Opinion ID: 553338
Heading Depth: 2
Heading Rank: 2

Heading: Public Body Criteria

Text: 30 Initially, we must determine whether the Commission's public body criteria are consistent with the language and purpose of the NRA and with our prior decisions. Petitioners challenge the Commission's three pronged public body test, asserting that the public body criteria are not mandated by the NRA and are inconsistent with the statute's purpose. Specifically, petitioners contend that two of the yardstick competitor elements--meeting the substantial needs of the public entity's customers and posing a threat of takeover to private entities--are inventions of the Commission, without any basis in law. 31 Petitioners advance several arguments in support of their position that the public body criteria undermine the very purpose of the NRA and are inconsistent with our prior decisions. First, they argue that through their leasing arrangements they possess the capability to distribute power at retail, thereby satisfying the definition of public body adopted in MTA. Second, they contend that the Commission misapplied the principle of yardstick competition. Specifically, they note that their rates are a matter of public record and can serve as a comparative benchmark when regulators set a private utility's rate of return. They argue that a public body need not create a threat of physical takeover or serve substantially all of its customers needs to provide yardstick competition. Third, petitioners assert that it is not necessary for a public entity to control without restraint the distribution system. They submit that in adopting this criterion, the Commission has imposed a de facto  ownership requirement. We find petitioners' arguments to be unavailing. 32 Petitioners are correct in noting that the statute itself does not impose these strict standards and that prior case law has not expressly imposed such eligibility criteria. Indeed, the term public body is not defined in the NRA. The absence of an express statutory mandate or a direct pronouncement of law by the courts, however, does not preclude an agency from adopting standards that it deems essential to the effective implementation of the statute it has been directed to administer. An agency must have the latitude to adopt standards that may evolve over time as long as those standards are consistent with the statute's purpose and are not contrary to law. 33 In an instance such as this, where Congress has not directly addressed the precise question at issue, a reviewing court does not simply impose its own construction on the statute.... Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. Chevron, 467 U.S. at 843, 104 S.Ct. at 2782 (footnotes omitted). Congress entrusted the Commission with the responsibility for the administration of the NRA. The Commission, due to its cumulative experience and expertise, is particularly well suited to this task. Unless the Commission's interpretation is inconsistent with the plain language of the statute or with the intent of Congress, we will defer to the Commission's construction as long as it is reasonable. Id. at 845, 104 S.Ct. at 2783. 34 Here, the ALJ methodically examined the leasing arrangements entered into by the New York MDAs and VDPS. In reaching his decision, the ALJ placed great reliance on our opinion in MTA. In that opinion, Judge Mansfield stated: Literally, the term 'public bodies' is not limited to 'publicly-owned entities that are capable of selling and distributing power directly to consumers of electricity at retail.' However, the legislative history of the NRA demonstrates that that is what Congress intended the term to mean. MTA, 796 F.2d at 591. 35 Thus, we have expressly accepted the proposition that in order to qualify as a public body an entity must actually deliver its energy to retail customers. Consumers will benefit from the existence of preference power only if that power is made available through the market for consumer purchase. As we have noted, [i]f the 'public body' used the preference power itself, the privately-owned [utilities] would not face any pressure to reduce the prices they charge other customers. MTA, 796 F.2d at 592. Similarly, the sale of this preference power directly from a public entity to a private company for resale to the public fails to create any sort of competitive pressures on the private utility. Id. 36 In Opinion 329, the Commission emphasized the importance of maintaining the competitive scheme initially envisioned by Congress wherein the customers of private utilities would not receive preference power directly, but rather would indirectly receive the benefits in the form of lower rates spurred by increased competition. As the Commission explained: 37 Congress did not intend the customers of IOUs to receive preference power, but rather mandated that they receive the benefit indirectly through the lower rates the private utilities would charge in response to the competition from the public bodies receiving preference power. Thus, the MDAs' and VDPS's argument that they can give a greater number of end-users access to the power is irrelevant if the MDAs and VDPS do not themselves sell and distribute the power directly to the retail consumer, but instead are giving that access to the customers of IOUs. 38 48 FERC at 61,467. 