Opinion ID: 194766
Heading Depth: 4
Heading Rank: 1

Heading: The court shall confirm a plan [of

Text: reorganization] only if all of the following requirements are met: (11) confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan. 11 U.S.C. 1129(a)(11). -20- Even were petitioners correct in their asseveration that FERC improperly counted the resolution of PSNH's bankruptcy as a benefit of the merger, the Commission's error would be immaterial in light of the overwhelming excess of other benefits ($791 million) over the costs (0) still attributable . . . to the acquisition. City of Holyoke Gas & Elec. Dep't v. S.E.C., 972 F.2d 358, 362 (D.C. Cir. 1992). Second, petitioners argue that FERC erred as a matter of law in weighing as merger benefits results or alleged savings that were, or could be, achieved by alternate means. Specifically, petitioners contend that FERC's failure to apply the alternate means test contradicted general agency policy and general antitrust principles. It is undisputed that utilities are not immune from antitrust laws. Otter Tail Power Co. v. U.S., 410 U.S. 366, 372-75 (1973); Town of Concord v. Boston Edison, 915 F.2d 17 (1st Cir. 1990), cert. denied, 111 S. Ct. 1337 (1991). At issue in this case is whether FERC is required by statute, or otherwise, to engage in standard antitrust analysis before passing on 203 merger applications. In claiming that FERC has such an obligation, petitioners rely on a statute governing agency approval of bank mergers (the -21- Bank Merger Act) which states that the agency with jurisdiction over a proposed bank merger,13 shall not approve (A) any proposed merger transaction which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States, or (B) any other proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade, unless it finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effects of the transaction in meeting the convenience and needs of the community to be served. . . . (6) The responsible agency shall immediately notify the Attorney General of any approval by it pursuant to this subsection of a proposed merger transaction. 12 U.S.C. 1828(c)(5)-(6). The Supreme Court, interpreting the Bank Merger Act, has held that before a bank merger which is injurious to the public interest may be approved, a showing [must] be made that the gain expected from the merger cannot reasonably be expected through other means. U.S. v. Phillipsburg Nat. Bank & Trust Co., 399 U.S. 350, 372 (1970). Petitioners claim that the language of the Bank Merger Act is sufficiently similar to the statute governing FERC's approval 13 Jurisdiction varies depending on whether the resulting entity is a national bank, a state member bank, a state nonmember bank, or a savings association. -22- of proposed mergers, 16 U.S.C. 824b(a), because both contain a public interest standard, to require FERC to use the alternate means test which bank regulators must use in evaluating proposed bank mergers. We disagree. As with any matter of statutory construction, we first examine the language of the statute. Under 16 U.S.C. 824b(a), the Commission is required, after notice and opportunity for hearing, to approve a proposed merger of utility facilities if it finds that the proposal will be consistent with the public interest. That is all the statute says. There is no explicit reference to antitrust policies or principles. There is no evidence that Congress sought to have the Commission serve as an enforcer of antitrust policy in conjunction with the Department of Justice and the Federal Trade Commission. The Bank Merger Act reveals a quite different intention. There, Congress explicitly set out standards for approval of bank mergers that incorporate principles embodied in the Sherman and Clayton Acts. 12 U.S.C. 1828(c)(5). By requiring the reviewing agency to notify the Attorney General of any decision to approve a proposed bank merger, 12 U.S.C. 1828(c)(6), Congress expressed its desire to have bank regulators serve as pre-screening bodies of mergers which, because of their importance or character, in most cases also deserve the attention of the Department of Justice. -23- The Bank Merger Act carries with it the implicit presumption that mergers are to be disapproved (the agency shall not approve a bank merger unless it finds that the anticompetitive effects are clearly outweighed in the public interest by the benefits of the merger, 12 U.S.C. 1828(c)(5)). The FPA, on the other hand, requires the Commission to approve any merger that is consistent with the public interest. 16 U.S.C. 824b(a). Antitrust considerations are, of course, relevant in FERC's consideration of the public interest in merger proposals. The statute, however, does not require FERC to analyze proposed mergers under the same standards that the Department of Justice or bank regulators must apply. Although the Commission must include antitrust considerations in its public interest calculus under the FPA, it is not bound to use antitrust principles when they may be inconsistent with the Commission's regulatory goals. See Otter Tail, 410 U.S. at 373 ([a]lthough antitrust considerations may be relevant [in determining the public interest], they are not determinative). In Town of Concord, this court observed that indiscriminate incorporation of antitrust policy into utility regulation could undercut the very objectives the antitrust laws are designed to serve. 915 F.2d at 22. Therefore, antitrust analysis must sensitively `recognize and reflect the distinctive economic -24- and legal setting' of the regulated industry to which it applies. Id. (quoting Watson & Brunner, Monopolization by Regulated Monopolies: The Search for Substantive Standards, 22 Antitrust Bull. 559, 565 (1977)). Petitioners may rest assured that were FERC to approve a merger of utilities which ran afoul of Sherman Act or other antitrust policies, the utilities would be subject to either prosecution by government officials responsible for policing the antitrust laws, or to suit by private citizens meeting the requirements of standing. See Otter Tail, 410 U.S. at 374-5. B. FERC's Failure to Condition Merger on NU's Waiver of Single Participant Status. Petitioners argue that the Commission erred in failing to condition the merger on waiver by NU and PSNH of single participant status (SPS) in the New England Power Pool (NEPOOL), thereby preventing the imposition of a $364 million cost shift from NU and PSNH to the other members of NEPOOL. 