Court Opinion

ID: 185162
Source: CourtListenerOpinion
Date Created: 2011-02-05 02:28:34+00
Date Added: 2024-06-11T17:26:13.618300
License: Public Domain

220 F.3d 595 (D.C. Cir. 2000)
Alabama Power Company, et al.,Petitionersv.Federal Energy Regulatory Commission, RespondentFlorida Power & Light Company and The City of Tallahassee, Florida, Intervenors
No. 98-1214
United States Court of Appeals, FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 24, 2000Decided June 30, 2000

On Petition for Review of Orders of the Federal Energy Regulatory Commission
Dan H. McCrary argued the cause for the petitioners. Andrew W. Tunnell was on brief.  Rodney O. Mundy entered an appearance.
Monique Penn-Jenkins, Attorney, Federal Energy Regulatory Commission, argued the cause for the respondent. John H. Conway, Acting Solicitor, Federal Energy Regulatory Commission, and Timm L. Abendroth, Attorney, Federal  Energy Regulatory Commission, were on brief.
Gary D. Bachman and Cheryl M. Feik were on brief for  intervenor City of Tallahassee, Florida.
Steven Jay Ross entered an appearance for intervenor  Florida Power & Light Company.
Before:  Edwards, Chief Judge, Henderson, Circuit Judge  and Buckley, Senior Circuit Judge.
Opinion for the court filed by Circuit Judge Henderson.
Karen LeCraft Henderson, Circuit Judge:

1
Petitioners  Alabama Power Company, Georgia Power Company, Gulf  Power Company, Mississippi Power Company, Savannah  Electric and Power Company and Southern Company Services, Inc. (collectively, the Southern Companies, petitioners)  seek review of two orders of the Federal Energy Regulatory  Commission (FERC, Commission) rejecting two components  of the rates they had proposed for supplying electric power to  the City of Tallahassee, Florida (City).1  The first component  is "turbine assembly costs" and the second is "heating loss  costs."  With regard to the former, the Southern Companies  argue that FERC's policy as applied here is inconsistent with  a recent FERC decision allowing recovery of such costs. With regard to the Commission's denial of recovery for  heating loss, the Southern Companies argue that the method  they used to calculate loss, yielding results FERC deemed  unreliable, is used by FERC for related purposes.  They also  argue that the Commission's concern over double recovery of  heating loss costs is misplaced.

2
For the reasons set forth below, we grant the petition for  review and remand to the Commission for proceedings consistent with this opinion and with its recent decision approving  recovery of turbine costs to determine whether the Southern  Companies justified this component of its rate.

I.

3
In 1990 the Southern Companies filed a Unit Power Sales  (UPS) Agreement between themselves and the City proposing the sale of certain electric power capacity to the City for a  term of ten years.  The UPS Agreement prescribed transmission charges for various support services, including a monthly  reactive control charge for the costs associated with  generator-supplied reactive power.  The Southern Companies  then faced the task of satisfying FERC that their proposed  reactive power charge was just and reasonable.  Hearings  before an administrative law judge yielded an Initial Decision  largely approving the Southern Companies' proposal, concluding that "the proposed reactive power charges, with modification to certain component allocations and [the Southern Companies'] reactive power credits, are just and reasonable."Southern Co. Servs., Inc., 61 FERC p 63,009 at 65,024 (1992).The Commission affirmed in part and reversed in part, taking  issue with certain aspects of the Southern Companies' methodology.  See Southern Co. Servs., Inc., 80 FERC p 61,318  (1997).  The Commission's two modifications at issue here, on  which the Commission stood firm in denying rehearing, see 82  FERC p 61,168 (1998), are the exclusion of turbine assembly  costs and the exclusion of heating loss costs.

4
The Commission described reactive power and its role in  the provision of electric power as follows:

5
Electric power consists of two components.  The firstcomponent, "real" power (expressed in terms of watts), isthe active force that causes electrical equipment to per-form work.  The second component, "reactive" power,(expressed in terms of volt-amperes reactive (VARs)) isnecessary to maintain adequate voltages so that "real"power can be transmitted.

6
Failure to provide the correct amount of reactive pow-er at various points on the transmission system can causedeviations from desired voltage levels and disruption inthe flow of power on the system.  In order to maintaindesired voltage levels, reactive power must be suppliedor absorbed by generators (or transmission equipment)at various points on the transmission system.

