Niagara Mohawk Power Corp. v. Federal Energy Regulatory Comm'n / State of New York v. Federal Energy Regulatory Comm'n - Opposition

Nos. 06-1010 and 06-1011

In the Supreme Court of the United States

NIAGARA MOHAWK POWER CORPORATION, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

STATE OF NEW YORK, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITIONS FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE
FEDERAL ENERGY REGULATORY COMMISSION
IN OPPOSITION

PAUL D. CLEMENT
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

JOHN S. MOOT
General Counsel
ROBERT H. SOLOMON
Solicitor
PATRICK Y. LEE
Attorney
Federal Energy Regulatory
Commission
Washington, D.C. 20426

QUESTION PRESENTED

Whether the Federal Energy Regulatory Commis sion acted lawfully in approving and enforcing a trans mission tariff under which generators of electric power may net their "station power" consumption against their power output on a monthly basis.

In the Supreme Court of the United States

No. 06-1010

NIAGARA MOHAWK POWER CORPORATION, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

No. 06-1011

STATE OF NEW YORK, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITIONS FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE
FEDERAL ENERGY REGULATORY COMMISSION
IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1a-13a) is reported at 452 F.3d 822.1 The orders of the Federal Energy Regulatory Commission (Pet. App. 20a-32a, 33a- 69a, 70a-95a, 96a-137a, 138a-159a, 160a-194a, 195a-219a, 220a-247a) are reported at 101 F.E.R.C. ¶ 61,230, 107 F.E.R.C. ¶ 61,142, 105 F.E.R.C. ¶ 61,337, 110 F.E.R.C. ¶ 61,032, 105 F.E.R.C. ¶ 61,336, 110 F.E.R.C. ¶ 61,033, 109 F.E.R.C. ¶ 61,169, and 111 F.E.R.C. ¶ 61,120.

JURISDICTION

The judgment of the court of appeals was entered on June 23, 2006. Petitions for rehearing (Pet. App. 14a, 15a, 16a-17a) were denied on October 23, 2006. The peti tions for a writ of certiorari in No. 06-1011 and No. 06-1010 were filed on January 18 and January 22, 2007 (Monday), respectively. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. Section 201 of the Federal Power Act (FPA), 16 U.S.C. 791a et seq., gives the Federal Energy Regula tory Commission (Commission or FERC) jurisdiction over the "transmission of electric energy in interstate commerce," the "sale of electric energy at wholesale in interstate commerce," and "all facilities for such trans mission or sale." 16 U.S.C. 824(b)(1). See New York v. FERC, 535 U.S. 1, 19-20 (2002). The States retain juris diction over "any other sale of electric energy" and "fa cilities used in local distribution" of electricity. 16 U.S.C. 824(b)(1).

"Historically, electric utilities were vertically inte grated, owning generation, transmission, and distribu tion facilities and selling these services as a 'bundled' package to wholesale and retail customers in a limited geographical service area." Public Util. Dist. No. 1 v. FERC, 272 F.3d 607, 610 (D.C. Cir. 2001). In 1996, the Commission adopted FERC Order No. 888, which di rected public utilities subject to FERC's jurisdiction to offer non-discriminatory, open-access transmission ser vice.2 To implement that directive, the Commission or dered the functional unbundling of wholesale generation and transmission services. See New York, 535 U.S. at 11. "Functional unbundling" requires each public utility to announce separate rates for its wholesale generation, transmission, and ancillary services. See ibid. Utilities also must take transmission service for their own whole sale sales and purchases under the same general tariff applicable to others, and they must separate their trans mission and generation marketing functions and commu nications. See ibid. In its decision in New York, this Court upheld Order No. 888.

New York utilities went beyond the "functional unbundling" required by Order No. 888. After the order was adopted, utilities in New York "began divesting their generation facilities, and the vast majority of elec tricity generation in the state of New York is now per formed by independent wholesale generators." Pet. App. 2a. Today, traditional utilities in New York main tain ownership of the transmission and local distribution facilities and provide retail service, while the not-for- profit New York Independent System Operator (NYISO) operates and controls the transmission grid. See ibid. The "merchant generators" who purchased the generation facilities divested by utilities have no retail-service obligation and sell wholesale power at market-based rates under FERC-approved tariffs. See, e.g., PJM Interconnection, L.L.C., 94 F.E.R.C. ¶ 61,251, at 61,883 n.12 (2001) (defining "merchant generator" as a "non-vertically integrated owner of generating facili ties" that includes both independent and affiliated power producers).