1. Background. NEPOOL is a power pool comprised of most of the utilities in New England. The association is governed by the New England Power Pool Agreement (the Agreement) which establishes a comprehensive interconnection and coordination arrangement among its members in order to achieve greater -25- reliability and economies in the production of electricity. Groton v. FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978). Section 202(a) of the Federal Power Act encourages such voluntary interconnection and coordination of electricity generating facilities in order to achieve economies of scale. 16 U.S.C. 824a; see also 16 U.S.C. 824a-1 (regarding pooling agreements). The Agreement was approved as a filed rate schedule by FERC's predecessor, the Federal Power Commission. 53 F.E.R.C. at 65,213. Under its terms, each member is required to supply the pool with resources (Capacity Responsibility) according to a formula based upon the relationship of the member's peak load to an estimate of aggregate peak load of all members. NU experiences its peak load in the summer, and PSNH experiences its peak load in the winter. By aggregating these two, complementary, peak loads, NU-PSNH can achieve a lower Capacity Responsibility than would be the case if the two utilities remained separate. Because the overall capacity requirements of NEPOOL will not change as a result of the merger, the Capacity Responsibilities of other members must rise to make up for the savings accruing to NU-PSNH. The ALJ accepted the undisputed estimate that single participant status (SPS) will result in a shifting of some $360 million in costs from NU-PSNH to other members of the pool. Id. -26- -27- 2. Discussion. Petitioners offer six arguments to support their claim that FERC erred in failing to condition the merger on waiver of SPS by NU and PSNH. First, petitioners claim that the Commission did not properly interpret the provision of the NEPOOL Agreement which governs the election of SPS. We agree with the Commission's finding that the Agreement both specifically allows for the election by NU-PSNH of SPS, and encourages such elections. Section 3.1 of the Agreement provides in relevant part that: All Entities which are controlled by a single person (such as a corporation or a common law business trust) which owns at least seventy-five percent of the voting shares of each of them shall be collectively treated as a single Participant for purposes of this Agreement, if they elect such treatment. They are encouraged to do so. Such an election shall be made by signing the appropriate form at the end of a counterpart of this Agreement. (Emphasis supplied.) Both the ALJ and the Commission interpreted section 3.1 to be an explicit endorsement of the election of SPS by NU-PSNH. The ALJ stated that [i]t is undisputed that NU and PSNH qualify for such [single participant] status under the Agreement. 53 F.E.R.C. at 65,213. The Commission gave great weight to the unrebutted testimony of witness Bigelow, who participated in the negotiation of the NEPOOL Agreement regarding the intent of the original signatories to the Agreement and their -28- recognition of such potentially large cost-shifts among NEPOOL members. Bigelow stated: [W]hen we put NEPOOL together 20 years ago, we recognized that these things might happen. This is not something that snuck up on people. . . . And we did discuss at length what would happen because . . . we were then coming up to a potential merger of Boston Edison, Eastern Utilities, New England Power. It was recognized that these kinds of things could happen in the future and we spelled out the ground rules and recognized that that would happen when it happened. And the people who didn't like it got something else for it. 53 F.E.R.C. at 65,214. Both the ALJ and the Commission rejected petitioners' claim on the basis of both the language of the Agreement, and Bigelow's unrebutted testimony that not only had the signatories been aware of such a potentially large savings shift, but that those utilities that were dissatisfied with this risk received additional concessions as compensation. We will not disturb the Commission's findings. Second, petitioners claim that the Agreement, as interpreted in NEPOOL Power Pool Agreement, 56 F.P.C. 1562, 1580 (1976), aff'd sub nom. Municipalities of Groton v. FERC, 587 F.2d 1296 (D.C. Cir. 1978), prohibits utilities with peak loads in different seasons from electing SPS. As the Commission explained, this argument mischaracterizes the Agreement and the decision of the Federal Power Commission (FPC) in NEPOOL. -29- The NEPOOL Agreement, as initially filed and as approved, allowed single participant status for utilities controlled by a single person owning at least 75 percent of the voting shares of each utility. An exception was expressly allowed in the filed agreement for any Vermont utility which elected to be grouped with Vermont Electric Power Company. This exception was approved for essentially two reasons: (1) the Vermont utilities had long acted as a single contiguous integrated electric entity; and (2) since they all experienced their peak loads in winter, single participant status would not give them a lower NEPOOL Capability Responsibility (and consequent savings). A broader exception was denied, however, for a group of municipal utilities (represented by MMWEC) that was not entitled to single participant status and that lacked the two cited attributes of the Vermont utilities. The basis for the denial was that allowing such status for any group of systems, such as MMWEC, could well be detrimental to the functioning of NEPOOL. The NEPOOL decision, thus, does not stand for the proposition that single participant status is available only to utilities having their peak loads in the same season. Instead, another way, indeed the primary way, in which utilities may qualify is if they are controlled by a single person with at least 75-percent common ownership. That is the basis upon which NU and PSNH will presumably seek to qualify if the merger is approved. Such status is expressly allowed under the NEPOOL Agreement regardless of when NU and PSNH experience their peak loads. 