Southwest Power Pool, Inc. v. FERC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 18, 2013 Decided December 3, 2013
No. 12-1158
SOUTHWEST POWER POOL, INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMITTEE,
RESPONDENT
AMERICAN ELECTRIC POWER CORPORATION, ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Barry S. Spector argued the cause for petitioner. With
him on the briefs was Jeffrey G. DiSciullo. Ryan J. Collins
entered an appearance.
Sean T. Beeny, Barry Cohen, Amanda Riggs Conner, N.
Beth Emery, Noel Symons, Lisa Sharp, David W.
D'Alessandro, M. Denyse Zosa, Gary Newell, and Rebecca
Sterzinar were on the brief for joint intervenors in support of
petitioner. Matthew A. Fitzgerald entered an appearance.
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Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were David L. Morenoff, Acting General Counsel,
and Robert H. Solomon, Solicitor.
Stephen L. Teichler argued the cause for intervenors
Midwest Independent Transmission System Operator, Inc. and
Entergy Services, Inc. in support of respondents. With him on
the brief were Ilia Levitine, John S. Moot, and Gregory W.
Camet.
Before: TATEL AND GRIFFITH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: This dispute between
two regional transmission organizations (“RTOs”) turns on
the interpretation of a single contract provision. The Federal
Energy Regulatory Commission resolved the conflict against
petitioner Southwest Power Pool (“SPP”). Applying both the
Administrative Procedure Act and the “Chevron-like analysis”
that governs review of such an interpretation, Colorado
Interstate Gas Co. v. FERC, 599 F.3d 698, 701 (D.C. Cir.
2010), we find that the Commission failed to provide a
reasoned explanation for its decision. It leapt to an
interpretation of one item of evidence without explaining its
implicit rejection of alternative interpretations, and, equally
without explanation (or at least adequate explanation), it
disregarded evidence that the applicable law required it to
consider. See Order on Petition for Declaratory Order, 136
FERC ¶ 61,010 (2011) (“Order”), rehearing denied, Order on
Rehearing, 138 FERC ¶ 61,055 (2012) (“Order on
Rehearing”). Accordingly, its decision was arbitrary and
capricious, and we vacate and remand the orders.
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* * *
SPP is an RTO adjacent to another RTO, the Midwest
Independent Transmission System Operator (“MISO”),
recently renamed Midcontinent Independent System Operator,
evidently to reflect its continuing expansion to the south.
Entergy Arkansas, an operating subsidiary of Entergy
Corporation and at the time of the petition not part of any
RTO, abuts both SPP and MISO.
In 2011 Entergy Arkansas made a regulatory filing
addressing the possibilities of joining MISO or SPP, and
indicating a preference for MISO. Order, 136 FERC ¶ 61,010
at P 7. That preference rested at least in part on the
considerable savings in production costs that joining MISO
would yield relative to joining SPP. Entergy Corp., RTO Path
for Entergy Operating Companies 4, 9; Joint Appendix
(“J.A.”) 225, 230. To realize those savings, however, MISO
must be able to move to Entergy Arkansas electricity
generated elsewhere in MISO. Although Entergy Arkansas
has transmission connections to both SPP and MISO, its
connection to MISO is relatively limited compared to those to
SPP and others. MISO would therefore need to rely on these
other, non-MISO transmission providers. MISO believes that
its Joint Operating Agreement (“JOA”) with SPP gives it the
right to rely on SPP’s transmission facilities to do so, even
after Entergy Arkansas becomes part of MISO itself, an event
that appears imminent—Entergy Arkansas has received
multiple regulatory approvals to join MISO. See Press
Release, Entergy Corp., APSC Issues Final Conditional Order
on Entergy Arkansas’ MISO Integration (Apr. 11, 2013).
Section 5.2 of the JOA, the provision invoked by MISO,
provides:
Sharing Contract Path Capacity. If the Parties have
contract paths to the same entity, the combined contract
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path capacity will be made available for use by both
Parties. This will not create new contract paths for either
Party that did not previously exist. SPP will not be able
to deal directly with companies with which it does not
physically or contractually interconnect and the [MISO]
will not be able to deal directly with companies with
which it does not physically or contractually interconnect.
The parties agree that at the time of FERC’s decision,
with Entergy Arkansas distinct from MISO, both RTOs had
“contract paths to the same entity,” to wit Entergy Arkansas.
Thus Section 5.2 allowed one RTO to use the other’s
transmission network to move electricity to Entergy Arkansas.
That is where agreement ends.
