ML20049J659
| ML20049J659 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 03/10/1982 |
| From: | SPIEGEL & MCDIARMID |
| To: | NRC COMMISSION (OCM) |
| References | |
| PROJECT-564M ISSUANCES-A, NUDOCS 8203190097 | |
| Download: ML20049J659 (120) | |
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'g rll UNITED STATES OF AMERICA -
Q NUCLEAR REGULATORY COMMISS70N , ,
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In The Matter Of )
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Pacific Gas and Electric Company ) Docket Nos. 50-275, (Diablo Canyon Nuclear Power ) 50:276 SQ-31$
Plant, Unit 1, Unit 2 )
(Stanislaus Nuclear Project, ) Docket No. P-564-A Unit No. 1) )
ATTACHMENTS A AND B TO MOTION TO SUPPLEMENT " PETITION TO ENFORCE AND MODIFY LICENSE CONDITIONS" OR ALTERNATIVELY MOTION FOR LEAVE TO LODGE DOCUMENTS.
Law Office Of:
Spiegel & McDiarmid 2600 Virginia Ave., N.W.
Washington, D.C. 20037 3 202-333-4500 March 10, 1982 li O
8203190097 820310 '
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RECEIVED g g 3 jggg UNITED STATES COURT OF APPEALS SPIECEL & .~.5CIARMID FOR THE DISTRICT OF COLUMBIA CIRCUIT i
Pacific Gas and Electric Company )
I Petitioner, )
) Nos. 79-1882
- v. ) and
) 80-2192
{ )
Federal Energy Regulatory )
t Commission,
)
r )
Respondent. )
(_7
)
Southern California Edison Company )
)
Petitioner, )
) Nos. 79-1893
- v. ) and
) 80-2195
)
Federal Energy Regulatory )
Commission,
)
)
Respondent. )
)
i
{ BRIEF OF PETITIONER PACIFIC GAS AND ELECTRIC COMPANY ON PETITIONS TO REVIEW ORDERS OF THE FEDERAL ENERGY REGULATORY COMMISSION i
l ROBERT OHLBACH HOWARD V. GOLUB A. KIRK McKENZIE PACIFIC GAS AND ELECTRIC COMPANY
( 77 Beale Street San Francisco, California 94106 MORRIS M. DOYLE TERRY J. HOULIHAN McCUTCHEN, DOYLE, BROWN & ENERSEN Three Embarcadero Center San Francisco, California 94111 P
Attorneys for Pacific Gas
' and Electric Company
s - _. ._ . .
IN THE !
- i. UNITED STATES COURT OF APPEALS r' FOR THE DISTRICT OF COLUMBIA CIRCUIT f
Pacific Gas and Electric Company, )
)
Petitioner, )
)
- v. )
) Nos. 79-1882
, Federal Energy Regulatory ) and Commission, ) 80-2192
)
Respondent. )
)
- t. )
Southern California Edison Company, )
j- )
i Petitioner, )
)
- v. ) Nos. 79-1893 I ed
)
! 1 Federal Energy Regulatory ) 80-2195 Commission, )
)
Respondent. )
)
CERTIFICATE REQUIRED BY RULE 8 (c) OF THE GENERAL RULES OF THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT t
The undersigned, counsel of record for Petitioner Pacific Gas and Electric Company, certifies that the following listed parties appeared below.in FERC Docket No. E-7777 (Phase II):
l Intervenors
- Northern California Power Agency and its members
!. - Cities of Anaheim, Riverside, Colton, Azusa, Alameda, Healdsburg, Lodi, Lompoc, Santa Clara l.
and Ukiah, California
- The intervenors are likely to argue that the orders under review should be affirmed.
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Respondents r- O I
- San Diego Gas and Electric Company
- Southern California Edison Company
., - Pacific Gas and Electric Company
- PGandE and Southern California Edison Company contend that the orders under review should be set aside.
The following are subsidiaries or affiliates of Peti-r L'oner Pacific Gas and Electric Company ("PGandE"):
Alaska California LNG Company Alberta and Southern Gas Co. Ltd.
Alberta Natural Gas Company Ltd.
L Calaska Energy Company Eureka Energy Company I' Gas Lines, Inc.
t Natural Gas Corporation of California Pacific Gas LNG Terminal Company Pacific Gas Marine Company Pacific Gas Transmission Company Pacific Transmission Supply Company Rocky Mountain Gas Transmission Company Standard Pacific Gas Line Incorporated These representations are made in order that the Judges of this Court may evaluate possible disqualification or recusal.
Respectfully submitted,
"~
ROBERT OHLBACH
- HOWARD V. GOLUB A. KIRK McKENZIE By k.
A. Kirk McKenzie'
' Pacific Gas and Electric Company l" P. O. Box 7442 San Francisco, CA 94120 (415) 781-4211 U Attorneys for Petitioner Pacific Gas and Electric Company
, (
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[' REQUEST FOR ORAL ARGUMENT i
Petitioner Pacific Gas and Electric Company requests i
that this matter be set for oral argument. The petitions for F
review present important questions concerning the scope of the Federal Energy Regulatory Commission's jurisdiction under section 205(c) of the Federal Power Act, as well as the scope
, of its authority to order wheeling. In addition, there may be questions concerning the proceed ngs below.
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~( TABLE OF CONTENTS Page STATEMENT OF THE ISSUES . . . . . . . . . . 3 IDENTIFICATION OF PARTIES, CONTRACTS AND RULINGS . . . . . . . . . . . . . . 4 HISTORY OF THE CASE . . . . . . . . . . . 8 i
SUMMARY
OF ARGUMENT . . . . . . . . . . . 15 ARGUMENT . . . . . . . . . . . . . . . 18
(, I. THE STANISLAUS COMMITMENTS ARE NOT A
" PRACTICE" WITHIN THE MEANING OF SEC- t TION 205(c) OF THE FEDERAL POWER ACT, !
AND THE COMMISSION'S ORDER DIRECTING SECTIONS I and VII THEREOF TO BE FILED i
SHOULD BE SET ASIDE . . . . . . . . . 18
! A. The Commission Has Misconstrued Section 205(c). . . . . . . . . . 19 B. The History And Nature Of The Stanislaus Commitments . . . . . . . 21 I
C. In Ordering PGandE To File Sections I L
And VII Of The Stanislaus Commitments, I
The Commission Misread Its Own Precedents . . . . . . . . . . . 24 t.
II. THE JUNE 2 ORDER EXCEEDS THE COMMISSION'S
! i AUTHORITY BECAUSE IT IMPROPERLY EXPANDS i
PGandE'S VOLUNTARY UNDERTAKING IN THE STANISLAUS COMMITMENTS TO NEGOTIATE 1
INDIVIDUAp WHEELING AGREEMENTS IN AP-PROPRIATE CASES. . . . . . . . . . . 26
\ -
l III. THE COMMISSION ACTED IMPROPERLY IN AS-
)* SERTING JURISDICTION OVER SECTIONS I
,t, AND VII OF THE STANISLAUS COMMITMENTS BECAUSE THEY ARE LICENSE CONDITIONS OF I THE NUCLEAR REGULATORY COMMISSION m ENFORCEABLE BY THAT COMMISSION. . . . . . 37 f
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(! i r-- O. Page l A. The Stanislaus Commitments Are NRC License Conditions Enforceable By That Agency. . . . . . . . . . . 38 i
B. The NRC Has Primary Jurisdiction r
Over All Issues Relating To The Enforcement Of The Stanislaus Commitments. . . . . . . . . . . 40 7 IV. THE JUNE 2, 1980 ORDER MUST BE SET
' ASIDE BECAUSE IT DOES NOT SET FORTH AN ADEQUATE BASIS FOR ITS CONCLUSIONS . . . 43 E
h.
A. There Is No Direct Relationship Between The Stanislaus Commitments And The Pacific Intertie Agreement . . . 44 B. There Is No Direct Relationship Between The Three Contracts To Which Both Edison And PGandE Are Parties
[
L .,
And The Pacific Intertie Agreement . . . 45 V. BY EXPANDING THE SCOPE OF THE E-7777 (PHASE II) PROCEEDING ON THE EVE OF
- HEARINGS, THE COMMISSION HAS DEPRIVED PGandE OF DUE PROCESS. . . . . . . . . 47
( CONCLUSION . . . . . . . . . . . . . . 51 l
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TABLE OF AUTHORITIES r- O i Cases Pages Armstrong v. Manzo, 380 U.S. 545 (1965). . . . . 47 I
Borough of Lansdale v. FPC, 161 U.S. App. D.C. 185, (1974) . . . . . . . . . . 20 California v. FPC, 369 U.S. 482 (1962) . . . . . 42 California v. Kleppe, 604 F.2d 1187 (9th Cir.
[ 1979) . . . . . . . . . . . . . . . 42 Central Iowa Power Coop. v. FERC, 196 U.S.
App. D.C. 249, 606 F.2d 1156 (1979) . . . . . 34 FPC v. Metropolitan Edison Co., 304 U.S.
375 (1938). . . . . . . . . . . . . . 50 FPC v. Texaco, Inc., 417 U.S. 380 (1974) . . . . 17, 43, 47 Federal Trade Commission v. Standard Oil Co. of California, 449 U.S. 232 (1980) . . . . 50
- Florida Power & Light Co. v. FERC, 660 F.2d 668 (5th Cir. Unit B, 1981) . . . . . . . . 3, 16, 24, 26, 27, 29, 30, 31, 32, l 37 Get Oil Out! Inc. v. Exxon Corp., 586 F.2d I 726 (9th Cir. 1978). . . . . . . . . . . 41 i..
Gonzales v. United States, 589 F.2d 465 (9th Cir. 1979). . . . . . . . . . . . . . 48 Michigan-Wisconsin Pipe Line, 34 F.P.C. 621
, (1965) . . . . . . . . . . . . . . . 24, 25, 26 1
l- ~
NAACP v. Federal Power Commission, 425 U.S.
i 662 (1976). . . . . . . . . . . . . . 42
- i. *New York State Electric & Gas Corp. v.
F.E.R.C. 638 F.2d 388 (2d Cir.1980) , cert.
denied, 50 U.S.L.W. 3237 (1981). . . . . . . 16-17, 35, 36
, Niagara Mohawk Power Corp. v. Federal Power Commission, 525 F.2d 966 (2d Cir.1976) . 50
{ . . .
0
- u Cases chiefly relied upon iii.
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Pagas I
t, Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) 19, 28, 33 rO 1 -
PSG Co. v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc. , 417 F.2d 659 (9th Cir. 1969),
Egrt. denied 397 U.S. 918 (1970) . . . . . . 48 Permian Basin Area Rate Cases, 390 U.S. 747 (1968) . . . . . . . . . . . . . . . 20 Richmond Power & Light, Etc. v. F.E.R.C., 187 U.S. App. D.C. 399, 574 F.2d 610 (1978) . . . . 17, 33, 34 Train v. Colorado Public Interest Research Group, 426 U.S. 1 (1976) . . . . . . . . . 41 f Statutes Atomic Energy Act I Section 104, 42 U.S.C. S 2134 . . . . . . . 39 Section 105 (c) , 42 U.S.C. S 2135(c) . . . . . 22, 39 I
i
! Federal Power Act, Section 205 (c) , 16 U.S.C. S 824d . . . . . . passim i
Section 206, 16 U.S .C. S 824e . . . . . . . passim Section 211, 16 U.S.C. S 824j . . . . . . . 28, 36-37 Section 212, 16 U.S.C. S 824K . . . . . . . 28, 36-37 1
. Miscellaneous i
3 K. Davis, ADMINISTRATIVE LAW TREATISE, i S 14.11 at 50 (2d ed. 1980) . . . . . . . . 47 i
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O UNITED STATES C= RT OF A>> EATS FOR THE DISTRICT OF COLUMBIA CIRCUIT Pacific Gas and Electric Company )
)
Petitioner, )
) Nos. 79-1892
) and
- v. ) 80-2192
)
- ^
Federal Energy Regulatory )
Commission, )
1 s )
Respondent. )
F )
)
Southern California Edison Company )
)
Petitioner, )
) Nos. 79-1893
) and
<r v. ) 80-2195
} )
Federal Energy Regulatory )
- Commission, )
' )
Respondent. )
BRIEF OF PETITIONER PACIFIC GAS AND ELECTRIC COMPANY ON PETITIONS TO REVIEW ORDERS OF THE FEDERAL ENERGY REGULATORY COMMISSION I
Pacific Gas and Electric Company ("PGandE") files 4
this brief seeking reversal of certain orders of the Federal Energy Regulatory Commission ("FERC" or "the Commission").
The orders arise out of FERC docket number E-7777 (Phase II),
in which PGandE is a respondent, and which the FERC commenced for the purpose of determining whether four contracts to which PGandE is party are "just and reasonable" within the O
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() meaning of section 206 of the Federal Power Act. The orders of which review is sought (1) expanded the scope of the E-7777 (Phase II) proceeding on the eve of hearing to include a major new subject, the Pacific Intertie Agreement and related contracts, (2) ordered PGandE to file with the Commission certain sections (I and VII, regarding the avail-ability of transmission services) of a set of Nuclear Regulatory Commission ("NRC") plant license conditions known as the Stanislaus Commitments, and (3) ordered Southern California Edison Company (" Edison") to file with the Commission three
, non-jurisdictional contracts to which PGandE is a party.
4 i
The proceeding below is both complex and lengthy.
The formal hearing commenced on June 26, 1979 and continued daily with few interruptions until April of 1981. Trial of a related proceeding, Pacific Gas and Electric Company, FERC Project No. 2735 (Helms Project), commenced immediately i thereafter and extended into September of this year. Sub-i stantial parts of the Helms record have been incorporated in the E-7777 (II) record below. Parties are presently drafting post hearing briefs for the presiding administrative law judge.
The record created has the dubious distinction of being the longest in the Commission's history, in no small measure due r- to one of the orders appealed from here.
The order directing the filing of sections I and VII of the Stanislaus Commitments is similar to that reversed by o
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() in Florida Power & Light v. FERC, 660 F.2d 668 (5th Cir. ,
Unit B, 1981).
1 STATEMENT OF THE ISSUES ]
- 1. Did the Commission misinterpret section 205(c) !
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l of the Federal Power Act, 16 U.S.C. S 824d, when it held, 1
under the circumstances of this case, that nuclear plant license conditions setting forth guidelines for the provision of transmission or " wheeling" service had to be filed as a u.
" practice"?
r-l 2. Did the Commission exceed its statutory author-
, ity by asserting jurisdiction over such nuclear plant license i
conditions pertaining to transmission or " wheeling" service?
i
- 3. Was the Commission's conclusion that the Stanis-laus Commitments and certain non-jurisdictional contracts were "related to" the Pacific Intertie Agreement supported by a reasoned analysis of substantial evidence?
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- 4. Does the doctrine of primary jurisdiction require the Commission to decline to exercise jurisdiction i
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over nuclear plant license conditions imposed and enforceable by the NRC?