56 F.E.R.C. at 61,996-97. The reasons offered by the FPC in its decision to grant a special exception for Vermont utilities seeking SPS were not intended to be, and are not, conditions, in addition to those set out in the Agreement, -30- which must be satisfied to elect SPS. The FPC did not narrow the scope of Section 3.1 to apply only to utilities sharing the same peak load season; rather, it created a special exception to the 75 percent rule to accommodate the unique situation faced by Vermont utilities. Third, petitioners claim that FERC failed to give proper consideration to Section 4.2 of the Agreement, the interests of other pool members, and the purpose of the Agreement as a whole. Essentially, petitioners argue that allowing NU-PSNH to elect SPS would violate a general provision of the Agreement, which states that participants shall not . . . take advantage of the provisions of this Agreement so as to harm another Participant or to prejudice the position of any Participant in the electric utility business. We reject this argument for the same reasons expressed by the Commission in its decision denying petitioners' request for a rehearing: [W]e find more relevance in the NEPOOL Agreement's explicit endorsement of single participant status than in the agreement's general goal of equitable sharing and prohibition on members taking advantage of the agreement to harm or prejudice other members. The NEPOOL Agreement specifically encourages eligible parties to seek single participant status; the provisions cited by the intervenors are general, not specific. Construing the general consistent with the specific, we find single participant status for the merged company consistent with an equitable sharing, as envisioned by the NEPOOL -31- Agreement, and not violative of the ban on taking advantage of the agreement's provisions to harm or prejudice other members. 58 F.E.R.C. at 61,189. We agree with FERC's interpretation of the Agreement. The NEPOOL signatories explicitly encouraged qualified members to seek SPS, indeed they contemplated that members that merged might choose to do just that. We agree with the Commission's construction of the Agreement which avoids a direct conflict between Sections 3.1 and 4.2, and instead gives both provisions reasonable effect. Fourth, petitioners argue that failure to condition the merger on waiver of SPS would create serious disincentives for current members to continue their membership in NEPOOL, and that the breakup of NEPOOL is contrary to the public interest. Petitioners imply that FERC did not take seriously their complaints about SPS, but rather rested its decision not to require a waiver solely on the fact that the Agreement allowed the election of SPS. This is simply not so. The Commission reversed the ALJ on the issue of whether SPS savings should be counted as a benefit of the merger. The Commission found that because the cost shift amounted to a zero-sum transaction, with NU and PSNH benefitting and the other members burdened dollar-for-dollar, the shift could not be counted as a benefit of the merger. -32- 56 F.E.R.C. at 61,997. Thus, the Commission did not dismiss petitioners' claims regarding SPS without thought. Also, the ALJ found, and the Commission agreed, that SPS was essential to the merger, and that the merger, as conditioned, was in the public interest. FERC must approve a proposed merger if it is consistent with the public interest. 16 U.S.C. 824b(a). FERC has the discretion to add conditions to a proposed merger to ensure that the merger will, taken as a whole, be in the public interest. 16 U.S.C. 824b(b). FERC need not, however, explain why every condition, or failure to establish a condition is consistent with the public interest when considered separately and apart from the entire transaction. Petitioners seem to argue that FERC was required by law to state why it was consistent with the public interest to follow the explicit terms of the approved fifteen year-old NEPOOL Agreement rather than to condition the merger on waiver of a membership right established by the Agreement. FERC had no such obligation. It need not have explained why it failed to add a particular condition prior to approving a merger. The statute simply provides that [t]he Commission may grant any application for an order under this section in whole or in part and upon such terms and conditions as it finds necessary or appropriate to secure the maintenance of adequate service and coordination in the public interest of facilities subject to the -33- jurisdiction of the Commission. 16 U.S.C. 824b(b). In this case, the Commission set forth a reasonable basis for approving the merger as consistent with the public interest in light of the supplementary conditions the Commission found necessary. FERC need not have gone further than this to explain why it failed to place further conditions on the merger. Fifth, petitioners allege that FERC acted inconsistently in its treatment of the NEPOOL Agreement's provisions regarding voting rights and SPS. The Commission adopted a condition limiting the merged company's NEPOOL voting rights to prevent PSNH and NU from gaining a veto power in NEPOOL. 56 F.E.R.C. at 62,043-45. FERC reasoned that, while there was evidence that the signatories anticipated that large cost-shifts would accompany the election of SPS in merger situations, there was no evidence that they anticipated the voting rights implications of such mergers. 