was annoyed, perhaps rightly, when its

direction to ISO-NE to reinstitute an administrative charge was

met by a proposal that FERC regarded as risible: a figure that

was a tiny fraction of the prior charge and of the ICAP charges

prevailing elsewhere on the Atlantic coast.5 And given the

impact of any widespread power shortage, FERC has every reason

to want effective enforcement of reserve requirements, even if

enforcement comes at a high price. Still, FERC is not therefore

excused from explaining its actions. Addressing contrary

arguments is part of establishing public acceptability and, in

any event, is part of FERC’s own responsibility. See Motor

Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 42-44, 48-50 (1983).
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What we have said applies as much to the specific

choice of the $8.75 figure as to the need for a substantial

charge. Absent evidence of significant change in construction

costs, FERC was entitled to revert to the pre-existing figure

rather than justify it afresh in the first instance, cf. S. La.

Area Rate Cases v. FPC, 428 F.2d 407, 433 (5th Cir.), cert.

denied, 400 U.S. 950 (1970); but it was not entitled to ignore

claims that the cost of peaking facilities is less than it was

in the past. Such claims have been made in this case; perhaps

they can be easily answered; or, if lengthy proceedings would be

needed to do so, FERC may be able to justify restoring the $8.75

charge on a provisional basis while making the evaluation. But

some response from FERC is required.

An agency's expert judgments are entitled to deference,

especially where safety concerns are on one side of the balance,

as they are here. E.g., Chem. Waste Mgmt., Inc. v. U.S. EPA,

869 F.2d 1526, 1538-40 (D.C. Cir. 1989); cf. K N Energy, 968

F.2d at 1303. If FERC had provided even a semblance of serious

discussion as to why a substantial ICAP charge was still

required and why the pre-existing figure was the best solution

on short notice, quite probably the charge would be sustained

outright. California’s recent experience is likely irrelevant

as to immediate causes but not as to consequences. But this is
-21-

all the more reason for FERC to write a decision reflecting a

serious look at objections.

Alternatives. In addition to attacking the $8.75

charge as unsupported, petitioners make a series of further

arguments, beginning with the claim that FERC "failed to

consider reasonable alternatives [to the $8.75 charge], which it

was obligated to do under reasoned decision-making principles."

Petitioners say that "FERC's only response was that it was

inappropriate to consider these alternatives when proposed in a

rehearing request," and they contend that this response is

inadequate because rehearing was "the first time" in which

parties opposed to the $8.75 charge could propose alternatives.

Petitioners have markedly overstated any legitimate

grievance. Broadly speaking, agencies are expected to consider

reasonable alternatives to proposed actions, Farmers Union Cent.

Exch., Inc. v. FERC, 734 F.2d 1486, 1511 (D.C. Cir.), cert.

denied, 469 U.S. 1034 (1984); but here FERC did not refuse to

consider alternatives or rest "only" on the failure to present

the alternatives earlier. It said that the record did not

provide a basis to sustain the main alternative urged (i.e.,

using bilateral contract prices to construct an ICAP charge) and

that ISO-NE was welcome to formulate alternatives and support
-22-

them in a new filing. ISO New Eng., 94 FERC ¶ 61,237, at

61,847.

Furthermore, the sense that agencies should address

alternatives before acting is not hard and fast: if prompt

action is necessary and delay would be harmful, agencies

sometimes do need to take interim action, deferring to further

proceedings other facets of the problem or alternative solutions

that may take more time to develop. See Competitive Telecomms.

Ass'n, 87 F.3d at 531; Nat'l Air Carrier Ass'n v. Civil

Aeronautics Bd., 436 F.2d 185, 194-95 (D.C. Cir. 1970). And,

for multiple reasons in this case, there is nothing unreasonable

in FERC's demand that proponents furnish the proposed

alternatives with adequate support.

It is quite true that FERC should have said more to

explain why it concluded that "the record in this proceeding

does not contain adequate information to support a just and

reasonable ICAP deficiency charge based on prices in the

bilateral market." ISO New Eng., 94 FERC ¶ 61,237, at 61,847.

This is so even if we assume, with FERC, that petitioners could

have pointed to such alternatives before the December 15 order,

knowing that protests to the earlier compliance filing had urged

that the $8.75 charge be re-adopted. But FERC did address the

main alternative and found it wanting even if FERC's explanation
-23-

was too cryptic; the alternative was not rejected simply because

it was belatedly offered.