7
Southern Co. Servs., Inc., 80 FERC at 62,080 (footnotes  omitted).

8
The Southern Companies utilize generators to produce  reactive power and the production of reactive power causes  heating loss that increases fuel consumption and demand on  the generators.  See Brief of Commission at 36.2  The Southern Companies factored the heating loss into its costs equation, seeking to recoup for the required use of additional fuel  and for a portion of the generators' real power capacity.  To  calculate costs, the Southern Companies combined the cost of  reactive power "impacts" on their energy system with the  heating loss cost to arrive at a control charge.  Brief of  Petitioners at 12.  They determined the cost of the reactive  power impacts through use of two load flow studies.  One  study measured the "base-case" load flow conditions and  quantified the reactive power requirement of all generators in  the transmission system.  The other, a "transaction-case"  load flow study, measured the effect on the system of an  energy transaction similar to those proposed in the UPS  Agreement with the City.  A comparison of the studies  demonstrated the impact (measured in megavolt ampere reactives (MVARs)) of individual transactions under the UPS  Agreement, allowing the petitioners to determine the amount  of generating capacity lost in each transaction and then to  multiply that figure by an average energy rate and thus  quantify the heating loss resulting from production of reactive  power necessary to supply the City.

9
The petitioners also sought to recoup, through the proposed reactive power charge at issue, costs incurred from use  of their generators to supply or absorb reactive power.  Having determined the amount of MVARs the transactions under  the UPS Agreement demanded, their next step in calculating  the charge was to identify the six major generator components associated with reactive power production.3  Relying on  the connection between the turbines and the production of  reactive power,4 the Southern Companies included the "turbine assembly"5 as one of the six major components in its  costs calculation.  Using these components, they estimated  the plant investment associated with production of reactive  power.  Because the turbine assembly is involved with the  production of both real power and reactive power, the Southern Companies included in their estimate, and thus in the  reactive power charge, only that portion of the turbine assembly cost allocated to reactive power based on the ratio of total  power to reactive power.  See 80 FERC at 62,083.

10
The Commission concluded the Southern Companies' calculations suffered from "erroneous modeling assumptions and flawed rate design."  Id. at 62,084.  The load flow studies  used to calculate heating loss costs came under attack first. The base-case load flow study reflected a hypothetical operating condition that, as the Southern Companies' expert conceded, is not typical or desirable.  See id. at 62,084-85.  The  Commission disapproved the transaction cases as well because the Southern Companies' calculations did not account  for possible generator responses that benefit the system by  either absorbing or producing fewer MVARs.  For example,  some transactions cause a decrease in the absorption of  MVARs, a benefit to the transmission system, but the petitioners' calculations reflected this reduction of demand on the  system as an increase in demand for reactive power service. As the Commission phrased its concern, "[j]ust as one would  expect not to be charged more for consuming less energy, one  would expect not to be charged more for reducing reactive  power support."  Id. at 62,086.  In addition to disapproving  the petitioners' methodology, FERC concluded that they had  not explained why their fuel adjustment clause, designed to  enable a utility to recover from its power customers the fuel  expense associated with producing power, see Brief of Commission at 39, did not already ensure recovery of these costs.The Commission concluded that, absent such a showing, the  petitioners' proposed rate would result in a prohibited double  recovery of costs.  See 80 FERC at 62,089.

11
Turning to the turbine assembly costs, the Commission  disallowed their inclusion in the petitioners' reactive power  charge because, in its words, "turbines produce only real  power."  Id. at 62,091.  In contrast, it noted that the generators, in addition to producing real power, produce (or absorb)  reactive power.  Accordingly, the Commission agreed that  costs of the generator and its parts are appropriately included  in the reactive power charge.  The Commission also noted  that reactive power can be produced by a generator disconnected from its turbine and operated as a "synchronous  condenser."6  In the end, the Commission determined that the Southern Companies failed to establish that their rates  were just and reasonable.

12
In denying rehearing, the Commission again addressed the  recovery of turbine assembly and heating loss costs.  While  the Southern Companies compared the costs associated with  the turbine that powers a generator to the cost of electricity  that powers a synchronous condenser, which the Commission  agreed would be recoverable under a reactive power charge,  the Commission again concluded that recovery of turbine  assembly costs was not appropriate because turbines produce  only real power notwithstanding their contribution to the  generators' production of reactive power.  See 82 FERC at  61,611.  With regard to heating loss costs, FERC again  rejected the load flow studies and also declined to accept the  summary of actual meter readings,7 which the Southern Companies submitted with their rehearing request, because the  readings "represent[ ] a moving target" and use of actual data  was inconsistent with FERC's approach "not to adjust estimates for actuals."  Id. at 61,612.  Finally, the Commission  remained unconvinced that the petitioners' revenue crediting  mechanism prevented double recovery of heating loss costs. See id.

II.