58 F.E.R.C. at 61,189. It was not, contrary to petitioners' argument, inconsistent as a matter of logic to condition voting rights where the Agreement was silent on the need or lack of need to do so, while failing to condition SPS where the Agreement explicitly favored the election of SPS. Furthermore, it was not an error of law to condition voting rights while leaving SPS rights untouched. Petitioners do not contest the Commission's decision to condition NU-PSNH's -34- voting rights. We will uphold whatever conditions the Commission imposes on a proposed merger so long as their necessity is supported in the record by substantial evidence. Finally, petitioners contend that the Commission failed to explain why burdening other NEPOOL members with $364 million in additional costs with no offsetting benefits to them is consistent with the public interest. In making this argument, petitioners imply that each and every piece of a complex package of merger agreements and conditions must be able to withstand public interest analysis without regard to other pieces of the package or to other conditions imposed by the Commission. Petitioners also imply that if any individual or group is harmed by a piece of the package, that provision is not in the public interest and must therefore be stricken or modified. Both implicit arguments are deeply flawed. In evaluating a transaction such as the one at issue here, the Commission is required to find that the entire transaction, taken as a whole, is consistent with the public interest. 16 U.S.C. 824b(a). Each element of the transaction need not benefit every utility or individual which might be affected; rather, the whole transaction must be consistent with the interest of the public. There is no reason to think that the interest of individual NEPOOL members is synonymous with the public interest. As has -35- already been noted, FERC may add conditions to a proposed merger before granting approval. 16 U.S.C. 824b(b). The statute does not require, however, that FERC establish conditions so that every effect of an approved merger could withstand the public interest test. At a less theoretical level, the ALJ determined that the NEPOOL savings were a vital part of the long and strenuous negotiations which culminated in the resulting PSNH reorganization plan, and the particular savings of $146 million for New Hampshire consumers were relied on specifically by the State of New Hampshire in approving the merged company's rate package. 53 F.E.R.C. at 65,213. The Commission accepted this finding of the ALJ, while, at the same time, it reversed the ALJ's decision to count the $360 million as a benefit of the merger. 58 F.E.R.C. at 61,997. The fact that the cost-shift was not a benefit to be counted in weighing the benefits and costs of the merger does not mean that the election of SPS and the concomitant cost-shift is not in the public interest. Election of SPS is in the public interest because it is a central element of the merger plan which, viewed as a whole, was found by FERC to be consistent with the public interest based on substantial evidence in the record. We approve the Commission's decision not to condition the merger on waiver by NU of SPS. C. Timing of Merger's Consummation. -36- In the proceedings before the ALJ, NU proposed filing a transmission tariff within 60 days following the merger. Intervenors and Commission staff proposed the filing and approval of an interim transmission rate. The ALJ rejected both proposals and instead held that the merger would be consummated upon the filing of NU's compliance tariff. He reasoned as follows: I see no need for requiring one tariff (with potential for controversy, charges, collections and refunds) to be followed by yet another tariff, with its own potential for still other disputes. Avoiding a transitional period will make it unnecessary to require a transitional tariff. To achieve this result, consummation of the merger must be conditioned on the concurrent filing of a compliance tariff which fully reflects all of the terms and conditions set out in this Initial Decision. Such a condition should encourage a prompt and fair compliance filing because NU could not begin to reap the merger benefits without it. 53 F.E.R.C. at 65,221. The Commission concurred: We believe the GTC [General Transmission Conditions] and the NH Corridor Proposal, as modified herein, adequately mitigate the merger's anticompetitive effects without requiring the adoption of the Merger Tariff. Trial Staff stated that the Merger Tariff would make service available immediately upon approval of the merger. We believe that the presiding judge accomplished the same result by allowing consummation of the merger when NU submits its compliance filing. We further believe that delaying the merger's consummation until the Commission accepts NU's compliance -37- submittal for filing would be inappropriate given the uncertainty surrounding issues which may be challenged and subject to further litigation in the compliance proceeding and given our commitment to act before the Merger Agreement's December 31, 1991 termination date. We believe that NU and PSNH are entitled to a prompt and fair resolution of this proceeding. At the same time the intervenors are entitled to have service begin as soon as practical, together with a fair resolution of any disputes raised regarding NU's compliance filing. Accordingly, we believe that it is in the best interests of all parties to allow NU to consummate the merger when it submits its compliance filing. We shall also require NU to begin honoring such requests for transmission service under the GTC, as modified herein, at that time. Such transmission service will be provided at either the firm or non-firm transmission rates proposed in NU's compliance filing, subject to refund, and without a refund floor. In reviewing NU's filing to ensure compliance with this Opinion, we will hold NU to a very high standard. As NU itself states, [i]f NU fails to comply with the letter or spirit of such [Commission] requirement, NU would be subject to summary judgment with respect to any aspect of its compliance filing. 