State Corp. Commission of KS v. FERC , 876 F.3d 332 ( 2017 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 11, 2017 Decided November 28, 2017
No. 15-1447
STATE CORPORATION COMMISSION OF THE STATE OF KANSAS,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
MIDCONTINENT INDEPENDENT SYSTEM OPERATOR, INC., ET
AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
John P. Coyle argued the cause for petitioner. With him
on the briefs was Amy E. McDonnell.
Beth G. Pacella, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Robert H. Solomon, Solicitor, and
Lona T. Perry, Deputy Solicitor.
Benjamin C. Mizer, Principal Deputy Assistant Attorney
General at the time the brief was filed, U.S. Department of
Justice, Charles W. Scarborough, and Mark W. Pennak,
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Attorneys, were on the brief for intervenor Western Area Power
Administration in support of respondent. Jeffrey A. Clair,
Attorney, U.S. Department of Justice, entered an appearance.
Jeffrey C. Genzer, Eli D. Eilbott, William D. Booth,
Valerie L. Green, and Thomas L. Blackburn were on the joint
brief of intervenors Southwest Power Pool, Inc., et al. in
support of respondent. Natalie M. Karas entered an
appearance.
Before: KAVANAUGH and MILLETT, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: In 1996, to facilitate the
unbundling of wholesale power generation from power
transmission and thus the development of competitive
wholesale power markets, the Federal Energy Regulatory
Commission required that power utilities under its jurisdiction
adopt open access transmission tariffs. Promoting Wholesale
Competition Through Open Access Non-Discriminatory
Transmission Services by Public Utilities, 61 Fed. Reg. 21,540,
21,541 (1996). FERC also encouraged these utilities to create
regional transmission organizations (“RTOs”) to operate
transmission facilities on behalf of their members. Braintree
Elec. Light Dep’t v. FERC, 550 F.3d 6, 8 (D.C. Cir. 2008).
This case involves the terms on which an RTO and a set of
utilities joined forces. The Southwest Power Pool (“SPP”) is
an RTO that at the time of the proposed integration operated
facilities in eight states encompassing nearly 50,000 miles of
transmission lines. Its members included Kansas utilities. The
State Corporation Commission of the State of Kansas
(“Kansas”) is the petitioner here, representing Kansas power
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consumers. During the period in question, the Integrated
System was an adjacent, 9,500-mile transmission system in the
Upper Great Plains Region. SPP and three of the Integrated
System entities, known here as the IS Parties, negotiated an
integration of their facilities to take effect on October 1, 2015.
Pursuant to § 205 of the Federal Power Act, 16 U.S.C.
§ 824d, SPP filed with FERC revisions to its tariff that reflected
the parties’ agreement. Over the objections of Kansas, FERC
approved the revisions as just, reasonable, and not unduly
discriminatory, Sw. Power Pool, Inc., 149 FERC ¶ 61,113(2014) (“Order”), and affirmed the Order on rehearing, Sw.
Power Pool, Inc., 153 FERC ¶ 61,051 (2015) (“Rehearing
Order”).
Kansas’s objections are in substance twofold. First, it
claims that the Commission wrongly accepted a rate structure
that disadvantaged the SPP participants. Second, it claims that
in accepting SPP’s calculation of the benefits that the merger
afforded SPP, the Commission unreasonably accepted data
challenged by Kansas. Thus FERC’s decision was not
supported by substantial evidence, 16 U.S.C. § 825l (b), or
reasoned decision-making, 5 U.S.C. § 706(2), see also Motor
Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 43 (1983), and was further marred by FERC’s failure to
conduct an evidentiary hearing in the face of factual disputes
that Kansas claims to have required one. We deny the petition
for review.
* * *
Cost allocation. Kansas objects to the way the parties
agreed to allocate the costs of “legacy” facilities. Here these
are facilities with a “need by” date before October 1, 2015, or,
approximately, facilities planned and constructed by the
proposed time of the SPP-IS Parties’ joinder. The tariff
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approved by FERC, reflecting the agreement of the two groups,
provided that these facilities would continue to be paid for by
the utilities in whichever pre-integration entity—SPP or the IS
Parties—had planned and constructed them.