- 5. Did the Commission abuse its discretion and
( deny PGandE its right to procedural due process when it expanded, on the eve of hearings and under the guise of
" interpreting" a five-year old order, a section 206 hearing from an inquiry regarding four named contracts into one
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-() covering a broad range of unnamed contracts many of which were not within the Commission's jurisdiction?
- 6. Is the Commission's order expanding the .
scope of the section 206 hearing interlocutory and thus not subject to review?
IDENTIFICATION OF PARTIES, CONTRACTS AND RULINGS PGandE is an investor owned utility operating in California. It is in the business of generating, transmitting, t.
distributing and selling electric energy in forty-seven l counties in northern and central California. PGandE's service area encompasses a population of about 9.1 million; the Company serves the needs of 3.3 million electric customers.
In order to provide these customers with adequate and reliable service, PGandE has over the years entered into a wide range of contracts with other public and private electric utilities, some of which provide for the interconnection and/or integrated operation of PGandE's system with other electric utility i
I systems. Some of those contracts are referred to in the orders appealed from and require identification. These agreements include:
(1) A 1970 contract between PGandE and the Sacramento Municipal Utilities District ( "SMUD") which provides for integrated operation of the SMUD and PGandE electrical systems, as well as for the purchase and sale of electric capacity and energy; .
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() (2) The California Power Pool Agreement, a contract l i
providing for the interconnection and coordinated operation of the electric systems of PGandE, Southern California Edison i Company (" Edison") and San Diego Gas and Electric Company ,
f
(" San Diego");
I (3) A contract between PGandE and the United States Department of Interior known as Contract 14-06-200-l 2948A which provides for the integrated operation of the l
electrical generating systems of PGandE and the Department j of Interior's Central Valley Project, as well as the purchase and sale of electric capacity and energy; and (4) The so-called "Seven Party Agrmement," a l
! contract among seven privately owned utilities in the Pacific Northwest and California which, until its termination in f' 1978, provided for the sale of surplus hydroelectric energy from the Northwest to California, among other things.
f.- The orders appealed from also refer to the Pacific Intertie and Pacific Intertie Agreement. The Pacific Intertie
(" AC") lines consists of two 500-kv alternating current and one 750-kv direct current ("DC") line. The AC lines extend from a point near the Washington-Oregon border through
. Oregon and California to a point near Los Angeles, a distance
. of nearly 1000 miles. The DC line originates near the northern terminus of the AC lines, then runs through Oregon and Nevada to the Sylmar substation ~-of the Los Angeles Department of t
Water and Power. Different segments of the AC lines are
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l O owned by the Bonneville Power Administration, Portland General Electric Co. , Pacific Power and Light Co. , the U.S. Bureau of Reclamation, PGandE, and Edison. The DC line in Oregon is owned by Bonneville; the segment in Nevada and California by the Los Angeles Department of Water and Power and Edison.
The AC lines extending through the PGandE and Edison service areas transmit power both locally and interstate. The Pacific Intertie Agreement is a contract among PGandE, Edison and San Diego in which, among other things, they agree to share costs of the AC lines allocable to interstate uses and share the cost of Edison's DC line interest. (See Para. 5.01.)
The Companies also agree generally .to share certain obligations
,to provide transmission and other services under contracts negotiated contemporaneously with the Agreement. (Para. 6.01.)
Finally, there are provisions regarding the sharing of certain uses or benefits of Intertie capacity available to the Companies.
i ' (E.g., Para. 7.01.)
On March 14, 1974, the administrative proceeding out of which this case arises, FERC Docket No. E-7777 (Phase II),
l< became an investigation under section 206 of the Federal Power l _
Act, 16 U.S.C. S 824e, of the contracts numbered (1) through (4) above. The purpose of the proceeding was to determine whether the four contracts were "just and reasonable" within l
the meaning of section 206. The original parties to the proceeding were PGandE,'a group of municipal electric systems in Northern California who purchase power at wholesale from
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l PGandE, and a joint powers agency of municipal systems in
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Northern California known as the Northern California Power Agency ("NCPA"). The group of municipal systems participating directly as parties consisted of the Cities of Alameda, 1
Lodi, Lompoc, Santa Clara, and Ukiah, California (" Northern l
\
r Cities"). In June of 1974, a group of Southern California i
Cities (Anaheim, Riverside, Banning, Colton and Azusa, referred l to hereinaf ter as the " Southern Cities") filed a petition to intervene in Docket No. E-7777 (Phase II) and moved that i
l' Edison be added as a party. The Commission granced the petition for intervention and joined Edison as a respondent in May of 1975. Collectively, the Northern and Southern Cities and NCPA are sometimes referred to hereinafter as the "intervenors."
The three orders of which PGandE seeks review in this case were issued on December 28, 1978, June 14, 1979 and i . June 2, 1980. The first of these orders was the first announce-ment by the Commission that the Pacific Intertie Agreement was
'i a part of the subject matter of Docket No. E-7777 (Phase II) and directed PGandE and Edison to file with the Commission
(
"all classifications, practices, rules, regulations or contracts which in any manner affect or relate to the Pacific Intertie Agreement." (R 1254.)1 The second order made clear that by 1 References with an R followed by a number are to the cor-responding page in the Certificate of Record in Lieu of Record filed in this docket November 2, 1979 and supplemented Novem-i ber 28, 1980 and December 11, 1981.
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() this language the Commission intended that the classifications, practices, etc. were not merely to be filed as evidence in the case below but were to be filed with the Commission as rate schedules. The third order, issued on June 2, 1980, interpreted this language of the earlier orders to require that Sections I and VII of the Stanislaus Commitments were '
" practices" affecting the Pacific Intertie Agreement, and it directed PGandE to file these sections of the Commitments with the PERC as part of a rate schedule.
HISTORY OF THE CASE i
As may be evident from the introductory material above, the administrative proceeding out of which this case f
arises has an exceptionally long and complex procedural history. Because some understanding of that history is necessary for resolution of the legal issues presented, the history of FERC Docket E-7777 (Phase II) is set forth in somewhat greater detail than is customary.
The proceeding began on September 29, 1972, when PGandE filed with the Federal Power Commission ("FPC") , pre-I decessor of the FERC, a revised tariff increasing PGandE's wholesale electric rates. Shortly after the filing, the Northern Cities filed a petition to intervene and protest in the docket. The Northern Cities' petition alleged, among other things, that PGandE was engaged in various forms of anticompetitive behavior" including attempts to limit the cities' access to less expensive sources of generation.
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' A petition to intervene with similar allegations was filed at the same time by NCPA.
Af ter consideration of the allegations made by the Northern Cities and NCPA, the FPC granted the petitions to intervene, suspended the proposed rate increase for the
,, maximum statutory period, and set the matter for hearing.
Subsequently, on September 25, 1973, the FPC staff moved
! to " dismiss and remove from this proceeding all matters i.
dealing with the issue of anticompetitive activities . ..
t I The motion was granted by the Administrative Law Judge, and NCPA and the Northern Cities eventually sought review .
of it from the FPC by filing a " Motion for Extraordinary Relief."
l The FPC granted the motion in an order issued on l
March 14, 1974. This order bifurcated the case, separating p, the rate issues from the allegations of anticompetitive con-duct, and instituted a " Phase II" proceeding to conduct "an investigation of the contracts in question pursuant to Sec-i tion 206 of the Federal Power Act." (R 106.) A footnote in the March 14 order made clear that the " contracts in question" were the four described in the Identification of Parties, *
'I Contracts and Rulings above. (R 105.) The order made no mention of the Pacific Intertie Agreement.
l After the order of March 14, 1974, the Commission did not address the scope of the proceeding again until 1978.
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- () In the meantime, the parties began to prepare their testimony and engaged in extensive discovery.2
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On August 9, 1978, as the final deadline for filing g testimony drew near, the Commission staff filed with the Administrative Law Judge a motion seeking " clarification" of the scope of the proceeding. In'its motion, the staff argued that the Pacific Intertie Agreement and all contracts related thereto should properly be considered a subject of the E-7777 (Phase II) docket. PGandE and Edison vigorously opposed the motion, arguing that neither the order of March 14, 1974 nor any subsequent order of the Commission had referred to the Pacific Intertie Agreement. The respondents pointed
- to many statements in the administrative record to support their position and showed that they had relied to their detri-ment on these statements in preparing their case.
Notwithstanding the respondents' showing of detri-mental reliance, the Administrative Law Judge ruled on Septem-i , ber 25, 1978 that " practices and arrangements of the [respon-dents] with respect to the Pacific Intertie" were within the l'
scope of the E-7777 (Phase II) procseding. (R 1245.) The Judge then certified this ruling to the full Commission.
s i
2 In the Spring of 1975, Edison and the Southern Cities were added as parties to the proceeding after the Cities filed a petition to intervene and a motion that Edison be
! joined as a party.
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() On December 28, 1978, the FERC issued the first of t6e three orders under review here, its Order Affirming Pre-siding Judge on Certified Questions, Granting Motions for Con-i solidation, and Granting Motions to Compel Filing (R 1241-63).
F i Although acknowledging that the Pacific Intertie Agreement had not been referred to in the order of March 14, 1974, the Com-l' 'l mission pointed to language in the 1974 order which suggested that if PGandE was found to have " limited custo,*ers' access i
to alternate supply sources," the Commission could grant appro-I priate relief. Because the Pacific Intertie was a transmission system that could be used to transmit power from " alternate
\
supply sources," FERC reasoned, the Pacific Intertie Agreement
', , was an appropriate subject for inquiry in the proceeding.
The Commission concluded:
! "We shall hereinafter order the I
signatories of the Pacific Intertie Agreement . . . to file (jointly or
} individually) with the Commission in
- .. f this docket all classifications, prac-tices, rules, Tegulations or contracts which in any manner affect or relate to
- the Pacific Intertie Agreement." (R 1254.)
In response to the December 28, 1978 order, PGandE filed a petition for rehearing (R 1416-1425) which protested that the expansion of the proceeding on the eve of the hearing deniad PGandE due process. PGandE also conditionally objected that in the order to file materials related to the Pacific Intertie Agreement, the Commission had exceeded its jurisdiction
)
under section 205 (c) of the Federal Power Act. It was PGandE's O
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.. ( ) position that if the order to file materials related to the Pacific Intertie Agreement was intended to provide evidence
- relevant to an evaluation of that Agreement, PGandE would com-ply. If, however, the order was intended to require some formal filing of the materials covered pursuant to section 205(c) of the Act, then the order misconstrued the statute and exceeded the Commission's jurisdiction. Accordingly, on January 29, 1979, PGandE and San Diego jointly filed with the Administra-tive Law Judge 21 documents chosen "to provide an evidentiary I' record for deciding issues which may be raised concerning the Pacific Intertie Agreement." The Commission's trial i
! staff was not satisfied with this filing, and on March 5, 1979 it filed a " Motion to Perfect Compliance" seeking an order that the agreements submitted to the Administrative
'l Law Judge be formally filed with the Commission.
The Commission disposed of both the petitions I
' l ,' for rehearing and the motion for compliance in its order of June 14, 1979, the second order under review in this case. (R 1641-1655.) The Commission found none of the I grounds urged by respondents sufficient to warrant rehearing l and. reiterated, by reference to the December 28, 1978 order, I that the respondents were to file with the Commission as rate schedules "all classifications, practices,. rules, regulations or contracts that in any manner affect or relate to the Paci-fic Intertie Agreement." The Commission stated explicitly:
12 M e"* e e e- e m see e +. 4 e e d3 e e*De O /m ae Q trs -QQ N m O- Q & O N,@ @ O M & M O O M C C
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- () "These additional contracts become part of the subject matter of the pro-
{ l ceeding and are subject to modification
, to the extent of the Commission's autho-i rity." (R 1649.)
Instead of directing the respondents to file as rate schedules those documents that had been submitted as i
evidence to the Administrative Law Judge, however, the June 14 i order lef t it up to the respondents to decide which documents I met the Commission's description of items that "in any manner f,
affect or relate to" the Intertie Agreement. The Commission f~
- j also stated that if staff believed that submissions made
, by respondents pursuant to the order were inadequate, it should file a motion to compel filing. Finally, the Commission
- specifically directed Edison to file two agreements allegedly related to the Pacific Intertie Agreement, called the f "DC Intertis Agreement" and the "Sylmar Agreement."
i In response to the June 14 order, PGandE on July 5,
!. 1979 filed under protest with the Commission ten documents that in its judgment were responsive to the June 14 order.
PGandE also pointed out that a number of contracts already on file with the Commission appeared to be within the scope of the June 14 order. And because the June 14 order also
! constituted a denial of PGandE's petition for rehearing
- of the December 28, 1978 order, PGandE filed a timely petition for review with this Court on August 13, 1979. (No. 79-1882.)
i Even though PGandE and Edison had filed with both the Administrative Law Judge and the Commission all contracts
({}
13 t
1 le.
() . which to them seemed related to the Pacific Intertie Agreement, the FERC staff remained dissatisfied. On August 34, 1979, it filed yet another motion with the Commission entitled
" Motion to Compel Filing." The motion set forth in appendices
, additional contracts that the staff argued were related to the Pacific Intertie Agreement. However, a substantial part of the motion was devoted to an argument that PGandE should l be required to file a set of nuclear plant license conditions i.
known as the Stanislaus Commitments. PGandE opposed the l'
- staff's motion to compel filing. (R 2239-2248.)
The Commission did not rule on the motion to compel filing until June 2, 1980. On that date, the Commission issued its Order on Motion to Compel Filing of Certain Docu-
)
ments (R 2249-2263), the third order under review in this case. The June 2 order rejected PGandE's arguments and directed
{
it to file sections I and VII of the Stanislaus Commitments.
l lJ The June 2 order directed PGandE to file only two of the
- nine sections of the Stanislaus Commitments because, the t
Commission concluded, only those two sections dealt specifically I
with transmission issues. The order also directed Edison a
to file certain contracts, including three to which PGandE I
was a party.
PGandE filed sections I and VII of the Commitments with the Commission under protest on June 17, 1980 (R 2264-2270). PGandE also file'd a timely petition for rehearing L.
- ()
14
--pA.. mn an , ,o g g g , acm rg Ro, oa *o C ** **f N N M m w m yn. yee em e -
1 of the order. (R 2471-2479.) On August 8, 1980, the Commis-
!.() sion issued its order denying the petitions for rehearing.
l~ (R 2481.) On September 2, 1980, both PGandE and Edison filed I
timely petitions for review of the June 2 order with this
, f Court (Docket Nos. 80-2192 and 80-2195, respectively). By order dated March 3,1981, these petitions for review were consolidated with those filed in response to the June 14, l 1979 order.
I
SUMMARY
OF ARGUMENT All three of the FERC orders under review in this case, and especially that of June 2,1980, exceeded the Com-mission's authority under the Federal Power Act. The orders are therefore invalid.
