Dynegy Midwest Generation, Inc v. FERC ( 2011 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 3, 2010 Decided February 11, 2011
No. 09-1306
DYNEGY MIDWEST GENERATION, INC,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
FIRSTENERGY SOLUTIONS CORP., ET AL.,
INTERVENORS
Consolidated with 09-1308
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
James K. Mitchell and Ashley C. Parrish argued the cause
for petitioners. With them on the briefs was Neil L. Levy. A.
Karen Hill and Michael J. Rustum entered appearances.
Lona T. Perry, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Thomas R. Sheets, General
Counsel, and Robert H. Solomon, Solicitor.
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Jeffrey G. DiSciullo, Wendy N. Reed, and David S.
Berman were on the brief for intervenors Midwest ISO
Transmission Owners in support of respondent.
Before: SENTELLE, Chief Judge, BROWN, Circuit Judge,
and WILLIAMS, Senior Circuit Judge.
Opinion for the court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: The petitioners own
and operate power generation facilities that are part of the
Midwest Independent System Operator (“ISO”), a regional
transmission organization. The generators supply two kinds
of power: (1) “real power” of the sort we are all familiar with
and use for running motors, lighting lamps, etc.; and (2)
“reactive power,” a support service used to maintain adequate
voltages to transmit real power, and to prevent damage such
as overheating of generators and motors. See FERC STAFF
REPORT, AD05-1-000, PRINCIPLES FOR EFFICIENT AND
RELIABLE REACTIVE POWER SUPPLY AND CONSUMPTION 17-
20 (2005), available at
http://www.ferc.gov/eventcalendar/files/20050310144430-02-
04-05-reactive-power.pdf. Inadequacies in reactive power can
cause voltage collapse and blackouts. Id. at 20. Real power is
sold to regular customers; reactive power is sold to the
Midwest ISO and the cost passed on to transmission owners
and operators. Midwest ISO Open Access Transmission and
Energy Markets Tariff, Schedule 2, III. A & C.
Before the orders in dispute here, generators within the
Midwest ISO were compensated for all reactive power with
cost-based rates, pursuant to Schedule 2 of the ISO’s tariff. In
the challenged orders, FERC accepted a tariff amendment
under which any transmission owner could elect an alternative
rule of compensation, Schedule 2-A. Under that schedule, the
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transmission owner would provide no compensation for
reactive power produced within a specified range (the so-
called “deadband” 1). (Transmission owners electing Schedule
2-A would continue to pay for reactive power outside the
deadband, though on a basis somewhat different from that of
Schedule 2.) A transmission owner’s election between the
two schedules would govern its compensation of all
generators in its zone (and, in case of a multi-zone
transmission owner, all its zones), affiliated and unaffiliated
generators alike.
The petitioners challenge the orders. Their primary
contention is that allowance of the Schedule 2-A option was
unduly discriminatory, as it would cause generators in
different zones to be compensated differently, entirely at the
untrammeled choice of each zone’s transmission owners, even
though Midwest ISO generators compete with each other
across zonal borders. Second, they contend that transmission
owners were not authorized to file the new tariff under § 205
of the Federal Power Act (“FPA”), 16 U.S.C. § 824d. We
grant the petitions for review on the first objection but reject
the second.
* * *
Historically, vertically integrated utilities could recover
the costs for providing both real and reactive power through a
single rate charged to customers. In 1996, FERC required
utilities to functionally unbundle their generation and
1
The “deadband” is a range between a 0.95 “leading” power
factor (reflecting the real/reactive ratio when the generator is
consuming reactive power) and a 0.95 “lagging” power factor
(reflecting the real/reactive ratio when the generator is supplying
reactive power). Commission Br. 4-5.
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transmission functions and to provide access to their
transmission grid to customers on a non-discriminatory basis.
See Promoting Wholesale Competition Through Open-Access
Non-Discriminatory Transmission Services by Public
Utilities, Order No. 888, 61 Fed. Reg. 21,540 (May 10, 1996).
