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Orangeburg, South Carolina v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

July 14, 2017

Orangeburg, South Carolina, Petitioner
v.
Federal Energy Regulatory Commission, Respondent

          Argued March 9, 2017

         On Petition for Review of Orders of the Federal Energy Regulatory Commission

          James N. Horwood argued the cause for petitioner. With him on the briefs were Peter J. Hopkins and Jessica R. Bell.

          Beth G. Pacella, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. On the brief were Robert H. Solomon, Solicitor, and Karin L. Larson, Attorney.

          Before: Millett and Wilkins, Circuit Judges, and Randolph, Senior Circuit Judge.

          OPINION

          WILKINS, CIRCUIT JUDGE

         Orangeburg, South Carolina, a city of approximately 14, 000 residents, has been trying to cut a better deal for wholesale power. The South Carolina city located a willing supplier in neighboring North Carolina but, according to Orangeburg, the deal was scuttled by the North Carolina Utilities Commission ("NCUC"), the state agency overseeing retail power sales in North Carolina. The Federal Power Act leaves regulatory authority over retail power sales to state agencies like NCUC, while reserving authority over interstate wholesale power sales to the Federal Energy Regulatory Commission ("FERC" or "Commission"). FERC v. Elec. Power Supply Ass'n, 136 S.Ct. 760, 766 (2016). Orangeburg alleges that, in exercising its retail ratemaking authority, NCUC has interposed itself as a gatekeeper for access to North Carolina's most affordable and reliable wholesale power, thereby intruding upon FERC's exclusive jurisdiction. In other words, this case presents one in "a steady flow of jurisdictional disputes" caused by, "in point of fact if not of law, " the reality that "the wholesale and retail markets in electricity are inextricably linked." Id.

         Orangeburg now challenges FERC's approval of an agreement between two utilities. According to Orangeburg, FERC's approval of that agreement constitutes an authorization of NCUC's unlawful regime. We hold that Orangeburg has standing to challenge FERC's approval because, among other reasons, the city has demonstrated an imminent loss of the opportunity to purchase a desired product (reliable and low-cost wholesale power), and because that injury is fairly traceable to the Commission's approval of the agreement at issue. This is especially true in light of the unique circumstances of this case: FERC has repeatedly sidestepped the legal issues raised by Orangeburg, thereby acquiescing to the gatekeeping regime allegedly causing the city's injury. On the merits, we conclude that FERC failed to justify its approval of the agreement's disparate treatment of wholesale ratepayers; to justify the disparity, the Commission relied exclusively on one line from a previous FERC order that, without additional explication, appears either unresponsive or legally unsound. Accordingly, we vacate in part the orders approving the agreement and denying rehearing, and remand to the Commission for further explanation.

         I.

         A.

         After nearly 100 years of purchasing its wholesale power from the same utility, Orangeburg tried to cut a better deal. In 2005, in anticipation of the expiration of its existing contract, Orangeburg informally sought proposals from new power suppliers. Only one new supplier submitted a proposal: Duke Energy Carolinas, LLC ("Duke"). In 2008, Orangeburg opted to switch from its old supplier over to Duke, signing an agreement for Duke to satisfy the city's wholesale power needs for approximately ten years.

         Under the agreement, Duke would have treated Orangeburg as a native-load customer. "Native load" is an industry term for customers to whom a power supplier has undertaken a long-term legal obligation to construct and operate its system to serve. 18 C.F.R. § 33.3(d)(4)(i). In practice, a great deal rides on native-load status and the question of who is, or is not, considered a "native-load customer" is at the heart of the instant petition. For instance, as a native-load customer, Orangeburg would pay a lower rate for wholesale power: the city would pay a rate based on the lower "system average costs, " instead of the higher "incremental costs." Orangeburg anticipated that, as a native-load customer under this agreement, the city would have been able to pass on approximately $10 million in savings per year to its own retail customers.