The June 2, 1980 order directing PGandE to file l sections I and VII of the Stanislaus Commitments is invalid I t on several grounds. The Commission's conclusion that the Stanislaus Commitments were " practices" related to the Pacific Intertie Agreement vithin the meaning of section 205(c) of the Federal Power Act misconstrues the statute. The general scheme of the Federal Power Act calls first for the voluntary negotiation of agreements among utilities I The Commitments which are then reviewed by the Commission.
- in pertinent part are guidelines for the negotiation of i
future contracts for transmission service. Such principles for future negotiations are not practices relating to rates and charges in existing contracts within the meaning of
[]}
15 l 4
^
l
.F ,
t
. r t
J
!.-()
,I section 205(c). To require the filing and review of such l
principles would change the basic order and nature of regulation
[~ under the Federal Power Act. The Commission previously construed section 205(c) only to require the filing of " practices" -
i-akin to eligibility requirements for service under a filed tariff schedule. Nothing in the Commitments is comparable l d to such an eligibility requirement for service under existing rates or contracts. Their operation is prospective.
PGandE long ago submitted the Stanislaus Commitments as an evidentiary exhibit in the E-7777 (Phase II) proceeding.
, In view of this, the obvious purpose of the order directing that sections I and VI:: of the Commitments be filed is to I enable the Commission to review and perhaps modify them.
The Commission has openly confirmed that intention in its
~
order.. But it is clear from decisions of the United States Supreme Court, this Court and other federal courts that the l~
i Commission has no such power, because the sections of the Commitments at issue set guidelines for the provision of
- wheeling services. Modification of the Commitments would change obligations to negotiate wheeling arrangements that PGandE has voluntarily undertaken. FERC has the power to i
l_ order wheeling or to modify voluntary wheeling arrangements
. only in very limited circumstances, and then only after it has complied with the detailed procedural requirements of sections 211 and 212 of the Federal Power Act. Florida Power & Light Co. v. F.E.R.C., 660 F.2d 668 (5th Cir. Unit B,
[}
16
-,___e --
y._ . _ _ _ _ , . _ _ _ _ _ _ _ . _ _ _ , , _ -- -
li d
p- (]) 1981); New York State Electric & Gas Corp. v. F.E.R.C.,
! 638 F.2d 388 (2d Cir. 1980), cert. denied, 50 U.S.L.W. 3237 (1981); Richmond Power & Light v. FERC, 187 U.S. App. D.C. 399, 409, 574 F.2d 610, 620 (1978). It is undisputed that the Commission has not done so in the orders under review here.
The June 2,1980 order is also invalid because the Stanislaus commitments are nuclear plant license conditions
, imposed and enforceable by the Nuclear Regulatory Commission.
i
That agency has primary jurisdiction over the Commitments to which FERC should defer.
In addition to the reasons set forth above, the 4
i June 2,1980 order must be set aside because "it falls short i , of that standard of clarity that administrative orders must
. exhibit," FPC v. Texaco, Inc., 417 U.S. 380, 395-96 (1974),
and is not based on substantial or any evidence. The Commission's order fails to articulate the direct relationship that allegedly exists between the Stanislaus Commitments (and certain
- contracts the order directed to be filed) and the Pacific Intertie Agreement. A brief examination of the Intertie Agreement's provisions demonstrates that there is, indeed, no such relationship. There is no evidence in the record on which to base a contrary conclusion.
The errors in the June 2, 1980 order represent a compounding of the mistake the Commission made in the two other orders under review here, those of December 28, 1978 and June 14, 1979. In the December 28 order, which the June 14 17 p.._........-,,..-...---_-.--,---m . - _ . . .
f' e
'-],
() order reaffirmed, the Commission ruled for the first time and on the very eve of hearings that the Pacific Intertie Agree-ment and all " classifications, practices, rules, regulations or contracts in any manner affecting or relating" thereto were part of the subject matter of the E-7777 (Phase II) proceeding.
The effect of this ruling has been to deny PGandE due process because the abrupt enlargement of the proceeding deprived PGandE of an adequate opportunity to prepare its case. In addition, the inclusion of the Pacific Intertie Agreement l, and related agreements in the E-7777 (Phase II) docket caused
. the proceeding to drag on substantially longer than it otherwise wovid have, thus subjecting PGandE to greatly increased
, litigation expenses. PGandE concedes, however, that its due process claim is not yet ripe for judicial review.
f ARGUMENT I.
THE STANISLAUS COMMITMENTS ARE NOT A " PRACTICE" WITHIN THE MEANING OF SECTION 205(c)
OF THE FEDERAL POWER ACT, AND THE COMMISSION'S ORDER DIRECTING SECTIONS I AND VII THEREOF TO BE FILED SHOULD BE SET ASIDE In ordering the Stanislaus Commitments to be filed the Commission misconstrued section 205(c) of the Federal Power Act, 16 U.S.C. 824d(c), and exceeded its jurisdiction.
Section 205(c) provides that "every public utility shall file with the Commission . . .
s _
O 18
1 . .
i
. - (]) a) schedules showing all rates and charges . . .
subject to the jurisdiction of the Commission,"
- _ b) " classifications, practices, and regulations affecting such rates and charges," and c) " contracts which in any manner affect or relate to such rates, charges, classifications, and services."
l The June 2, 1980 order asserted that sections I and VII of the Commitments are " practices" related to the Pacific Intertie Agreement within the meaning of this section.
4 That conclusion is inconsistent with the language of 205(c)
'r-
!t and the Commission's own precedents, and it represents an indirect effort by the Commission to expand its very limited
- authority to order wheeling.3 For these reasons, those portions l
of the June 2, 1980 order relating to the Stanislaus Commit-ments must be set aside.
- A. The Commission Has Misconstrued Section 205(c)
The order of the Commission requiring the filing i
l of Sections I and VII of the Stanislaus Commitments is incon-t.
sistent with both the language of Section 205 and the general j scheme of the Federal Power Act.
Under the Federal Power Act, parties are free to develop arrangements suitable to their particular needs.
Af ter that occurs, the Commission may review the voluntary 3 Wheeling has been defined as the " transfer by direct transmission or displacement (of] electric power from one utility to another over the facilities of an intermediate utility." Otter Tail Power Co. v. United States, 410 U.S. 366, 368 (1973).
O
~.
19 l
p .. ,_ .. , . s ,...-.......,,a,,.u..,__,_..=_.- -.. --
- s _ , _ . _ . _ . - . . .
9 Y
,() contractual arrangements and revise them where there is an " unequivocal public necessity" for such revision. This essential nature of the regulatory scheme of the Federal Power Act has been acknowledged by the Supreme Court: l The regulatory system created by f the Act is premised on contractual i agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circuastances of unequivocal public necessity.
Permian Basin Area Rate Cases, 390 U.S. 747, 822 (1968).
f See also Borough of Lansdale v. FPC, 161 U.S. App. D.C. 185,
,, 494 F. 2d 1104 (1974).
This basic nature of the regulatory scheme was also noted by this Court in its discussion of the so-called Sierra-Mobile doctrine in Lansdale, supra:
9 l
[I]t is the purpose of that [ Sierra-Mobile] doctrine to subordinate the statutory filing mechanism to the broad and familiar dictates of contract law . . . .
. , Contracts govern the legality of filings not because the contracts may themselves have been previously filed but because
' the regulatory statutes permit relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts, which to that end must be filed with the Commiss'on and made public. United Gas Pipe Line Co. v. Mobile Gas Service Corp., supra, 350 U.S. at 399, 76 S. Ct. at 378.
161 U.S. App. D.C. at 194, 494 F.26 at 1113.
Section 205(c): is part of the basic supervisory l scheme described above. The simple and straightforward
[)
20
~
1
%. , . . . ._ . . _ _ ._.w... _ _ _ ~ .- _ . _.- -
7..
4 i
() meaning of Section 205(c) is that utilities must file practices,
. l rules or contracts which have some impact on charges or '
rates already filed with the Commission and over which the Commission has regulatory authority. It is a provision designed to insure that the Commission and others have information pertinent to its rate regulation process. It is not a mechanism for extending the Commissions's jurisdiction over new matters.
In particular, it is not a mechanism for reversing the basic scheme of the Federal Power Act by requiring utilities first p
! to submit broad principles for contracts to be negotiated In the future and then to negotiate contracts pursuant to
,' those FERC-approved principles. The Commission's order puts q the cart before the horse.
B. The History And Nature Of The Stanislaus Commitments The Stanislaus Commitments are not a " practice" I
within the meaning of Section 205 (c) to be filed and reviewed prior to the negotiation and filing of contracts implementing those Commitments. In order to understand why the Stanislaus Commitments cannot be considered a " practice" within~ the' meaning of section 205 (c) , some understanding of their history and provisions is necessary.
The Stanislaus Commitments are the product of negotiations between PGandE and the United States Department of Justice that brought,tx) an end an investigation by the Department's Antitrust Division of alleged anticompetitive 21
. _ - - _ - - - . , . - _ - _ . , - ~ _
,- (]) conduct by PGandE. When PGandE agreed that the Commitments would be included as license conditions to the Company's proposed Stanislaus Nuclear Power Plant, the Department of Justice concluded that allegations of possible anti-competitive conduct by PGandE had been rendered moot. The Department therefore advised the Nuclear Regulatory Commis-sion that in the Department's opinion, no antitrust hearing
! concerning the Stanislaus application was necessary under section 105(c) of the Atomic Energy Act of 1954, 42 U.S.C.
! S 2135(c). This advice, and the Commitments themselves,
- were published in the Federal Register pursuant to the Atomic Energy Act. 41 FED. REG. 20,225-20,228 (May 17, 1976).
PGandE's negotiated license conditions are not unique. During the 1970's the Antitrust Division used the preliceasing antitrust review provisions of section 105(c)
L.
of the Atomic Energy Act to secure conditions designed to I.
promote competition in the electric utility industry. Many
,, utilities around the country accepted such provisions.
As is evident from an examination of their provisions
! (R. 2197-2209), the Stanislaus Commitments are a statement of general principles by which PGandE has agreed to abide in negotiating contracts with other electric utilities in northern and central California for services such as inter-connection, transmission, access to nuclear generation, capacity and energy exchange, and reserve coordination.
The Stanislaus Commitments are not contracts or rate schedules 22 E
_ , - . . . . . . . . . . . . . ~ ,n___,m_________._____ _
_,g_.,...
l
() in and of themselves, but are guidelines to be followed in future contract negotiations. The Commitments do anticipate that, when negotiated, contracts for such services will be filed with the appropriate regulatory agency. For example, section VII-D of the Commitments provides that " rate schedules and agreements for transmission services provided under this section shall be filed by Applicant [i.e., PGandE]
with the regulatory agency having jurisdiction over such i
rates and agreements." (R. 2206-2207.)
The June 2,1980 order directed PGandE to file only two of nine s2ctions of the Commitments, Sections I and VII. Section I defines terms that are used throughout
,the Commitments, such as " neighboring entities," " costs,"
and " good utility practice." Section VII concerns the provision of transmission services, and states generally that " Applicant shall transmit power pursuant to interconnection agreements, with provisions which are appropriate to the requested trans-action and which are consistent with these license conditions."
Although Section VII contemplates that PGandE will enter into wheeling and other transmission arrangements in appropriate circumstances, it is by no means a general undertaking to provide such services on a common carrier basis. (See Section IX-E of the Commitments.)
Since the Stanislaus Commitments went into effect on April 30, 1976, PGandE has conducted a number of nego-tiations dealing with the provision of transmission service
[}
23
~ _ _ . , . . .
..... ._... - - - _ n _ - - - - . _. ..
() to electrical systems located within or immediately adjacent to PGandE's service area. One of these negotiations recently resulted in a contract with intervenor NCPA to provide inter-ruptible transmission service over the Pacific Intertie.
Pursuant to Section VII-D, this agreement has been filed with the FERC. Negotiations to provide other forms of trannaission service are still in progress.
The Stanislaus Commitments are a blueprint for i
future contract negotiations, not a modification of existing contracts. As such they just do not fit the mold of practices which should be filed under .section 205(c) on the theory i that they somehow relate to a pre-existing contract. The
- . Commitments were issued in 1976. The Pacific Intertie Agreement was signed in 1966. No reasonable construction of section 205(c) calls for the formal filing of these NRC j, license conditions with FERC.
l!
- i. ,
C. In Ordering PGandE Tb File Sections I And VII Of The Stanislaus Commitments, The Commission Misread Its Own Precedents Although the June 2, 1980 order is far from a model of clarity, its directive that PGandE file Sections I and VII of the Stanislaus Commitments appears to be based on two of the Commission's own precedents. The first of these precedents, the Florida Power & Light decision, was reversed. It is discussed below. The second was the Commission's decision in Michigan-Wis'consin Pipe Line, 34 F.P.C. 621 (1965). In that case, the FPC required a pipeline company
(])
24 L. . , _ . _ .m.. _ _ - . _ - _. - - - - - - - - - - - --- -
1
.-.Q to file a statement setting forth a formula to be used in determining the allocation of costs for certain lateral i pipeline extensions. In ordering the formula to be filed, the Commission said:
"A consistent and predictable course of conduct of the supplier that affects its financial relationship with the consumer in our opinion is a ' practice' subject to the filing requirements.
The filing of such a procedure as part of the pipeline tariff is not only consistent with but furthers the purpose I.
underlying the filing and posting require-ments of rate schedules. A pipeline tariff announces not only what the pipeline has done in the past but the terms and conditions upon which it would as a matter of policy, provide service to new customers meeting the tariff's eligibility requirements. Even if the tariff were viewed as merely an infor-mational description of existing service obligations, this description of the l pipeline's actual practice would be t
I of real benefit to both existing and potential customers, for it would show them, as well as the Commission, the terms by which gas would be sold . .. . "
34 F.P.C. at 626.
The Stanislaus Commitments are not eligibility requirements for service under an existing tariff. It is contemplated that contracts will be negotiated under them and then filed. The tariffs or rates in these contracts may vary depending on the nature of the service provided and other factors. The Commitments do not specify any particular rate.
Michigan-Wisconsin stands only for the proposition
([) that where a utility hae a statement of policy setting forth 25
\.,_ _ _ - - _ . .
1 l
l
() financial conditions that directly affect rates or the avail-ability of service under an existing tariff, the utility is required to file that statement as a " practice" under section 205(c). The Stanislaus Commitments do not meet j this description. The June 2, 1980 order was, therefore, a substantial extension of the Michigan-Wisconsin decision.
II.