39 The test articulated by the ALJ and adopted by the Commission is an attempt to clarify further the requisite characteristics of a public body. In MTA, we noted that FERC has expressly declined to rule on the legitimacy of the kind of leasing arrangements currently before us. 796 F.2d at 591. We, therefore, did not rule on the issue. Given our silence, the ALJ undertook a detailed inquiry into the nature of the leasing arrangements entered into by the New York MDAs and VDPS. 40 The ALJ engaged in a careful analysis and rendered a thoughtful decision expanding on concepts we initially articulated in PASNY and MTA. In those cases, we emphasized the importance of direct retail distribution of Niagara preference power and focused on the benefits of competition. Here, the Commission reasoned that competitive benefits cannot fully be realized when a public entity simply enters into an arrangement with a private utility to distribute preference power, unless that public entity has an active role in the day-to-day distribution operations. The lease arrangements before the Commission vested the lessee public entities with few if any substantive rights. Rather, these agreements essentially provided the lessees with the right to pass their preference power on to consumers through a private utility's distribution system. The Commission concluded that such agreements do not provide private utilities with any incentive to achieve cost reductions or operating efficiencies. 41 VDPS, the MDAs and PASNY submit that the Commission's adoption of the public body criteria will actually result in reduced competition because LOAs allow for public entities to compete without having to expend vast sums to acquire distribution facilities. As petitioners have argued: 42 Satisfying FERC's requirements of control without restraint, meeting the substantial needs of the utility's customers and posing a threat of takeover require such huge expenditures of public funds that few, if any, public utilities would try to meet the criteria in order to qualify for the limited amounts of preference power available. 43 We think petitioners have overstated their case. Ownership is not required by the Commission. Indeed, LOAs that afford the lessee operational control would satisfy the test. 44 Although we might not have adopted these exact criteria had we analyzed these issues in the first instance, the Commission's construction of the statutory term public bodies is not so unreasonable as to amount to an arbitrary and capricious action. In reviewing the Commission's construction, we need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding. Chevron, 467 U.S. at 843 n. 11, 104 S.Ct. at 2782 n. 11 (citations omitted). 45 The Commission's public body test strikes a delicate balance. While not requiring public entities directly to own distribution facilities, the test does require such entities to have active management control over the distribution of preference power. Absent such a requirement, the competitive role that we deem essential for public body status could not be achieved. We therefore find FERC's public body test to be consistent with the purposes of the NRA and the reasoning of our prior decisions.
46 Petitioners also challenge the factual findings that provided the basis for Opinion No. 329. They submit that the ultimate conclusions of the Commission are unsupported by the evidence and amount to arbitrary and capricious action. Specifically, VDPS and the MDAs assert that even assuming the correctness of the public body criteria, the Commission's finding that they did not satisfy these criteria was not supported by substantial evidence and was an exercise of unreasoned decisionmaking. Petitioners argue that the ALJ and the Commission failed to address adequately in their respective opinions the factual evidence that was introduced. Additionally, they assert that the Commission has imposed a de facto  ownership requirement and that this represents an unexplained change in policy. Finally, petitioners contend that the Commission failed to consider several relevant factors when adopting the operational control component of the public body test. We find these arguments to be without merit. 47 Initially, we note that the record of the proceedings before the ALJ consists of thousands of pages. Both the petitioners and the complainants below introduced documentary and testimonial evidence. Nothing in the record suggests that the ALJ did not carefully consider and evaluate all the evidence before rendering his decision. Indeed, the ALJ's decision indicates that the contrary is true. 48 The assertion that the Commission failed to consider evidence presented by petitioners simply is not supported by the record. Indeed, the factual findings of the Commission encompass all of the specific points now being raised. Both the ALJ and the Commission carefully considered each of the factors on which the petitioners presently rely. These challenges to the application of the public body test in our view are nothing more than veiled attempts at collaterally attacking the public body criteria. 49 Moreover, we find no basis for the argument that the Commission in some way abdicated its responsibility by adopting the ALJ's findings and conclusions. After reviewing Opinion No. 329, we are satisfied that the Commission evaluated the ALJ's decision and all the arguments advanced by the parties and that its ultimate conclusions were supported by substantial evidence. 50