         But the agreement faced a significant hurdle: NCUC, the state agency overseeing retail power sales in North Carolina. Years earlier, as a condition for approving Duke's merger with another utility, NCUC imposed several regulatory conditions on Duke's future power sales. See Order Approving Merger Subject to Regulatory Conditions and Code of Conduct, Docket No. E-7, Sub 795, 2006 N.C. PUC LEXIS 296, at *200-19 ( N.C. Utils. Comm'n Mar. 24, 2006). As relevant here, NCUC imposed, and Duke accepted, two sets of conditions. First, Duke agreed to continue serving its "lowest-cost power" to retail native-load customers in North Carolina, and to plan its system with an eye toward providing those customers the most reliable and lowest cost power. Id. at *206-07 (Regulatory Conditions 5 and 6). Second, Duke agreed to provide notice to NCUC if the utility intended to treat any new wholesale customer as a native-load customer, and NCUC reserved the right to decide for itself whether to recognize that native-load status when it came to its own retail ratemaking, accounting, and reporting. Id. at *207-12 (Regulatory Condition 7).

         Accordingly, when Duke agreed to treat Orangeburg as a native-load wholesale customer, Duke notified NCUC. In response, NCUC issued a declaratory ruling that "[i]n any future retail ratemaking proceeding, " the commission would not recognize Orangeburg's native-load status and, consequently, would account for Duke's revenue from Orangeburg as though it were "based upon incremental costs, " instead of the lower "system average costs" provided for in the agreement. Order on Advance Notice and Joint Petition for Declaratory Ruling, Docket No. E-7, Sub 858, 2009 WL 904943 ( N.C. Utils. Comm'n Mar. 30, 2009) (hereinafter, "2009 NCUC Declaratory Ruling"), J.A. 207. In other words, when NCUC set rates for North Carolina retail customers, it would act as though Duke were receiving more wholesale revenue from Orangeburg than it actually was; the commission would "impute" revenue. This ostensibly minor accounting decision regarding retail power sales within North Carolina had a major impact on the Duke-Orangeburg wholesale power deal.

         The mechanics of how this imputation in one domain (retail) can affect another domain (wholesale) is not plainly obvious, and so an analogy will hopefully help. Consider the following. A North Carolina university program costs $500 per month to maintain. A state agency mandates that students born in North Carolina must be charged the lowest rate possible, in light of the $500-per-month cost. The program has four current students, each of whom was born in North Carolina. Accordingly, the agency permits the university to collect $125 from each student ($500 divided by four). The next month, the program enrolls a fifth student who was born in South Carolina, promising to treat her the same as the current North Carolina-born students. Under this arrangement, the university would collect $100 from each student ($500 divided by five). But the state agency then declares that, in calculating the appropriate fees for the four North Carolina students, it would impute an amount of $300 - not $100 - as the fees collected from the new South Carolina student. Based on the agency's accounting, the North Carolina students would pay only $50 each ($500 cost minus $300 in imputed revenue, with the difference of $200 divided by the four North Carolina students). If the university were to stick to the agreement to treat the fifth student the same as the first four, it would collect only $250 in total fees ($50 from each of the five students). The difference between the $500 cost and the $250 in actual revenue are "trapped costs, " and those trapped costs render the new agreement economically infeasible. The university, acting rationally, would try to get out of its agreement with the fifth student from South Carolina. The key lesson to draw is this: even if the state agency neither enjoys nor exercises direct regulatory authority over the South Carolina student's fees, the agency can nonetheless frustrate the deal struck by the university and the new student.