In all events, on remand FERC should explain why, on

this record, the bilateral-market prices are not an adequately

supported substitute. If other substantial alternatives were

presented, FERC should also address them. But we harbor some

doubts about the strength of petitioners' claim as to other

alternatives; it is hard in their briefs to find any substantial

discussion of what the alternatives were and why (absent the

$8.75 charge) they might be expected effectively to enforce the

reserve obligations that already exist.

The $0.17 Charge. This brings us to petitioners’ next

objection, which is superficially quite different because it

focuses on the rejection of the $0.17 charge rather than the

adoption of the $8.75 charge. Although petitioners do not

contest FERC's general authority to review the $0.17 charge, 16

U.S.C. §§ 824d, 824e (1994), they say that under established

case law, FERC had no power to "reject" ISO-NE's $0.17 proposal

without a "hearing" because it was not procedurally deficient or

substantively a "nullity," Mun. Light Bds. v. FPC, 450 F.2d

1341, 1345 (D.C. Cir. 1971), cert. denied, 405 U.S. 989 (1972).

Petitioners also say that the reasons given by FERC for the

rejection were unsound or unsupported.
6E.g., ANR Pipeline Co. v. FERC, 931 F.2d 88, 92-93 (D.C.

Cir. 1991); United Gas Pipe Line Co. v. FPC, 551 F.2d 460, 463-

64 (D.C. Cir. 1977); Mun. Light Bds., 450 F.2d at 1345; accord

Fla. Power & Light Co., 67 FERC ¶ 61,326, at 62,148 (1994); cf.

Cajun Elec. Power Coop., Inc. v. FERC, 28 F.3d 173, 176-80 (D.C.

Cir. 1994) (summary approval of tariffs).

-24-

There is a body of case law, not entirely consistent

in rhetoric or substance, that limits the power of federal

ratemaking agencies like FERC summarily to reject new tariffs

except as to narrow grounds.6 The case law is a gloss on

statutory procedures designed to allow carriers to institute

rate changes on their own initiative and, subject both to

temporary delay or "suspension" and to refund of lateroverturned obligations, to place new rates into effect during

agency investigation and hearing. E.g., AT&T Co. v. FCC, 487

F.2d 865, 871-72 (2d Cir. 1973). But the $0.17 charge was not

just a typical utility-initiated rate charge but was purportedly

filed in compliance with FERC's June 28 order.

Here, FERC says that the $0.17 rate was inconsistent

with its June 28 order and that that order cannot be attacked in

this proceeding. The two propositions are quite different. We

have already explained why the premises of the June 28 order

cannot be insulated from criticism insofar as those premises are

used to support FERC’s later actions. However, the fact that

the June 28 order is still before FERC on rehearing petitions
7FERC has "broad discretion . . . to determine whether a

filing substantially complies with its regulations." United Gas

Pipe Line Co. v. FERC, 707 F.2d 1507, 1512 (D.C. Cir. 1983)

(internal quotation marks omitted).

-25-

does not prevent FERC from relying upon it in evaluating a

purported compliance filing, which is just what the $0.17

proposal constituted. The June 28 order was effective unless

stayed, and no stay was secured either from FERC or from a

reviewing court.

According to FERC’s December 15 order rejecting the

proposal, the $0.17 charge was a nominal rather than a plausible

response to the June 28 directive. If FERC was correct, it was

entitled to reject the filing as patently inconsistent with an

existing, unstayed directive. "[A] utility is not entitled to a

hearing before the non-conforming portion of its rate filing is

rejected or when it challenges an established policy," Jersey

Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1205 (D.C. Cir.

1987) (internal citations omitted); see also ANR Pipeline Co. v.

FERC, 931 F.2d 88, 92. FERC certainly did make a determination

of non-compliance, and in this determination it enjoys a

favorable standard of review, Pepperell Assocs. v. U.S. EPA, 246

F.3d 15, 22 (1st Cir. 2001).7 Whether FERC adequately explained

the determination is a different question.
-26-

In critiquing the determination, petitioners focus on

a terse and arguably confusing statement by FERC that the $0.17

was merely an average derived from the (now abandoned) auction

market and was not "useful." Yet, fairly read, FERC's June 28

order clearly envisaged a return to a substantial ICAP charge;

and the core concept of such a charge has long been in New

England, and still is in other Atlantic Coast regions, the cost

of adding new peak load generating capacity (not excluding a

possible penalty as well). That cost is far above $0.17 and

probably lies in the $5.00 range. On this premise, the $0.17

proposal was plainly non-complying, and FERC's rejection of the

$0.17 proposal was therefore well justified.