THE JUNE 2 ORDER EXCEEDS THE COMMISSION'S AUTHORITY BECAUSE IT IMPROPERLY EXPANDS PGandE's VOLUNTARY
, UNDERTAKING IN THE STANISLAUS COMMITMENTS TO NEGOTIATE INDIVIDUAL WHEELING AGREEMENTS IN APPROPRIATE CASES Even assuming some relationship between the Stanislaus Commitments and the Pacific Intertie Agreement, the Commission's
, attempt to make use of any such connection to assert jurisdiction over the Commitments exceeded its authority. Recent decisions
- of this court and other Courts of Appeals compel this conclusion.
l One decision on which the Commission relied in directing PGandE to file sections I and VII of the Stanislaus Commitments was the Commission's order of December 21, 1979, concerning Florida Power and Light Company ("FP&L") . The Fifth Circuit recently reversed that decision. Florida Power & Light Co. v. FERC, 660 F.2d 668 (5th Cir. Unit B, November 6, 1981). Its opinion as well as decisions of the Second Circuit and this Court make it plain that the Commission's June 2 order in this proceeding exceeded its authority. -'
() .
26 i
ne _ m. -.___m - _m __ -
~ - - . , . . - . - - - -_, _w _. _. _
~
In Florida Power & Light, the Commission ordered .
FP&L to file a general transmission tariff that would include a policy statement of transmission service availability an FPEL Vice President described in rebuttal testimony the utility filed in a related proceeding before the commission.4 In ordering the tariff to be filed, the Commission noted that FP&L had recently filed 18 interchange transmission service schedules with substantially identical provisions that appeared to reflect the transmission policy. On the basis of these facts, the Commission concluded:
"The similarity of these agreements and the proximity of filing dates lead us to conclude the transmission services 1
4 The testimony read as follows:
![
l Q. Does the failure of FPL to file a generally applicable transmission tariff reflect r any intention by FPL to preclude neighboring utilities from obtaining transmission service?
A. Most emphatically not. We are willin to provide transmission service when:g i
- 1. The specific potential seller and i
buyer are contractually identified;
- 2. The magnitute, time and duration of the transaction are specified prior to the commencement of the transmission;
- 3. It can be determined that the transmission capacity will be available for the term of the contract; and
- 4. The rate'for such service is sufficient to compensate FPL for its costs.
27 l- - . . _ _ _ . _ _ _ _
() are being purchased by a number of utilities under the transmission availability criteria discussed above. In accordance with Section 205(c), all service agreements must contain these availability criteria.
The individual agreements may purport to be limited to a specific customer; however, FP&L's statement of company policy apparently controls in all instances where service is requested." December 21, 1979 order, mimeo. at 6.
In addition, the Commission noted that the testimony setting forth the transmission policy was "an unqualified statement of transmission service availability, subject to four objective criteria. It contains no implicit conditions. . .
Id.,
mimeo at 4.
The Fifth Circuit concluded that in ordering FP&L i .to file the transmission policy as a tariff, the Commission had exceeded its authority, because it had improperly enlarged the wheeling obligations FP&L had voluntarily undertaken.
After setting forth the facts and a summary of the December 21, l' 1979 order, the Court began its analysis by noting that the Federal Power Act specifically denied the FPC (now FERC) the power to order wheeling. See Otter Tail Power Co. v.
United States, 410 U.S. 366, 375-376 (1973) .5 With that in mind, the Court observed:
5 The only exception to that proposition is embodied in Sections 211 and 212 of the Federal Power Act (16 U.S.C.
SS 824j; 824k), which provide for wheeling orders in strictly limited circumstances. The Staff has not argued either in FP&L or in this case that the Commissior.'; crders satisfy the procedural requirements of secticas 211 and 212, which
(]) were added to the Federal Power Act in 1978. ,
28 l
/~
"While the Commission may not compel t i the transmission of electricity, it does possess the authority to review transmission contracts under 5 206(a) and to make modifications of those contracts upon a determination that the terms
' of such a contract are unjust, unreasonable, unduly discriminatory, or preferential. . . .
It also has the authority to review any change in such a contract under S 205. Jr1 performing these functions with respect to a wheeling contract,
~
though, the CommTssion must be especially y careful not to overstep its authority I- and require the involuntary wheeling of electricity, absent compliance with tee new SS 211 and 212 of the FPA."
[" 660 F.2d at 673 (Emphasis supplied)
After a careful review of the legal implications of a tariff filing, 660 F.2d at 674-676, the Court concluded that as a result of the Commission's order, FP&L would have to provide the tariff services to all applicants, not just those for which it had an individual rate schedule on file, in effect making it a common carrier. The Court further determined that "FP&L . . . lost the freedom to alter its i
policy of availability with respect to wheeling" without t
the Commission's approval, and in addition that the Commission gained the power to require FP&L to amend its policy, a step its order indicated it might take. For these reasons the Court concluded that the Commission's December 21, 1979
, order had transgressed the limits on its authority:
"We agree with FP&L that the Commission's order does in effect impose common carrier status upon FP&L. While the tariff is on file, FP&L would be obligated to provide the tariff service to all
(]) customers. In a significant sense, i
29
-( its duties and liabilities have changed.
Although FP&L had a policy regarding the availability of wheeling, FP&L, nevertheless, negotiated interchange transmission service agreements on an individual basis with each municipal utility when approached. There is no indication in the record that FP&L had voluntarily agreed to become a common carrier. There is no indication that FP&L has voluntarily agreed that any
- change in the terms of its policy, or any interpretation thereof, should be submitted to the Commission for its
! approval. The imposition of common
- i. carrier status on FP&L, which the orders at issue accomplish, is precisely the r
authority which the (Federal Power Act] .
denies the Commission. The legislative history of the [ Federal Power Act] makes clear that the Commission lacks the authority to require electric utilities to provide wheeling even on a reasonable request. Accordingly, we conclude that
, the Commission lacks statutory authority to issue the order in question." 660 F.2d at 676 (footnote omitted) .
The Court further decided that the FP&L policy l statement could not be considered a " practice" subject to
- s. the filing requirement of section 205(c) of the Act. About that, the Fifth Circuit said:
"Having held that the [ Federal Power
, Act] prevents the imposition of common l
carrier status on utilities for wheeling services, it would make no sense to permit the imposition of this status by the device of requiring a utility to file any policy of availability as a practice. It is reasonable to assume that any well-managed utility will have a policy governing the availability of wheeling services and will act on ,
this policy. Giving the Commission the authority to order a policy of avail-l -
ability to be filed as a ' practice'
(]) could vitiate Congress' desire to leave 30 m- -
Y
() utilities free to make wheeling decisions."
660 F.2d at 677.
Under the Fifth Circuit's reasoning in Florida Power & Light, the June 2, 1980 order directing PGandE to r
file Sections I and VII of the Stanislaus Commitments is clearly invalid. Although the policy expressed in Section VII of the commitments differs somewhat from the statement of policy at issue in FP&L, the two cases are fundamentally
! alike. Like the testimony offered by FP&L describing the availability of transmission over its system,'the= sections i
of the Commitments the Commission ordered PGandE to file s
state in general fashion PGandE's current policy regarding the availability of transmission on its system. Like FP&Ll 1
PGandE's policy under the commitments is to negotiate trans-mission agreements on an individual basis with each applicant for service. Like FP&L, PGandE has not voluntarily agreed
,I to become a common carrier. Finally, like FP&L, PGandE has
- i_
not voluntarily agreed to submit changes and interpretations of its policy to the Commission for approval, or to permit
, the Commission to order the policy amended.
While filing the Commitments did not in itself require PGandE to wheel for all qualified applicants (since the Commitments only require PGandE to provide service pursuant to agreements PGandE has undertaken to negotiate) it is clearly a first step in that direction. The FERC Staff has already sought an order requiring PGandE to develop O
31 w
l
() and file tariffs implement *,ng the Commitments as soon as possible. (R 2191.) In addition, the Commission's order strongly suggests it will consider modifying the Commitments as a result of the filing. (R 2251.) If the June 2 order stands, PGandE will no longer be free to modify its undertakings without the Commission's approval.
The only arguably pertinent difference between the FP&L case and this case is that prior to being ordered to file, FP&L was free to change its policy at will, while
- 2, PGandE can modify the policy acated in the Commitments only with the NRC's consent. That difference, however, is immaterial. '
The Fifth Circuit held that the Commission could not require t
, FP&L to file its availability policy because "[g]iving the Commission authority to order a policy of availability to j; be filed as a ' practice' could vitiate Congress' desire to leave utilities free to make wheeling decisions." 660 F.2d at 677. The fact that the NRC has circumscribed PGandE's freedom to make wheeling decisions pursuant to another statutory regime has altered congressional intent not one whit so far as the Federal Power Act and the FERC are concerned.
The Commission's order transgresses that intent, and it erred in requiring the Commitments to be filed.
The Fifth Circuit's decision in Florida Power &
Light is not the only decision to hold that the FERC's authority to order wheeling is strictly limited and that O
32
....._.. - - . - __ _ -- - _ _ - - _ _ _ _ _ _ =
) .
i it cannot enlarge that authority by indirection. This Court 1
has so held on two occasions as has the Second circuit.
In Richmond Power & Light, Etc. v. FERC, 187 U.S.
App. D.C. 399, 574 F.2d 610 (1978) a municipal utility challenged the actions of the FPC in approving tariffs filed in response to the Commission's " coal by wire" program, which was designed to alleviate power shortages in the oil-dependent Northeast brought about by the 1973 Arab 011 Embargo. 187 U.S. App. D.C. at
(
402, 574 F.2d at 613.
Richmond argued before the Commission that it should issue a direct order to the utilities to wheel, and it also contended the Commission should achieve the same end less directly by conditioning its approval of the voluntarily filed tariffs en the utilities' commitment to an expanded l wheeling obligation. By the time the case reached this Court, Richmond had abandoned the first argument in favor of the second. .
After reviewing the legislative history of the Federal Power Act as set forth in Otter Tail, supra, which established that the Commission was powerless to order a utility to wheel, this Court rejected Richmond's second argument:
In this court Richmond seeks the same
, end through less direct means. Since the Commission,may reject unreasonable rate proposals and fix acceptable rates instead, and since the utilities submitted to the Commission rates for voluntary
(]) wheeling, Richmond asserts that the 33
---,. ,- m ---.- a .,.,.. _ . . . , , . _ - _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ - _ _ _ _ _ __- , -
)
i 4
O Commission must have the power to condition l its approval of those rates on continued, albeit involuntary, wheeling. This logic is superficially persuasiver the Commission does have authority to impose requirements and conditions "necessary !
!. or appropriate to promote the policies" of the Act. But such conditions may ,
i not contravene the Act, and the reasoning !
of Richmond's unstated minor premise, '
as we now explain, seeks to achieve
, exactly that.
, " Richmond assumes that the proffered
!l rates were unreasonable because they did not guarantee that utilities will wheel. Yet Congress' as-yet unamended '
,' purpose was to indulge utilities that very freedom. If Congress had intended that utilities could inadvertently bootstrap themselves into common-carrier status by filing rates for voluntary service, j it would not have bothered to reject l, mandatory wheeling in favor of a call i' for just such voluntary wheeling. What 1
the Commission is raohibited from doing directly it may not achieve by indirection."
187 U.S. App. D.C. at 409, 574 F.2d at 620 (footnotes omitted; emphasis added).
i In Central Iowa Power Coop. v. FERC, 196 U.S. App.
D.C. 249, 605 F.2d 1156 (1979), this Court reaffirmed that the Commission is not empowered to order wheeling either ;
i l directly or by indirect means. In that case the South Dakota Public Utilities Commission attacked the FERC's approval, in pertinent respects, of the Mid-Continent Area Power Pool (MAPP) Agreement. The South Dakota PUC contended the FERC should have considered ordering MAPP participants to modify the agreement to provide for wheeling power to nongenerating electric systems. Citin~g Richmond's discussion of Congressional
([) intent "to preserve 'the voluntary action of the utilities'"
34
- - - - - - - - , , . - - , - - - - , - , , , - , - - . . - - , - . . - . , _ - - _ - - - . _ , ---,,v-- - - , . - - - _ , - - - - - - - - -
~
,-( where wheeling is concerned, this Court upheld the Commission's 1
order. 196 U.S. App. D.C. at 262, 606 F.2d at 1169.
The Second Circuit's decision in New York State l
Electric & Gas Corp. v. FERC, 638 F.2d 388 (2d Cir. 1980),
cert. denied, 50 U.S.L.W. 3237 (1981), is in accord. The subject of that case was a transmission contract between NYSEG and the Power Authority of the State of New York (PASNY) i in which NYSEG agreed to transmit power from PASNY to PASNY's I
customers, one of which was the Village of Penn Yan. The
- particular provision that was litigated obligated NYSEG 4
to wheel to Penn Yan only that power necessary to serve customers within the limits of the village as they existed l
t on the date of the contract. Several years later Penn Yan
~
annexed territory containing additional customers and sought j to have NYSEG transmit PASNY power to serve them. The Commission found the limiting provision unreasonable and anticompetitive and declared it unenforceable. It rejected NYSEG's contention that the effect of its order was to compel wheeling. Instead, the Commission characterized its order as one that removed an anticompetitive contractual " restriction" on the use of power NYSEG had already agreed to wheel.
The Second Circuit regarded the Commicsion's characteri-zation as a distinction without a difference. It correctly concluded that, regardless of the description applied, "the effect of the Commission's order is to expand NYSEG's commitment
~
to wheel."
(]) 638 F.2d at 401. Noting that until the enactment 35
__. .- . - - __- _.. _ _ . _ - _ _ _ ._- _ - - . ~ _ - -
- () of sections 211 and 212, the' Federal Power Act did not permit the Commission to compel wheeling, the Court held that the Commission's order, issued without compliance with the require-ments of sections 211 and 212, exceeded its authority.
The court summarized its ruling as follows:
l
[We do not] suggest that the Commission is powerless to review a wheeling agreement under S 206 without following the require-ments of SS 211 and 212. If, after a hearing as required by 5 206, the Commission determines that a particular rate, charge, or condition is unreasonable, it can order a modification. But where, as here, the modification amounts to an order requiring wheeling, it must be preceded also by determinations in accordance with SS 211 and 212. Simply put, we will not allow the Commission to do indirectly without compliance
' . with the statutory prerequisites, what it could not do directly without such compliance. Cf. Richmond Power & Light
- v. FERC, 574 F.2d 610, 620 (D.C. Cir. 1978).
638 F.2d at 403.
The four decisions described above compel the conclusion that the June 2, 1980 order directing PGandE to file sections I and VII of the Stanislaus Commitments is invalid. The Commitments represent a voluntary undertaking by PGandE to negotiate wheeling contracts in appropriate circumstances. Under the Federal Power Act, the Commission cannot augment the obligations PGandE has voluntarily assumed either directly or indirectly, unless it complies with the procedures and makes the filings set forth in sections 211 O
36
z_ -
r P
.. o and 212 of the Act. The commission has not met those require-ments in the order under review. Yet its order here, like l its order in Florida Power & Light, has the effect of curtailing PGandE's freedom to make wheeling decisions, and so of expanding its wheeling obligations. It is an effect the Commission is not permitted to achieve, and the order thus exceeds the Commission's authority.
III.