The Commission ordered public utilities to offer ancillary
services necessary for a reliable system (including reactive
power supply), required transmission customers to purchase
those services, id. at 21,580–82, and ordered that the rates
paid to generators for reactive power be cost-based, id. at
21,590.
In two orders issued in 2003 and 2004, the Commission
created the opportunity for transmission owners to select
among alternative bases of compensation. First it found that,
as a general matter, a generator should not be compensated for
providing reactive power within a specified range, the
deadband, “since it is only meeting its obligation [to do so].”
See Standardization of Generator Interconnection Agreements
and Procedures, Order No. 2003, 68 Fed. Reg. 49,846 at
49,891 (P 546) (Aug. 19, 2003) (“Order No. 2003”). But the
Commission allowed ISOs and Regional Transmission
Organizations to deviate from this principle. Id. at 49,891 (P
548). On rehearing it made clear that if a transmission owner
continued to pay its own or affiliated generators for reactive
power service, the principle of “comparability” would require
it to pay unaffiliated generators similarly. See
Standardization of Generator Interconnection Agreements
and Procedures, Order No. 2003-A, 69 Fed. Reg. 15,932 at
15,964 (P 416) (Mar. 26, 2004) (“Order No. 2003-A”).
The Midwest ISO is a regional transmission organization
to which many of the public utilities in the Midwest
transferred operational control over their transmission
facilities. Midwest Independent Transmission System
Operator, Inc., 97 FERC ¶ 61,326 (2001). It has designated
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certain transmission pricing zones within its footprint which
generally correspond to the boundaries of the transmission
facilities of each participating transmission owner. Midwest
ISO Transmission Owners, 122 FERC ¶ 61,305, P 1 & n.4
(2008) (“Initial Order”). Transmission rates in different
transmission zones may vary, but for a sale to any purchaser
throughout the Midwest ISO, the transmission rate will be
simply the price for the purchaser’s zone. Id.; Midwest ISO,
84 FERC ¶ 61,231 at 62,166 (1998) (explaining that the single
rate is “based on the costs of the local service area where the
point of delivery is located”).
In October 2007, certain transmission owners in the
Midwest ISO proposed a change in the ISO’s tariff that in
effect exercised the option they believed had been created by
Orders Nos. 2003 and 2003-A. Each transmission owner (or
all transmission owners in a zone in the case of such multiple
owners) could choose between Schedule 2 (cost-based
compensation for all reactive power) and Schedule 2-A (no
compensation for reactive power in the deadband, and
somewhat different compensation for reactive power outside).
Initial Order, P 1. FERC rejected a claim—raised only
secondarily before us—that even if transmission owners in
each zone compensated all the generators in their zone,
affiliated and unaffiliated, on a comparable basis, granting
transmission owners the right to choose would violate the
comparability requirement developed in Orders Nos. 2003 and
2003-A. Midwest ISO Transmission Owners, 129 FERC
¶ 61,041, P 78 (2009) (“Rehearing Order”). It paid virtually
no attention to petitioners’ independent argument that its order
allowed undue discrimination in violation of § 205(b) of the
FPA, see, e.g., Request for Rehearing of Exelon Corporation
at 5-12, treating it as merely a claim that some generators
might be economically disadvantaged. See Rehearing Order,
PP 91-97.
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The petitioners object that comparability and absence of
undue discrimination are not synonymous, and urge us to
declare FERC’s orders to be in violation of § 205(b)’s anti-
discrimination provision, as well as arbitrary and capricious
and unsupported by substantial evidence. 5 U.S.C.
§ 706(2)(A), (E). They also argue that the filing of the tariff
was (quite apart from FERC’s acceptance of it) without legal
foundation.
* * *
Undue discrimination. Before reaching the merits of the
petitioners’ discrimination claim, we must consider FERC’s
objection that the petitioners’ challenge to Schedule 2-A was
an impermissible collateral attack on the rule of comparability
for reactive power tariffs as developed in Orders Nos. 2003
and 2003-A—essentially an assertion that this court lacks
jurisdiction to hear the discrimination claim. FPA § 313(b),
16 U.S.C. § 825l(b) (giving this court jurisdiction only if an
aggrieved party files a petition with the court within 60 days
of the issuance of the order). FERC contends that petitioners
failed to file a timely challenge to Orders Nos. 2003 and
2003-A, which it now views as establishing the proposition
that where “comparability” as defined in those orders is
present, there can be no undue discrimination.
