Opinion ID: 184737
Heading Depth: 1
Heading Rank: 2

Heading: analysis

Text: 14 We review FERC orders under the Administrative Procedure Act's (APA) arbitrary and capricious standard. See Union Pac. Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C.Cir.1997); 5 U.S.C. § 706(2)(A) (1994). Because  '[i]ssues of rate design are fairly technical and, insofar as they are not technical, involve policy judgments that lie at the core of the regulatory mission,' our review of whether a particular rate design is 'just and reasonable' is highly deferential. Northern States, 30 F.3d at 180 (quoting Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C.Cir.1992)). Nonetheless, such review is not an empty gesture. Id. [T]he Commission must be able to demonstrate that it has 'made a reasoned decision based upon substantial evidence in the record,'  id. (quoting Town of Norwood, 962 F.2d at 22), and the path of [its] reasoning must be clear. Id. at 182.
15 Because Sithe is challenging Niagara's existing rates, its claim must be brought pursuant to § 206, rather than § 205, of the FPA. Section 206(a) provides, in relevant part, that: 16 [w]henever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order. 17 16 U.S.C. § 824e(a). As complainant, Sithe bore the burden in this proceeding of demonstrating that Niagara breached the statutory just and reasonable standard. See id. § 824e(b); Alabama Power Co. v. FERC, 993 F.2d 1557, 1571 (D.C.Cir.1993). By dismissing Sithe's complaint in the orders on review, then, the Commission implicitly found that Sithe did not satisfy its burden--either that it failed to establish its prima facie case, or that Niagara had effectively rebutted that case. 18 The core of Sithe's complaint in this case is that the transmission loss component of Niagara's rate violates the Commission's long-standing policy requiring that the base and loss elements of an overall rate be computed using consistent methodologies. Sithe's position rests on its contention that Niagara's rate components do not match, because its base rate is calculated on a rolled-in basis, while its loss rate is calculated on an incremental basis. In its brief to this court, Sithe goes so far as to suggest that these characterizations are undisputed, see Amended Brief of Petitioner at 16, but that is a stretch. To be sure, there does not appear to be much dispute that Niagara computes Sithe's loss rate on an incremental basis. See 81 F.E.R.C. at 61,301. As noted earlier, however, there is considerable disagreement concerning the appropriate characterization of the methodology by which Niagara computes Sithe's base rate: Sithe argues that it is an average, rolled-in approach, whereas Niagara argues that it is a modified cost-of-service approach that is not fully rolled-in. The record, as far as we can tell, suggests that this calculation makes use of an average formula, but does not incorporate the full complement of Niagara's costs, as it excludes investment in certain facilities, a flat sum, and various expenses. 19 Whatever the appropriate description of this disputed methodology (fully rolled-in, partially rolled-in, or not rolled-in at all), it is clear that Niagara does not use the same approach to calculate both the base and loss components of its rate. This would appear to defy FERC's well-established policy of requiring utilities to compute the base and loss components of their transmission rates using consistent methodologies. See, e.g., Northern States Power Co., 59 F.E.R.C. p 61,100, at 61,369, reh'g denied, 60 F.E.R.C. p 61,076, at 61,252-53 & n. 25 (1992), clarification denied, 64 F.E.R.C. p 61,111, at 61,920 (1993), aff'd sub nom. Northern States Power Co. v. FERC, 30 F.3d 177 (D.C.Cir.1994). In the Northern States proceeding, FERC stated that it does not allow the use of incremental loss factors when the transmission charge is developed on a rolled-in basis. 59 F.E.R.C. at 61,369. It further explained that: 20 [t]his policy flows directly from the Commission's longstanding practice of requiring that the demand and energy components of a rate be calculated on the same basis. Where, as here, the customer pays for average fixed costs rather than the fixed costs of only certain incremental facilities, logic dictates that the customer pay for average variable costs in the energy charge. 