56 F.E.R.C. at 62,025. Petitioners' stated concern is that, by allowing the merger to be consummated prior to FERC's approval of the compliance tariff, FERC did not provide a sufficient guaranty that NU would provide transmission access that would mitigate -38- the merger's anticompetitive effects.14 Petitioners do not, however, seek to unravel the merger. Rather, they propose that any cost shift under the NEPOOL Agreement, see discussion in Part III(B), supra, be postponed until after the compliance tariff is approved. Petitioners complain that the course chosen by FERC creates an incentive on the part of NU to delay proceedings on the compliance tariff, thereby maximizing competitive advantage. Petitioners do not, of course, point out that their proposal would create an incentive on their part to delay final approval of the compliance tariff, thereby postponing the day when the NEPOOL cost shift will take effect. The ALJ and the Commission carefully considered the alternatives before reaching their decisions. The Commission held that the anticompetitive effects of the merger would be adequately mitigated by the dual requirements that NU immediately provide transmission access upon the filing of its compliance tariff, and that any fees collected by NU would be subject to refund without a refund floor. Because NU accepted these merger conditions, the Commission can enforce NU's promise to pay such refunds if the Commission finds them to be appropriate. See Distrigas of Massachusetts Corp. v. FERC, 737 F.2d 1208, 1225 (1st Cir. 1984). FERC 14 We note that, at oral argument, petitioners conceded that no one had as yet sought access to NU's transmission facilities. -39- explicitly warned NU that [i]n reviewing NU's filing to ensure compliance with this Opinion, we will hold NU to a very high standard. 56 F.E.R.C. at 62,025. The Commission balanced the merging companies' need for a prompt and fair resolution of the merger proceeding against the intervenors' need to have [transmission] service begin as soon as practical, together with a fair resolution of any disputes raised regarding NU's compliance filing. 56 F.E.R.C. at 62,025. An agency's discretion is at its zenith when it fashions remedies to effectuate the charge entrusted to it by Congress. Niagra Power Corp. v. FPC, 379 F.2d 153, 159 (D.C. Cir. 1967). See also, Consolo v. FMC, 383 U.S. 607, 620-21 (1966); Environmental Action, Inc. v. FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991); Boston Edison Co. v. FERC, 856 F.2d 361, 371 (1st Cir. 1988). We hold that FERC's exercise of its discretion was not inappropriate in these circumstances. FERC did not defer, as petitioners suggest, consideration of the anticompetitive effects of the merger which FERC itself identified. The Commission recognized the effects, and dealt with them in a reasoned way which balanced the competing interests of all parties. FERC's remedy is not unreasonable, and we therefore affirm its order. D. Protection of Native Load Customers. 1. Priority of Services. -40-
In its merger application, NU made a voluntary commitment to provide wholesale transmission service, including third party wheeling service,15 for any utility over its existing transmission system. At the same time, NU sought to limit this obligation by reserving an absolute priority for power purchases on behalf of native load customers (whose power needs NU is bound by franchise or contract to meet). The ALJ held that although NU may reasonably give native load service priority over wheeling service if NU's transmission system had insufficient capacity to serve both, 53 F.E.R.C. at 65,221-222, NU could not deny firm wheeling requests based upon the reservation of transmission capacity for its own non-firm sales, id. at 65,225. In Opinion No. 364, the Commission balanced the interests of native load customers and third party wheeling customers and affirmed the ALJ's denial of an absolute priority: we . . . deny NU's proposal to give higher priority to its own non-firm use than to third party requests for firm wheeling in allocating existing transmission capacity. In no event, however, will NU be required to provide firm third party wheeling service out of existing transmission facilities if 15 For a definition of wheeling see n.9, supra. -41- reliability of service to native load customers would be adversely affected. 56 F.E.R.C. at 62,021 (footnote omitted). The Commission found it reasonable to allow NU to reserve firm transmission capacity to provide reliable service to its native load customers. Id. (Emphasis in original.) On rehearing, NU asked the Commission to clarify the scope of the reliability criterion. The Commission reiterate[d] that under no circumstances will NU be required to provide firm wheeling service out of existing transmission capacity where doing so would impair or degrade reliability of service to native load customers. 58 F.E.R.C. at 61,199 (emphasis removed). The Commission held the concept of reliability generally encompasses the: (1) reservation of transmission capacity to back up large generating units; (2) provision of generation reserves; and (3) coverage of certain future needs. As to the coverage of future demand requirements, the Commission specifically ordered that any capacity needed for reliability purposes within a reasonable planning horizon must be offered for wheeling use until NU expects to need the capacity for reliability reasons. Id. at 61,199-200. Petitioners assert that the decision to accord a priority to native load over transmission load is arbitrary, discriminatory, and anticompetitive. They argue that FERC neither defined nor justified the priority granted by -42- allowing reservation of transmission capacity for native load service and that any such priority creates competitive advantages for NU. We hold that the Commission adequately defined and reasonably justified its decision to allow such a reservation and properly addressed the anticompetitive concerns raised by the intervenors.