Under § 313(b) the 60-day clock starts running only when
“the agency has decided a question in a manner that
reasonably puts aggrieved parties on notice of the rule’s
content.” Southern Company Services, Inc. v. FERC, 416
F.3d 39, 44–45 (D.C. Cir. 2005) (citing RCA Global
Communications, Inc. v. FCC, 758 F.2d 722, 730 (D.C. Cir.
1985)). A petition is a “collateral attack only if a reasonable
firm in [petitioners’] position would have perceived a very
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substantial risk that the [order] meant what the Commission
now says it meant.” Id. at 45 (internal quotations omitted).
Those criteria are not satisfied here. In its Rehearing
Order, FERC acknowledged that,
prior to this case, the Commission has never evaluated a
proposed tariff provision that allows all generators within
a particular zone in an RTO—affiliated and
unaffiliated—to collect reactive power compensation on
one basis, while all generators in a different zone in the
same RTO collect reactive power compensation on a
different basis.
Rehearing Order, P 71.
Moreover, if Orders Nos. 2003 and 2003-A made it clear
that satisfaction of the comparability requirement within each
zone inherently and automatically meant satisfaction of the
FPA’s anti-discrimination provisions, one would have
expected the Commission to offer us some snippet from the
orders advancing that idea. It offers no such thing.
When FERC itself has acknowledged that the issue it was
considering was new, and can point to no words expressing
the supposedly governing principle, we cannot conclude that a
reasonable petitioner would have perceived a “very substantial
risk” that Orders Nos. 2003 and 2003-A meant what FERC
now says they mean. Southern Company Services, Inc., 416
F.3d at 45. Thus petitioners are not mounting a collateral
attack on Orders Nos. 2003 and 2003-A, and, equivalently,
§ 313(b) is no bar to our jurisdiction.
We now turn to the merits of the discrimination claim. Its
gist is that a compensation regime that allows transmission
owners to choose whether or not to compensate generators for
providing reactive power within the deadband will create
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arbitrary differences in the competitive position of generators
in different zones, and is thus unduly discriminatory under
§ 205(b) of the FPA.
It is not altogether clear that the Commission understood
petitioners’ discrimination complaint. It insisted that so long
as the proposed Schedule 2-A requires transmission owners to
treat affiliated and unaffiliated generators comparably, as
required by Orders Nos. 2003 and 2003-A, resulting zonal
variations in compensation would not be unduly
discriminatory. It analogized zonal reactive power
compensation to zonal transmission rates and concluded that
there was no discrimination because “customers are obligated
to pay only one zonal rate.” Rehearing Order, P 81.
This completely disregards the core of petitioners’ theory.
Generators in the Midwest ISO compete across zonal
boundaries. If transmission owners in one zone offer cost-
based compensation for reactive power under Schedule 2,
while transmission owners in another zone invoke Schedule 2-
A and therefore withhold compensation for reactive power
within the deadband, generators in the latter zone appear to be
competitively disadvantaged.
The Commission brushed this off, saying that
independent power producers can “recover” the
uncompensated reactive power cost “in their market-based
power sales rates.” Rehearing Order, P 97.
This appears to be a complete non-answer (or is based on
a misconception of rudimentary economics). It is true, of
course, that if generators did not compete across zonal lines,
then all generators in each zone governed by Schedule 2-A
would incur an uncompensated reactive power cost and none
would be competitively disadvantaged in the relevant market.
But the Commission acknowledged in oral argument that
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generators can and do sell real power outside their own zones.
Oral Arg. Recording 17:30-19:00. Generators that follow the
Commission’s advice to raise their power sales rates would
suffer an increased risk of being undersold by generators from
zones where reactive power costs are compensated. The
Commission has revealed no basis for its contention that
generators in different zones are not “similarly situated” for
purposes of receiving reactive power compensation. Initial
Order, PP 49, 55; Rehearing Order, PP 59-60.