21 Id. In upholding the Commission's application of this matching policy, this court recognized that, because rolled-in costing assumes that each customer in an integrated system enjoys the benefits of the transmission system as an integrated whole, it makes sense to hold each customer ... responsible for an indivisible portion of the transmission system losses imposed upon the system by the configuration of the group of customers using it at any one time. Northern States, 30 F.3d at 182. Where, then, is the Commission's explanation for not requiring matching methodologies in this case? 22 The Commission purported to re-affirm its matching policy in the orders on review, see 76 F.E.R.C. at 62,458, but concluded that Sithe had failed to establish a violation thereof. In so holding, however, FERC neither provided a clear explanation of its rationale nor revealed the data and assumptions underlying its findings. On the record before us, therefore, we are unable to satisfy ourselves that the Commission engaged in reasoned decision making and reached conclusions supported by the record. Indeed, we are unable to penetrate the logic of FERC's orders to ascertain whether FERC in fact departed from established policy and precedent and, if so, whether it justified that departure. Cf. Northern States, 30 F.3d at 180 ([T]he Commission must be able to demonstrate that it has 'made a reasoned decision based upon substantial evidence in the record.' ) (quoting Town of Norwood, 962 F.2d at 22); Hatch v. FERC, 654 F.2d 825, 834 (D.C.Cir.1981) ([A]n agency must provide a reasoned explanation for any failure to adhere to its own precedents.). 23 The Commission's position could be, as both FERC's appellate counsel and Niagara urge before this court, that the matching policy is not implicated in this case, because Niagara does not compute its base transmission rate on a fully rolled-in basis. See Brief for Respondent at 19; Brief of Intervenor at 9. Indeed, if we stretch our imagination, we might even conclude that a single sentence in the Rehearing Order, indicating that Sithe's matching argument failed because it incorrectly presumes that [Niagara] developed Sithe's transmission rates using full average costs while Sithe's transmission losses were based on incremental costs, 81 F.E.R.C. at 61,302 (emphasis in original), lends some support to the view pressed by FERC's appellate counsel and Niagara. And this argument is tempting, for it avoids the absurdities that are faced in any attempt to employ a matching rule in this case--the notion of matching is utterly baffling when the methodologies themselves are impure, as with Niagara's base rate in this case. What, we wonder, would match this rate, which apparently resulted from a negotiated compromise? 24 The problem, however, is that FERC did not articulate the rationale that appellate counsel and Niagara now propound. Thus, we cannot accept this articulation of the agency's judgment. As we explained in Hatch: 25 Without any explicit recognition by the Commission that the standard has been changed, or any attempt to forthrightly distinguish or outrightly reject apparently inconsistent precedent, we are left with no guideposts for determining the consistency of administrative action in similar cases, or for accurately predicting future action by the Commission. The failure to admit or explain such a basic change in the interpretation of a statutory standard to be applied to conduct of the public undermines the integrity of the administrative process. 26 654 F.2d at 834-35 (footnote omitted). 27 The bottom line is that, if the asserted conclusion were so obvious, it would have been a simple task for FERC to clearly state and support the view that its matching rule does not, or even should not, apply unless the base rate is fully rolled-in. FERC did not do this, so we cannot rely on the theory now advanced by its appellate counsel. See SEC v. Chenery Corp., 318 U.S. 80, 87, 63 S.Ct. 454, 87 L.Ed. 626 (1943). The simple fact here is that FERC purported to apply the matching rule in a situation in which the disputed rate methodologies concededly do not match. 28 Alternatively, the Commission's ruling arguably could rest on the finding that the rate paid by Sithe to Niagara reflects a discount below Niagara's average system costs. See 76 F.E.R.C. at 62,458, 81 F.E.R.C. at 61,301 & n. 1. Yet, FERC did not elaborate on what significance, if any, it ascribed to this purported discount. Compare 76 F.E.R.C. at 62,458 (apparently relying on the existence of the discount in deeming Niagara's methodology consistent with the matching rule), with 81 F.E.R.C. at 61,302 (describing as irrelevant Sithe's argument that it did not receive a discount from Niagara). For instance, FERC may have considered this discount in deciding that Niagara's base rate was hybrid, rather than purely rolled-in. Or, FERC may have accepted an inference that Sithe pays an overall rate--both cost and loss components--that is less than it would pay if Niagara computed both costs and losses using a fully rolled-in method and, accordingly, that the rate is reasonable notwithstanding any noncompliance with the matching policy. 29 Niagara urges this second view, stating that [b]y requiring consistent application of rolled-in or incremental methodologies, the Commission has created a short-hand means for preventing excessive rates. Brief of Intervenor at 9. In other words, [i]f the 'end result' of the combined rate is less than the just and reasonable rate produced by consistent methodologies, then the rate is ipso facto just and reasonable. Id. at 11. Lending some support to this view, we have, in the past, suggested that the use of a so-called comparison rate--comparing the rate charged to the rate that could lawfully have been charged--seems eminently reasonable. City of Holyoke Gas & Elec. Dep't v. FERC, 954 F.2d 740, 742 (D.C.Cir.1992). FERC, however, did not state this rationale in the orders below. 30 It is also noteworthy that the Commission itself has, in the past, interpreted the § 206 burden scheme to require a customer seeking an investigation into existing rates to provide some basis to question the reasonableness of the overall rate level, taking into account changes in all cost components and not just [the challenged component]. Houlton Water Co., 55 F.E.R.C. p 61,037, at 61,110 (1991); see also City of Hamilton, Ohio and Am. Mun. Power-Ohio, Inc. v. Kentucky Power Co. and Ohio Power Co., 72 F.E.R.C. p 61,158, at 61,785-86 (1995) (dismissing, without prejudice to re-filing, a customer's § 206 complaint because it failed to satisfy the threshold of providing a basis to question the overall reasonableness of the utility's rates). Although it appears that Sithe never made a proffer to show net harm under Niagara's existing scheme, FERC did not articulate this as its basis for dismissing Sithe's complaint. In short, we cannot uphold FERC's reliance on the discount without a clearer explanation of the basis for that reliance. 31 We find, moreover, that the Commission's reasoning was cryptic with respect to its finding that Sithe receives a discount. The Commission offered no indication of what exactly its independent analysis entailed or what issues it considered. Cf. Maine Pub. Serv. Co. v. FERC, 964 F.2d 5, 9 (D.C.Cir.1992) (remanding in part because the Commission's analysis ... contains no explanation of how it derived the [relevant] figure); City of Holyoke, 954 F.2d at 743 (The Commission must support its decision with enough data to enable an adversely affected party and by extension a reviewing court, to understand its calculation of the comparison rate upon which it would rely, as well as the underlying assumptions.). Because the Commission in this case failed to disclose its calculations, we do not know whether it simply adopted Niagara's figures and, if so, why. We also have no basis to confirm FERC's assumptions--for instance, we are left to wonder if it considered whether Niagara's variable costs, such as transmission line losses, would remain constant and, therefore, whether the alleged discount would actually exist over the long term. If the Commission does, in fact, intend to rely on the existence of a discount to support its disposition of this case, it must clarify its reasoning and support its findings in this regard. 32 As a final matter, we note that Sithe also raised an undue discrimination claim in this case, based on Niagara's method of prioritizing its customers for the purpose of assigning transmission losses. Under Niagara's system for calculating losses, the order in which customers are removed from the model substantially affects the losses for which they are charged. Sithe argued, on rehearing and before this court, that the Commission failed to address this argument. We are not so sure. Throughout both orders, FERC made reference to the issue of undue discrimination, apparently rejecting Sithe's claim because Niagara's customers are treated comparably, and because Sithe freely negotiated its rates. See 81 F.E.R.C. at 61,301-02. FERC did not, however, explicitly discuss contract dates per se, leaving us simply to infer that a customer with a later contract date imposes greater losses on Niagara's system by the sheer fact of added volume. On remand, FERC should clarify its ruling on this point. In so doing, FERC must be careful to eschew any assumption that, where aggregation of load increases average costs, the costs a customer imposes on a system depend on the sequence in which the customers are added. As we noted in Town of Norwood, 33 Each customer's contribution to the coincident peak load causes the costs associated with the peak, regardless of whether that contribution comes from the customer's increasing, or its failing to diminish, its historic consumption. 34 962 F.2d at 24 n. 1 (emphasis added). In the meantime, we express no view on the merits of Sithe's undue discrimination claim.