Court Opinion

ID: 9488124
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:36:57.237238+00
Date Added: 2024-06-11T17:52:42.441274
License: Public Domain

WALD, Circuit Judge,
dissenting:
Mindful of significant deference owed the Commission on the inferences to be drawn from disputed evidence, I nonetheless remain deeply troubled by the Commission’s cursory treatment of a substantial amount of record evidence supporting the Power Agency’s charges that Indiana Michigan entered into long-term coal supply contracts with AMAX at inflated prices in order to induce AMAX to purchase the Price River mines at their book *257value. Thus, I would remand the ease to the Commission for more adequate explanation of what I consider to be glaring pieces of evidence that point in the direction of the alleged “sweetened” contracts.
The gravamen of the Power Agency’s charge is that Indiana Michigan included “sweeteners” in its long-term coal supply contracts with AMAX — and passed these costs along to ratepayers — in order to induce AMAX to buy the Price River mines at their book value. I first discuss the legal standard governing the alleged sweeteners. The Power Agency argues that such sweeteners, if proved, would violate the statutory requirement that rates be “just and reasonable,” Federal Power Act § 205, 16 U.S.C. § 824d (1988), FERC’s accounting standards, and the McDowell settlement. The majority concludes that while the alleged sweeteners would violate FERC’s accounting regulations, and possibly the McDowell settlement, Majority Opinion (“Maj. op.”) at 256, they are completely irrelevant to the Power Agency’s statutory challenge: “if the market price study demonstrates that the coal contracts are reasonably priced our task is at an end, regardless of whether the contract rate includes a premium of some kind.” Maj. op. at 252. In so doing, the majority takes the astonishing step of announcing an interpretation of the Commission’s organic statute— with implications far beyond this case — that the Commission itself declined to adopt, turning the principle of deference to administrative agencies on its' head. “[A] reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency.” Securities & Exchange Comm. v. Chenery Corp., 332 U.S. 194, 196, 67 S.Ct. 1575, 1577, 91 L.Ed. 1995 (1947). By the same token, courts cannot use the review of an agency decision as an occasion to announce a rule of law not adopted by the Commission. Under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), unless we are dealing with the plain meaning of a statute, which we are plainly not,1 we must defer to the agency’s own reasonable interpretation, not announce our own. See 467 U.S. at 843, 104 S.Ct. at 2781-82.
Contrary to the majority, I am unable to .discern from the Commission’s opinion the position that the market price test would trump actual evidence of the alleged sweeteners. The logic of the Commission’s opinion points in completely the opposite direction: the Commission determined that Indiana Michigan’s coal purchase price withstood the Power Agency’s statutory challenge only on the basis of its findings that that price passed both the market price and prudence test. See, e.g., 65 F.E.R.C. ¶ 61,087 at 61,526 (the “contract price was not excessive when considered under either of these standards”) (emphasis added). Thus, although the Commission undoubtedly placed great reliance on the market test, that reliance was never exclusive. Indeed, the Commission explained its understanding of the interrelation of the two tests quite clearly: “[I]f the price paid by the utility falls within the range of market prices, for comparable goods ..., it becomes especially difficult for the complainants to demonstrate imprudence.” 62 F.E.R.C. ¶ 61,189 at 62,238 (emphasis added). It does not, however, per the Commission, become impossible to demonstrate imprudence. The Commission’s prudence standard, in turn, is not mere surplusage; under settled Commission precedent, that standard is a direct interpretation of the statutory “just and reasonable” requirement. See Michigan Power & Light Co., 11 F.E.R.C. ¶ 61,312 at 61,644-45; see also Kentucky Utilities Co., 62 F.E.R.C. ¶ 61,097 at 61,197. Under the approach taken by the Commission in its opinion, then, Indiana Michigan’s coal purchase contracts cannot pass the statutory “just and *258reasonable” standard without passing the prudence test.2
Indeed, the Commission’s own defense of its decision in briefs and at argument contradicts the majority’s reading. At oral argument, Commission counsel repeatedly declined to take the position now adopted by the majority, instead characterizing the charges as “very, very serious.” The court asked Commission counsel point blank:
If we had absolute gold-plate proof that ... there was a sweetener in this particular deal ... but [the final price] somehow satisfie[d] the market price ... would there be any violation of ratemaking principles?
In response, as one member of the panel noted, counsel “filibuster[ed],” and, in the end, confirmed that the Commission required the contract prices to pass two separate tests — the prudence test and the market price study — before deeming them “just and reasonable”:
You’ve got ... one standard which basically did not in itself involve a market price analysis. And you know it’s a loose standard. The Commission used that. It looked at ... the evidence of a sweetener. And then you use market price analysis in that context as corroboration.
