UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


CTRL

v.

PUB SVC CORP V. FERC


98-1532a

D.C. Cir. 2000


*	*	*


Tatel, Circuit Judge: For years Central Vermont Public  Service
Corporation has sold electricity to its wholly owned  subsidiary,
Connecticut Valley Electric Company, which has  resold the electricity
to retail customers in New Hampshire.  After ordering Connecticut
Valley to terminate its power  purchase agreement with Central
Vermont, the New Hamp- shire Public Utility Commission denied
Connecticut Valley's  request to recover stranded costs from its own
retail custom- ers. Central Vermont then petitioned the Federal Energy
 Regulatory Commission for approval of a transmission rate  surcharge
that would permit Central Vermont to recover  stranded costs from
Connecticut Valley's retail customers.  Finding the proposed surcharge
inconsistent with its strand- ed cost policy, FERC rejected the
surcharge. Because we  find FERC's decision neither arbitrary nor
capricious, we  deny the petition for review.


I


In order to stop utilities from discriminatorily denying  other power
suppliers access to their transmission lines, the  Federal Energy
Regulatory Commission, acting through what  is known as Order 888,
required public utilities that own,  control, or operate transmission
facilities to file open access  tariffs under which they agree to
provide transmission service  according to certain minimum terms and
conditions. See  Promoting Wholesale Competition Through Open Access 
Non-Discriminatory Transmission Services by Public Utili- ties;
Recovery of Stranded Costs by Public Utilities and  Transmitting
Utilities, Order No. 888, FERC Stats. & Regs.  p 31,036, 61 Fed. Reg.
21,540 (1996), clarified, 76 FERC 


p 61,009 and 76 FERC p 61,347 (1996), modified, Order No.  888-A, FERC
Stats. & Regs. p 31,048, 62 Fed. Reg. 12,274  (1997), order on reh'g,
Order No. 888-B, 81 FERC p 61,248,  62 Fed. Reg. 64,688 (1997), order
on reh'g, Order No. 888-C,  82 FERC p 61,046 (1998). Recognizing that
utilities might  incur transition costs--so-called "stranded
costs"--as a result  of former customers' new ability to reach
alternate power  suppliers through FERC-mandated open access, as well
as  through parallel actions on the state level, Order 888 provides 
for both wholesale and retail stranded cost recovery.


Wholesale stranded costs result when wholesale utility  customers
(customers who purchase power for resale) take  advantage of Order
888's open access requirement to pur- chase power from another
supplier using their former utility's  transmission lines. Under the
pre-open access regulatory  regime, the Commission explained,
utilities entered into long- term contracts for the wholesale sale of
power to require- ments customers. Because wholesale customers had no 
source of power supply other than their historic utility, these 
contracts were normally extended at the end of their term.  Relying on
the expectation of continued service to historic  customers, utilities
invested money, built facilities, and en- tered into long-term fuel
purchase contracts. See Notice of  Proposed Rulemaking, Recovery of
Stranded Costs by Public  Utilities and Transmitting Utilities, FERC
Stats. & Regs.  p 32,507 at 32,863-64, 59 Fed. Reg. 35274 (1994).
These costs  will become "stranded" if, before utilities have
recovered  them, their long-term requirements customers take advan-
tage of open access and cease purchasing the utilities' power. 
Recognizing that FERC "cannot change the rules of the game  without
providing a mechanism for recovery of the costs  caused by such
regulatory-mandated change," Order 888-A,  p 31,048 at 30,346, Order
888 provides a mechanism for  utilities to recover stranded costs


Retail stranded costs occur when retail customers take  advantage of
state-ordered retail "wheeling" (i.e., state- ordered transmission of
power by utilities for other power  suppliers) to purchase power from
suppliers other than their 


historic utilities. Because these costs result from state regu- lation,
FERC agreed to consider utility proposals to recover  stranded costs
from retail customers only if the appropriate  state regulatory
commission lacks authority to do so under  state law. See Order 888, p
31,036 at 31,824-26.


In Transmission Access Policy Study Group v. FERC, No.  97-1715 (D.C.
Cir. 2000), also issued today, we uphold Order  888's stranded cost
policy in all respects relevant to this case.


In this case, Central Vermont seeks to use Order 888 to  recover
stranded costs from the retail customers of its whole- sale
requirements customer, Connecticut Valley. A wholly  owned subsidiary
of Central Vermont, Connecticut Valley  purchases power from Central
Vermont pursuant to a whole- sale requirements contract (the "RS-2
contract") and then  resells the power to retail customers in New
Hampshire. As  part of state-wide electric utility restructuring, the
New  Hampshire Public Utility Commission ("NHPUC") ordered 
Connecticut Valley to terminate the RS-2 contract so that its 
customers could take advantage of state-ordered retail wheel- ing to
reach other power suppliers. In response, Connecticut  Valley
petitioned the NHPUC to recover its stranded costs  from its retail
customers in New Hampshire. Concluding  that Connecticut Valley was in
part responsible for these  costs because it had imprudently declined
to terminate the  RS-2 contract when the retail restructuring program
was  enacted into law in 1996, the NHPUC denied its request.


Central Vermont then filed with FERC a notice of cancella- tion of the
RS-2 contract. Claiming that cancellation of the  contract would
produce $44.9 million of stranded costs, and  relying on Order 888,
Central Vermont sought to recover  those costs through a surcharge to
the transmission rate  charged to customers who use Central Vermont's
transmis- sion system to deliver power to customers in Connecticut 
Valley's service area. In other words, the surcharge collected  by
Central Vermont would be paid by Connecticut Valley's  retail
customers and the entities transmitting power to them.  Central
Vermont explained: "In this way, the stranded costs  would be paid by
the same persons who caused the cost 


stranding to occur by displacing, through use of Central  Vermont's
transmission system, Central Vermont power with  power acquired from a
different supplier."


Without holding a hearing, FERC rejected Central Ver- mont's proposed
transmission surcharge, explaining that Or- der 888 permits utilities
to recover stranded costs only from  wholesale customers--in this case
Connecticut Valley--not  from retail customers of their wholesale
customers. Central  Vermont Public Service Corp., 81 FERC p 61,336 at
62,541- 42 (1997). FERC recommended that Central Vermont seek 
recovery of its stranded costs directly from Connecticut Val- ley
through an exit fee amendment to the RS-2 contract. See  id. at
62,542. Although Central Vermont followed that advice  and filed a
proposed exit fee amendment--a hearing on that  proposal is pending,
see Central Vermont Public Service  Corp., 82 FERC p 61,237 (1998)--it
also sought rehearing,  claiming that an exit fee would be
unsatisfactory and chal- lenging FERC's rejection of its surcharge
proposal. See  Central Vermont Public Service Corp., 84 FERC p 61,295 
(1998). In the alternative, asserting that FERC's rejection of  the
surcharge rendered its transmission rates confiscatory, it  argued
that FERC should have either treated its surcharge  proposal as a
section 205 rate increase filing or waived its  stranded cost
regulations altogether. FERC rejected Cen- tral Vermont's challenges,
finding the last two unripe in light  of the pendency of Central


Central Vermont now petitions for review. It argues that  its
transmission surcharge proposal fits within three situa- tions in
which FERC agreed to consider proposals for strand- ed cost recovery
on a case-by-case basis. First, it claims that  its proposal is
analogous to the "retail-turned-wholesale" sce- nario, in which Order
888 permits utilities to recover stranded  costs from newly formed
municipalities who serve the utili- ties' former retail customers. See
Order 888, p 31,036 at  31,818. Second, asserting that the RS-2
contract contains a  reserve equalization formula, Central Vermont
argues that  FERC should have permitted it to recover stranded costs 
pursuant to Order 888's provisions concerning situations 


where costs are shifted across state lines. See id. at 31,826. 
Finally, it invokes Order 888's provisions for the recovery of 
stranded costs that result from restructuring, see id. at  31,845-46;
according to Central Vermont, it is voluntarily  restructuring in
response to NHPUC-ordered retail wheeling.  Central Vermont also
claims that FERC's refusal to treat its  filing as a section 205 rate
increase filing or to waive its  regulations was arbitrary and


II


We review FERC's orders under the APA's familiar arbi- trary and
capricious standard. See 5 U.S.C. s 706(2)(A);  Williams Field
Services Group, Inc. v. FERC, 194 F.3d 110,  115 (D.C. Cir. 1999). Of
particular importance to this case,  we "afford substantial deference
to the Commission's inter- pretations of its own regulations,
deferring to the agency  unless its interpretation is plainly
erroneous or inconsistent  with the regulation." Bluestone Energy
Design, Inc. v.  FERC, 74 F.3d 1288, 1292 (D.C. Cir. 1996) (internal


At oral argument, counsel for Central Vermont emphasized  that Central
Vermont relies not on Order 888's implementing  regulations, see 18
C.F.R. s 35.26, but rather on Order 888  itself, which identifies
certain situations not covered by the  regulations in which FERC will
consider proposals for  stranded cost recovery on a case-by-case
basis. This was a  wise strategy, for Central Vermont's transmission
surcharge  proposal does not conform to the Order 888 regulations, 
which authorize recovery of stranded costs from wholesale 
requirements customers (in this case, Connecticut Valley), not  those
customers' retail customers. The regulations provide  that FERC will
consider proposals for recovery of stranded  costs from a utility's
retail customers, but only when the state  regulatory commission lacks
authority to do so. See id.  s 35.26(d)(1). Not only does the NHPUC
have authority to  address stranded costs (and did in fact do so), but
the retail  customers from whom Central Vermont seeks recovery are 
not its customers--they're Connecticut Valley's.


Central Vermont's attempts to fit its transmission sur- charge proposal
into Order 888 rest on a misunderstanding of  the order. Take, for
example, Central Vermont's effort to  analogize its plight to
situations where a municipality con- demns a utility's distribution
plant, becomes a wholesale  customer of the utility, and utilizes open
access transmission  to purchase power on the competitive market. In
that sce- nario, known as retail-turned-wholesale, FERC reasoned that 
the municipality, as a new wholesale customer, stands in the  shoes of
former retail customers for purposes of obtaining  transmission access
and new power supplies. Because of this  direct link between former
retail customers and the munici- pality, FERC agreed to consider
utility proposals for recov- ery of stranded costs from the
municipality itself. Order  888-A, p 31,048 at 30,408-10.


According to Central Vermont, Connecticut Valley's former  retail
customers, like newly created municipalities, are not  technically
former wholesale customers, but are using Central  Vermont's
transmission system to supply the very loads for  which Central
Vermont incurred the now-stranded costs.  That analogy doesn't work.
In the retail-turned-wholesale  situation, retail customers were
former customers of the  utility seeking recovery. Here, the retail
customers from  whom Central Vermont seeks recovery are former
customers  of Connecticut Valley. Under the retail-turned-wholesale 
analogy, Connecticut Valley, not Central Vermont, would be  seeking
recovery from these customers. Moreover, because  Connecticut Valley's
customers remain retail customers, the  proper forum for stranded cost
recovery is, as Connecitcut  Valley seems to have recognized, the
NHPUC, not FERC.  Not until the NHPUC denied Connecticut Valley's
original  request for stranded cost recovery did Central Vermont turn 


Equally unsuccessful is Central Vermont's effort to fit itself  into
Order 888's stranded cost provisions for multi-state and 
restructuring situations. Its arguments amount to little more  than
attempts to fit square pegs into round holes, for in  neither
circumstance did FERC agree to consider proposals 


to recover stranded costs from retail customers of a utility's 
wholesale customer.


We begin with the multi-state exception. Concerned that  the "denial of
retail stranded cost recovery by a state regula- tory authority could,
through operation of the reserve equali- zation formula in a
Commission-jurisdictional intra-system  agreement, inappropriately
shift the disallowed costs to affili- ated operating companies in
other states," FERC agreed to  consider stranded cost recovery in such
situations on a case- by-case basis. Order 888, p 31,036 at 31,826.
Claiming that  its RS-2 contract with Connecticut Valley contains just
such a  "reserve equalization formula," Central Vermont argues that 
its inability to recover stranded costs from Connecticut Val- ley's
New Hampshire retail customers will, through the for- mula's
operation, shift costs to its Vermont customers.  FERC rejected this
claim, concluding that the RS-2 contract  in fact contains no reserve


At oral argument, the parties continued to disagree about  whether the
RS-2 contract actually contains a reserve equali- zation formula.
Insisting that it does, counsel for Central  Vermont pointed us to the
contract's "capacity charge formu- la." Counsel for FERC told us that
the capacity charge  formula is not the same as a reserve equalization
formula; to  illustrate his point, he simply referred us to an
inter-system  agreement (not in the record of this proceeding) that he
says  contains such a formula.


Fortunately, we can decide this case without resolving this  debate,
for even if the RS-2 contract contains a reserve  equalization
formula, FERC did not err in concluding that  Central Vermont's
surcharge proposal did not fit within the  multi-state exception.
Order 888's sole method for avoiding  the automatic shifting of costs
across state lines is a contract  amendment. See Order 888, p 31,036
at 31,826; Order 888-A,  p 31,048 at 30,420. See also Central Vermont,
84 FERC at  62,371 ("[T]he remedy for preventing automatic shifting of
 retail stranded costs was to amend the jurisdictional contract  on
file with the Commission."). Central Vermont seeks not to 


amend the RS-2 contract, but rather to recover stranded  costs from its
customer's customers.


For its final effort to fit its surcharge proposal into Order  888,
Central Vermont relies on provisions permitting recovery  of stranded
costs resulting from voluntary restructuring.  Order 888 said little
more than this about voluntary restruc- turing:


[T]he functional unbundling of wholesale services does not  require
corporate unbundling (such as disposition of assets  to a
non-affiliate, or establishing a separate corporate affili- ate to
manage a utility's transmission assets). At the same  time, we
indicated that some utilities may ultimately choose  some form of
corporate unbundling. We reaffirm in this  Final Rule that we are
willing to consider case-specific  proposals for dealing with stranded
costs in the context of  any restructuring proceedings that may be
instituted by  individual utilities.


Order 888, p 31,036 at 31,845-46 (footnote omitted).


Citing New Hampshire's restructuring of the retail electric- ity market
and its own "inevitable" need to divest generation  assets, Central
Vermont claims that FERC should have ap- proved its surcharge proposal
as arising in connection with a  voluntary restructuring. FERC refused
to do so, finding that  Central Vermont had not demonstrated that it
was pursuing  corporate unbundling of the type contemplated by Order
888.  Participation in state-wide restructuring, FERC reasoned,  was
insufficient to constitute a "voluntary restructuring."  See Central
Vermont, 84 FERC at 62,372. Indeed, in the  only two proceedings cited
by the parties in which FERC has  set hearings to consider stranded
cost proposals in the re- structuring context, utilities had proposed
to sell off specific  assets and to modify their contracts with
wholesale require- ments customers. See Montaup Electric Co., 79 FERC 
p 61,386 (1997); New England Power Co., 78 FERC p 61,080  (1997).
Central Vermont has said only that it will "inevita- bly" divest
assets. More fundamentally, the stranded cost  proposals at issue in
the two cited cases required recovery  from wholesale customers, not
from retail customers of 


wholesale customers. Were we to accept Central Vermont's  claim, then
every utility denied stranded cost recovery in  connection with
state-ordered restructuring could seek relief  from FERC. Yet Order
888 emphatically and repeatedly  states that "[t]he only circumstance
in which we will entertain  requests to recover stranded costs caused
by retail wheeling  is when the state regulatory authority does not
have authority  under state law to address stranded costs when the
retail  wheeling is required." Order 888, p 31,036 at 31,825 (footnote


To sum up, we see no basis for questioning FERC's  rejection of Central
Vermont's surcharge proposal, much less  for finding the agency's
action arbitrary or capricious. As we  read the record in this case,
Central Vermont simply did not  like the consequence of Order 888's
deference to state agen- cies--the NHPUC's denial of Connecticut
Valley's retail  stranded cost recovery proposal--and now seeks from
FERC  what the state agency denied. Nothing in Order 888 permits  such
an end run around FERC's decision to defer to state  agencies'
assessments of retail stranded cost recovery. Or- der 888 allows
Central Vermont to recover stranded costs  only from a wholesale
requirements customer--here, its whol- ly owned subsidiary Connecticut
Valley--just the course it is  now pursuing in another proceeding.


III


This brings us finally to Central Vermont's alternative  claim that
without stranded cost recovery, its current trans- mission rates are
confiscatory and that FERC should there- fore have either treated its
transmission surcharge filing as a  section 205 rate increase filing
or waived its stranded cost  regulations and approved the proposed
surcharge. Citing the  pendency of the exit fee amendment hearing,
FERC rejected  both claims. See Central Vermont, 84 FERC at 62,369 &


FERC now contends that Central Vermont's claims are  unripe, relying on
the familiar two-part test of ripeness:  courts must "evaluate both
the fitness of the issues for  judicial decision and the hardship to
the parties of withhold-


ing court consideration." Abbott Laboratories v. Gardner,  387 U.S.
136, 149 (1967). "A claim is not ripe for adjudica- tion," the Supreme
Court recently explained, "if it rests upon  contingent future events
that may not occur as anticipated, or  indeed may not occur at all."
Texas v. United States, 523  U.S. 296, 118 S. Ct. 1257, 1259 (1998)
(internal quotation  marks and citations omitted). Central Vermont's
challenge to  FERC's refusal to treat its filing as a section 205 rate
 increase filing or to waive its regulations depends on no  future
events, contingent or otherwise. To resolve its chal- lenge, we need
only examine the record before us and assess  FERC's rationale. To be
sure, FERC's own decision may  have rested in part on the existence of
contingent events-- namely, the resolution of the pending exit fee
amendment  proposal--but that does not make Central Vermont's chal-
lenge unripe in this court.


On the merits, we can easily dispose of Central Vermont's  arguments.
We see no basis for questioning FERC's judg- ment that whether and to
what extent to permit Central  Vermont to increase its rates in a
section 205 proceeding  depend on the outcome of the exit fee
proposal. After all, if  Central Vermont recovers its full stranded
costs through the  exit fee, it will have no need to increase its
rates. Moreover,  FERC made its decision "without prejudice to Central
Ver- mont making a filing in the future seeking recovery of non-
open-access-related costs." Central Vermont, 84 FERC at  62,369 n.8.
If Central Vermont is unhappy with the outcome  of the exit fee
hearing, it may renew its claim.


We have the same reaction to Central Vermont's argument  that FERC
should have waived the Order 888 regulations.  Given the possibility
that Central Vermont may recover its  full stranded costs through an
exit fee--a method perfectly  consistent with the regulations--FERC's
refusal to waive its  regulations is hardly arbitrary or capricious.


IV


The petition for review is denied.


So ordered.