         Something similar happened here, according to Orangeburg. The 2009 NCUC Declaratory Ruling provided that the state commission would, for North Carolina retail ratemaking purposes, decline to treat Orangeburg - a South Carolina wholesale customer - as native load. The critical fact is that native-load customers enjoyed a special, lower rate (based on system average, not incremental, costs). Consequently, when NCUC set rates for retail customers, the state commission would account for revenue from Orangeburg as being greater than Duke actually collected. The difference between the higher, imputed amount and the lower, agreed-upon amount generated "trapped costs, " which soured the whole Duke-Orangeburg deal. Shortly after the 2009 NCUC Declaratory Ruling, Duke invoked a "regulatory out" provision (i.e., an escape clause) in the agreement. Consequently, Orangeburg was forced to return to its old power supplier. This dynamic, according to Orangeburg, empowers NCUC to act as the gatekeeper for reliable and low-cost wholesale power from North Carolina-based utilities, where the state commission leverages the knock-on effects of its retail accounting decisions to control which wholesale customers enjoy the benefits of native-load status.

         In July 2009, Orangeburg filed a petition with FERC, requesting that the Commission find that the 2009 NCUC Declaratory Ruling "does not apply to [Orangeburg] . . . by reason of federal preemption . . . ." City of Orangeburg, S.C., 151 FERC ¶ 61, 241, at 62, 596 (2015), J.A. 223. In short, Orangeburg argued that the "2009 NCUC [Declaratory Ruling] intrudes upon [FERC]'s exclusive jurisdiction over wholesale rates pursuant to the [Federal Power Act]." Id. at 62, 597, J.A. 225. Orangeburg's petition languished for six years. Eventually, in 2015, FERC dismissed the petition without addressing the merits, holding that because "Orangeburg and Duke voluntarily terminated the Agreement following the 2009 NCUC [Declaratory Ruling], " the petition was moot. Id. at 62, 601, J.A. 232. FERC, in other words, declined to pass on the legality of NCUC's purported gatekeeping role that, according to Orangeburg, thwarted - and continues to thwart - the city's ability to purchase interstate wholesale power from North Carolina utilities like Duke.

         B.

         The controversy over NCUC's actions did not end there. In 2011, Duke's parent company, Duke Energy Corporation, sought to merge with Progress Energy, Inc. Duke Energy Corp., 136 FERC ¶ 61, 245 (2011). As part of that merger, the two parent companies filed with FERC a Joint Dispatch Agreement ("JDA"), which would govern the interstate dispatch of power from the generation systems of their subsidiaries, Duke and Progress Energy Carolinas, Inc. ("Progress").

         The JDA incorporated the NCUC regulatory conditions that allegedly thwarted the 2008 Duke-Orangeburg deal. Specifically, Section 3.2(c) provided that Duke and Progress would not: (1) "make or incur a charge" unless in accordance with "orders of the NCUC;" (2) "seek to reflect in its North Carolina retail rates" any cost disallowed by NCUC or "any revenue level . . . other than the amount imputed by the NCUC;" nor (3) "assert in any forum" that NCUC's authority to impute revenue is preempted. Joint Dispatch Agreement Between Duke Energy Carolinas, LLC and Carolina Power & Light Co. at 4-5 (hereinafter, "Joint Dispatch Agreement"), J.A. 15-16. Importantly, the JDA further embedded the distinction between native-load and non-native-load customers, providing that only the former would be entitled to the most reliable and lowest cost power. Id. at 5-6 (Article V), J.A. 16-17; id. at 8 (Article VII), J.A. 19; see also id. at 2 (Article I, Definitions), J.A. 13.

         In June 2012, over Orangeburg's protest, FERC approved the JDA in substantial part. Duke Energy Corp., 139 FERC ¶ 61, 193 (2012) (hereinafter, "JDA Approval Order"), J.A. 118-35. Two grounds for the city's protest are relevant here. First, Orangeburg argued that Section 3.2(c) of the JDA, which effectively incorporated the NCUC regulatory regime, "will result in [NCUC]'s usurpation of [FERC]'s exclusive jurisdiction over wholesale sales." Id. at 62, 324, J.A. 126-27. In its JDA Approval Order, FERC directed the applicants to remove the problematic provisions of Section 3.2(c) because they "pertain[ed] fundamentally to retail ratemaking, " but the Commission continued to "offer no view on [NCUC]'s authority to impose or apply such requirements in its proceedings." I ...


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