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Westar Energy, Inc. v. Federal Energy Regulatory Commission

June 12, 2009

WESTAR ENERGY, INC., ET AL., PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT



On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

The opinion of the court was delivered by: Kavanaugh, Circuit Judge

Argued March 26, 2009

Before: HENDERSON, TATEL and KAVANAUGH, Circuit Judges.

Exercising its statutory authority to ensure that rates for the sale of wholesale electric power are just and reasonable, the Federal Energy Regulatory Commission generally allows wholesale electricity sellers to sell at market-based rates -- unless the wholesaler possesses market power in a particular region, in which case it must make sales at cost-based prices. FERC's approach raises the issue at the heart of this dispute: Suppose a wholesaler sells energy in a region where it has market power but the energy ultimately is used in a region where the wholesaler does not possess market power. Because of the difficulty in monitoring transactions to determine where energy is ultimately used, the Commission has ruled that the dispositive factor in those circumstances is whether the wholesaler has market power at the point of sale -- not where the energy is actually used or "sinks." See Order No. 697, Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, 72 Fed. Reg. 39,904, 40,000 (July 20, 2007).

In this case, the Commission followed the point of sale test -- not a sink-based test -- and ordered two electricity wholesalers to make refunds to customers to the extent they had previously made sales in areas where they have market power at market-based prices. The wholesalers challenge the Commission's decision as arbitrary and capricious under the Administrative Procedure Act. We conclude that FERC's decision was reasonable, and we therefore deny the petitions for review.

I.

Electricity generators convert energy from coal, nuclear power, natural gas, or other sources into electricity. The generators then sell the electricity -- either (i) as wholesalers to utilities that serve retail customers or (ii) directly to retail customers.

Congress has assigned the Federal Energy Regulatory Commission the responsibility to ensure that all rates for jurisdictional sales are just and reasonable. 16 U.S.C. § 824d. FERC divides the areas served by an electricity wholesaler into two categories: mitigated and non-mitigated areas. Mitigated areas are those regions where a wholesaler possesses market power. Sales in a mitigated area must occur pursuant to a cost-based tariff to protect customers from the wholesaler's market power. In non-mitigated areas, the wholesaler may make sales under a market-based tariff -- that is, a tariff that allows the wholesaler to "enter into freely negotiated contracts with purchasers." Morgan Stanley Capital Group, Inc. v. Pub. Util. Dist. No. 1, 128 S.Ct. 2733, 2741 (2008).

Wholesalers often make "export sales" to utility customers who in turn sell energy at retail to end users outside of the wholesalers' mitigated areas. Westar Energy, Inc. and the Empire District Electric Company are electricity wholesalers that sell to utility customers outside of their mitigated areas.

In May 2005, Westar and Empire filed tariffs that proposed (i) cost-based rates for sales to customers serving energy needs within their mitigated areas and (ii) market-based rates for sales to customers when the energy would be used outside their mitigated areas. Under their proposals, the location where the energy is ultimately used -- or "sinks" -- would determine whether the sale would be made at market rates or cost-based rates. On several occasions between November 2005 and March 2006, FERC accepted similar sink-based tariffs filed by other wholesalers. See, e.g., Carolina Power & Light Co., 113 FERC ¶ 61,130 (2005).

In March 2006 -- before officially accepting petitioners' proposed tariffs -- FERC changed course and began rejecting the sink-based approach. MidAmerican Energy Co., 114 FERC ¶ 61,280 (2006). In August 2006, consistent with this new policy, FERC denied Empire's sink-based tariff and ordered it to pay refunds for sales made within its mitigated area that occurred after May 16, 2005, the earlier established refund effective date. In September, the Commission followed the same course with Westar, ordering refunds for offending sales made after June 7, 2005, previously established as Westar's refund effective date. Both parties petitioned for rehearing.

In July 2007, while those petitions for rehearing were pending, the Commission published Order No. 697, Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, 72 Fed. Reg. 39,904 (July 20, 2007). This Order -- issued after a notice-and-comment rulemaking -- rejected the sink-based test because FERC concluded that it "is unrealistic to believe" that such sales "can be traced to ensure that no improper sales are taking place" and noted the "complex administrative problems that would be associated with trying to monitor" those sales. Id. at 40,000.

Relying on Order No. 697 and its recent precedents, FERC affirmed the Empire and Westar decisions on rehearing. In this Court, the petitioners now contend that those orders are arbitrary and capricious under the Administrative ...


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