THE COMMISSION ACTED IMPROPERLY IN ASSERTING JURISDICTION OVER SECTIONS I AND VII OF THE STANISLAUS COMMITMENTS BECAUSE THEY ARE LICENSE CONDITIONS OF THE NUCLEAR REGULATORY
- l. COMMISSION ENFORCEABLE BY THAT COMMISSION As the discussion in the preceding section demon-I strates, the FERC's June 2, 1980 order directing PGandE to file Sections I and VII of the Stanislaus Commitments is invalid because (1) the Commitments cannot be considered I
a " practice" within the meaning of Section 205(c) of the i
Federal Power Act, and (2) by asserting jurisdiction over
{ them, the FERC is improperly seeking to enlarge a commitment
, to negotiate wheeling contracts that PGandE has voluntarily undertaken.
l However, as PGandE pointed out in its petition for rehearing of the June 2 order (R 2471-2479), there is another reason why the order is improper. The Stanislaus i Commitments have legal' force because they are conditions attached to the licenses' tha have been issued to PGandE by
() the NRC for the construction and low power testing of the 37 l . _ _ _ .. _ _ . _ _ _
l
() Diablo Canyon Nuclear Power Plant. The simple fact that two different agencies seek to exercise jurisdiction over and enforce identical license conditions creates substantial and clear potential for conflict. That possibility was underscored when NCPA recently filed before the NRC a petition "to enforce and modify" the commitments. If the FERC's June 2 order is upheld and the FERC seeks to enforce or
. modify the Commitments in its final order in the E-7777 (Phase II) proceeding, such actions might very well conflict with orders of the NRC or otherwise disrupt the NRC proceedings.
In short, the June 2, 1980 order is invalid because it fails to recognize the primary jurisdiction of the NRC over the
.Stanislaus Commitments. .
A. The Stanislaus Commitments Are NRC License Conditions Enforceable by That Agency As shown in Part I.B. of this brief, the Stanislaus p- Commitments resulted from negotiations between PGandE and the
'i Justice Department that brought to an end an f.nvestigation i
by the Department's Antitrust Division into alleged'anticompe-titive activity by PGandE. When PGandE agreed in 1976 to accept the Commitments as license conditions on its proposed i
Stanislaus Nuclear Project (or on Diablo Canyon if Stanislaus 1
6 e (Z) 38
a 4
( was not licensed by' a specified date) ,6 the Assistant Attorney General for the Antitrust Division advised the NRC, pursuant to Section 105(c) of the Atomic Energy Act of 1954, 42 U.S.C. 5 2135(c) that the Commitments had rendered moot the allegations that led to the investigation, and l that it was unnecessary in the Department of Justice's opinion to hold an antitrust hearing with respect to the Stanislaus Nuclear Project. (R 2210-2212) The commitments became license conditions to the Diablo Canyon Nuclear Power Plant on December 6, 1978. 43 FED. REG. 59934 (December 22, 1978).
The operating license for Diablo Canyon will be issued to PGandE under section 104 of the Act, inasmuch
(
as PGandE received a construction permit for Diablo Canyon prior to December 19, 1970. The NRC has authority to issue i
an order enforcing the Stanislaus Commitments.
In its Petition to Enforce and Modify License Conditions, which NCPA filed on December 4, 1981 in both i -
1 l
6 PGandE agreed that in the event it chose not to construct the Stanislaus Nuclear Project, or that a construction permit for the project had not been issued by July 1, 1978, the Stanislaus Commitments would be attached as conditions to any licenses that had been or might in the future be issued by the NRC in connection with Diablo Canyon. 41 FED. REG. 20,226 (May 17, 1976). -
O .
39 W -%_ __
1
-- ( ) the Stanislaus and Diablo Canyon dockets,7 NCPA requested the NRC
. to find Pacific Gas and Electric Company ( ' PG& E ' ) in violation of the terms of the license conditions in these dockets
[i.e. the Stanislaus Commitments] and issue an immediate order enforcing these license conditions. Simultaneously, NCPA t requests that the license conditions be modified and strengthened to prevent the anticompetitive activity, inconsistent with the antitrust laws, in which PGandE i
has engaged even under its license condi-tions." NCPA Petition, p.l.
1 In its 57-page petition, NCPA alleges, among other things, that PGandE's conduct has been inconsistent with I
sections I and VII of the Commitments. These sections are, of course, the same ones that the FERC directed PGandE to
" file in the order of June 2, 1980, and which the FERC has asserted it has the power to modify (R 2251) .
B. The NRC Bas Primary Jurisdiction Over All Issues Relating To The Enforcement l
Of The Stanislaus Commitments.
The NRC's power to enforce its own license conditions should give the NRC primary' jurisdiction to enforce the Commit-I ments. The assertion of jurisdiction over the Commitments L
in the FERC's June 2, 1980 order was therefore erroneous, because it raises the strong possibility that the NRC and 7
The NRC docket concerning the Stanislaus Nuclear Project is P-564-A.
The NRC has established two dockets concerning Diablo Canyon, 50-275 and 50-276.
O 40 i
m.......... . . . __. _ . ~_. ~ _ - !
- ()
FERC may issue inconsistent and conflicting orders with respect to the Commitments.
There is a strong policy in federal law against the
, exercise of such overlapping jurisdiction by two administra-tive agencies. In Train v. Colorado Public Interest Research I
Group, 426 U.S. 1 (1976), for example, the Supreme Court held that the Environmental Protection Agency lacked authority to regulate the discharge of radioactive materials under the Federal Water Pollution Control Act of 1972 where the legisla-tive hiscory of the 1972 Act suggested that Congress intended the Atomic Energy Commission to continue exercising jurisdic-tion in this area. 426 U.S. at 23-25. Similarly, in Get Oil Out! Inc. v. Exxon Corp., 586 F.2d 726 (9th Cir.1978) , the United States Court of Appeals for the Ninth Circuit rejected the argument that the Deepwater Port Act applied to a marine loading terminal that was to be operated in conjunction with an offshore drilling platform constructed pursuant to a lease 1
! awarded by the United States. Department of Interior under the Outer Continental Shelf Lands Act. In so ruling, the Court pointed to the potential for conflict among administrative agencies and said:
"It is our obligation to so construe federal statutes so that they are con-sistent with each other, as by this means congressional intent can be given its fullest expression. '[W] hen two statutes are capable of.co-existence, it is the duty of the co'urts. . .to regard each as effective.'" 586 F.2d at 729 (cita-f O tions omitted).
41
- ( See also California v. Kleppe, 604 F.2d 1187, 1194 (9th Cir. 1979); NAACP v. Federal Power Commission, 425 U.S. 662, l 673-74 (1976) (Burger, C.J. , concurring in the judgment) .
The decision in California v. FPC, 369 U.S. 482 (1962), also demonstrates that the FERC has acted improperly l _
in asserting jurisdiction over the Stanislaus Commitments.
t In California v. FPC, the Supreme Court held that the FPC
! had acted improperly in approving El Paso's merger application i
prior to the conclusion of proceedings in the District Court.
The Supreme Court said:
"Where the primary jurisdiction is in the agency, courts withhold action until the agency has acted. . . The converse should also be true, lest the antitrust
~
policy whose enforcement Congress in this
'~ situation has entrusted to the courts is in practical effect taken over by the Federal Power Commission." 369 U.S. at 490 (citations omitted).
The same reasoning applies in this case. The Atomic
[ Energy Act and the decisions under it leave no doubt that 1 Congress has conferred primary jurisdiction on the NRC to review and enforce nuclear plant license conditions. In i filing its recent motion before the NRC, NCPA has implicitly adopted the same view. It requires no citation of authority i
to demonstrate that if the FERC's June 2, 1980 order is allowed to stand, there will be a serious risk that the FERC and NRC l' proceedings will result'in inconsistent and conflicting orders.
Therefore, insofar as the June 2, 1980 order directs PGandE O
42 .
l
\ . . . .
l .
() to file sections I and VII of the Stanislaus Commitments, it should be set aside.
I IV.
THE JUNE 2, 1980 ORDER MUST BE SET ASIDE BECAUSE IT DOES NOT SET FORTH AN ADEQUATE BASIS FOR ITS CONCLUSIONS It is un elementary proposition of administrative law that an order cannot be sustained unless its reasoning i
l is sufficiently clear to demonstrate that the agency has acted within the scope of its statutory authority and discretion.
FPC v. Texaco, Inc., 417 U.S. 380, 395-396 (1974). Moreover, an order cannot be upheld on the basis of "' appellate counsel's post hoc rationalizations for agency action'; for an agency's i
s order must be upheld, if at all, 'on the same basis articulated in the order by the agency itself. '" Ibid. at 397 (citations omitted).
Under these tests, it is clear that the Commission's June 2, 1980 order is fatally defective. The conclusion in the June 2 order, which led to the direction that PGandE t
file sections I and VII of the Stanislaus commitments and that Edison file several contracts to which PGandE is also a
- party, was that each of these documents was directly related to the Pacific Intertie Agreement. The basis for that conclusion is far from clear. There was no evidence submitted on the issue. It is evident from an examination of their provisions, moreover, that none of these documents bears any real relationship O
43
I
() to the Pacific Intertie Agreement. The June 2 order should therefore be set aside in its entirety.
A. There Is No Direct Relationship Between The Stanislaus Commitments And The Pacific Intertie Agreement As noted above, there are three parties to the Pacific Intertie Agreement'--PGandE, Edison and San Diego.
None of these companies is a " Neighboring Entity" as defined in Section I of the Commitments. (R 2197.) In general, the Pacific Intertie Agreement allocates among the parties the cost of fulfilling certain obligations to provide inter-state transmission service under contracts negotiated contem-poraneously with the Intertie Agreement. The contract also
, provides a mechanism for sharing the cost of maintaining the portions of the Pacific Intertie transmission lines allocable to interstate transmission use. These cost alloca-tions are not affected by the Stanislaus Commitments, and no evidence to the contrary was before the Commission when l it ruled.
The Commission's reasoning in the June 2 order appears to be that' because there is a provision in Section VII of the Commitments that mentions the Pacific Intertie trans-mission system (R 2205), it necessarily follows that the Commitments are related to the Pacific Intertie Agreement.
(R 2257.) But the Intertie itself and the Pacific Intertie Agreement are two differ'ent things. Other contracts besides
(]) the Intertie Agreement provide for transmission service 44
i O over the Intertie lines. Many contracts govern purchases and sales of power transmitted over that physical facility.
To say that the Commitments in some way affect rights to
}
r the use of the Intertie lines does not establish a connection to the Pacific Intertie Agreement. The Commission's simplistic reasoning is no substitute for careful analysis, and there l is no analysis in the June 2 order supporting a conclusion l that the Commitments and the Pacific Intertie Agreement t
l are relate .
The June 2 order also seems to be based on the conclusion that the E-7777 (Phase II) proceeding involves the investigation of allegations that access to the Intertie i
has been restricted for anticompetitive reasons. (R 2251.)
Nothing more is required to refute this proposition than to state it. It makes absolutely no sense to suggest that the statutory filing requirements of section 205(c) of the Federal Power Act turn on whether or not someone has alleged 9
a violation of law that the. Commission wants to investigate.
It appears that the Commission has confused its investigatory responsibilities under section 206 of the Act with the filing obligations imposed by section 205.
B. There Is No Direct Relationship Between The Three Contracts To Which Both Edison And PGandE Are Parties And The Pacific Intertie Agreement The June 2 order not only directed PGandE to file sections I and VII of the Stanislaus Commitments, but also 45
I
() directed Edison to file three contracts to which PGandE l Edison filed them on June 17, 1980.
is also a party. (R 2348-(
2379, 2380-2414, 2415-2459.) The contracts were described in an appendix to the staff's motion (R 2195) as (1) the " Inter-suppliers' Contract," (2) the "Oroville-Thermalito Power Sale Contract," and (3) the " Contract among the California Companies with respect to purchase of power generated at Oroville-Thermalito Power Plant." The Commission's basis for ordering the filing of the Intersuppliers' Contract was that "it assigns rights and responsibilities among the various suppliers of power to the State (of California] over the Intertie."
(R. 2261.) Its basis for ordering the filing of the other two contracts was that "the contracts require transmission 4
via the Intertie and therefore affect or relate to the PIA."
(Ibid.) No evidence was taken on any of these questions.
,. As the discussion above demonstrates, these
! conclusory statements are insufficient to establish a nexus I'
between the three contracts and the Pacific Intertie Agreement.
None of these contracts is related, directly or indirectly, to the allocation of costs among PGandE, Edison and San Diego for maintenance of the Intertie facilities. Nor is any of the contracts related to allocation of the costs of fulfilling the obligations of PGandE, Edison and San
~
Diego to provide transmision service in accordance with the contracts negotiated contemporaneously with the Pacific Intertie Agreement.
{])
46 L
-() The Commission's June 2, 1980 order " falls short of that standard of clarity that administrative orders must i
exhibit." FPC v. Texaco, Inc., supra at 417 U.S. at 395-
- 96. It should therefore be set aside.
V.
BY EXPANDING THE SCOPE OF ME E-7777 (PHASE II)
PROCEEDING ON W E EVE OF HEARINGF, M E CCEMISION HAS DEPRIVED PGandE OF DUE PROCESS PGandE has suffered substantial prejudice as a t
r result of the Commission's December 28, 1978 and June 14, 1979 orders. By the time these orders expanding the E-7777 (Phase II) proceeding were issued, PGandE had been engaged in discovery and trial peaparation for more than four and one-half years. During that time, it had made many decisions about what documents it should inspect and copy, what it should ask by way of interrogatories, and which persons it should depose and present as witnesses at the hearing.
If PGandE had known that the Pacific Intertie was to be included among the areas of inquiry in E-7777 (Phase II),
it would have made different decisions with respect to each of these, areas.
Due process requires a hearing "at a meaningful time and in a meaningful manner." Armstrong v. Manzo, 380 ,
U.S. 545, 552 (1965). Implicit in the right to a meaningful hearing is that "a party is entitled to such notice as will L provide reasonable opportunity to prepare." 3 K. Davis,
, ADMINISTRATIVE LAW TREATISE S 14.11 at 50 (2d ed. 1980).
L.
47
l __
~() In apparent recognition of the hardship and due process problems that addition of issues at the eleventh hour can pose, courts regularly deny motions to amend complaints
, when such motions are made on the eve of or during trial.
Gonzales v. United States, 589 F.2d 465, 469-470 (9th Cir.1979) ;
PSG Co. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
417 F.2d 659, 665 (9th Cir. 1969) cert. denied 397 U.S. 918
- (1970). In following a contrary course in this proceeding,
(
the Commission violated PGandE's right to due process.
To comprehend fully the extent of the change of direction and distortion of prior orders reflected in the Commission's decision of December 28, 1978, one need only r.efer to the many statements concerning the scope of the proceeding made by the Commission, the Administrative Law Judge and even the intervenors' attorneys between 1974 and 1978. Less than three months af ter the Commission's March 14, 1974 order, for example, the Administrative Law Judge then hearing the case said:
There are four contracts at issue.