In sum, without considering whether the Commission is required to hold utilities to the prudence standard when it determines whether its rates are “just and reasonable,”3 it is enough for the moment that the Commission does hold utilities to this standard. It is, accordingly, the application of this standard to Indiana Michigan that we must review.
The critical question, then, is the factual one whether the long-term contracts included premiums to induce AMAX to complete the Price River mines purchase at Indiana Michigan’s asking price.4 The Commission points to selective evidence in the record to conclude that the only “premiums” involved in this transaction were premiums commonly included in long-term coal supply contracts over the spot market. To reach this conclusion, however, the Commission turns a blind eye to a great deal of evidence that the “premiums” in the long-term contracts were, in fact, designed to offset the inflated cost of the Price River mines.5
First, I find unconvincing the Commission’s treatment of AMAX’s own assessment of the transactions in its Management Presentation to the board. AMAX’s presentation, based on “detailed feasibility studies and a comprehensive market evaluation of *259the Price River properties,” 65 F.E.R.C. ¶ 61,087 at 61,526, concludes that the Price River mines component of the transaction has a negative net present value — that the expected income is less than half of the cost. Memorandum from J.A. Olsen to AMAX Management, Attachment 1, at 1 (September 3, 1985) (“Management Presentation”), reprinted in 2 Joint Appendix (“J.A.”) 322, at 323. The presentation nevertheless recommends to AMAX’s board that it enter the linked Price River mines and coal supply transactions on the basis of its “Summary of Transactions,” in which it offsets the negative value of the Price River mines purchase with the positive present value of the long-term coal supply contracts. Id.
The Commission discounts this negative valuation of the Price River mines by AMAX’s own management by noting that the negative valuation “reflects only 20 years of cash flow from the Price River mining operation, even though the evidence shows that the Price River reserve would support more than 35 years of mining. This fact led AMAX to conclude that the Price River properties contained ‘significant upside potential’, so much so that AMAX even considered mining a second seam at Price River.” 65 F.E.R.C. ¶ 61,087 at 61,526 n. 18.
This reading of AMAX’s valuation equation is a strained one indeed. In the course of its analysis of the transactions, AMAX’s Management Presentation notes the possibilities mentioned by the Commission — that production could continue longer and more coal be exploited — and states that the projected earnings from the mines “could be surpassed.” But it also expressly finds it “conceivable ... that [AMAX] could be unsuccessful in its attempts to profitably reactivate the Price River Mine,” ie., it could end up with a totally worthless mine. Management Presentation at 4, reprinted in 2 J.A. at 326. Thus, AMAX recognized that, like any business investment, this one could do better or worse than expected. In the end, however, AMAX chose those “[projected operating costs and realizations” for the mines that it “felt to be realistic” to arrive at the final values presented in its “Summary of Transactions.” Id. And in this final analysis, AMAX concluded that the Price River mines purchase had a negative value. FERC’s suggestion that AMAX actually decided to consummate the transaction on the basis of an unquantified and speculative “upside potential” that might bring the mines marginally closer to the black defies common sense.6 The Management Presentation’s recommendation that AMAX enter the transaction is based on the final analysis presented in the “Summary,” under which the Price River Mines component of the transaction has a negative present value, offset only by the positive present value of the Coal Supply Agreements. It takes no law and economies maven to conclude that a business would not enter into a transaction assessed at a negative value absent countervailing benefits. In this case, the Power Agency argues that it was premiums in the linked, long-term contracts that made the transaction worthwhile, and the Commission has provided no persuasive alternative.
Second, FERC’s response to statements in the record made by certain of the negotiators of the deal involving the Price River Mines and the coal supply contracts is equally discomfiting. Internal AMAX documents stating in no uncertain terms that the long-term coal supply contracts are set at a level to offset the cost of the Price River mines purchase pepper the record. One AMAX review, for instance, identifies possible questions and answers for the presentation of the proposal to the Board. In response to an anticipated question that the price of the mining property “seems awfully high,” the memo suggests the following answer:
*260First, the $175 million is to be paid over 20 years, so that its present value is near $50 million — a price not unreasonable when compared with other Utah properties that have sold recently. Second, insofar as AEP[7] is concerned, this transaction has two aspects, the Utah acquisition and the coal supply agreements; any change in value for one would therefore be reflected in an offsetting change in the value for the other. Thus, a lower price for Utah would result in lower contract pricing.
Memorandum from R.B. Meschke to W.R. Wahl, Attachment 2, at 1 (September 26, 1985), reprinted in 2 J.A. 361, at 368 (emphasis added).