2. These petitions arise from a set of FERC orders concerning the NYISO's treatment of "station power." Station power is "the electric energy used for the heat ing, lighting, air-conditioning, and office equipment needs of the buildings on a generating facility's site, and for operating the electric equipment" at the site. PJM Interconnection, 94 F.E.R.C. at 61,889. A generating facility may "self-supply" its station power "behind the meter" by redirecting some of its outbound generated electricity for its station power needs. See id. at 61,890. But in certain circumstances, a generating facility may be incapable of self-supplying station power and there fore may look to the transmission grid for its station power needs. See ibid.

When utilities were vertically integrated, the treat ment of station power was not an issue. Utilities have a longstanding practice of treating station power as "neg ative generation" and netting station power needs when measuring the output of a generator. That is, utilities historically have not charged themselves, their affiliates, or their fellow utilities for station power, even for peri ods when the generating unit was not operating. See PJM Interconnection, 94 F.E.R.C. at 61,882, 61,886, 61,889-61,890 & n.56. Instead, they have simply treated the generator as if it produced only its net output-that is, its gross power output minus the station power it con sumed.

The treatment of station power became a disputed issue upon the entry of non-traditional merchant gener ators into the market. Merchant generators sought to obtain and account for necessary station power service in the traditional manner employed by traditional utili ties-by netting station power needs against gross out put. See PJM Interconnection, L.L.C., 95 F.E.R.C. ¶ 61,333, at 62,189 (2001). If netting were not allowed, a generator that was unable to self-supply "behind the meter" would have to pay for its station power at state- approved retail rates.

In the PJM Interconnection orders, FERC permit ted the independent operator of the grid in the Pennsyl vania-New Jersey-Maryland area to allow netting on an hourly basis. See 94 F.E.R.C. at 61,892. For example, a generator that used the grid to obtain its station power for fifty minutes but then returned a greater amount of power during the next ten minutes would be deemed to have supplied the net amount and to have consumed nothing.

The Commission explained that netting "will better ensure comparable treatment, and will address the con cerns of the merchant generators that some vertically- integrated utilities are favoring their own or affiliated generating facilities to the competitive disadvantage of merchant generators." PJM Interconnection, 94 F.E.R.C. at 61,893. Because vertically integrated utili ties "generally own more generating facilities than mer chant generators do," they "may be able to self-supply more often than merchant generators and may never have to pay another utility's retail rates for third-party supply of station power." Ibid. Likewise, vertically in tegrated utilities own transmission lines between their generating facilities, so they may never have to pay a third-party's charges for transmission of station power. See ibid. Allowing netting by merchant generators, the Commission concluded, would therefore "limit if not fully eliminate disparities between merchant generators and vertically-integrated utilities." Ibid.

3. In the orders at issue here, the Commission af firmed merchant generators' ability to net station power uses over a reasonable period of time so as to enable those generators to procure station power competitively. Specifically, the Commission found that the NYISO's decision to use a one-month netting period was reason able. See Pet. App. 27a-29a, 86a-87a, 148a-151a, 217a- 218a. Under that approach, no retail sale occurs-and thus no retail charge is permissible-when a generator's net output, measured over one month, is positive.

4. Petitioners-a group of electric utilities and the State of New York-sought review of FERC's orders. The court of appeals denied the petitions for review. Pet. App. 13a.

Petitioners argued that monthly netting violates the FPA because it allegedly encroaches upon state jurisdic tion over local distribution services and retail sales. See Pet. App. 7a. The court of appeals acknowledged that, as an abstract matter, this argument was "not insubstan tial." Id. at 9a. But it concluded that petitioners' posi tion was fatally undermined by their "clear concession" that an hourly netting period would be consistent with the statute. Ibid.

The court explained that "some practical accommo dation is necessary" in drawing the jurisdictional lines between interstate transmission (the grid) and retail sales. Pet. App. 9a. Petitioners objected to monthly netting "because it eliminates many-perhaps virtually all-of the station power transmissions" from the cate gory of retail sales subject to state jurisdiction, "and a shorter netting period would eliminate fewer." Id. at 10a. But under petitioners' reasoning, "any netting out of what it deems 'retail sales' over any period would amount to a statutory violation." Ibid. That result would be inconsistent with petitioners' view that hourly netting is acceptable. See ibid. The court concluded that "if hourly netting is perfectly consistent with the statute, we see no principled reason why monthly net ting violates the Act." Ibid.

