Opinion ID: 194766
Heading Depth: 6
Heading Rank: 1

Heading: the incremental cost of new network

Text: 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: . . .