Before: Wald, Williams and Tatel, Circuit Judges.
FOR THE DISTRICT OF COLUMBIA CIRCUIT
On Petition for Review of Orders of the Federal Energy Regulatory Commission
Opinion for the Court filed by Circuit Judge Williams.
The Federal Energy Regulatory Commission rejected a provision of a tariff filed by Florida Power & Light ("FPL"), proffered by FPL as a means of preventing an inefficient interaction between its sales to certain wholesale ("partial requirements") customers and those customers' activities on an automated "economy energy" market, the Florida Coordinating Group Broker. The Commission acknowledged that FPL's proposal would properly thwart some inefficient transactions, but rejected it as "overly broad," because there were other, efficient transactions that it said the proposal would also frustrate. Florida Power & Light Co., 66 FERC Para(s) 61,227 at 61,529 (1994) ("Order on Policy Issues"), reh. denied, 70 FERC Para(s) 61,158 (1995) ("Order on Rehearing"). FPL countered that where the tariff provision thwarted an "efficient" sale by one of FPL's partial requirements customers, FPL itself would be in a position to make the same sale. The Commission never responded to this argument, which on its face appears correct.
Further, the Commission's apparent effort to justify the casual quality of its analysis by pointing FPL in the direction of marginal cost pricing for its partial requirements customers is unconvincing; it is most unclear whether that proposed alternative is available in the real world of FERC regulation. Because the Commission's decision failed basic requirements of reasoned decisionmaking, we reverse and remand the case to the Commission.
FPL sells power both retail and wholesale. Among its wholesale transactions is "partial requirements" service, under which municipal utilities and rural electric cooperatives augment their self-produced power supplies with FPL's as necessary to meet their customers' demands. FPL's rates for these wholesale buyers are based on average costs - a demand charge based on the average cost of generation and transmission resources, and a per-unit energy charge based primarily on FPL's average fuel costs. FPL asserts, and the Commission acknowledges, Order on Rehearing, 70 FERC at 61,486, that this average cost pricing is in accord with the Commission's traditional rate design.
Another type of wholesale transaction takes place through the Florida Broker, which enables utilities in Florida to make bulk sales of "economy energy" to each other. On an electronic bulletin board the utilities make hourly postings of amounts of electricity they are interested in selling or buying, along with the incremental costs of producing what they are offering for sale, or the "decremental" costs that they would avert by a purchase. (These costs are evidently the variable costs of production, largely fuel, sometimes with a contribution to fixed capital costs.) The Broker automatically matches up the offers, linking the lowest incremental costs with the highest decremental ones, so that the first match made will be the one that averts the most net costs. The transaction price is midway between the proposals of each member of a matched pair, so that the value of the gain is split evenly between them. The Broker evidently keeps on matching until all economizing possibilities have been exhausted. Some of the net savings by utilities are flowed back to their customers. See Order on Rehearing, 70 FERC at 61,485; see also Order on Policy Issues, 66 FERC at 61,527 n.22 (describing Florida Broker operations). FPL and the Commission appear to agree that, unredressed, the interaction of its partial requirements tariff with the participation of FPL's partial requirements purchasers in the Florida Broker market will lead to some inefficient sales. In an example used by both parties, FPL might at a given hour be able to produce energy at 12 mills per kWh (its incremental cost) but be selling it to its partial requirements customer at 6 mills (its average cost). The latter would offer it to the Broker at 6 mills. Where another utility faced a decremental price of 10, the Broker would dutifully match them up. The transaction goes forward, causing a 12-mill cost to be incurred for a need that could have been satisfied for 10 mills.
FPL proposed solving the problem with a provision in its proposed comprehensive wholesale power sales tariff, limiting bulletin board sales by partial requirements purchasers:
The Customer may resell capacity and energy purchased under this Rate Schedule; provided, however, that ... the Customer shall not resell energy purchased under this Rate Schedule to other entities pursuant to an economy ... sale [i.e., an "economy energy" transaction] ... without FPL's consent. FPL will consent to such sale for any hour during which FPL's incremental cost for such resold power is expected to be equal to or less than the incremental revenue received under this Rate Schedule in connection with FPL's sale of such power to the Customer.
In rejecting the provision, FERC said that it was overly broad, prohibiting some hypothetically efficient trades on the economy energy market in addition to the inefficient trades of the sort hypothesized above. For example, it explained, where a partial requirements customer was buying at 6 mills, FPL's incremental cost was 8 mills, and the Florida Broker had a proposal to buy at 10 mills, FPL's rule would prevent the sale. Order on Policy Issues, 66 FERC at 61,528. The rule would, said FERC, bar a deal that could have saved 2 mills in energy expense.
Of course, one answer to the Commission's hypothetical seems laughably simple, and FPL made it: There appears no obstacle, in such a case, to FPL's making the sale. See Order on Rehearing, 70 FERC at 61,485 (referring to FPL's argument on rehearing). (We address below whether that solution may have some deleterious side effects.) After all, the partial requirements customer would be taking the power solely for purposes of engaging in the "economy energy" transaction. Further, FPL went on to say, allowing the partial requirements customer to make the sale may actually thwart an alternative and more efficient transaction: if the partial requirements customer offers 8-mill energy at 6 ...