51 The MDAs submit that their LOAs with the IOUs satisfy the public body criteria. Specifically, they assert that they (1) provide yardstick competition, and (2) that the LOAs provide them with a sufficient degree of control over the distribution of power. Regarding the first point, the MDAs contend that the Commission ignored the fact that they compete directly with IOUs and that each kilowatt hour sold by a MDA is a kilowatt hour lost to an IOU. Additionally, they note that their rates are a matter of public record and are therefore available for regulatory comparison. Finally, the bills received by MDA customers reflect the difference in cost resulting from the provision of MDA power instead of IOU power. With regard to the second point, the MDAs submit that the record demonstrates that they maintain a high level of control over distribution. Specifically, they select their customer base, determine the amount of power to be sold to each customer, and set their own rates. 52 The LOAs entered into by the MDAs were a part of the record and the subject of close examination. In particular, the Commission analyzed the terms of the lease and operating agreement entered into by NYCPUS (one of the MDAs) and Consolidated Edison Co. (Con Ed)--a New York based IOU. Because the terms of the LOAs entered into by the other MDAs parallelled those of the NYCPUS/Con Ed agreement, the Commission focused its attention on this one agreement. Initial Decision, 42 FERC at 65,169. The Commission reached several conclusions. First, the ultimate responsibility for control of distribution remained with Con Ed. Indeed, the LOA expressly provided that Con Ed retain the franchise responsibility for providing service and that it be vested with the exclusive control over the entire distribution system. Second, Con Ed functioned as the operating agent for NYCPUS with responsibility for billing, metering and collection. Third, Con Ed retained the right to suspend the LOA in the event that provision of preference power resulted in higher energy costs for consumers. Fourth, Con Ed reserved the right to terminate the LOA if the MDA initiated condemnation proceedings or if compliance with the agreement would result in an increase in Con Ed's rates or a reduction in net income available for stockholders below the level that would pertain in the absence of the LOA. Fifth, a prerequisite to receipt of preference power was being a customer of Con Ed. See Opinion No. 329, 48 FERC at 61,471. 53 All of these conditions were expressly enumerated in the LOA. The Commission reasonably concluded that to compete with IOUs public entities must have the ability to manage and change those variables that affect costs and service. These LOAs provided no such flexibility. Instead, all responsibility for operations rested with the IOU. As the Commission appropriately explained: 54 In addition ..., the consumer must be a customer of the privately owned utility, or service is not available. Thus, the consumer has no real choice between utilities. There is insufficient separation of functions between the MDAs and the IOUs to create a threat of displacement, to allow the MDAs substantially to serve their customers' needs, or to provide an opportunity for rate comparison. 55 Id. 56 Given the express conditions of the LOAs and in light of the entire record, we conclude that there was substantial evidence in the record to support the Commission's conclusion that the MDAs lacked the requisite degree of control over distribution. As discussed above, we agree with the Commission that the exercise of such control is essential to a finding of public body status. 57
58 Petitioner VDPS attacks the Commission's finding that it fails to qualify as a public body, challenging the Commission's decision regarding the yardstick competition prong of the public body test. VDPS asserts that it clearly satisfies this test because it supplies a substantial percentage of Vermont residents' electricity needs. VDPS also submits that it presents a clear competitive threat to IOUs and that billing statements clearly identify VDPS as the source of a customer's power. 1 Finally, VDPS, like the MDAs, submits that the LOAs provide it with a sufficient degree of control over distribution. 59 VDPS entered into LOAs with various IOUs in Vermont for the purpose of distributing Niagara preference power to consumers. Under these LOAs, VDPS obtains the right to use of the IOUs' distribution facilities. However, like the MDAs, VDPS has no responsibility for the maintenance, construction, or operation of the distribution facilities. The billing, metering and collection responsibilities are also performed by the IOUs. In short, the distribution and customer service functions that a customer expects ... are performed by the [IOUs], not by VDPS. Id. at 61,474. Most importantly, the Commission concluded that under lease arrangements like those entered into by VDPS and the MDAs, the public entities essentially are precluded from competing with the IOUs on a cost basis. As the Commission stated in reference to VDPS's arrangement: 60 [S]ince VDPS leases its distribution facilities from the IOUs, and the IOUs actually operate them, the distribution costs which are supposed to provide some part of the benchmark against which to judge IOU performance are those of the IOUs. Thus no benchmark is possible, and VDPS does not foster yardstick competition. 61 Id. Simply stated, the Commission concluded that the distribution costs of the lessee public entity and the lessor private utility will always be the same. We find this to be the most compelling argument against the form of leasing arrangement that is before us. If spurring competition is the objective of the NRA, it is difficult for us to see how the leasing arrangements at issue advance that fundamental objective. 62 As in many cases, VDPS points to parts of the record that tend to undermine the Commission's conclusions. However, we are acutely aware that the ALJ was charged with the responsibility of resolving these apparent inconsistencies. After a thorough review of the record, we conclude that the Commission's determination that VDPS's leasing agreements failed to satisfy the public body test was supported by substantial evidence.