In its Rehearing Order the Commission observed that it
had “previously noted” that “the incremental cost to the
generator of reactive power within the deadband is minimal.”
Rehearing Order, P 96 (citing Bonneville Power Admin., 120
FERC ¶ 61,211, at P 21 (2007)). There is, however, no
finding to that effect in this case, and no evidence in the case
that would support such a finding. Indeed, the record contains
one transmission owner’s estimate that shifting to Schedule 2-
A would reduce its reactive power costs from over $11
million to about $228,000. Affidavit of Greg M. Gudeman,
October 1, 2007, at 9-10. Thus, if the Commission’s glancing
remark expresses an intent to rely on a de minimis theory,
which seems doubtful, there is no evidence, much less
substantial evidence, to support it.
A reader may wonder whether there may be less
substance in all this than meets the eye. A generator’s
competitive position would seem to depend on the sum of two
costs: (1) its own generating and related costs, and (2) its costs
in transmitting power. Uncompensated reactive power costs
would fit in (1); if compensated by the transmission owner,
they would seemingly justify an increase in transmission rates,
and thus fit in (2). If the generating firm’s transmission costs
were the charges for its zone, then generators who were paid
by the local transmission company for reactive power would
find the reactive power cost burdening them in their out-of-
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zone sales just as much as it would with reactive power
uncompensated. But as we explained above, all transmissions
to any given customer are priced at the rate for that customer’s
zone, so that in fact equal treatment of generators’ costs of
supplying reactive power is critical to giving meaning to the
zonal rate system’s apparent intent to assure competitive
equality between generators.
Accordingly, we grant the petitions for review as to their
claim that the Commission’s orders violate § 205(b) of the
FPA.
Authority to file. The petitioners complain that FERC
should not have accepted the filing of Schedule 2-A as a valid
tariff filing under § 205 of the FPA. Transmission owners’
rights to file tariff changes under § 205 have been modified by
the Settlement Agreement Between Transmission Owners and
Midwest ISO On Filing Rights (the “Filing Rights
Settlement”). Its § 3.9 governs tariff filings for ancillary
services:
3.9 Ancillary Services Other Than Schedule 1—Both
Transmission Owners that own or control generation or
other resources capable of providing ancillary services
(offered to customers pursuant to the [Open Access
Transmission Tariff]) and the Midwest ISO shall have the
right to submit filings under FPA section 205 to govern
the rates, terms, and conditions applicable for the
provision of ancillary services. . . . [A]ny ancillary
service proposal with regional impacts shall be subject to
the governance and coordination provisions of Sections 4
and 5 of this Settlement Agreement [requiring
transmission owners to decide by a majority vote to make
a joint section 205 filing and to provide at least 30 day
notice].
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Filing Rights Settlement, § 3.9 (emphasis added).
As § 3.9 gives filing rights to the Midwest ISO and to
“Transmission Owners that own or control generation or other
resources capable of providing ancillary services [including
reactive power],” the petitioners argue that transmission
owners may file reactive power tariffs only for services they
provide.
The Commission found § 3.9 ambiguous and noted that it
appeared to draw no distinction between the filing rights of
“Transmission Owners that own or control generation or other
resources capable of providing ancillary services” and of the
Midwest ISO itself. Petitioners’ proposed limitation would
render the ISO’s filing rights meaningless, as it provides no
“ancillary services.” Initial Order, P 24; Rehearing Order, PP
6-7. The Commission also noted—persuasively, in our
opinion—that the reference in § 3.9 to filings with “regional
impacts” would be redundant if, as the petitioners say, the
Filing Rights Settlement authorized transmission owners to
make only those § 205 filings that pertain to their individual
rates for reactive power. Id. at P 8.
We find FERC’s conclusion that the Filing Rights
Settlement gave transmission owners the right to file Schedule
2-A to be reasonable.
* * *
In sum, though we uphold the Commission’s decision as
to the transmission owners’ right to file the tariff amendment
creating Schedule 2-A, the Commission’s approval of that
change violated § 205(b)’s ban on undue discrimination and
must be vacated.
So ordered.