One, the Intertie, is not at issue."
i (R 1124)
In 1976, at a hearing in another FPC proceeding concerned with alleged anticompetitive conduct by PGandE, NCPA's attorney said:
This is a proceeding in docket number E7777 [ sic], phase II, which is a Pacific Gas and Electric rate increase case which the Commission divided into two phases, one of which is a standard rate
[]}
1 48 l
~
l
l case and the other is an order to investigate '
the anti-competitive activities allegedly l of PG&E with reference to four contracts, '
the Central Valley Project contract between the Bureau of Reclamation and Pacific Gas and Electric, contract 2948A; the contract of the California Power Pool, so-called the contracts between Sacramento and (sic] Municipal Utility District and Pacific Gas and Electric; and the seven-party agreement. (R 1137)
Finally, in its June 21, 1977 Order Denying Rehearing, the Commission described the E-7777 (Phase II) proceeding as "an investigation under Section 206 of the Federal Power Act into the justness and reasonableness of the terms and conditions of various contracts executed by Pacific Gas and Electric Company (PG&E) which are allegedly restrictive and anticompetitive." A footnote identified the contracts i
as the 1970 agreement between PGandE and SMUD, Department of Interior Contract 2948A, the California Power Pool Agreement and the Seven-Party Agreement. (R 1131.)
PGandE believes that presentation of its case was prejudiced by the December 28, 1978 and June 14, 1979 orders. PGandE further believes that the Commission's approach I
of creating one big case in which to resolve many largely unrelated issues has lead to e. waste of time, money and resources by all parties. The Commission's approach is diametrically opposed to modern concepts of managing large k
cases by the early identification and, where possible, resolution L of issues.
- ()
49 w - --
,~ O Nonetheless, PGandE recognizes that the Commission has not yet made any findings with respect to the Intertie issues considered in Docket No. E-7777 (Phase II).
This lack of adverse findings appears to preclude judicial review l
at this time of whether the Commission improperly expanded !
the scope of the proceeding, because the right of judicial review set forth in section 313 (b) of the Federal Power I
, Act " relates to orders of a definitive character dealing ll with the merits of a proceeding before the Commission and resulting from a hearing upon evidence and supported by
- findings appropriate to the case." FPC v. Metropolitan l
Edison Co., 304 U.S. 375, 384 (1938).
- The Commission's orders expanding the scope of
, the E-7777 (Phase II) proceeding are similar to orders instituting administrative investigations. Two recent decisions have denied judicial review of such orders. In Niagara Mohawk
(
Power Corp. v. Federal Power Commission, 538 F.2d 966 (2d Cir.
r 1976), the Court held that an FPC order denying a motion to l
dismiss an investigation into alleged anticompetitive conduct by a utility was interlocutory. In denying review, the Court noted that "no investigation has as yet commenced, the commission has taken no evidence, and has made no findings."
538 F.2d at 969. Similarly, in its recent decision in Federal l Trade Commission v. Standard Oil Co. of California, 449 U.S. 232 (1980), the Supreme Court' held that the FTC's order instituting
() a proceeding against the eight major oil companies was not 50 i
-w .
" final agency action", and thus could not be judicially reviewed under the Administrative Procedure Act. 449 U.S. at 241-243.
PGandE contends that the decisions cited above do not give sufficient recognition to the enormous burdens that investigative proceedings launched without good cause impose upon the parties who must respond to them. Nonetheless, such decisions are binding upon this court and appear to preclude judicial review at this time of the due process issue set forth above.8 CONCLUSION For the reasons stated above, the orders appealed from below should be vacated insofar as they purport to require the filing of the Stanislaus Commitments and contracts not subject to the Commission's jurisdiction. The order of June 2,1980 should be set aside in its entirety. The prior orders should also be set aside to the extent they i
f 8 of course, in the event the Commission's final order on the merits in Docket No. E-7777 (Phase II) makes findings adverse to PGandE with respect to the Pacific Intertie, the due process issue outlined abcve will be ripe for judicial review. In the event PGandE's claim of prejudice is sustained, the proper remedy would appear to be a new hearing with respect to the Pacific In,tertie in which PGandE and the other respondents will be given an adequate opportunity to develop and present their case.
51
.o ~
purport to require these filings in excess of the Commission's author ity. .
Respectfully submitted, Robert Ohlbach l Howard V. Golub A. Kirk McKenzie
' Morris M. Doyle Terry J. Houlihan McCUTCHEN, DOYLE, BROWN & ENERSEN By k.
A. Kirk McKen'zie Attorneys for Pacific Gas and Electric Co.
I 9
(
l 'I 4
0 L
O I
52 l
FEDERAL POWER ACT, S 205 f 824d. Rates and charges; achedules; suspenalon of new raies (a) All rates and charges made, demanded, or received by any pub-lic utility for or in connection with the transmission or sale of electric
, energy subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.
(b) No public utility shall, with respect to any transmission or sale subject to the jurisdiction of the Commission, (1) make or grant any undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage, or (2) maintain any unreasons-ble difference in rates, charges, service, facilities, or in any other re-spect, either as between localities or as between classes of service.
(c) Under such rules and regulations as the Commission may pre-i scribe, every public utility shall file with the Commission, within such time and in such form as the Commission may designate, and shall
( keep open in convenient form and place for public inspection schedules
!- showing all rates and charges for any transmission or sale subject to the jurisdiction of the Commission, and the classifications, practices, and regulations affecting such rates and charges, together with all contracts which in any manner affect or relate to such rates, charges, classifications, and services. ,
(d) Unless the Commiselon otherwise orders, no change shall be made
. by any public utility in any such rate, charge, clasettication, or service, or in any rule, regulation, or contract relating thereto, except after sixty days' notice to the Commission and to the public. Such notice shall be given by f!!!ng with the Commission and keeping open for public inspec-tion new schedulee stating plainly the thange or changes to be made in the schedule or schedules then In force and the time when the change or changes will go into effect. The Commiselon, for good cause shown, may allow changes to take effect without requiring the sixty days' notice herein provided for by an order specifying the changes so to be mada and the time when they aball take effect and the manner in which they shall be filed and pubtlehed.
(e) Wheneve'r any such new schedule is filed the Commission shall have authority, either upon complaint or upon its own initiative with-I out complaint, at once, and, if it so orders, without answer or formal pleading by the public utility, but upon reasonable notice, to enter upon a hearing concerning the lawfulness of such rate, charge, classi-fication, or service; and, pending such hearing and the decision there-on, the Commission, upon filing with such schedules and delivering to the public utility affected thereby a statement in writing of its rea-sons for such suspension, may suspend the operation of such schedule ,
- and defer the use of such rate, charge, classification, or service, but
- not for a longer period than five months beyond the time when it
['
- O i
d 1
1
would otherwise go into effectl and after full hearings, either com-pleted before or after the rate, charge, classification, or service goes into effect, the Commission may make such orders with reference O thereto as would be proper in a proceeding initiated after it had be.
come effective. If the proceeding has not been concluded and an order made at the expiration of such five months, the proposed change of rate, charge, classification, or service shall go into effect at the end of i f- such period, but in case of a proposed increased rate or charge, the l Commission may by order require the interested public utility or pub-lic utilities to keep securate account in detail of all amounts received
/
by reason of such increase, specifying by whom and in whose behalf such amounts are paid, and upon completion of the hearing and occi-sion may by further order require such public utility or public utilities to refund, with interest, to the persons in whose behalf such amounts were paid, such portion of such increased rates or charges as by its decision shall be found not justified. At any hearing involving a rate or charge sought to be increased, the burden of proof to show that the increased rate or charge is just and reasonable shall Fe upon the put-lic utility, and the Commission shall give to the hearing and decision of such questions preference over other questions pending before it ar!
d decide the same as speedily as possible.
I (f)(1) Not later than 2 years after November 9,1973, and not less
{'
often than every 4 years thereafter, the Commission shall make a thor-ough review of automatic adjustment clauses in pubtle ut!!!ty rate schedules to examine--- .
(A) whether or not each such clause effectively provides incen-tives for efficient use of resources -(locluding economical purchase and use of fuel and electric energy), and (B) whether any such elause reflects any costa other than costs which are--
i (1) subject to periodic fluctuations and
(!!) not susceptible to preelse determinations in rate casas prior to the time such costs are incurred.
Such review may take place in Individual rate proceedings or in generic or other separate proceedings applicable to one or more utilities.
(2) Not less frequently than every 2 years, la rate proceedings or
' in generic or other separate proceedings, the Commission shall review, with respect to each public utility, practices under any automatic adjust-ment clauses of such utility to insure efficie t u. ' of rasourcesunder(including such economical purchase and use of fuel and "M.'c e ,ergy)
- clauses.
(3) The Commission may, on its own er en or upon complaint, after an opportunity for an evidentfary besir /., order a public utility
(. to-( A) modify the terms and provisions of any automatic adjustment clause, or (B) cease any practlee in connection with the clause, if such clause or practice does not result in the economical purchase and use of fuel, electric energy, or other items, the cost of which is included l' in any rate schedule under an automatic adjustment clause.
(4) As used in this subsection, the term ** automatic adjustment clause **
means a provision of a rate schedule which provides for increases or decreases (or both), without prfor hearing, la rates reflecting increases in costs incurred by an electric utility. Such or decreases (or both) term does not include any rate wh;ch takes effect subject to refund and subject to a later detire.ination of the appropriate amount of such rate.
I O
- ' " - M ha m_._r.- ige g 3g
FEDERAL POWER ACT, S 206 r O
$ 824e. Power of Commission to fix rates and charges; de-
[ termination of cost of production or transmission (a) Whenever the Commission, after's hearing had upon its own motion or upon complaig shall find that any rate, charge, or classifi-cation, demanded, observed, charged, or collected by any public utility for any transmission or sale subjectio the jurisdiction of the Commis-sion, or that any rule, regulation, practice, or entract affecting such rate, charge, or classification is unjust, unreasonable, unduly discrim-inatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.
7 (b) The Commission upon its own motion, or upon the request of
\ any State commission whenever it can do so without prejudice to the efficient and proper conduct of its affairs, may investigate and deter.
[
4 mine the cost of the production or transmission of electric energy by means of facilities under the jurisdiction of the Commission in cases where the pommission has no authority to establish a rate governing the sale of such energy.
i s
1
(
l (
ll .
O I
i 1
e d
-J e
-,__,____________m- - _ _ _ _ m__-- '- - - - - - - - -- ---- " ""
l FEDERAL POWER ACT, S 211 l' i 1
4 azej. Wheellag methority-Transmission service by may electric stility; notice, hearing and findings by Cosnmissaca
'-~ O (a) Any electric utility, geothermal power producer (1Actuding a pro-
, ducer which is not an electric utility), or Federal power marketing agency asay apply to the Comm!ssion for an order under this subsection requiring any cther electric utility to provide transmission services to the applicant
. (Including any enlargement of transmission espacity necessary to provide such services). Upon receipt of such application, after public nouco and
~
notice to each affected State regulatory authority, each affected electric atility, and each affected Federal power markedag agency, and after
affording an opportunity for an evidentlary hearsg. the Commission may lasue such order if it finds that such order-(1) Is in the public1nterest, (2) would- ,
(A) conserve a significant amount of energy, j (B) signiffeantly promote the effielent use of facilities and resources, or (C) Improve the reliab!!!!y of any electric ut!!!ty system to which the order applies, and
,. (3) meets the requirement ; of section 324k of this title.
'rremoaaleelen servlee by wNys ed ele 4 tree emergy for reamles neuee. hearies ama deteensameteene my cem-sessem
( (b) Any electric utility, or Federal power marketing agency, which purchasee electric energy for resale from a6ay other electric utility may i apply to the Commission for an order under this subsection requiring ,
such other electric utility to provide transmission services to the applicant ]
(including any increase in transmission capacity necessary to provMe such services). Upon receipt of an app!! cation under this subsection, after public notice and notice to each affected State regulatory authority, each 1 affected electric utility, aud each affected Federal power marketing agen-cy, and after affording an opportunity for an evidentiary hearing, the Commission may lasue such an order if the Commission determines that-
. (1) such other electric utility has given actual or constructive notice that it is unwilitar or unable to provide electric service to the applicant and has been requested by the applicant to provide the
[
transmission services requested la the app!! cation under this sub-I ; section, and I ' (2) such order meets the requirements of section 324k of this
( title.
l , Preservattee of eemapetittee pelotteneb1pse repleeeament 3
et electree emergyg ameonelatest state lawa l I( (c)(1) No order may be issued under subsection (a) of this section
( unless the Commission determines that such order would reasonably preserve existing competive relationships.
I (2) No order may be Issued under subsection (a) or (b) of this section I which requires the electrie utility subject to the order to transmit, during any period, an amount of electric energy which replaces any amount of electric energy-f ( A) required to be pr' ovided to such applicant pursuant to a con.
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i O (B) currently provided to the applicant by the utility subject to the order pursuant to a meta schedMe on file during such period with the Commission. -
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(3) No order naar be lasued Andar the authority of subsection (a)
I or (b) of this section which is inconsistent with any State law which governs the retall marketing areas cf electric utilities.
! (4) No order may be issued under subsection (a) or (b) of this see-tion which provides for the transmisalos of electric energy directly to an alumate consumer.
T*rmt..es er m astseets .t reers ..tsee, beartes d es.anass
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. serame . d e.editle e memd up by parties (d) (1) Any alectric utilJty ordered uns.er si,bsection (a) or (b) of tble sectJon to provide transmiselon services may apply to the Commisalon for an order permitting such electric utility to osase y,roviding all, or any portion of, such services. After public notice, notice to each affected State regu! story authority, each affected Federal power marketing
' agency, and each effected electrie ut!!!ty, and after an opportunity for an evidentiary hearing, the Commission shall issue an order terminating or modtfying the order issued under subsection (a) or (b) of this section.
( if the electric utility providlag such transmission services has demon-
. strated, and the Commission has found, that-
! *(A) due to changed circumstances, the requirements applicable, under thle section and section Stik of this title, to the issuance of an order under subsection (a) or (b) of this section are no longer met,or (B) any tranamtssion capacity of the utility providtag trans-mission services under such order which was, at the time such order was issued, in excess of the capacity necessary to serve its own customers is ao longer la esossa of the capacity a-ary for such purposes.
No order shall be leeued under this subsection pursuant to a finding under subparagraph (A) unless the Commission finds that such order is in the public laterest.
(2) Any order issued under this subsection terminating or modifytag an order issued under sobeection (a) or (b) of this section shall-( A) provide for any appropriate compensation, and (H) provide the affected electric ut!!!tles adequ' ate opportunity and time to-(1) make suitable alternative arrangements for any trans.