Petitioners also argued that FERC Order No. 888 explicitly acknowledged state jurisdiction over delivery services to "end users" and drew no distinction between the typical industrial end user, who is susceptible to re tail charges, and a wholesale generator that takes power from the transmission grid. See Pet. App. 7a. The court rejected that argument, explaining that the term "end user" in Order No. 888 could reasonably be interpreted to contain an exception for a non-traditional wholesale generator. See id. at 11a. In addition, the court noted that "petitioners' concession equally undermines their argument based on Order 888," since "[i]f generators must be thought of as equivalent to industrial end us ers," then hourly netting would be just as improper as monthly netting. Ibid.

Finally, the court of appeals rejected petitioners' argument that the Commission's decision to allow net ting on a monthly basis, rather than over some shorter period of time, was arbitrary and capricious. See Pet. App. 11a. After examining FERC's explanation that "netting is necessary in order to put wholesale genera tors in roughly the competitive position integrated utili ties enjoy," and petitioners' claim that "this competitive concern is really irrelevant in the New York market," the court concluded that "we simply do not see, on these arguments, how we could determine that a one-hour, a one-month, or for that matter a one-week netting period is unreasonable." Id. at 12a.

ARGUMENT

In the orders at issue here, FERC acted reasonably to prevent discrimination against merchant generators that do not own electrical transmission facilities. The court of appeals correctly upheld the Commission's or ders. Its decision is consistent with this Court's inter pretation of the FPA in New York v. FERC, 535 U.S. 1 (2002), and it does not conflict with any decision of this Court or any other court of appeals. Petitioners argue that the court of appeals allowed FERC to assert juris diction over retail sales of electricity, a matter reserved to the States. That contention lacks merit and in any event would not be suitable for resolution in this case, because petitioners' concession in the court of appeals fatally undermined the logical premise of their argu ment. Further review is not warranted.

1. FERC's orders were a reasonable effort to ensure that non-traditional utilities-merchant generators without transmission facilities or a retail customer base-are not subject to undue discrimination at the hands of traditional utilities, in contravention of the non- discrimination mandate of Sections 205 and 206 of the FPA, 16 U.S.C. 824d and 824e. See New York, 535 U.S. at 6-7 (FERC is obligated under FPA Sections 205 and 206 to prohibit and remedy any unreasonable rates and undue discrimination "with respect to any transmission or sale subject to the jurisdiction of the Commission."). The court of appeals correctly upheld the Commission's action.

Historically, vertically integrated utilities netted out their station power needs. There was no need for FERC approval of such practices when services were bundled and utilities did not have to provide or take unbundled transmission service under open-access transmission tariffs. The transmission tariff that the Commission approved in this case simply affords merchant genera tors the same right to net their station power needs against their gross output that was historically afforded to New York utilities. The Commission has "never re quired that net output be measured on a real time or second-by-second basis"; rather, it always has al lowed net output to be "measured over a reasonable time period, so as to take into account fluctuations in electric production." PJM Interconnection, 94 F.E.R.C. ¶ 61,251, at 61,892.

In accepting and enforcing the New York transmission-tariff provision that permits netting, the Commission acted to "eliminat[e] disparities between merchant generators" and other New York utilities. Pet. App. 28a; see id. at 52a ("netting is simply the tra ditional accounting for station power as negative genera tion"). A non-traditional merchant generator unable to net its station power needs, and forced to pay a retail rate for retail service it neither wants nor receives, would be placed at a competitive disadvantage in com parison with a traditional utility-like the former owner of the divested generator-that incurs no such addi tional charge. See, e.g., id. at 192a (Commission acted to "permit[] merchant generators to compete fairly with utilities for customer load, fostering competition in elec tricity markets").

The court of appeals understood that the Commission has an obligation under the FPA to foster competitive, non-discriminatory utility practices and to remedy un due discrimination. It properly traced the evolution of markets in New York, including the divestment of "the vast majority of electricity generation" in that State by "traditional utilities," which still "maintain ownership of the transmission and local distribution facilities," to "independent wholesale generators." Pet. App. 2a; see id. at 11a (wholesale generator is a "new creature in the market," one that is "in a quite different position from a retail user"). It recognized the Commission's reasoning that netting would "reduce the disparities between wholesale generators and vertically-integrated utilities." Id. at 6a. And it agreed with the Commission that the potential for such disparities continues to exist in New York, as New York merchant generators still compete with traditional New York utilities that either own gen eration capacity or that purchase generation for resale, as well as with merchant generators and traditional util ities in neighboring regions. See id. at 12a. In sum, the court of appeals properly appreciated the evolving na ture of the electricity markets and the Commission's traditional regulatory responsibilities as applied to those markets. See New York, 535 U.S. at 23 (recognizing "the importance of the changes in the electricity indus try that have occurred since the FPA was enacted in 1935").

2. Petitioners argue (Pet. 15-25; 06-1011 Pet. 18-19, 23-25) that the court of appeals has sustained an order that exceeds FERC's statutory authority under the FPA. In their view, the Commission has improperly intruded on state authority over retail sales. Petitioners are incorrect. Far from ousting the States of their juris diction over retail sales of electricity, the court confined both FERC and the States to their respective jurisdic tional roles under the FPA.

The court of appeals correctly recognized that regu latory jurisdiction over electricity is "split between the federal government and the states." Pet. App. 2a. Cit ing Section 201(b)(1) of the FPA, 16 U.S.C. 824(b)(1), FERC's open-access transmission rulemaking in Order No. 888, and this Court's decision upholding that rulemaking in New York, the court of appeals accurately described the division of jurisdictional authority be tween the federal and state governments: (1) "FERC has jurisdiction over both the interstate transmission of electricity and the sale of electricity at wholesale in in terstate commerce," while (2) "States retain jurisdiction over retail sales of electricity and over local distribution facilities." Pet. App. 2a-3a; accord New York, 535 U.S. at 17.

Focusing on the statutory recognition of authority for the States to regulate local distribution service and retail sales, petitioners argue (Pet. 13-15; 06-1011 Pet. 21-22) that the decision below sanctions FERC en croachment on state regulation. They contend that FERC's approval of monthly netting of station power undermines the States' discretion and policy to limit netting to just one hour or shorter. See id. at 14-17.

Petitioners' argument begs the question. By enact ing the FPA, Congress allowed FERC effectively to limit state regulatory authority when FERC acts within its jurisdiction. See, e.g., Entergy La., Inc. v. Louisiana Pub. Serv. Comm'n, 539 U.S. 39, 49-51 (2003). Under the statute, FERC's jurisdiction extends to the "sale of electric energy at wholesale in interstate commerce" and "all facilities for [interstate] transmission or sale." 16 U.S.C. 824(b)(1). To exercise its jurisdiction, the Commission must define when a wholesale sale occurs and when the facilities of interstate transmission are used to transmit power. In the orders at issue here, FERC did just that. Those orders reflect FERC's judg ment that when a generator produces power but also consumes a smaller amount of station power during the netting period, it has engaged in a single "sale of electric energy at wholesale," and it has used transmission "fa cilities" only for that sale. 16 U.S.C. 824(b)(1). As the Commission explained, it is not "intrud[ing] into state jurisdiction over retail rates or local distribution ser vices," but only "determin[ing] based on applicable law and fact what type of services (wholesale or retail) are actually being provided." Pet. App. 173a.

As the court of appeals recognized, the problem FERC confronted is essentially one of line drawing: "[I]n drawing the jurisdictional lines in this area, some practical accommodation is necessary." Pet. App. 9a. See New York, 535 U.S. at 16 (noting that "the electric ity universe" is not "neatly divided into spheres of retail versus wholesale sales") (quotation marks omitted). The Commission's reasonable line-drawing in this area is entitled to deference. See Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842-844 (1984); Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 380-382 (1988) (Scalia, J., concurring) (Chevron defer ence applicable to agency's interpretation of its own statutory authority or jurisdiction); see, e.g., NLRB v. Town & Country Elec., Inc., 516 U.S. 85, 89 (1995); CFTC v. Schor, 478 U.S. 833, 844 (1986).3

3. Petitioners argue (Pet. 11; 06-1011 Pet. 19) that the decision below is inconsistent with this Court's deci sion in New York. In fact, New York supports the deci sion of the court of appeals.