The alternative readings of Section 5.2 are these: MISO
understands “contract path to the same entity” to include any
physical or contractual interconnection and to apply regardless
of whether the “entity” is a part of either RTO. So, even if
Entergy Arkansas becomes part of MISO, Entergy Arkansas
will (under MISO’s view) be an “entity” to which both RTOs
have contract paths. SPP argues that an RTO cannot have a
“contract path to” itself or to part of itself. Thus, once
Entergy Arkansas joins MISO, Section 5.2 will no longer
(under SPP’s view) apply, despite the existence of a “physical
or contractual” interconnection between the part of MISO
made up of Entergy Arkansas and the other parts of MISO.
After the parties negotiated for some time in vain, MISO
petitioned FERC for a declaratory judgment on the
interpretation of Section 5.2. FERC adopted MISO’s reading,
finding that the term “contract path” was broad enough to
encompass any physical or contractual interconnection, and
that “entity” could include any operating entity, whether or
not it was part of one of the RTOs. Order, 136 FERC ¶
61,010 at PP 61-62; Order on Rehearing, 138 FERC ¶ 61,055
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at P 19. We discuss the details of the Commission’s decision
as they become relevant.
* * *
Before reaching the merits of SPP’s arguments, we must
first address FERC’s assertions that SPP lacks standing and
that, in any case, its claims are unripe.
On standing, FERC contends that SPP’s interest in the
interpretation of Section 5.2 is too attenuated to create an
injury that is “actual or imminent.” Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560-61 (1992). It says that no harm
will ensue for SPP unless Entergy Arkansas elects to join
MISO and secures the necessary state and federal approval,
and MISO then seeks to use Section 5.2 to transmit electricity
to Entergy Arkansas. Thus FERC characterizes SPP’s injury
as “too speculative.”
We have held that an agency interpretation that defines
contractual rights and obligations may itself create enough of
an injury to confer standing on a party to that contract. See
Dominion Transportation, Inc. v. FERC, 533 F.3d 845, 852
(D.C. Cir. 2008). We need not explore the scope of that
decision, because the Commission’s decision here cast a very
present shadow over the three-way maneuvering between
SPP, MISO and Entergy Arkansas. The latter’s parent
corporation (Entergy) proclaimed in its 2011 presentation on
joinder with MISO that “[r]esolution of the JOA issue in
MISO’s favor would increase the potential production cost
savings and further tip the benefit ratio in MISO’s favor.”
Entergy Corp., RTO Path for Entergy Operating Companies
9; J.A. 230. It is surprising that FERC should think that
standing rules require SPP to remain in limbo while its
competitor MISO woos Entergy Arkansas with FERC’s
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assurance of access to SPP’s infrastructure—an assurance that
SPP believes is unlawful.
FERC’s ripeness argument fares no better. Ripeness of
course typically involves an inquiry into the fitness of the
issues for judicial review and the hardship to the parties of
withholding that review. Abbott Labs. v. Gardner, 387 U.S.
136, 149 (1967). But a showing of hardship is ordinarily
unnecessary where the agency “has suggested no institutional
interests in postponing review . . . , and adjudication will not
benefit from additional facts.” Pub. Serv. Elec. & Gas Co. v.
FERC, 485 F.3d 1164, 1168 (D.C. Cir. 2007).
Neither SPP nor FERC has suggested a need for further
factual development. And although FERC insists that it may
address “implementation” issues in a subsequent proceeding,
it nowhere suggests that its interpretation of Section 5.2 has
not crystallized enough for this court’s review. Burlington N.
R. Co. v. Surface Transp. Bd., 75 F.3d 685, 691 (D.C. Cir.
1996). Instead, the Commission repackages its standing
argument, asserting that many “contingencies” lie between the
order under review and any harm to SPP, rendering the order
unripe. Our discussion of standing of course dooms that
argument.
* * *
Our review of the Commission’s decision in the end does
not call on us to answer the “Chevron-like” question whether
FERC has adopted a “reasonable interpretation” of the
contract—“not necessarily the only possible interpretation,
nor even the interpretation deemed most reasonable by the
courts.” Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208,
218 (2009); Am. Elec. Power Serv. Corp. v. FCC, 708 F.3d
183, 186 (D.C. Cir. 2013). Here FERC’s treatment of the
issue founders on APA principles—the requirements that it
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“examine the relevant data and articulate a satisfactory
explanation for its action including a ‘rational connection
between the facts found and the choice made.’” Motor Vehicle
Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines Inc.
v. United States, 371 U.S. 156, 168 (1962)). Agency action
that fails either requirement is arbitrary and capricious. Id.
Neither SPP nor FERC contends that Section 5.2’s
meaning is unambiguous. Although FERC attempts to draw
meaning from a couple of terms, its theme is only that they do
not preclude MISO’s preferred interpretation. Only
Intervenor MISO contends that the text is in fact
unambiguous. But its argument consists largely of
declarations that if the parties intended SPP’s interpretation,
they could have made that clear. Of course; the parties’
potential ability to make a provision clear is a universal
characteristic of ambiguity. But it hardly establishes that the
parties affirmatively made MISO’s preferred reading clear.
Agreeing with SPP and the Commission that Section 5.2 is
ambiguous on the relevant issue, we turn to the process by
which the Commission sought to resolve that ambiguity.
SPP raises two principal complaints about FERC’s
decisionmaking, first, that the Commission misinterpreted the
evidence on which it relied and, second, that it erred in
refusing to consider relevant evidence before it.
FERC relied heavily on what it termed “course of
performance” evidence, to wit the only prior use of Section
5.2—a transaction between MISO, SPP, and a third party,
coincidentally, Entergy Arkansas. The particular
circumstances of the transaction are critical.
It is undisputed that both SPP and MISO have (or at least
had at the relevant times) contract paths to Entergy Arkansas
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within the meaning of Section 5.2. MISO’s is an interchange
agreement between MISO (in the form of a MISO
transmission owner, Ameren Company), Entergy Arkansas
and a third party. Order, 136 FERC ¶ 61,010 at P 3; Affidavit
of Carl A. Monroe on behalf of SPP ¶ 12; Affidavit of
Thomas J. Mallinger on behalf of MISO ¶ 13. During a
period when that contract path was out of order, MISO used
SPP’s path to Entergy Arkansas in order to “allow Ameren to
continue to serve its radial load on the Entergy transmission
system.” Mallinger Aff. ¶ 13; Order on Rehearing, 138 FERC
¶ 61,055 at P 20.
The Commission regarded this episode as supporting
MISO’s view of Section 5.2. Though acknowledging that it
was a “use of SPP’s path to Ameren through SPP and across
Entergy Arkansas,” the Commission seemed to find decisive
the fact that the path in question “was still used to provide
transmission service to Ameren, an internal MISO operating
member.” Order on Rehearing, 138 FERC ¶ 61,055 at P 20.
Thus, so far as we can see, FERC acknowledges that the
only service provided by SPP under Section 5.2 was between
MISO and a third party, Entergy Arkansas. Why it is
important that the MISO member using this service then went
on to reach its own operating area via Entergy Arkansas is
never explained. The service SPP provided appears consistent
both with its view of Section 5.2 and with MISO’s broader
view (though not in any way relying on that broader view).
Given the episode’s apparent complete consistency with both
parties’ competing views, we are at a loss to see why FERC
regarded the episode as decisive in favor of MISO. Its
unexplained leap from neutral evidence to a decision in favor
of one side rendered its order arbitrary and capricious.
FERC’s confident reading of the single use of Section 5.2
led it to dismiss additional types of evidence offered by SPP.
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First, SPP introduced an affidavit by Carl Monroe, SPP’s
chief negotiator for the JOA, stating that at the time of the
negotiations, SPP understood that Section 5.2 would apply
only when the electricity was transmitted to a third party, not
when it was delivered to part of the originating RTO. Monroe
Aff. ¶ 15. Second, SPP pointed to definitions of “contract
path” used by the North American Electric Reliability
Corporation and the North American Energy Standards Board.
It urged the relevance of these by pointing to our statement
that “[r]elying on the trade usage of [a] term is appropriate, as
construing terms in light of their commonly understood
meaning is a hallmark of reasonable interpretation.”
Colorado Interstate Gas Co. v. FERC, 599 F.3d at 703
(quoted in SPP’s Request for Rehearing at 10 n.27, J.A. 333).
The trade materials SPP cited are replete with words of art,
and without the Commission’s having explored them at all we
are in no position to assess their force in support of SPP’s
contention.
FERC, however, “decline[d] to consider” these materials.
It observed, correctly, that the Restatement (Second) of
Contracts § 203(b) and Delaware law (agreed by the parties to
be controlling) accord “greater weight” to course of
performance evidence than to evidence based on usage of
trade or course of dealing (as FERC characterized the Monroe
Affidavit). In a literal sense, of course, FERC afforded
“greater weight” to course of performance evidence, as it
accorded no weight at all to any other. See Order on
Rehearing, 138 FERC ¶ 61,055 at PP 21-22 (“declin[ing]” to
consider either type of evidence). But FERC points to nothing
in Delaware law or the Restatement supporting total disregard
of either type of extrinsic evidence. We may assume
arguendo that in some instances course of performance
evidence would be so overwhelming as to justify disregard of
other evidence, but the seemingly neutral impact of the single
episode of Section 5.2’s use makes any such assumption
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irrelevant. Thus, together with its unexplained reading of that
episode, the Commission’s complete failure to consider the
evidence proffered renders its orders arbitrary and capricious.
* * *
The orders are therefore
Vacated and remanded.