Although the Commission reaffirmed the general rule that firm transmission service should be accorded priority over non-firm service, even if the latter would benefit native load, it nonetheless allowed NU to reserve firm transmission capacity needed to ensure reliability of native load service and allowed the use of this capacity for nonfirm transactions. 58 F.E.R.C. at 61,196. Thus, native load service will receive a priority over third-party wheeling service in allocating existing transmission capacity when reliability of service to native load would be adversely affected. The Commission specifically qualified this priority by requiring NU to offer the capacity for wheeling use until NU needed it to assure reliability to native load customers. There is nothing arbitrary or discriminatory about FERC's decision. It struck a reasonable balance between the competing interests of native load customers and third-party wheeling customers. NU-PSNH is obligated to serve its native -43- load customers. In return for this obligation to serve, the native load customers regularly bear the cost of transmission facilities; native load customers pay for them, use them, plan on them, and rely on them. As the ALJ noted, [e]very New England utility favors its own native load. Nothing in the NEPOOL agreement requires its members to surrender their native load preference, and none do. 53 F.E.R.C. at 65,222. Thus, NU should be allowed to give priority over safe and reliable service to its native load customers using existing transmission capacity built to serve those customers. 58 F.E.R.C. at 61,199. FERC explicitly defined and justified the challenged native load priority. 2. Transmission Upgrades Pricing. a. Background. NU's commitment to provide third-party transmission service includes the obligation to build additional transmission facilities as necessary to relieve transmission constraints on its system. 58 F.E.R.C. at 61,204-10; 56 F.E.R.C. at 62,021-24. The issue then becomes, how should the cost of constructing such transmission upgrades be allocated. The ALJ stated that questions of cost allocation are best addressed in future proceedings regarding the particular responsibilities for particular facilities. Nevertheless, the ALJ adopted the but for analysis for determining responsibility proposed by NU witness Schultheis: -44- [W]heeling customers must make a pro rata contribution whenever the facilities would not have been needed but for the wheeling transfers across a constrained interface. This means that NU's native load customers pay for the new facilities they create the need for and wheeling customers pay for the facilities they create the need for. 53 F.E.R.C. at 65,223. The ALJ also noted that the financial exposure of transmission customers was limited by the cost caps to which NU was committed.16 Id. at 65,224. The Commission agreed that cost questions should be litigated in the context of a specific proposal, and accepted the concept of the but for test as a framework for ascertaining cost responsibility and the use of the proposed cost caps as a reasonable means of limiting the transmission customers' responsibility for future upgrades. 56 F.E.R.C. at 62,028030. The Commission reaffirmed that decision on rehearing. 58 F.E.R.C. 61,204-207. Petitioners contend that the Commission failed to adequately explain the pricing policy it will employ in pricing transmission upgrades. Basically, petitioners claim the ruling is too ambiguous to determine whether, or how, the 16 NU committed to cap cost responsibility to (1) those specific facilities identified by NU at the time of the wheeling request as needing to be built or upgraded either at the time of the request or in the future; and (2) the maximum dollar amount contained in NU's initial estimate of a wheeling customer's pro rata share of the costs of future upgrades needed to accommodate a request for wheeling service. 56 F.E.R.C. at 62,031-32. -45- Commission changed its policy from the traditional rolledin approach used in pricing transmission service. We hold that the Commission provided a clear and reasoned justification for the principles that will guide its future determinations of transmission upgrade pricing. We affirm the Commission's decision not to modify the basic principles adopted in its order. b. Discussion. In accepting as reasonable the but for test, the Commission has done no more than approve a framework for determining cost responsibility which furthers the general principle that transmission costs should be borne by those entities responsible for the cost. 58 F.E.R.C. 61,205. Under this test, incremental cost pricing could be found appropriate when firm wheeling across a particular interface would degrade reliability absent upgrades. The Commission specifically declined, however, to answer the requests of the intervenors to decide the rolled-in versus incremental rate17 issue in the abstract and chose instead to evaluate it only within the context of a particular rate proposal or upgrade. Id. The Commission articulated how it envisioned 17 Under rolled in pricing principles, the upgrade costs would be rolled in with other company costs and charged to all ratepayers as part of NU's general rate structure; while administratively simple, it ignores any concept of responsibility. Thus, incremental pricing principles look to hold parties responsible for their share of upgrade costs. -46- pricing transmission upgrades and adopted a condition limiting the amount NU may propose to collect from a transmission customer to the greater of