In New York, the Court held that FERC may draw reasonable lines to define the extent of its jurisdictional authority over wholesale sales and interstate transmis sion. 535 U.S. at 16-17. In particular, the Court deter mined that there is no statutory limitation on FERC's ability to define its jurisdiction over transmission in in terstate commerce, see id. at 16, and that FERC's trans mission jurisdiction extends at least as far as unbundled retail transactions, id. at 18. See id. at 27 (FERC juris diction "could very well" extend further to regulation of bundled retail transactions upon a finding of "undue discrimination in the retail electricity market"). Indeed, this Court, while recognizing that FERC does not have jurisdiction over local distribution service and facilities, accepted FERC's identification of a seven-factor test for distinguishing between FERC-jurisdictional transmis sion and state-jurisdictional local distribution. See id. at 22-23.

The fact that FERC is able to identify and define state-jurisdictional services, in order to distinguish those services from FERC-jurisdictional services, does not mean that FERC is able to assert jurisdiction over all defined services. See New York, 535 U.S. at 22-23. Here, the Commission assured petitioners that it has no intention of encroaching upon traditional state jurisdic tion. See, e.g., Pet. App. 26a-27a ("Any delivery of sta tion power over local distribution facilities, and the com pensation for such delivery is a matter properly for the New York Commission and not for this Commission.").

All that FERC did in these proceedings was to ap prove and enforce a FERC-filed transmission tariff that defines the amount of FERC-jurisdictional service a wholesale generator is receiving. More precisely, the Commission approved and enforced a definition of ser vice under a FERC tariff that nets over one month the amount of electric power a wholesale generator both offers to the transmission grid and takes from the grid. Consistent with its earlier orders on the subject of net ting, the Commission found that monthly netting in New York represented a reasonable period of netting. That action-and the decision of the court of appeals uphold ing it-was in no way inconsistent with New York.

4. Even if the question presented otherwise merited review, this case would be a poor vehicle for considering it because petitioners conceded away an essential prem ise of their argument when they acknowledged, before the court of appeals, that FERC would have the author ity to allow netting over a one-hour period. See Pet. App. 9a-10a. No logical distinction separates netting over one hour and netting over one month. Thus, if hourly netting does not violate the FPA, then neither does monthly netting.

Petitioners contend (Pet. 26-27) that the court of ap peals misunderstood the nature of their concession. Even if petitioners were correct, that case-specific ques tion would not warrant review. In any event, the court's conclusion was amply supported by the statements of petitioners' counsel at argument. See 06-1011 Pet. App. 90a, 107a, 113a-116a. And contrary to petitioners' sug gestion (Pet. 25-27; 06-1011 Pet. 13-14), the court of ap peals did not view petitioners' willingness to accept hourly netting to be a concession to jurisdiction where none otherwise exists. Rather, the court understood pe titioners' concession as undermining the logic of their argument. See Pet. App. 9a. Since petitioners failed to present a cogent explanation of how the agency erred, the court appropriately upheld its orders. Cf. Carducci v. Regan, 714 F.2d 171, 177 (D.C. Cir. 1983) (Scalia, J.) ("The premise of our adversarial system is that appel late courts do not sit as self-directed boards of legal in quiry and research, but essentially as arbiters of legal questions presented and argued by the parties before them.").

CONCLUSION

The petitions for a writ of certiorari should be de nied.

Respectfully submitted.

PAUL D. CLEMENT
Solicitor General

JOHN S. MOOT
General Counsel
ROBERT H. SOLOMON
Solicitor
PATRICK Y. LEE
Attorney
Federal Energy Regulatory
Commission

MARCH 2007

1 Unless otherwise noted, all references to "Pet." and "Pet. App." are to the petition and appendix filed in No. 06-1010.

2 See Promoting Wholesale Competition Through Open Access Non- discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 61 Fed. Reg. 21,540 (1996) (Order No. 888), clarified, 76 F.E.R.C. ¶¶ 61,009 and 61,347, order on reh'g, 62 Fed. Reg. 12,274 (Order No. 888-A), order on reh'g, 62 Fed. Reg. 64,688 (1997) (Order No. 888-B), order on reh'g, 82 F.E.R.C. ¶ 61,046 (1998) (Order No. 888-C), aff'd sub nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).

3 Petitioners assert (Pet. 22-25) that the decision of the court of appeals is inconsistent with Section 212(h) of the FPA, 16 U.S.C. 824k(h). Petitioners do not allege that there is any conflict on this issue. In any event, their argument lacks merit because it is essentially derivative of their theory that the provision of station power to a generator is a retail sale even when that power is netted out by the generator's output.