Procedural Matters. Petitioners' final argument on

review brings them back to FERC’s adoption of the $8.75 charge.

In adopting this charge, say petitioners, FERC "failed to

provide due process and unreasonably refused to hold a hearing."

Two quite different arguments are presented under this heading:

first, that FERC was required to hold not just a hearing (which

it did) but a specific kind of hearing before adopting the $8.75

charge; and second, that because selling utilities first

proposed the $8.75 charge in protesting the $0.17 filing, the

buying utilities had no fair opportunity to respond since

"[u]nder FERC’s rules, answers to protests are not permitted."
8See 5 U.S.C. § 556(d) (1994); Seacoast Anti-Pollution

League v. Costle, 572 F.2d 872, 879-80 (1st Cir.)

(distinguishing a "public hearing"), cert. denied, 439 U.S. 824

(1978); Friendly, "Some Kind of Hearing", 123 U. Pa. L. Rev.

1267, 1270 & n.14 (1975).

-27-

The term "hearing" is notoriously malleable, but what

petitioners got here was not only a hearing but a species of

evidentiary hearing8 which is now quite common in utility and

carrier regulation, e.g., Town of Norwood, 202 F.3d at 404.

Very extensive evidentiary submissions were made by both sides

in the form of affidavits from experts and others, together with

extensive written argument; indeed, it is these submissions by

buying utilities that petitioners complain (rightly in some

degree) were before FERC but not seriously addressed in its

orders.

At least where forward-looking industry-wide regulation

is at issue, it is increasingly common for agencies to employ

such hearings by affidavit and nothing more. In such

situations, courts have approved of this agency practice when

any genuine issues of material fact can be "adequately resolved

on the written record." E.g., Town of Norwood, 202 F.3d at 404;

La. Energy & Power Auth. v. FERC, 141 F.3d 364, 371 (D.C. Cir.

1998); see also La. Ass'n of Indep. Producers & Royalty Owners

v. FERC, 958 F.2d 1101, 1113 (D.C. Cir. 1992) (trial-type

evidentiary hearing not necessary to answer "purely technical
9E.g., R&W Technical Servs. Ltd. v. Commodity Futures

Trading Comm'n, 205 F.3d 165, 176 (5th Cir.), cert. denied, 121

S. Ct. 54 (2000); La. Pub. Serv. Comm'n v. FERC, 184 F.3d 892,

895 (D.C. Cir. 1999); City of St. Louis v. Dep't of Transp., 936

F.2d 1528, 1538 (8th Cir. 1991).

-28-

issue" "whether additional pipeline capacity is needed to meet

future demand" (internal quotation marks omitted)).

Of course, an agency can do more: it can afford oral

hearings in which cross-examination is conducted before an

administrative law judge; in utility regulation, direct

testimony is commonly offered (as here) in written form.

Whether and when particular procedures are necessary is no

longer governed by clear-cut judicial rules. It is often said

that an agency’s decisions as to procedure are reviewed for

abuse of discretion,9 and, again, the reasons for deference are

especially strong where the decision is entangled with the

agency's expert judgment regarding forward-looking industry-wide

regulation, see, e.g., Fresno Mobile Radio, Inc. v. FCC, 165

F.3d 965, 971 (D.C. Cir. 1999).

Turning to the question whether buying utilities had

a fair opportunity to respond to the prospect of an $8.75

charge, there are two additional points. First, in 77 pages of

comments filed with FERC on August 28, 2000 (the very same day

that sellers filed protests arguing for the $8.75 charge),

buying utilities specifically anticipated, and responded
10In the December 15 order, FERC invoked this rule to

justify refusing to consider a terse five-page answer filed by

one buying utility on September 12, 2000. ISO New Eng., 93 FERC

¶ 61,290, at 61,974.

-29-

extensively to, arguments for the $8.75 charge. Thus, under the

particular circumstances of this case, FERC's general rule

against answers to protests, 18 C.F.R. § 385.213(a)(2) (2000),

did not prevent buying utilities from presenting the principal

arguments against the $8.75 charge.10

A second, more decisive point is that, whatever the

adequacy of the "hearing" provided before December 15, opponents

to the $8.75 charge had ample opportunity to contest the $8.75

charge in their requests for rehearing. See Boston Edison Co.

v. FERC, 885 F.2d 962, 966 (1st Cir. 1989). As noted above,

FERC's March 6 order considered the various arguments against

the $8.75 charge and responded to them. The main question

remains not whether petitioners' arguments were heard, but what

FERC should have done to respond to them adequately.

In all events, on remand petitioners are free to ask

FERC for the opportunity to make further submissions and to show

FERC why oral cross-examination is necessary. As we are

structuring our remand, petitioners will have no incentive for

delay and good reason for expedition; they can then consider

again whether they think oral cross-examination is vital. And
-30-

something may depend on how FERC proposes to answer the

objections made to its contemplated $8.75 charge and just how

much of an interim measure it intends the $8.75 charge to be.

Remand. We conclude that certain specific issues

raised by opponents of the $8.75 charge require more reasoned

consideration than FERC afforded. The results of FERC's orders

may well be defensible, given FERC's view that immediate action

is required and that the charge can be reconsidered if opponents

provide an adequate alternative regime. However, the immediate

impact of those orders is high and FERC's errors and omissions

are troubling. Thus, a remand is appropriate for further

explanation. Noram Gas, 148 F.3d at 1165-66.

The principal questions that FERC needs to answer more

fully are these: why, despite petitioners' various claims to

the contrary, a substantial ICAP charge is still required to

enforce reserve obligations; why, in light of petitioners'

claims of a lower present cost of peaking capacity, $8.75 is the

proper interim figure; and why any alternatives already

proffered by opponents are inadequate or are otherwise not

properly considered at this time. Answers can be imagined, but

it is FERC that must formulate and adopt them in the first

instance. SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).
-31-

A reviewing court that perceives flaws in an agency's

explanation is not required automatically to set aside the

inadequately explained order. Allied-Signal, Inc. v. U.S.

Nuclear Regulatory Comm'n, 988 F.2d 146, 150-51 (D.C. Cir.

1993). Whether to do so rests in the sound discretion of the

reviewing court; and it depends inter alia on the severity of

the errors, the likelihood that they can be mended without

altering the order, and on the balance of equities and public

interest considerations. Int'l Union, United Mine Workers of

Am. v. Fed. Mine Safety & Health Admin., 920 F.2d 960, 966-67

(D.C. Cir. 1990). Here, a preliminary assessment suggests that

the errors at issue can probably be mended.

 Further, FERC's warrant that the charge is needed now

to assure adequate energy supplies in New England carries

weight. FERC has plausibly adverted to the need for confidence

among power suppliers that reserve requirements will be

meaningfully enforced. Cf. Fresno Mobile Radio, 165 F.3d at

971. An on again-off again ICAP charge is not likely to

encourage suppliers to maintain marginal (i.e., high cost)

existing plant or to build new facilities for peak demand. At

least at this time, we think that the public interest in

assuring power is decisive.
-32-

In remanding, we leave open to FERC's informed judgment

the decision whether to conduct further proceedings (and, if so,

what kind) or whether simply to write a further decision on

reconsideration. Nor do we preclude FERC from modifying the

outcome if it is so advised. No time limit need be imposed at

this time. If FERC unduly delays, any party to this case may

apply to us for an order fixing a deadline for agency

reconsideration. Cf. Int'l Union, 920 F.2d at 967.

We retain jurisdiction over this case to issue all

orders necessary to assure compliance with our mandate and to

review whatever decision FERC makes on reconsideration in

response to our mandate, assuming that the decision remains

contested. Cf. BASF Wyandotte Corp. v. Costle, 598 F.2d 637,

663 (1st Cir. 1979); Kennecott Copper Corp. v. EPA, 462 F.2d

846, 851 n.21 (D.C. Cir. 1972). FERC's counsel is directed to

file a status report, served on all other parties, with the

Clerk of this court every 45 days from the date of this

decision.

Accordingly, FERC's orders of December 15, 2000, and

March 6, 2001, are not vacated at this time but the case is

remanded for further action consistent with this decision.

Parties may petition for rehearing of this court's decision in

the ordinary course. However, our prior stay order barring the
-33-

$8.75 charge is vacated forthwith, and FERC is free to re-impose

its $8.75 charge prospectively, either at once or as of some

specified future date. All parties shall bear their own costs

in this court.

It is so ordered.