facilities required at the time the customer's new transmission load is added or (2) the rolled-in cost of all network facilities required to serve the combined transmission loads of [NU], including any required transmission additions. Id. at 61,206. Thus, a wheeling customer may be charged the greater of rolled-in cost rates or incremental cost rates. The Commission acknowledged that the introduction of incremental cost pricing principles is a departure from its traditional pricing policies18 and justified this new policy on NU's unprecedented obligation to provide third party transmission service. Id. The Commission noted that incremental cost pricing may be appropriate in certain circumstances, but decided to leave the details of cost responsibility questions to a future specific section 205 rate case. When such a case arises, NU will bear the burden of justifying any direct assignments of costs and support[ing] any arguments that reliability is degraded by a particular firm transmission service. No presumption is 18 The Commission generally has adhered to rolled in pricing, but has never precluded particularized cost allocations to specific customers where appropriate. See Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,291 n.163 (1988); Public Service Co. of Indiana, 51 F.E.R.C. 61,367, at 62,203 (1990). -47- created by NU's `but for' criterion that firm wheeling customers always cause the need for upgrades. Id. at 61,207 (quoting 56 F.E.R.C. at 62031). The Commission also allowed that any reliance by NU upon the but for test may be challenged in future actions. The Commission sufficiently explained and justified the principles that will guide its transmission upgrade pricing. E. Opportunity Cost Pricing. As has already been discussed, the Commission found it necessary to impose a number of conditions on the proposed NU-PSNH merger to mitigate the merged company's market power in the markets for transmission and short-term bulk power. 58 F.E.R.C. at 61,195. Specifically, the Commission held that NU must provide firm transmission service out of existing capacity for any utility, subject only to a reservation of sufficient capacity to maintain reliable service to its native load customers and to honor existing contractual obligations. NU was prohibited, however, from denying a request for firm transmission service by reserving capacity for non-firm transactions that would enable it to provide more economical service to its native load customers. 56 F.E.R.C. at 62,014-21; 58 F.E.R.C. at 61,196-200. FERC also held that NU must build additional transmission facilities as needed to provide transmission where insufficient capacity exists. 56 F.E.R.C. at 62,021-24; 58 -48- F.E.R.C. at 61,204-10. The Commission found that these and other conditions would adequately mitigate the merger's anticompetitive effects. 58 F.E.R.C. at 61,213. On rehearing, NU and the States of Connecticut and New Hampshire argued that the Commission should address the issue of firm transmission pricing because, in Opinion No. 364, FERC had established principles governing the related issue of firm transmission priority which made NU's ability to purchase inexpensive power (which would lower its cost of serving its native load customers) subordinate to its obligation to provide firm transmission for third parties. 58 F.E.R.C. at 61,201-02. The Commission agreed, but declined to approve opportunity cost pricing19 outside the context of a specific tariff proposal. Instead, the Commission announced three basic goals to guide its future decisions on the pricing of firm transmission service on the merged company's existing capacity, and left the door open to NU to propose a tariff based on opportunity costs or any 19 As the Commission explained, opportunity costs are the revenues lost or costs incurred by a utility in providing third-party transmission service when transmission capacity is insufficient to satisfy both a third-party wheeling request and the utility's own use. For example, opportunity costs might include the revenues lost or costs incurred because a utility must reduce its own off-system purchases or sales in order to overcome a constraint on the [transmission] grid. 58 F.E.R.C. at 61,200-201. -49- other methodology that would meet the three goals. The Commission explained its decision as follows: We are now confronted with the need to provide NU with enough specificity regarding what it will be allowed to propose for the pricing of future third- party wheeling service, so that the company can decide whether to proceed with the merger. We also cannot ignore the need to act as expeditiously as possible given the commercial realities and time pressures presented in corporate matters subject to our jurisdiction, and in particular the need to resolve a bankruptcy situation. At the same time we are confronted with the need to ensure an adequate record on pricing issues and to afford all parties an adequate opportunity to voice their objections. Balancing these respective needs, we conclude that the best course is to provide guidance on pricing issues, but to defer specific pricing issues to the compliance phase of this proceeding, or to subsequent cases where the Commission may consider specific proposals from NU in a concrete, factual setting and with a more developed record. . . . . First, the native load customers of the utility providing transmission service should be held harmless. Second, transmission customers should be charged the lowest reasonable cost-based rate for third-party transmission service. Third, the pricing should prevent the collection of monopoly rents by the transmission owner and promote efficient transmission decisions. In ruling on specific proposed rates, we will balance these three goals in light of the facts and circumstances presented at that time. 58 F.E.R.C. at 61,203 (emphasis added) (footnotes omitted). FERC was careful to point out that it endorsed opportunity cost pricing only insofar as NU could show that -50- it could propose rates which include legitimate, verifiable opportunity costs. Id. The Commission warned NU that any such proposal would be carefully scrutinized and would be subject to challenge. Id. at 61,203-04. Specifically, FERC stated that NU would have to address the following issues should it seek recovery of opportunity costs: (1) whether opportunity costs should be capped by incremental expansion costs or any other cap; (2) whether current wheeling and wholesale requirements customers should be treated differently from future wheeling and wholesale requirements customers, e.g., by receiving grandfather rights to