/ mission services terminated or modified, and
! (11) insure that the interests of ratepayers of such utilities are adequately protected.
l (3) No order may be issued under this subsection terminating or modt-fytag any order issued under subeection (a) or (b) of this section if the order under subsection (a) or (b) of this section includes terms and condluona agro.81 upon by the parties which-r (A) fiz a period during which transmission servlees are to be '
provided under the order under subsection (a) or (b) of this section.
or (B) otherwise provide procedures or methods for terminating or modifying such order (incloding, if appropriate, the return of the transmission capacity when necessary to take into account an in-crease, after the Issuance of such order, in the needs of the electric t~
ut!!!ty subject to such order for transmission capacity).
Decessa.es (e) As used in this sectitm, the term ** facilities ** means only fac!!!tles
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used for the generation or transmission of electric energy.
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FEDERAL POWER ACT, S 212 l
'O 3 334k. Onlere requirtag latereonneceton er wheeling--Deter-i-tions by Counmission (a) No order may be tanced by the Comm! san under section 8241 or suLsection (a) or (b) of seedon 824j of this title unless the Commis-sion deterar.ines that such order-l (2) is not likely to result in a reasonably ascertalnable uncom-pensated economie lose for any electrie ut!!!ty, qualifying cogen-ertur, or qualifying small power producer, as the case may be, affected by the ordert r (2) will not place an nodue burden on an electrie utility, qualify-.
lag cogenerator, or qualifying small power producer, as the case i may be, affected by the order!
(2) will not unreasonably impair the reltaldliti of any electric utility affected by the orderl and (4) will not impair the ability of any electate utility affected by the order to render adequate serrfee to its customera.
The determination under paragraph (1) shall be based upon a showing of the parties. The Commission shall have no authority under section E241 or 824] of this title to compel the enlargement of generattag facill-ties. .
I' mesmbee.ement et pants eebs t se edere .
[ (b) No order mar be issued under section 8241 or subsection (a) or
- (b) of section 824j of this title unless the app!! cant for such order demonstrates that he is ready, willlag, and able to reimburse the party subjset to such order for-(1) in the case of an order under section 8241 of this title, such party's share of the reasonably amuelpated costs incurred under such order, and (2) in the case of an order under subsection (a) or (b) of section 324j of this title-
- (A) the reasonable costs of transmission services, includlag the costs of any enlargement of transmission faellities, and (B) a reasonable rate of return on such costs as appropri-ste, as determined by the Commission.
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&m floal ereers fallare to agree (e)(1) Before issuing an order under section 8241 or subsection (a) or (b) of secuon 824j of this tjue, the Commission shall issue a proposed I order and set a reasonable time for parties to the proposed interconnection or transmission order to agree to terms and condit8ons under which such I order is to be carried out, imeloding the cpportionment of costs between them and the compensation or reimbursement reasonably due to any of them. Such proposed order aball not be reviewable or enforceable la any court. The time set for such parties to agree to such terms and
( condiUons may be shortened if the Commission determines that delay <
would jeopardize the attalament of the purposes of any proposed order.
Any terms and conditions agreed to by the parties shall be subject to the i approval of the Commission.
l (2)(A) If the parties agree as provided in paragraph (1) within the time set by the Commission and the Commission approves such agreement, the terms and conditions aball be laeluded in the final order. In the case of an order under section 8241 of this title, if the parties fall to agree within the time set by the Commiselon or if the Commission does not approve any such agreement, the Commission shall prescribe such t'
terms and cond1Uons and include such terms and ceiditions in the final order.
(B) In the case of any order applied for under section 824j of this title if the parties fall to agree within the time set by the Commission, the Commission shall prescribe such terms and conditions in the final
. order.
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O st eement et so fee dennes (d) If the Commission does not issue any order applied for under section 8241 or 824j of this title, the Commission shall, by order, deny such app!!cadon and state the reasons for such dental, i
. IJtfila.sher melee er anteseemseetles meebersers =esseses oror wheelser c.==s .somsetbertir le Ises of estaerity (e) No provision of section 8241 or 824j of this title shall be treated- l (1) es requiring any person to ut!!!se the authority of such
{
section 8241 or 824j of this title in lieu of any other authority of '
law, or (2) an limiting, impatring, or otherwise affecting any authority of the Commisalon under any other provision of law.
arreetsee esse et ereers haertess motsees revsew (t)(1) No order under section 8241 or 824j of this title requiring the Tennessee Valley Authority (hereinafter la this subsection referred to as the "TVA") to take any action shall take effect for 60 days following the sate of issuance of the order. Within 60 days following the issuance by the Commission of any order under seedon 8241"or of section 824j of this title requiring the TVA to enter into any contract for the sale or delivery I of power, the Commission may on its own r?fon initiate, or upon pett-tion of any aggrieved person shall initiat% a widentiary hearing to de-
+
4 ermine whether or not such sale or de *, c would result la violation of the third sentence of section 15d(a) of the Tennessee Valley Authority 1 Act of 1932, hereinafter in this subsection referred to as the TVA Act.
(2) Upon initiation of any evidentiary hearing under paragraph (1),
i the Commission shall give notice thereof to any applicant who applied for and obtained the order from the Commission, to any electrie utility or other enuty subject to such order, and to the public, and shall promptly nahe the determination referred to la paragraph (1). Upon initiation of such hearing, the Commission shall stay the effectiveness of the order
-asder section 8241 or 824) of this title until whichever of the following lates is app!! cable--
(A) the date on which there is a final determination (including any judicial review thereof under paragraph (2)) that no such jj vi.olation would result from such order, or l'
i (B) the date on which a specific authorization of the Congress (within the meaning of the third sentence of section 15d(a) of the TVA Act) takes effect.
(2) Any determinadoa under paragraph (1) shall be reviewable only the appropriate eoart of the United States apon petition filed by any
\,
aggrieved person or municipality within 60 days after such determination,
, and such ocurt shall have jurisdiction to grant appropriate relief. Any i applicant who applied for and obtained the order under section 8241 or i
824j of this title, and any electrie utility or other entity subject to such
. order shall have the right to intervese in any such proceeding in such court. Except for review by such court (and any appeal or other review by an appellate court of the United States), no court shall have juris-diction to consider any action brought by any person to enjoin the carry-ing out of any order of the Commission under section 8241 or section 824) of this title requiring the TVA to take any action on the grounds that such action requires a specific authorization of the Congress pur.
suant to the third sentence of section 15d(a) of the TVA Act.
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ATOMIC ENERGY ACT S 105 inti.trast ,,ovisions .ove,nin,ii- I re,o,ia
- O ' 2ias. Attorney General (a) Nothing contained in this chapter shall relieve any person from the operation of sections 1 to 13,14 to 19,20,21,22 to 27,41 to 46, and 47 to 68 of Title 15 and sections 52 and 53 of Title 29. In the event a licensee is found by a court of competent jurisdiction, either in an original action in that court or in a proceeding to en-r force or review the findings or orders of any Government agency having jurisdiction under the sections cited above, to have violated any of the provisions of such secdons in the conduct of the licensed activity, the Commission may suspend, revok'e, or take'such other ac-tion as it may deem necessary with respect to any license issued by the Commission under the provisions of this chapter.
(b) The Commission shall report promptly to the Attorney Gener- ..
al any inform . tion it may have with . respect to any utilization of special nuclear material or atomic energy which appears to violate or to tend toward the violation of any of the foregoing sections, or
( to restrict free competition in private enterprise.
l (c) (1) The Commission shall promptly transmit to the Attorney General a copy of any license application provided for in parag%ph (2) of this subsection, and a copy of any written request prended for in paragraph (3) of this subsection; and the Attorney General shall, within a reasonable time, but in no event to exceed 180 days after receiving a copy of st ch application or written request, render such advice to the Commission as he determines to be appropriate in
~
' ' regard to the finding to be made by the Commission pursuant to paragraph (5) of this subsection. Such advice shall include an ex-planatory statement as to the reasons or basia therefor.
f (2) Paragraph (1) of this subsection shall apply to an application for a license to construct or operate a utilization or production fa-cility under section 2133 of this title: Provided, however, That
- paragraph (1) shall not apply to an application for a license to op-t erste a utilization or production facility for which a construction t permit was issued under section 2133 of this title unless the Com-mission determines such review is advisable on the ground that sig-
,[
nificant changes in the licensee's activities or proposed activities
! have occurred subsequent to the previous review by the Attorney General and the Commission under this subsection in connection with the construction permit for the facility. '
l (3) With respect to any Commission permit for the construction of a utilization or production facility issued pursuant to subsection (b) of section 2134 of this title prior to December 19,1970, any per-son who intervened or who sought by timely written notice to the Commission to intervene in the construction permit proceeding for the facility to obtain a determination of antitrust considerations or to add :ce a jurisdictional basis for such detennination shall have l, the rigit, upon a written request to the Commission, to obtain an 5 cntitrust review under this section of the application for an operat-Ing license. Such written request shall be made within 25 days aft-gr the date of initial Commission publication in the Federal Register I cf notice of the filing of an application for an operating license for the facility or December 19,1970, whichever is later.
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(4) Upon the request of the Attorney General, the Commission
. shall furnish or cause to be furnished such ir. formation as the At-torney General determines to be appropriate for the advice called for in paragraph (1) of this subsection.
(5) Promptly upon receipt of the Attorney General's advice, the
~
Commission shall publish the advice in the Federal Register.
Where the Attorney General advises that there may be adverse anti-trust aspecta and recommends that there be a hearin2. the Attorney ;
, General or his designee may participate as a party in the proceed.
Ings thereafter held by the Commission on such licensing matter.in connection with the subject matter of his advice. The Commission shall give due consideration to the advice received from the Attor-ney General and to such evidence as may be provided during the proceedings in connection with such subject matter, and shall make a finding as to whether the activities under the license would create or maintain a situation inconslatent with the antitrust laws as spec-liied in subsection (a) of this section.
(6) In the event the Commission's finding under paragraph (5) la
' In the affirmative, the Commission shall also consider, in determin-
! Ing whether the license should be issued or continued, such other
, factors, including the need for power in the affected area. as the Commission in its judgment deems necessary to protect the public interest. On the basis of its findings, the Commission shall have
} the authority to issue or continue a license as applied for, to refuse
! to issue a license, to rescind a license or amend it, and to issue a 11-cense with such conditions as it deems appropriate.
(7) The Commission, with the approval of the Attorney General, may except from any of the requirements of this subsection such classes or types of licenses as the Commission may determine would
' not significantly affect the applicant's activities under the antitrust
! laws as e;ecified in subsection (a) of this section.
(8) With respect to any applicat!on for a construction permit on file at the time of enactment into law of this subsection, which per-mit would be for issuance under section 2133 of this title, and with l'
I respect to any application for an operating license in connection
! with which a written request for an antitrust review is made as pro-i vided for in paragraph (3), the Commission, after consultation with
[ the Attorney General, may, upon determination that such action is necessary in the public interest to avoid unnecessary delay, establish by rule or order periods for Commission notification and receipt of advice differing from those set forth above and may issue a con-i struction permit or operating license in advance of consideration of and findings with respect to the matters covered in this subsection:
' Provided, That any construction permit or operating license so is-sued shall contain such conditions as the Commission deems appro-priate to assure that any subsequent findings and orders of the Commission with respect to such matters will be given full force and effect.
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18 C.F.R. S 35.2 S 3L2 Definitions. l (a) KZectric service. ' Die term "elec- (c) FUing date. The term " filing tric service" as used herein shall mean '. date" as used herein shall mean the the transmission of electric energy in date on wh!ch a rate schedule filing is interstate commerce or the sale of completed by the receipt in the office electric energy at wholesale for resale of the Secretary of all supporting cost in interstate commerce, and may be and other data required to be filed in comprised of various classes of capac. compliance with the requirements of ity and energy sales and/or transmis- this part, unless such rate schedule is sion services. " Electric servlee" shall . rejected as provided in i 35.5. If the include the uti!!zauon of facilities material submitted is found to be in- l owned or operated by any public util. complete, the Director of the Office of l Ity to effect any of the foregoing sales
- Electric Power Regulation will so or services whether by leasing or other notify the filing utility within 60 days arrangements. As defined herein, of the receipt of the submittal.
" electric service" is without regard to (d) Posting. The term " posting" as the form of payment or compensation used herein shall mean, (1) keeping a for the sales or services rendered copy of every rate schedule of a p ablic whether by purchase and sale, inter- utility as currently on file, or as ten.
change, exchange, wheeling charge, dered for filing, with the Commission faculties charge, rental or otherwise. . open and available during regular *
(b) Rafe schedule. The term "ratt : business hours for public inspection in schedule" as used herein shall mean a . a convenient form and place at the statement of (1) electric service as de. public utility's principal and district or 8 fined in paragraph (a) of this section, division offices in the territory served.
(2) rates and charges for or in connec. and (2) malling to each purchaser tion with that service, and (3) all clas. under a rate schedule a copy of such sifications, practices, rules, regulations rate schedule on the date it is sent to or contracts which in any manner this Commission for filing. Posting
, affect or relate to the aforementioned shall include, in the event of the filing service, rates, and charges. This state. of increased rates or charges, the mail-ment shall be in writing and may take ing to each purchaser under a rate the physical form of a contractual doc. schedule or schedules proposed to be ument, purchase or sale agreement, changed and to each State Commis lease of facilities, tariff' or other writ. sion within whose jurisdiction such ing. Any oral agreement or under. purchaser or purchasers distribute and standing forming a part of such state, sell electric energy at utail, a copy of ment shall be reduced to writing and the rate schedule showing such in-made a part thereof. ' creased rates or charges, comparative billing data as required under this I 'The term " tariff" means a compilation.
M and, U nquesM h a pMaser in book form, of rate schedules of a particu. or State Commission, a copy of the lar public utility. effective under the Feder. supporting data required to be submit '
ted to this Commission under this al Power Act, and a copy of each form of
! service mercement. In connection heresith. Part. Upon direction of the Secretary.
- attenuon is invited to Part 154 of this chap. the public utility shall serve copies of
, ter Le the commisalon's reculations under rate schedules and supplementary the Natural ons Act, as a sunde to the form data upon designated parties other an c mp atuon of a tartu.
- than those specified herein.
(e) I//ective date. As used herein the "effecuve date" of a rate schedule shall mean the date on which a rate schedule filed and posted pursuant to the requirements of this part is per-mitted by the Commission to become effective as a !!!ed rate schedule. The effective date shall be 60 days after the filing date, or such other date as
' may be specified by the Commission.
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e CERTIFICATE OF SERVICE I hereby certify that copies of the attached brief of Petitioner Pacific Gas and Electric. Company were served on attorneys for all of the parties to this appeal by de-positing copies of said brief in the United States mail addressed to tnose attorneys this 17th day of December, s
1981. -
h'A. Kirk McKenzie "
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-.7. UNITED STATES OF AMERICA 5 . ., f . . . - ..
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CHARLES A. FERGUSON
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January 8,1982 .