Kansas argues, in effect, that by accepting these provisions
SPP got taken for a ride. It forewent the benefits potentially
afforded by an alternative allocation system, which would have
charged legacy costs in the SPP region to the IS Parties as well.
By Kansas’s expert’s calculations, these foregone benefits
swamped SPP’s estimate of the transaction’s benefits to SPP—
$334 million over ten years. Joint Appendix (“J.A.”) 341-43,
360-61. Kansas’s expert estimates that SPP would have
received another $475 million in revenue under a system in
which the IS Parties were required to pay for use of SPP legacy
facilities. Id. Kansas thus argues that SPP’s choice and the
Commission’s approval make the deal a loser for SPP, and also
violate controlling norms of ratemaking.
In upholding the tariff, FERC characterized the integrating
parties’ plan as “a practical, reciprocal cost allocation approach
for facilities in service before the integration date. . . . [C]osts
for such legacy facilities in the Integrated System region will
be allocated to the Integrated System Parties; likewise, costs for
legacy facilities in the pre-integration SPP region will be
allocated to the pre-integration SPP membership.” Rehearing
Order at P 41. It reasoned that such allocation methods were
just and reasonable because they “reflect prior investment
decisions and the fact that existing facilities were built
principally to support load within the sub-region.” Id. FERC’s
decision to approve similar arrangements has withstood
judicial review in analogous circumstances. See Illinois
Commerce Comm’n v. FERC, 576 F.3d 470, 474 (7th Cir.
2009).
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FERC accurately described the agreement as reciprocal. It
would be difficult to label it otherwise, as the agreement and
FERC’s approval assigned each side’s legacy costs to the
power consumers in that side. The reciprocity of the
arrangement alone undermines Kansas’s expert’s idea that SPP
left $475 million lying on the table—a point FERC emphasized
in favoring SPP’s expert testimony on this point over that of
Kansas’s expert. Rehearing Order P 41. Kansas never suggests
any reason to believe that the IS Parties would have agreed to
share SPP members’ legacy costs without demanding that SPP
members share the IS Parties’ legacy costs, and perhaps give
other concessions as well.
We note for purposes of clarity that even if we assumed (as
Kansas does) that an arrangement giving SPP the extra $475
million was available, SPP’s failure to achieve that
arrangement would not make the actual transaction a negative
for SPP—only less positive than it might have been. Kansas’s
hypothetical $475 million is an opportunity cost, not an out-of-
pocket cost.
Of course, an arrangement could be reciprocal and yet
violate critical norms of ratemaking. So Kansas contends, in a
series of attacks that have in common a reliance on Kansas’s
misreading of various precedents. First, it points to our
decision in FirstEnergy Serv. Co. v. FERC, 758 F.3d 346, 355
(D.C. Cir. 2014), characterizing it as a FERC (and Circuit)
precedent “requiring allocation of transmission costs based on
benefits where a utility joins a regional transmission
organization.” But FirstEnergy provides no basis for saying
that FERC imposed any such requirement or that we endorsed
its doing so. The complaining energy system had entered an
RTO (PJM) without challenge to the latter’s pre-existing
provision allocating certain costs to a new entrant, including
facilities based on investment decisions made before the
joinder. Id. at 351, 355. It then sought a finding from the
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Commission that PJM’s rate structure would be unjust and
unreasonable unless the entrant were exempted from that
provision. In a decision applying § 206, 16 U.S.C. § 824e,
under which the complaining party has the burden to show that
the rates challenged are unjust and unreasonable, 758 F.3d at
353, FERC rejected FirstEnergy’s position, finding that the
costs in question “related to the benefits” of joinder, and that,
having elected to proceed in the face of those costs, FirstEnergy
could not now claim that the cost allocation methodology
“created a barrier to entry,” id. at 351 (internal quotation marks
omitted). Indeed, more generally, FERC had urged upon the
merging parties the desirability of a negotiated cost allocation
made in light of what each party had to offer. Am. Transmission
Sys., Inc. FirstEnergy Serv. Co., 129 FERC ¶ 61,249, P 114
(2009). FERC ultimately accepted the outcome resulting from
whatever negotiations occurred, exactly as it did here, and later
refused to upset that outcome in the § 206 proceeding reviewed
in FirstEnergy, a refusal that we affirmed.
Kansas also claims that SPP-specific precedent calls for
requiring a new entrant to share the costs of SPP’s legacy
facilities and that failure to follow that precedent here renders
the resulting rate unduly discriminatory. Of course, a
difference in rate design can be discriminatory only if the
contested design “has different effects on similarly situated
customers,” and even then only if the differences cannot be
justified. Transmission Agency of N. Cal. v. FERC, 628 F.3d
538, 549 (D.C. Cir. 2010); Ark. Elec. Energy Consumers v.
FERC, 290 F.3d 362, 367 (D.C. Cir. 2002).
The precedent invoked is SPP’s apparent former practice
of requiring new entrants to pay a share of SPP’s legacy costs
on entry. But here the Commission pointed not only to its
general expectation that a “new entrant proposal will be the
result of a collaborative effort,” Rehearing Order at P 40, but
also to characteristics of this merger that Kansas does not claim
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to have been matched in the prior entries to SPP: increased
efficiency and reliability, improvement in SPP’s dispatch of
power on its western edge (the part most directly affected by
inclusion of the IS Parties), and a lower price of energy by
virtue of reduced needs for generation curtailment. Id. at P 21.
We see no basis for a claim of undue discrimination.
Assessment of benefits from the merger. Apart from
mistakenly trying to reevaluate the merger transaction on the
basis of an alternative rate allocation that it has not shown to
have been plausible, Kansas claims a quite independent flaw in
the Commission’s estimate of a $334 million benefit to SPP.
As its expert did before the Commission, J.A. 357-60, Kansas
protests SPP’s reliance on a study commissioned by the IS
Parties and performed by the Brattle Group. Kansas appears to
assert two objections: that SPP didn’t perform the study itself
and that Kansas never had an opportunity to verify its accuracy.
As to the first, it is enough that, although SPP lacked direct
access to the entire study, its staff had reviewed the study’s
“input assumptions and the results for reasonability,” J.A. 87,
and after conversations with Brattle “was confident relying on
the information provided by Brattle and using [its data] for its
calculation” of the probable benefits, id. 389.
Kansas’s claim of lack of access to the study is somewhat
exaggerated. Kansas in fact had access to a redacted, electronic
version even before the start of the FERC proceedings involved
here. See Respondent’s Br. at 24 n.5 (giving the URL). And it
had access to some publicly unavailable confidential data. J.A.
389 (alluding to data in confidential attachment). At no point
does Kansas pinpoint either a special reason to question the
Brattle Group study, or some debilitating feature of the
redaction.
In any event, even if one omitted the SPP benefits that were
substantiated by the Brattle study, the integration would result
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in a substantial net benefit for SPP members—over $61 million
over ten years.
Evidentiary hearing. Finally, Kansas challenges FERC’s
decision not to hold an evidentiary hearing on the disputed
features of the record underlying its approval of the merger.
But the presence of disputed factual issues does not ipso facto
require an evidentiary hearing where the Commission can
adequately resolve the issues without such a hearing.
Blumenthal v. FERC, 613 F.3d 1142, 1144 (D.C. Cir. 2010).
We review FERC’s decision not to hold an evidentiary hearing
only for abuse of discretion. Minisink Residents for Envtl. Pres.
& Safety v. FERC, 762 F.3d 97, 114 (D.C. Cir. 2014).
FERC did order a “trial-type” hearing for issues that it
believed it could not resolve in the absence of a hearing. Order
at P 17; Respondent’s Br. at 27. But, for the challenges at issue
here, FERC concluded that a hearing was unwarranted.
Rehearing Order at P 20-21.
In disputing the benefits of the integration proposal and
the validity of SPP’s cost/benefit analysis, Kansas had an
opportunity to present its contrary expert testimony as part of
the written record. Kansas asserts that its expert’s testimony
was “simply ignored” by FERC. Not true. As the above
discussion demonstrates, the testimony was considered, but
rejected on the merits.
And while Kansas takes issue with SPP’s results, it points
to no vulnerability in the testimony of SPP’s expert witness that
could be better resolved with cross-examination than with
analysis of the written testimony itself in light of all the
information before the Commission. We therefore find no
abuse of FERC’s discretion. See Blumenthal, 613 F.3d at 1145.
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* * *
The petition for review is
Denied.