13
We review FERC's orders under the arbitrary and capricious standard of the Administrative Procedure Act (APA).See 5 U.S.C. § 706(2)(A) (1994);  Sithe/Independence Power  Partners v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999).  We  explained the applicable standard of review in Northern  States Power Co. v. FERC, 30 F.3d 177, 180 (D.C. Cir. 1994):

14
The Federal Power Act requires that rates for "the transmission ... of electric energy subject to the jurisdiction of the Commission ... be just and reasonable."16 U.S.C. § 824d(a).  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 particularrate design is "just and reasonable" is highly deferential. Town of Norwood v. Federal Energy Regulatory Com-mission, 962 F.2d 20, 22 (D.C. Cir. 1992).  Our review is not, however, an empty gesture:  the Commission must be able to demonstrate that it has "made a reasoned decision based upon substantial evidence in the record."Id.

15
The Southern Companies argue that the Commission's  exclusion of turbine assembly costs from the reactive power  charge was arbitrary and capricious because the real power  created by the turbine is essential to the generator's production of reactive power.  In producing reactive power, the  generator derives power from the turbine, the generator's  "prime mover."  Brief of Commission at 7;  see JA 177;  80  FERC at 62,091.  Although FERC allows recovery of generator costs, it disallowed recovery of the petitioners' turbine  assembly costs.  In fact, FERC allows recovery of costs of  electric power serving as the prime mover of a synchronous  condenser generator producing reactive power, that is, a  generator disconnected from the turbine assembly.  See 82  FERC at 61,611 & n.6.  The Southern Companies contend  that the recoverability of costs for the prime mover of a  generator should not depend on whether the generator's  prime mover is electric power, as with a synchronous condenser, or a turbine.  FERC chose to draw the costs recovery line at the generator and its integral parts rather than at  its prime mover.  We need not decide whether the line is  reasonably so drawn, however, because FERC's treatment of  the Southern Companies' turbine costs compared with its  treatment of turbine costs in American Electric Power Service Corp., 80 FERC p 63,006 (1997), aff'd in relevant part, 88  FERC p 61,141 (1999) (AEP), requires remand.

16
In AEP FERC allowed recovery of turbine costs as part of  the investment required for the production of real power necessary to drive the generator.  In the AEP initial decision,  which the Commission affirmed summarily, see 88 FERC at  61,439-40, the administrative law judge (ALJ) approved the  amount of production plant investment that American Electric Power Service Corporation (AEPSC) allocated to reactive  power production and sought to recover through the reactive  power charge.  AEPSC divided its charge into three components:  "(1) the generator and its exciter, (2) accessory electric equipment that supports the operation of the generatorexciter, and (3) the remaining total production investment  required to provide real power and operate the exciter."  80  FERC at 65,074.  Although AEPSC omitted its investment in  turbines from its generator and exciter costs, the ALJ recognized its turbine investment as a legitimate cost, see id. at  65,076-77, and therefore included turbine costs in the residual  category of "the remaining total production investment required to provide real power and operate the exciter," id. at  65,074, which the ALJ labeled "Other Power Production  Investment."8 Id. at 65,079-80.  FERC's allowance of recovery of turbine costs in AEP and its failure to explain its  disallowance of the Southern Companies' turbine costs requires us to remand to FERC for reconsideration in light of  its holding in AEP.

17
As the Commission points out, however, its inclusion of  turbine costs in AEP does not necessarily mean it must adopt  the Southern Companies' method of calculation.  See Brief of  Commission at 29, 35.  The petitioners use "a relatively large  allocation of one component (the turbine) to serve as a proxy  for the amount of [the] other production plant that is attributable to reactive power production" compared to the "smaller  allocation of all components of the other production plant"  approved in AEP.  Brief of Petitioners at 31 n.18 (emphasis  in original).  While they insist that the end result of their  methodology is "virtually identical" to that obtained with  AEPSC's methodology, see id. at 33-34, we leave that determination to FERC on remand.

18
Although we also remand FERC's denial of heating loss  recovery, the Commission's rejection of the Southern Companies' heating loss cost calculations survives our review under  the APA.  It disallowed recovery because the Southern Companies' calculations rested on their base-case load flow study  which the Commission found flawed.  The flaw, according to  the Commission, resulted from the measurement of VAR  output at peak operating conditions instead of normal conditions.  See 80 FERC at 62,085.  The Southern Companies'  own witness testified that they would not operate at the level  used in the calculations.9  See JA 237-39, 241-42.  The  Commission thus determined that the petitioners' calculations  did not accurately quantify their heating loss costs.  See 82  FERC at 61,612;  80 FERC at 62,086.  Although they seek to  recast FERC's denial as based on their choice of methodology, that is, the load flow study, and not on their calculations,  we conclude that the Commission rejected, correctly, their  calculations associated with heating loss costs.  On remand,  FERC should allow the Southern Companies to recalculate  the costs associated with heating loss.