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TABLE OF CONTENTS Page I N TRO DUCT I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Two-Year Perspective........................ 4 I. N ATU RE OF TH E P ROC EED ING . . . . . . . . . . . . . . . . . . . . . . 8 A. Procedural History....................... 9 B. Applicable Legal Standards............... 9
, 1. The Sierra-Mobile Doctrine.......... 10
- 2. The Role of Antitrust Considerations 13
\
- 3. Statutory Limits on the Commission's Remedial Authority Serve Further to Define the Nature of the Commission's Review Function..................... 15
- a. The Commission is powerless to modify contracts in a way that expands transmission obligations even in the interest of promoting
( com pe t i t io n . . . . . . . . . . . . . . . . . . . . 16
- b. The Commission cannot modify contracts in a way that expands obligations to coordinate operations.......... 21
(
(i) The provisions of the Federal Power Act deny the Commission broad power to order inter-utility coordination...... 22 (ii) The legislative history shows Congress denied the Commission broad power to order coordination. . . . . 24
- c. The courts have af firmed that the scope of the Commission's O power to order interutility coordination is limited........ 26 i
1
Page II. A GENERAL PERSPECTIVE ON THE CONTRACTS. . . . . . . . 30 A. The Companies Are Regulated Electric Utilities................................ 31 B. PGandE Has Cooperated Reasonably with Other Utilities..................... 32 C. The Stanislaus Commitments............... 33
- 1. Background of the Commitments . . . . . . . 34
- 2. Bene f its of the Commitments. . . . . . . . . 35 4
( 3. PGandE Has Complied with the Comm itmen ts . . . . . . . . . . . . . . . . . . . . . 36
(
D. The Proper Framework for Contract Evaluation............................... 37 III. THE INTERTI E CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . 39 A. Congressional Approval of the Intertie Program Immunizes It f rom Other Federal Law...................................... 39
- 1. The Federal Government's Partici-pation Demonstrates that the Intertie Arrangements Are in the
< Public Interest..................... 40
- 2. The Doctrine of Congressional Ra t i f i c a t i o n . . . . . . . . . . . . . . . . . . . . . . . . 41
- 3. The Doctrine of Implied Pamunit.y. . . . 43 t
- 4. The Noerr-Pennington Doctrine....... 44 B. The Evidence Establishes that the Intertie Arrangements Are the Products of Federal Policies and Decisions. . . . . . . . 46 L
- 1. The Development of an Intertie Plan--1959 to 1964.................. 46
- 2. Developments in the Spring of l 1964................................ 53
- 3. 1964 Congressional Hearings......... 55 11 l
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- 4. Negotiations in the Summer of 1964--the Final Compromise s . . . . . . . . . 58
- a. A federal transmission link be tween B PA and CVP . . . . . . . . . . . . 58
- b. Additional benefits to CVP an d DW R . . . . . . . . . . . . . . . . . . . . . . . . 59
- 5. The Intertie Plan Is Explicitly Approved by the Full Congress. . . . . . . 60
- 6. Approval of Contracts Implementing the Intertie Program................ 62
- a. Interior Department review and approval................... 62
- b. Antitrust Division review an d a p p r ov a l . . . . . . . . . . . . . . . . . . . 63
- c. Federal Power Commission 1
review and approval. . . . . . . . . . . . 64
- d. Congressional review and approval....................... 65 l IV. THE INTERTIE CONTRACTS ARE JUST AND REASONABLE.................................... 66
(.
A. The EHV Contracts........................ 66
- 1. The ENV Contracts Fulfilled the l Intertie Program's Objective of Granting Options of Transmission Rights to Specific Public Agencies. . 66
- 2. The EHV Contracts Remain in the Public In te r es t Today . . . . . . . . . . . . . . . 69 B. The Pac ific Intertie Agreement. . . . . . . . . . . 70
(.
- 1. The Pacific Intertie Agreement Affords the Type of Sharing Envisioned under the Intertie Program............................. 70
- 2. Pacific Intertie Agreement J Provisions Are Just and
() Reasonable.......................... 73 0 tii
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- a. Paragraph 7.02................. 74 (i) Objections to para-graph 7.02 are unsound.... 75 (ii) Paragraph 7.02 is an economically justified arrangement............... 77 (iii) Elimination of para-graph 7.02 will not improve compe tit ion. . . . . . . 79
- b. Paragraph 7.01(e).............. 80 C. It Would Be Contrary to the Public Interest to Grant Cities Additional Direct Access to the Inte r t ie. . . . . . . . . . . . 81
- 1. The Cities Already Have Access to More Than a Proportionate Share of the Benefits of the Intertie............................ 83
- 2. Additional Direct Access to the Intertie Will not Improve Cities' Compe t itiv e Po s i tion . . . . . . . . . . . . . . . . 85 C 3. The Ultimate Fconomic Effect of Cities' Transmission Remedies Is the Transfer of Benefits to the Cities from Customers of the Companies....................... 90 t 4. Cities' Proposed Transmission Remedies Pose Serious Operational and Planning Difficulties .......... 93 V. CONTRACT 2948A SERVES THE PUBLIC INTEREST; ITS MODIFICATION IS NOT JUSTIFIED BY THE t EVIDENCE AND IS BEYOND THIS COMMISSION'S J U R I S D I C T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 A. An Overview.............................. 97 B. The Central Valley Project and Its Integ ra tion Contract with PGandE. . . . . . . . . 98
() C. Benefits of Contract 29 4 8 A to CVP . . . . . . . . 101 iv
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, Page D. Procompetitive Benefits to CVP's Customers................................ 106
- 1. 2948A Doubled CVP's Firm Power Sales............................... 107
- 2. 2984A Provides CVP Customers with Indirect Intertie Access............ 107 3, 2948A Enabled CVP Customers to Be Supplied with Long-Term, Firm, Low-Cost Power................ 109 E. Cities and Staff Have Failed to
( Demonstrate that Contract 2948A Has a Significant Anticompetitive Impact. . . . . . . 110 F. Cities and Staff Failed to Establish that the Transmission or " Wheeling" Provisions of Contract 2948A Are Unreasonable............................. 116
- 1. The Size of the Wheeling Area in Contract 2948A Is the Result of Federal Government Marketing Decisions........................... 117
- 2. The Wheeling Area in Contract 2948A Has not Affected CVP's t Power Marketing Program............. 118 G. Other Challenged Provisions of Contract 2948A Are Reasonable and Reasonably Necessary to the Coordination of the PGandE and s
CVP Systems.............................. 119
- 1. A r t i c l e 14 ( a ) . . . . . . . . . . . . . . . . . . . . . . . 119 .
- 2. A r t i cle 19 (d ) - ( f ) .*. . . . . . . . . . . . . . . . . . 120
- 3. A r t i c l e 19 ( g ) . . . . . . . . . . . . . . . . . . . . . . . 121 VI. THE CALIFORNIA POWER POOL AGREEMENT........... 124 A. Legal Principles......................... 124 B. The Evidence Shows the Pool Agreement to Be in the Public Inte r est. . . . . . . . . . . . . 126 O
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- 1. The California Power Pool Agreement Serves to Enhance the Reliability, Efficiency and Economy of Electric Service c in California....................... 128
- 2. No Basis Exists for Adding Membership Provisions to the Pool Agreement.................. 129
- a. A general membership pro-vision is not a necessary prerequisite to a reasonable pool agreement................. 130
( '
- b. There is no basis for requiring the admission of non-generating entities to a power p0o1................ 131
- c. There is no competent evidence that Cities '
f ailure to be included in the Pool has had any adverse effect................. 132
- 3. There Is No Unequivocal Public Necessity to Change or Delete Any Provision of the Pool Agreement..... 134 L
- a. Paragraphs 5.01-5.03........... 134 i
- b. Paragraphs 3.02 and 8.01(b) . . . . 137 VII. 1970 SMUD-PGandE CONTRACT AND ITS L AMENDMENTS.................................... 140 A. Overview of SMUD and its Integration ,
Cont ract w ith PG andE . . . . . . . . . . . . . . . . . . . . . 141 B. Benefits of the Contract to SMUD......... 143 L
C. Benef its to PGandE's Customers . . . . . . . . . . . 145 D. Intervenors and Staf f Failed to Demonst ra te that the SMUD-PGandE Contract Has a Significant Anti-Compe t it iv e E f f ec t . . . . . . . . . . . . . . . . . . . . . . . 146 O E. Aside from Competitive Considerations, the Contract Is Reasonable............... 149 vi
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( Page VIII. CITIES AND STAFF HAVE FAILED TO PRESENT COMPETENT ECONOMIC EVIDENCE ESTABLISHING THAT THERE IS AN UNEQUIVOCAL PUBLIC NECESSITY TO MODIFY THE CONTRACTS AT ISSUE SO AS TO FOSTER COMPETITION IN THE ELECTRIC UTILITY INDUSTRY IN CALIFORNIA................................. 152 A. There Is No Competent Evidence that the Public Interest Requires Addi-tional Competition in the Electric Utility Industry in California........... 153
- 1. There Is No Empirical Evidence
, that Competition Would Improve l
the Performance Of Utilities In California; Indeed, The Evidence Is to the Con t rar y . . . . . . . . . . . . . . . . . . 154
- 2. There Is No Reliable Theoretical Basis for a General Presumption that Additional Competition Will Improve the Performance of the Electric Utility Industry in California....................... 157
- 3. The Conduct Characterized as Competition Is Not That Which Classical Economic Theory Asso-( cia tes with Good Performance . . . . . . . . 161 t' B. There is No Competent Evidence Estab-lishing That the Contracts at Issue Have a Real Impact on Competition.. ..... 162
, 1. The Economic Evidence is Based on The Incompetent, Biased And
. Largely Stricken Direct Testimony of Cities' " Engineering" Ad v o ca t e s . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 y C. The Economic Testimony Provides No Method for Measuring the Importance of the Competit ive Impacts Alleged. . . . . . . 166 D. The Economic Evidence Provides No Basis for Judging the Value of Benefits to Be Achieved.............................. 167 O
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l E. The Economic Case of Cities and Staff Was Further Flawed by Unrealistic Definitions of the Relevant Markets. . . . . . 170
- 1. Miller on Mar ke ts . . . . . . . . . . . . . . . . . . . 171
- 2. Earley on Markets................... 176 I
IX. CO NC L U S IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 1
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TABLE OF AUTHORITIES CASES Pace Acme Precision Products Inc. v. American Allovs Coro.,
48 4 F . 2d 1237 (8th Cir. 1973) ..........,.......... 170 Alabama ex rel. Graddick v. TVA, 636 F.2d 1061 (5th Cir. 1981) ..................... 41 American Louisiana Pice Line Co. v. FPC, 344 P.2d 525 (D.C. Cir . 196 5) ..................... 10 Ba tes v. Little Rock, 361 U.S. 516 (1960) ............................... 45 Board of Trade of Chicago v. United States, 246 U.S. 231 (1918) ............................... 15 Borough of Lansdale v. FPC, 49 4 F. 2d 1104 (D.C. Cir. 1974) .................... 11 3 rooks v. Dewar, 313 U.S. 354 (1941) ............................... 41,42 B r own S hoe Co . v. United States, 370 U.S. 294 (1962) ............................... 170 California v. FPC, 369 U.S. 48 2 (1962) ............................... 15,29 California v. Kleece, 604 F.2d 1187 ( 9 th Cir . 1979) .................... 44 California Motor Transcort Co. v. Truckino Un li m i te d , 404 U.S. 508 (1972) .................... 45,46 Cen tral Hudson Gas & Electric Co. v. Public Service Commission, 447 U.S. 557 (1980) .......... 45 l Central Iowa Power Coco. v. FERC, 606 F. 2d 1156 (D.C. C ir . 1979) .................... cassim City of Groton v. Connecticut Licht &
i
() Power Co., 1980-81 CCH Trade Cases 9 i4329 (2d Cir . 1981) ............................ 134 l
iX
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\- Pace City of Huntingburg v. FPC, 498 F.2d 778 (D.C. Cir. 1974) ..................... 14 City of Lafavette v. Louisiana Power &
Light Co., 435 U.S. 38 9 (1978) .................... 45 City ot Santa Clara v. Kleppe, 418 F. Supp. 1243 (N . D. Cal. 1976),
modified, 429 F. Supp. 315 (N.D. Cal. 1976),
att'd in eart, rev'd in cart, and remanded sub nom. City of Santa Clara v. Andrus, 572 F.2d 660 (9th Cir.), cert. denied, 439 U.S. 859 (1978) .............................. 99 Consolidated Edison Co. v. Public Service Commission, 447 U.S. 530 (1980) ................... 45 Continental T.V., Inc. v. GTE Svlvania Inc.,
433 U.S. 36 (1977) ................................ 15 Conwav Corp. v. FPC, 510 F.2d 1264 (D.C. Cir. 1975), aff'd, 426 U.S. 271 (1976) ............................................ 13 Dalmo Sales Co. v. Tysons Corner Regional Shocoino Center, 308 F. Supp. 988 (D.D.C.),
aff'd, 429 F.2d 206 (D.C. Cir . 1970) .............. 125 Deesen v. PGA, 358 F.2d 165 (9th Cir.),
cert. denied, 385 U.S. 846 (1966) ................. 125 Eastern R.R. Presidents Conference v. Noerr i
Motor Freicht, Inc., 365 U.S. 127 (1961) .......... 45,46 E.I. DuPont de Nemours & Co., 3 CCH Trade Reg. Rep. 1 21,770 (F.T.C. Docket 9108, October 20, 1980) ................................. 164 l
Electric & Water Plant Board of Frankfort v.
Kentuckv Utilities Co. ,
15 Fed. Pwr. Serv. 5-314 (1978) ................... 71 Eng e l v . Henrv, 59 Cal. P.U.C. 457 (1962) ......................... 31 First Na tional Bank of Boston v. Bellotti, 435 U.S. 765 (1973) ............................... 45
)
l
Pace Florida Power & Licht Co.,
18 Fed. Pwr. Serv. 5-783 (1979), rev'd on other grounds sub nom.
Florida Power & Licht v. FERC, 660 F.2d 668 'Sth Cir . , Unit B 1981) .............. 170 Florida Power & Light Co. v. FERC, 660 F.2d 668 (5th Cir . , Unit B 1981) .............. cassim FPC v. Conway Coro.,
426 U.S. 271, (1976) .............................. 20,21 FPC v. Sierra Pacific Power Co.,
3 50 U. S. 348 (1956) ............................... 10,32,70 Franchise Realty Interstate Corp. v. San Francisco Local Joint Exec. Bd. of Culinarv Workers, 542 F. 2d 10 76 (9th Cir. 1976), cert. denied, 430 U.S. 940 (1977) .............................. 46 Friends of the Earth v. Armstrong, 485 F.2d 1 (10th Cir . 1973),
cert. denied, 415 U.S. 1171 (1974) ................ 41 Gainesville Utilities Deoartment v. Florida Power & Licht Co., 402 U.S. 515 (1971)............. 24 Get Oil Out!, