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


E TX ELEC COOP INC

v.

FERC


99-1222a

D.C. Cir. 2000


*	*	*


United States Court of Appeals


FOR THE DISTRICT OF COLUMBIA CIRCUIT


Argued April 10, 2000 Decided July 25, 2000 


No. 99-1222


East Texas Electric Cooperative, Inc., et al.,  Petitioners


v.


Federal Energy Regulatory Commission,  Respondent


Central Power and Light Company, et al.,  Intervenors


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


A. Hewitt Rose, III argued the cause for the petitioners.


David H. Coffman, Attorney, Federal Energy Regulatory  Commission,
argued the cause for the respondent. John H.  Conway, Acting
Solicitor, Federal Energy Regulatory Com- mission, was on brief. Jay
L. Witkin, Solicitor, and Susan J. 


Court, Counsel, Federal Energy Regulatory Commission, en- tered
appearances.


Clark Evans Downs argued the cause for the Intervenors.  Martin V.
Kirkwood was on brief.


Before: Edwards, Chief Judge, Henderson and Rogers,  Circuit Judges.


Opinion for the court filed by Circuit Judge Henderson.


Karen LeCraft Henderson, Circuit Judge: Petitioners  East Texas
Electric Cooperative, Inc., Northeast Texas Elec- tric Cooperative,
Inc. and Tex-La Electric Cooperative of  Texas, Inc. (collectively,
Texas Electric) seek review of three  orders of the Federal Energy
Regulatory Commission  (FERC, Commission) ultimately approving the
open access  transmission tariff the CSW Operating Companies (CSW)1 
proposed for their provision of electric power to Texas Elec- tric,
inter alia. Texas Electric argues that the Commission,  in its Tariff
Order, Central Power & Light Co., 81 F.E.R.C.  p 61,311 (1997),
accepted certain rates included in CSW's  proposed rates but rejected
and ordered modification of  another. CSW not only responded to the
Commission's di- rective regarding modification of the specified rate,
they also  eliminated a different rate which, Texas Electric argues,
had  been accepted and was therefore not supposed to be eliminat- ed.
The Commission accepted CSW's compliance filing in  relevant part in
its Compliance Order, Central Power & Light  Co., 85 F.E.R.C. p 61,224
(1998), including the alleged rate  change resulting from the
elimination of the rate earlier  accepted. Finally, in its Rehearing
Order, Central Power &  Light Co., 87 F.E.R.C. p 61,073 (1999), the
Commission reject- ed Texas Electric's arguments and concluded CSW had
com- plied with the Tariff Order directives.




__________

n 1 The Central and South West Corporation, a registered public 
utility holding company, is comprised of four operating companies 
(CSW): Southwestern Electric Power Company; Public Service  Company of
Oklahoma; Central Power and Light Company; and  West Texas Utilities
Company. CSW filed a brief as intervenors in  support of the


Texas Electric argues, citing 16 U.S.C. s 824d, that CSW  failed to
justify the rate change as the Federal Power Act  (Act) requires and
that the Commission's acceptance, without  explanation, of CSW's
compliance filing and its resulting  approval of CSW's elimination of
the previously accepted  charge (thereby effecting a rate change) also
failed to satisfy  the Commission's duty under the Administrative
Procedure  Act, 5 U.S.C. s 706(2). Texas Electric further contends the
 new rates unduly discriminate against it (and other CSW  customers)
and that the Commission violated its duty under  the Act, 16 U.S.C. s
824e, to assure that rates are not unduly  discriminatory.


The Commission on the other hand claims it did not accept  the proposed
rates in the Tariff Order and that nothing  therein prohibited CSW
from eliminating the rate at issue.  Rather, the Commission claims
that its Tariff Order makes  clear the decision was left to CSW's
discretion. We defer to  FERC's interpretation of its Tariff Order as
not limiting  CSW's revised transmission tariff. We conclude, however,
 that the Tariff Order did not sufficiently notify Texas Electric  of
CSW's discretion to modify the original proposal, particu- larly in
light of the Tariff Order's language approving the  rates at issue.
Hence Texas Electric's failure to seek rehear- ing does not bar it
from raising this issue before us. More- over, the Commission failed
to explain why the revised tariff  was lawful, that is, just and
reasonable. Given that the  revision at issue could not fairly have
been anticipated by  Texas Electric, the Commission erred in summarily
approv- ing that part of the Compliance Tariff without explaining 
whether the new rates were just and reasonable; accordingly,  we
remand for FERC to make that determination.


I.


The CSW System operates in two power districts: the  Southwest Power
Pool (SPP) and the Electric Reliability  Council of Texas (ERCOT). Of
the four operating companies  in the CSW System, two are entirely
within SPP and the 


other two are entirely within ERCOT.2 CSW's facilities are 
interconnected, however, forming a single, integrated system.


In 1996 FERC addressed the rate systems of public utili- ties, like
those comprising CSW, who are members of regis- tered public utilities
holding companies. In Order No. 888  (filed May 10, 1996), Promoting
Wholesale Competition  Through Open Access Non-discriminatory
Transmission  Services by Public Utilities, FERC Stats. & Regs. p
31,035,  61 Fed. Reg. 21,540 (1996), codified as revised at 18 C.F.R. 
Pts. 35 & 385 (1999),3 which resulted from a rule-making  proceeding
designed to remedy undue discrimination in the  transmission of
electric power, FERC required all such utili- ties to file a tariff
permitting transmission service across the  holding company's entire
system at a single price. See  Transmission Access Policy Study Group,
2000 WL 762706,  at *3, *5 (D.C. Cir. June 30, 2000); see also Tariff
Order, 81  F.E.R.C. at 62,430 (discussing Order No. 888). Thus,
individ- ual member utilities within a holding company could no longer
 charge separate, "pancaked" rates4 for what is a single trans-




__________

n 2 ERCOT operates entirely in Texas and, to a large extent, is 
governed by the Public Utility Commission of Texas. Although the 
ERCOT companies became subject to FERC jurisdiction as a result  of
their interconnection with the SPP companies, FERC commonly  defers to
the Texas transmission ratemaking methodologies within  ERCOT. See
Brief of Commission at 7; Brief of Petitioners at 5.


3 For the revisions and clarifications of Order No. 888, see 76 
F.E.R.C. p 61,009 (1996), 76 F.E.R.C. p 61,347 (1996), and 79 
F.E.R.C. p 61,182 (1997), on reh'g, Order No. 888-A, FERC Stats.  &
Regs. p 31,048, 62 Fed. Reg. 12,274 (1997), on reh'g, Order No. 
888-B, 81 F.E.R.C. p 61,248, 62 Fed. Reg. 64,688 (1997), on reh'g, 
Order No. 888-C, 82 F.E.R.C. p 61,046 (1998), aff'd in part and 
remanded sub nom. Transmission Access Policy Study Group v.  FERC,
2000 WL 762706 (D.C. Cir. June 30, 2000).


4 A "pancaked" rate is equal to the sum of the rates for a single 
transmission of two or more utilities within a holding company's 
system. In other words, the customer must pay each utility's  separate
charge for a single transmission: here, the customer would  pay both
SPP and ERCOT rates for a transmission through their 


mission over the holding company's system. Id. at 62,432.  Instead, the
utilities must provide the transmission under a  single rate,
resulting in a de facto reduction of the overall  charge. FERC
addressed the CSW System specifically, di- recting the utilities
therein to file "a system tariff that will  provide comparable service
to all wholesale users on the CSW  System, regardless of whether they
take transmission service  wholly within ERCOT or the SPP, or take
transmission  service between the reliability councils over the North
and  East Interconnections." Order No. 888, 61 Fed. Reg. at  21,595.
Furthermore, FERC noted that "[i]t may be appro- priate to have
different rates for transmission service wholly  within ERCOT or the
SPP, and for service between [them]."  Id. at 21,595 n.422.


CSW filed a proposed transmission tariff that provided  separate rates
for wholly intra-ERCOT service and wholly  intra-SPP service but did
not provide a single CSW System- wide rate for transmissions through
both ERCOT and SPP.  Thus, customers requiring service traversing the
SPP-  ERCOT boundary would pay pancaked rates. In its Tariff  Order
the Commission analyzed CSW's separate rates for the  two service
areas (ERCOT and SPP) and determined that the  rate structures were
reasonable.


Assessing different rates for service in the different  regions is
reasonable.... [I]t is appropriate to allow  CSW to adopt the Texas
Commission's regional network  pricing structure for services wholly
in ERCOT. As a  corollary, it is also reasonable for CSW to assess a
single  postage stamp rate for service wholly within SPP.


Tariff Order, 81 F.E.R.C. at 62,432-33. The Commission,  however, then
rejected the pancaked rates for service tra- versing both areas. See
id. at 62,433. It "require[d] CSW to  revise its tariff to propose a
single rate for use of the entire  CSW system" and added that,
"[w]hile CSW may continue to  propose multiple charges, their total
sum may not exceed 




__________

n separate service areas but within the CSW System. See Brief of 
Commission at 11.


CSW's average system cost." Id. In closing the Commission  further
described its action:


The Commission orders:


(A) CSW is hereby directed to make the changes  discussed in the body
of this order within 30 days of the  date of this order.


(B) The proposed CSW Tariff is hereby accepted for  filing, as modified
as directed in Ordering Paragraph (A)  above, effective January 1,
1997....


Id. at 62,440.


CSW filed a Compliance Tariff proposing a single four- company,
system-wide rate applicable both to customers  served by transmissions
through ERCOT and SPP and to  customers accessing only SPP service.5
The tariff also set a  rate applicable to customers using only ERCOT
but eliminat- ed the comparable rate for "SPP-only" customers it had 
originally proposed. Texas Electric protested the Compli- ance
Tariff's elimination of the intra-SPP rate. It argued  that the Tariff
Order had approved the intra-SPP rate and,  therefore, CSW must
justify elimination of the rate as the Act  requires. In addition,
Texas Electric argued that the intra- SPP rate was necessary to
prevent undue discrimination in  light of the intra-ERCOT rate which
remained in effect and  was less expensive than the system-wide rate
to which  SPP-only customers had become subject. In the Compliance 
Order the Commission focused on whether CSW had com- plied with the
Tariff Order. The Commission found that it  had: "In the [Tariff
Order], we directed [CSW] to submit a  single, system-wide rate, and
they have done so." Compli- ance Order, 85 F.E.R.C. at 61,924.
Accordingly, the Commis- sion approved elimination of the intra-SPP


Texas Electric requested rehearing challenging FERC's  approval of the
elimination of the intra-SPP rate in the 




__________

n 5 Although Texas Electric requested rehearing on "the Com- mission's
approval of direct assignment of the costs of transmission  facility
upgrades," Joint Appendix 42, it did not challenge the  system-wide
rates or CSW's authority to establish multiple charges.


Compliance Tariff. It argued that elimination of the rate was  not
consistent with the Tariff Order and lacked adequate  justification by
CSW and adequate consideration by the Com- mission. In the Rehearing
Order, the Commission again  rejected Texas Electric's challenges
because it found CSW  had complied with its directive in the Tariff
Order (that is, to  propose a single rate for use of the entire CSW
system) when  it eliminated the intra-SPP rate in favor of a
single-system  rate. See Rehearing Order, 87 F.E.R.C. at 61,300. The 
Commission added that, if Texas Electric wished to challenge  the
directive, it could have done so on rehearing of the Tariff  Order but
not on rehearing of the Compliance Order. See id.


II.


"As a general matter, we will uphold FERC's factual  findings if
supported by substantial evidence and will endorse  its orders so long
as they are based on reasoned decision  making." Texaco, Inc. v. FERC,
148 F.3d 1091, 1095 (D.C.  Cir. 1999) (citing Koch Gateway Pipeline
Co. v. FERC, 136  F.3d 810, 814 (D.C. Cir. 1998)). And if FERC
interprets its  own orders reasonably, we will sustain its
interpretations.  See Natural Gas Clearinghouse v. FERC, 108 F.3d 397,


Arguing that the Tariff Order left CSW free to eliminate  the multiple
charges they had proposed, FERC relies on the  permissive "may" in the
statement that "CSW may continue  to propose multiple charges," Tariff
Order, 81 F.E.R.C. at  62,433 (emphasis added). Although FERC
precedent gener- ally confines the scope of modifications in
compliance filings  to the Commission's particular directives, see
Entergy Power  Mktg. Corp., 75 F.E.R.C. p 61,282 at 61,903 (1996);
Southern  Co. Servs., 63 F.E.R.C. p 61,217 at 62,595-96 (1993), here
the  Commission specifically left to CSW the decision whether to 
"continue to propose multiple charges." 81 F.E.R.C. at  62,433. Thus,
CSW's subsequent elimination of the intra-SPP  rate was contemplated
and in fact authorized, albeit not  ordered, in the Tariff Order. FERC
points to specific lan- guage supporting its interpretation of its


prescriptive with regard to proposing multiple charges, see  Brief of
Commission at 21,6 and, finding FERC's interpreta- tion of its own
order reasonable, we must sustain it against  Texas Electric's
challenge. See Natural Gas Clearinghouse,  108 F.3d at 399.


Nevertheless the Tariff Order did not provide sufficient  notice to
Texas Electric that CSW could eliminate the ap- proved intra-SPP rate.
See McElroy Elecs. Corp. v. FCC,  990 F.2d 1351, 1358 (D.C. Cir. 1993)
("[W]e look not at the  reasonableness of the Commission's intended
interpretation,  but at the clarity with which the agency made that
intent  known."). Much of the Tariff Order indicated acceptance of 
CSW's proposed tariff, including the declarations in the intro-
ductory paragraph: "In this order, the Commission directs 
modifications to and accepts for filing, as modified, a joint 
system-wide open access transmission tariff." Tariff Order,  81
F.E.R.C. at 62,430 (emphasis added). In the Commission's  concluding
list of orders, it also accepted the tariff for filing  conditioned on
the modifications CSW were directed to make.7  See id. at 62,440. The
Commission approved the separate  intra-SPP and intra-ERCOT rates so
long as their sum did  not exceed CSW's average system cost. See id.
at 62,432-33.  In fact, FERC deemed the methodology used to determine 
separate rates "appropriate" and "reasonable." Id. at 62,433.  One
reasonable interpretation of the phrase granting CSW  discretion is an
indication of FERC policy toward future rate 




__________

n 6 In brief the Commission argued:


As for any requirement that [CSW] must retain their intra- SPP rates,
the Tariff Order spoke to that as well. The Tariff  Order specifically
stated that "[w]hile CSW may continue to  propose multiple charges,
their total sum may not exceed  CSW's average system cost." By using
the permissive "may,"  FERC made clear that [CSW] had the discretion
to keep or  eliminate multiple charges including the SPP-only rates.


Brief of Commission at 21 (citations omitted) (emphasis in original).


7 As noted earlier, proposed tariff modifications are ordinarily 
limited to what the Commission directs but the Commission did not 
direct CSW to eliminate the intra-SPP rate.


changes, as "may continue" implies future action. This inter- pretation
is all the more reasonable if, given FERC's discus- sion in approving
the separate, regional rates, the reader  interpreted the order as
accepting the proposed rates that  were not subject to the directed
modification. On the whole  it was not unreasonable for Texas Electric
to have overlooked  or misread the permissive language of the Tariff
Order so as  to relieve it of the obligation to petition for
clarification or  rehearing. It is for this reason we disagree with
the Com- mission's statement in the Rehearing Order that Texas Elec-
tric failed to preserve its challenge (thus precluding our  exercise
of jurisdiction) because it did not raise the objection  in its
petition for rehearing of the Tariff Order.


The judicial review portion of the Act provides that "[n]o  objection
to the order of the Commission shall be considered  by the court
unless such objection shall have been urged  before the Commission in
the application for rehearing unless  there is reasonable ground for
failure so to do." 16 U.S.C.  s 825l(b). We have consistently rejected
agency efforts to  bind parties "by what the agency intended, but
failed to  communicate." McElroy Elecs. Corp. v. FCC, 990 F.2d 1351 
(D.C. Cir. 1993). Rather, an agency order must provide  reasonable
notice of its import:


The policy requiring timely filing of motions for reconsid- eration is
one of fairness to [FERC8] and to parties  affected by its order; only
a perversion of that policy  could be used to cut off the rights of a
party that filed its  application in good faith, as soon as it could
reasonably  have become aware of the import of an [FERC] order. 
Endorsement of the position that the [FERC] takes  would permit an
administrative agency to enter an am- biguous or obscure order,
wilfully or otherwise, wait out  the required time, then enter an
"explanatory" order that 




__________

n 8 Instead of referring to FERC, the opinion refers to "FPC,"  the
former Federal Power Commission and the predecessor of  FERC. See,
e.g., Elizabethtown Gas Co. v. FERC, 575 F.2d 885,  886 (D.C. Cir.


would extinguish the review rights of parties prejudicial- ly
affected.


Sam Rayburn Dam Elec. Coop. v. Federal Power Comm'n,  515 F.2d 998,
1007 (D.C. Cir. 1975). As earlier discussed, it  was not clear that
the Commission could allow elimination of  the intra-SPP rate (absent
statutorily mandated procedures)  until it did so in the Compliance
Order. Texas Electric's  challenge made in its request for rehearing
of the Compliance  Order, therefore, was not untimely. See MCI
Telecomms.  Corp. v. FCC, 765 F.2d 1186, 1190-91 (D.C. Cir. 1985) (be-
cause implication of policy did not follow from earlier order, 
request for rehearing of subsequent order enunciating policy  was
timely); Sam Rayburn Dam, 515 F.2d at 1007-08 (not  clear until
further clarification order that purchaser of elec- tric power was
"aggrieved" so application for rehearing was  timely filed); see also
RCA Global Communications, Inc. v.  FCC, 758 F.2d 722, 730-31 (D.C.
Cir. 1985) ("We simply  cannot agree that a fair reading of the
Prescription Order ...  permits the conclusion that [petitioner] did
know or should  have known that the Commission had confronted, much
less  resolved, the issue [petitioner] now petitions us to review."); 
cf. ANR Pipeline Co. v. FERC, 988 F.2d 1229, 1230 (D.C. Cir.  1993)
("[W]e believe that an ordinary reader familiar with the  industry
background would have recognized a very substan- tial likelihood that
the order meant what the Commission  ultimately said it meant.").


Having concluded that Texas Electric's challenge to the  Compliance
Order was timely, we look at its merits. The  Commission's summary
approval of the Compliance Tariff  cannot be regarded as a finding
that a modification beyond  the modifications directed, that is, the
new rate to which  SPP-only customers were subjected, was just and
reason- able.9 Ultimately, the Commission failed to offer anything 




__________

n 9 While it might be argued that the mere reference to the Tariff 
Order was sufficient to establish that the rates accepted in the 
Compliance Order were reasonable because no multiple rates would  be
summed and yield a rate exceeding CSW's average system cost 


from which the court can "discern a reasoned path ... to the  decision
[the Commission] reached." K N Energy, Inc. v.  FERC, 968 F.2d 1295,
1303-04 (D.C. Cir. 1992). Accordingly,  we conclude the Commission's
approval of the rates proposed  in the Compliance Tariff was arbitrary
and capricious and  remand for reconsideration. See AT&T v. FCC, 974
F.2d  1351, 1355 (D.C. Cir. 1992) ("We conclude that the Reconsid-
eration Order is arbitrary and capricious for want of an  adequate
explanation and remand it for further consider- ation.").


For the foregoing reasons, we remand to FERC for further  proceedings
consistent with this opinion.


So ordered.




__________

n in violation of the condition the Commission had set, see Tariff 
Order, 81 F.E.R.C. at 62,433, nonetheless we cannot agree that the 
Commission determined the rates reflected in the Compliance Tariff 
were just. For example, the Commission did not respond to Texas 
Electric's challenge that the elimination of the separate, intra-SPP 
rate constituted undue discrimination in light of the continued 
existence of a separate, intra-ERCOT rate.