embedded cost rates for the amount of transmission capacity they already use; (3) how NU will identify those customers responsible for growth on its system and what particular new facilities are necessary to accommodate that growth; (4) whether and how third parties should be protected from uncertainty regarding fluctuations in opportunity costs; (5) how the proposed rates will prevent the collection of monopoly rents; and (6) how the proposed opportunity costs will be verified. Id. The Commission expressly postponed consideration of whether opportunity cost pricing would be inconsistent with nondiscriminatory pricing and nondiscriminatory terms and conditions of service until those issues were raised in a concrete factual context. Id. at 61,204, n.118. Petitioners claim that FERC's decision amounted to an arbitrary endorsement of opportunity cost pricing that was not supported by evidence in the record, was inherently -51- discriminatory, and contrary to FERC's regulation of natural gas pipelines. Petitioners' underlying concern seems to be that when the issue arises next in the context of the Commission's review of NU's compliance tariff, FERC will simply approve the tariff and dismiss petitioners' objections on the ground that opportunity cost pricing principles had already been endorsed by the Commission. Although we understand petitioners' concerns, we believe that they are misplaced and that FERC did not go as far as petitioners fear in endorsing opportunity cost pricing. Petitioners will have an opportunity to contest any compliance tariff proposed by NU. The Commission itself laid out a number of issues which NU would have to address were it to propose a tariff based on opportunity costs. 58 F.E.R.C. at 61,203. Only after carefully considering the competing interests of providing guidance to NU as to what kinds of tariffs it would consider, and the need to endorse specific methodologies only on the basis of a fully-developed record, did the Commission decide to outline broad pricing goals which would allow for a number of pricing schemes including opportunity cost pricing. Id. It was squarely within the Commission's power to defer consideration of petitioners' assertions until after NU filed its compliance tariff. As the Supreme Court has held, [a]n agency enjoys broad discretion in determining how to handle related yet discrete -52- issues in terms of procedures, and priorities. Mobil Exploration & Producing Southeast, Inc. v. United Distribution Cos., 111 S. Ct. 615, 627 (1991) (citations omitted). Petitioners argue that deferral was inappropriate in this case because their objections went to the heart of the public interest determination to be made. Maryland People's Counsel v. FERC, 761 F.2d 768, 778 (D.C. Cir. 1985). We disagree. The Commission announced pricing goals and conditions that it determined would keep the merger consistent with the public interest, and would result in just and reasonable rates. Until NU proposed a specific tariff regime, the Commission did not have a developed record to evaluate on the merits. The Commission remains free to, and we expect it will, invite objections to NU's compliance tariff from affected parties, and will reject any proposed tariff that conflicts with its statutory responsibility to approve rates that are just and reasonable, and to approve mergers that are, as conditioned, consistent with the public interest. F. Environmental Impact Statement. The City of Holyoke Gas & Electric Department (HG&E) alleges that FERC's refusal to examine the potential environmental impacts of its approval of the merger was arbitrary and capricious. We disagree. -53- The National Environmental Policy Act of 1969, 42 U.S.C. 4321 et seq., (NEPA) requires federal agencies to consider the potential environmental effects of a proposed major federal action that may significantly affect the quality of the human environment. Section 102(2)(C) of NEPA states: The Congress authorizes and directs that, to the fullest extent possible: . . .
Government shall . . . . (C) include in every recommendation or report on proposals for legislation and other major Federal actions significantly affecting the quality of the human environment, a detailed statement by the responsible official on (i) the environmental impact of the proposed action, (ii) any adverse environmental effects which cannot be avoided should the proposal be implemented, (iii) alternatives to the proposed action, (iv) the relationship between local short-term uses of man's environment and the maintenance and enhancement of long- term productivity, and (v) any irreversible and irretrievable commitments of resources which would be involved in the proposed action should it be implemented. 42 U.S.C. 4332(2)(C). Agencies were authorized, under guidelines promulgated by the Council on Environmental Quality (CEQ), to create categorical exclusions for actions which do not individually or cumulatively have a significant effect on the human environment. 40 C.F.R. 1507.3, 1508.4. FERC adopted such a category of exclusions, -54- including one for merger approvals such as the one at issue in this case. That regulation states in pertinent part: (a) General rule. Except as stated in paragraph (b) of this section, neither an environmental assessment nor an environmental impact statement will be prepared for the following projects or actions: . . . . (16) Approval of actions under sections 4(b), 203, 204, 301, 304, and 305 of the Federal Power Act relating to issuance and purchase of securities, acquisition or disposition of property, merger, interlocking directorates, jurisdictional determinations and accounting orders. 18 C.F.R. 380.4(a)(16). An agency need not issue a finding of no significant impact in cases concerning matters that fall into a categorical exclusion. 40 C.F.R. 1501.3, 1501.4, 1508.13. CEQ guidelines also required agencies adopting categorical exclusions to provide for extraordinary circumstances in which a normally excluded action may have a significant environmental effect. 40 C.F.R. 1508.4. FERC made such provision in its regulations: