Ohio Power Co. v. Federal Energy Regulatory Commission
Docket: No. 88-1293
Court: Court of Appeals for the D.C. Circuit; February 3, 1992; Federal Appellate Court
Ohio Power Company, an electricity producer, is regulated by both the Federal Energy Regulatory Commission (FERC) and the Securities and Exchange Commission (SEC). In a wholesale rate proceeding, FERC ruled that Ohio Power could not include the SEC-approved price it paid for coal from Southern Ohio Coal Company (SOCCO) in its wholesale rates if that price exceeded the market price for similar coal. Initially, a court vacated this FERC order based on § 318 of the Federal Power Act, which was interpreted as protecting SEC-approved prices from FERC modification. However, the Supreme Court found that § 318 did not resolve the conflict and remanded the case for further consideration.
The statutory framework originates from the Public Utility Act of 1935, which established the SEC and the Federal Power Commission (now FERC). Title I of this act, the Public Utility Holding Company Act (PUHCA), allows the SEC to regulate transactions between subsidiary companies to protect investors and consumers, requiring SEC approval for such transactions to be lawful. Title II, the Federal Power Act (FPA), tasks FERC with overseeing wholesale electric power transmission and sales, mandating the establishment of just and reasonable wholesale rates. Consequently, electric power companies like Ohio Power, which are affiliates of registered public utility holding companies, are subject to both SEC and FERC regulations.
Ohio Power Company, a subsidiary of American Electric Power Company, operates coal-burning generation plants and entered into a coal lease with Martinka Mine's owners in 1971. Prior to capitalizing its subsidiary SOCCO, Ohio Power required SEC approval under § 10 of the Public Utility Holding Company Act (PUHCA). The SEC approved Ohio Power's coal purchase from SOCCO at cost, including a reasonable return on investment. In 1982, Ohio Power applied to FERC for a wholesale rate increase, which was accepted except for including the SOCCO coal price, deemed unreasonable compared to market rates. Ohio Power argued that SEC had jurisdiction over inter-associate pricing and sought judicial resolution on regulatory conflicts under § 318 of the Federal Power Act (FPA), which determines governing requirements when PUHCA and FPA regulations conflict. FERC contended there was no conflict as it mandated a market price lower than costs, while SEC set a cost ceiling. The Court determined that Ohio Power faced conflicting regulations since FERC established different pricing for a SEC-approved contract, concluding both agencies regulated the same subject matter, thus requiring FERC to adhere to SEC's cost-based price. A separate concurrence highlighted FERC's failure to recognize prices deemed reasonable by other regulatory bodies. The Supreme Court later interpreted § 318 as applying only to specific conflicts, ruling that the overlapping regulatory jurisdiction present for Ohio Power was not addressed by § 318.
The Court remanded the case to determine whether FERC violated its own regulations and if the rate set by FERC is unjust and unreasonable due to its inclusion of costs approved by the SEC. Justice Stevens, in a concurring opinion, noted that despite overlapping authorities under § 318, there was no conflict between SEC and FERC regulations, as FERC regulated the portion of fuel costs Ohio Power could pass to customers, while the SEC set a ceiling on coal prices paid to suppliers. Stevens cautioned that allowing SEC to interfere with FERC’s wholesale rate regulation would counter congressional intent.
The analysis focused on 18 C.F.R. § 35.14(a)(7), which pertains to fuel price adjustments. Judge Mikva argued that this regulation prevents FERC from applying a market-price test when a cost-based coal price is approved by the SEC, concluding that the regulation creates a conclusive presumption of reasonableness for such costs. The term "deemed" in the regulation is pivotal, with Ohio Power asserting it establishes a conclusive presumption for including costs, while FERC claims it merely allows for a rebuttable presumption. Judge Mikva emphasized that interpretations contrary to the plain meaning of the text are not entitled to deference and noted that judicial precedents generally support the interpretation of "deemed" as establishing a conclusive presumption. Relevant case law from the circuit reinforces this reading, indicating that "deemed" in statutory language typically creates such a presumption.
The interpretation of § 35.14(a)(7) mandates that FERC include the SEC-approved cost-based price for SOCCO coal in Ohio Power's wholesale rate. The language of "deemed" within the regulation indicates a conclusive presumption rather than a rebuttable one, contrary to FERC's assertions that complicate its meaning. This conclusion is supported by the regulation's evolution from its original proposal to its final form, which shifted from a focus on "reasonable cost" to a clear directive that costs are "deemed reasonable and includable." Previous administrative interpretations that conflict with this clear language hold little weight, and if FERC intends to establish a rebuttable presumption, it must do so explicitly. Thus, FERC is required to acknowledge the SEC's price determination as reasonable and includable in Ohio Power's fuel costs, leading to a remand for further findings consistent with this ruling.
The overlapping regulatory authorities of the SEC and FERC create inherent conflicts for Ohio Power, particularly regarding the pricing of SOCCO coal. The Supreme Court's guidance in Arcadia indicates that § 318 is not the solution for these conflicts, leaving it to the court to reconcile discrepancies arising from FERC’s preference for market-based pricing versus the SEC's requirement to pay costs. Justice Stevens highlighted that, although market prices have historically been lower than SOCCO's costs, Ohio Power's assertion that market prices may exceed mining costs introduces regulatory discord, particularly if SEC orders are interpreted as setting both a price floor and ceiling.
FERC's argument that it is merely regulating Ohio Power's charges for power, rather than its costs for SOCCO coal, is rejected. By deeming part of the SOCCO coal price unreasonable and excluding it from Ohio Power’s wholesale rate, FERC impacts the economic relationship between Ohio Power and SOCCO, which is under SEC jurisdiction. The SEC has the statutory authority, per Section 13(b) of the PUHCA, to approve inter-associate sales prices, mandating that such prices be set "at cost." In contrast, FERC lacks equivalent authority and is limited to setting "just and reasonable" wholesale rates. When conflicts arise between specific and general provisions, courts favor the specific legislative intent. The SEC's orders approving Ohio Power's transactions with SOCCO reflect this cost-based pricing requirement, which FERC cannot override. Moreover, while FERC claims that SEC rules allow for a market price to be set below cost, it acknowledges that only the SEC can establish such a price. The SEC orders do not indicate an intention to set a market price below cost, nor do they impose conditions that would limit Ohio Power's obligation to pay the cost for SOCCO coal, thus adhering to the principles of cost-based pricing.
SEC Rule 90(a) prohibits associate companies from selling goods to one another at prices exceeding "cost," defined by Rule 91(a) as not surpassing a fair allocation of expenses. Historical SEC orders, such as those from 1971 and 1978, affirm that coal charges by Southern Ohio Coal Company (SOCCO) must align with actual costs. The emphasis on cost as a price ceiling stems from the potential for associate companies to inflate expenses, which Congress aimed to regulate under PUHCA, particularly to prevent excessive charges to subsidiary public utilities. While both the ceiling and floor of pricing are dictated by cost, any flexibility in cost-based pricing is reserved for SEC discretion. The orders dictate that Ohio Power must pay SOCCO coal's price equal to cost, rejecting FERC's claims to set a market-based price cap. Although FERC can influence the SEC's price-approval process through investigations and public notice requirements, it lacks authority to determine prices for inter-associate transfers governed by SEC rules. Consequently, FERC cannot exclude SEC-approved coal prices when calculating Ohio Power's wholesale rates. The conclusion affirms that FERC must respect the SEC's authority under PUHCA, necessitating a remand to ensure compliance with this ruling.
Section 13(b) of the Public Utility Holding Company Act (PUHCA) prohibits subsidiary companies of registered holding companies from engaging in service or sales contracts with associated companies unless prescribed by the Commission to protect public interest and ensure economic efficiency. The Supreme Court noted that Ohio Power received SEC approvals for capital transactions with Southern Ohio Coal Company (SOCCO) in 1978, 1979, and 1980. The SEC defines 'goods' to encompass coal and possesses the authority to deviate from the 'at cost' requirement under certain circumstances, but there is no indication that such authority was invoked for Ohio Power’s transactions. The SEC acknowledges that a strict 'lower-of-cost-or-market' interpretation could hinder affiliate transactions by preventing profit retention when costs are below market prices. While SEC Rule 90(d) allows prices to exceed cost, this provision was not applied in Ohio Power’s case. The court's interpretation aligns with the SEC’s submissions, despite not granting the SEC’s views deference.