19
The Commission further concluded that the heating loss  costs should not even be reflected in the proposed rates. According to FERC, the fuel adjustment clause allows for  compensation for heating loss and the Southern Companies  failed to explain why the clause did not cover the heating loss component.  The Southern Companies, however, maintained  that their revenue-crediting mechanism prevented double recovery and also avoided subsidy of certain customers' rates  by other customers.  But it was the Commission that failed to  explain its rejection of the revenue-crediting mechanism.  See  82 FERC at 61,612.  Thus, FERC should reconsider whether  all heating loss costs are recovered through the fuel adjustment clause and whether the revenue-crediting mechanism  prevents double recovery of those costs that are recovered  through the fuel adjustment clause.  Assuming FERC's reconsideration of the petitioners' revenue-crediting mechanism  discloses unrecovered10 heating loss costs, FERC should allow  the Southern Companies to adjust the rate accordingly so  that the costs are recovered.

20
For the foregoing reasons, we grant the petition for review  and remand to the Commission for reconsideration of the  turbine assembly costs in light of its holding in American  Electric Power Service Corp., 80 FERC p 63,006 (1997), aff'd  in relevant part, 88 FERC p 61,141 (1999).  The Commission  should also reconsider whether the Southern Companies incur  unrecovered heating loss costs or heating loss costs that could  be more equitably recovered.

21
So ordered.

Notes:

1
 The City filed an intervenor brief in support of FERC's decisions.

2
 See also Joint Appendix (JA) 180 (testimony of FERC staff  member) ("Producing or absorbing reactive power at a generator  results in real power heating losses in the generator and [this]  heating loss requires that fuel be burned [and] causes a portion of  the real capacity of [sic] generator to be consumed producing the  heating loss.").

3
 They identified the (1) exciter, (2) exciter cooling system, (3)  generator stator, (4) rotor, (5) turbine assembly and (6) step-up  transformers.  See 80 FERC at 62,083.

4
 Turbines are mechanical devices with fan-like blades that rotate  when steam, for example, is forced though them.  The resulting  mechanical energy powers a connected instrument like a generator  (or, more specifically, a generator's exciter):  "The turbine produces  the mechanical [or real] power to turn the generator, which, in turn,  produces both real and reactive power."  80 FERC at 62,090 n.65;see 82 FERC at 61,611.  A turbine is essential to the production of  reactive power.  See JA 212-13 (testimony of petitioners' witness)  ("Without the turbine, there would be no production of real or  reactive power[;]  the exciter is driven by the rotor and turbine  assembly, and thus that equipment is directly involved in the  production of reactive power.").

5
 The turbine assembly is "the device [or motor] that turns the  exciter within the magnetic field" and includes "all of the equipment  that is on the same shaft," described as "a lot of equipment."  See  JA 248-49 (testimony of petitioners' witness).  "Turbine assembly"  is used interchangeably with "turbine(s)," see, e.g., 80 FERC at  62,091;  Brief of Commission at 17-18, and there is "not generally" a  difference between the two terms.  JA 248.

6
 As the Commission notes, the Southern Companies do not use  these self-powered generators.  See Brief of Commission at 7 n.2.

7
 The Southern Companies submitted the actual meter readings  showing the system's total MVAR production for 1991 and the  "Reactive Power Effects on Southern Company Generators," JA  425.  The total MVAR production was greater than they had  estimated.  See id. at 419-20, 423 (5897 MVARs versus 4954  MVARs).

8
 In brief FERC disputes that it allowed recovery of turbine costs  in AEP.  See Brief of Commission at 34-35.  In AEP, however,  FERC allowed recovery of "the remaining total production investment required to provide real power to operate the exciter."  80  FERC at 65,074.  AEPSC incurred costs for investment in turbines, see id. at 65,077, and the turbines provide real power to  operate the exciter.  See supra notes 4 and 5.  The investment in  turbines was not included in the first two categories, see 80 FERC  at 65,076-78, but was instead part of AEPSC's third category of  recoverable costs.  See id. at 65,079-80.

9
 Before us the Commission cites only the flaw it found with the  base-case study, see Brief of Commission at 36-37;  in its original  order, however, the Commission found the transaction-case study  flawed because it did not accurately reflect "the benefits and  burdens of its generators in response to the subject transactions."80 FERC at 62,085;  see p. 598 supra.

10
 Even if the costs are already recovered, the Commission should  consider if it is more appropriate to allow recovery through the  proposed rates (with appropriate revenue-credits), that is, if the  rates properly allocate costs among consumers.