The Commission does not even try to explain away this express understanding by AMAX’s management officials that the price of the mines and the long-term coal supply contracts move in tandem. Instead, it simply dismisses the memorandum as the “statement of only one negotiator,” which can “hardly [be] dispositive.” FERC Brief at 37. Though certainly not “dispositive,” this memorandum designed for the board’s understanding of the deal deserves more than the Commission’s cursory dismissal when there is an absence of any evidence advancing a different explanation.
Indeed, the Power Agency has pointed to not one but a string of internal analyses AMAX prepared over the course of negotiations with Indiana Michigan, all characterizing the long-term contract “premiums” as offsets to the cost of the Price River Mines, rather than the “premiums” for long-term coal supplies suggested by the Commission.8 AMAX’s “Mine Feasibility Study” of September, 1985, says:
AEP recognizes that on a fair market value basis [Price River Mines] worth considerably less than $140 million; therefore willing to include long term contracts as an offset to the consideration received from a purchase.
Memorandum from J.A. Olsen to W.R. Wahl, Attachment 1, at 1 (September 26, 1985), reprinted in 2 J.A. at 375.9
AMAX’s review of December, 1985, states: AEP would pay AMAX a permium [sic] on both midwest and compliance coal to cover the cost of the Price River lease. Premium payments and lease payments would be equated on a present value basis.
Memorandum from J.E. Schroder to R.B. Meschke at 1 (December 4, 1984), reprinted in 2 J.A. at 437.
And AMAX’s transaction analysis of June, 1984, explains:
Coal Prices will be structured to include premium sufficient to reimburse AMAX and South East for plant, equipment, and reserve lease payments.
Memorandum from D.E. Coovert to R.B. Detty at 4 (June 1,1984), reprinted in 2 J.A. at 417.
The Commission’s only reply to this evidence is that “there is nothing at all unusual about a business anticipating profits from one of its transactions to pay for another transaction.” FERC Brief at 40. But the cited memoranda suggest far more than AMAX’s anticipation that “profits from one of its transactions [will] pay for another”; they state that the deal is being “structured” to accomplish this result through the use of premiums. These repeated and uncontra-dicted statements that the coal supply “premiums” are designed to offset the cost of the Price River Mine Purchase demand more than the casual attention given them by the Commission.
*261Finally, FERC’s finding that all of the “premiums” were simply long-term premiums is flatly contradicted by concrete record evidence. The Commission’s decision “find[s]” categorically “that the ‘premiums’ or ‘net revenues’ mentioned in the AMAX documents simply refer to how much more money AMAX would earn by selling the coal to [Indiana Michigan] on a long-term contract basis rather than selling the coal on the spot market.” 65 F.E.R.C. ¶ 61,087 at 61,-527.
As to some of these “premiums,” however, the Commission is clearly wrong. The “ ‘premiums’ or ‘net revenues’ mentioned in the AMAX documents” were included in long-term contracts at Breed, Tanners Creek 1-3, and Tanners Creek 4. Although the Power Agency does not, in the end, challenge the pricing at Tanners Creek 1-3, it has pointed to record evidence that for these contracts AMAX expressly calculated the “net revenue” — the premium — from the baseline of a long-term contract. Under the mutual arrangements for the Tanners Creek 1-3 long-term coal supply contracts, AMAX buys coal from a third party on a long-term contract and then turns around and sells it to Indiana Michigan on a long-term contract. See Management Presentation at 6-7, reprinted in J.A. at 328-29. The calculated premium is between these two long-term contracts and most definitely not between a long-term and a spot market contract. See id.10
FERC does not dispute this analysis of the premiums in the Tanners Creek 1-3 contracts, but provides the “simple answer” that the Tanner’s 1-3 premiums are “irrelevant” because those contracts are not challenged by the Power Agency. FERC Brief at 39. Though the Tanners Creek 1-3 contracts are assuredly not “directly at issue,” id., they are part of the same transaction between AMAX and Indiana Michigan and — in combination with the other evidence — strongly suggest inferences about the intent underlying the related “premiums” in the Breed and Tanners Creek 4 contracts. The Commission’s disposal of this uncontradicted evidence that the premiums in the Tanners Creeks 1-3 contracts were not long-term premiums is far too breezy.
As we have often repeated, “[t]he substan-tiality of evidence must take into account whatever in the record fairly detracts from its weight.” Universal Camera Corp. v. NLRB, 340 U.S. 474, 71 S.Ct. 456, 95 L.Ed. 456 (1951). In concluding that the only “premiums” in the deal between Indiana Michigan and AMAX were premiums for long-term coal, the Commission has failed utterly to take into account large portions of the record “detracting] from [the] weight” of this conclusion and pointing strongly toward a contrary conclusion that the deal did indeed involve inducement premiums for the sale of the mines as alleged by the Power Agency. Given the force of this counter evidence, I believe the Commission had an obligation to answer it directly and, if it could not, to change its own result and hold for the Power Agency. On the ground that the record in its present state does not in the end provide the “substantial evidence” necessary to validate the Commission’s decision, I respectfully dissent.

. The majority does not contend that the statutory requirement that rates be "just and reasonable” plainly means that a market price study is the final arbiter of rates.

. The Commission's application of the prudence standard, in turn, reveals that proof of the alleged sweeteners would violate that standard. Although the Commission mentions that Indiana Michigan's “intentions'' in setting the coal prices are not dispositive to the prudence analysis, 65 F.E.R.C. ¶ 61,087 at 61,527 n. 21, it devotes considerable energy to explaining that the repeated references by AMAX to “premiums” are “long-term” premiums rather than the inducement payments alleged by the Power Agency. This exercise, of course, would be entirely unnecessary if the alleged premiums met the prudence standard.

. Although we have consistently accorded the Commission a high degree of deference in the economic modelling underlying its rates, see Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287-88, 88 L.Ed. 333 (1944), I have found no decision by the Commission or any court in which a market price analysis was found to trump actual evidence that wholly extraneous costs were allocated to a utility's supply purchase. When the 10th Circuit affirmed FERC's use of the market-price standard to evaluate whether transactions between affiliates are arms-length transactions, it did so only on "the record before us” in which the Administrative Law Judge "found ... no evidence suggesting anything improper.” Public Service Co. v. FERC, 832 F.2d 1201, 1213-14 (10th Cir.1987) (internal quotations omitted).

. Of course, this factual question is equally critical to the majority’s disposition of the Power Agency's challenges based on FERC's accounting standards and the McDowell settlement.

. At the time of the Commission’s decision, some of the evidence was under seal. The Commission assured that it "reviewed protected portions of the record and f[ound] that they do not advance the Power Agency's cause,” 65 F.E.R.C. ¶ 61,087 at 61,525. I realize that constraints on disclosure may have prevented the Commission from fully discussing some of the evidence identified by the Power Agency. Accordingly, as detailed below, I consider the Commission's discussion in briefs as well as in its published decision. (The relevant information has since been made public, and the Commission faced no constraints on its disclosure in brief.)

. Indeed, FERC identifies as one source of the possible "upside potential” the fact that the mines could produce for'35 years rather than 20. Even if the projected income stream from year 20 to year 35 were included, it would not raise the value of the mines above their cost. The present value of the income from those later years of production would be significantly less than the present value of the first 20 years of production because it would be far more heavily discounted. As the present value of the first 20 years of income is itself less than half the present value of the cost of the mines ($26.7 million of $55.2 million in pre-tax dollars), inclusion of the next 15 years could not even approach making up the deficit.

. AEP is the parent company of Indiana Michigan.

. Some of these documents describe earlier versions of the deal, but describe the same fundamental transactions. No party has suggested that the nature of the premiums shifted over the course of the negotiations.

. FERC responds to this statement by singling out the assertion that the properties are "worth considerably less than $140 million,” and con-eluding that this assertion does not support the conclusion that the properties are overpriced "because there is no indication whether that figure was premised on a direct sale, lease, or other financial arrangement." FERC Brief at 36. This response sidesteps entirely the point of the statement — made after the transaction was in its final form — which is that because the properties are overpriced, Indiana Michigan will include the long-term contracts.

. Further, when the total tonnage for Tanners Creek 1-3 changed from 600,000 to 800,000, AMAX stated: "On our calculation we must figure what we have to charge for this coal in order to obtain the same value that we previously calculated at 600,000." Memorandum from P.M. Garson to T.M. Blangiardo and R.B. Meschke at 1 (March 8, 1985), reprinted in J.A. at 474. This statement that the premium would remain constant regardless of the amount of coal delivered conflicts with FERC's conclusion that the premium is long-term v. spot market premium.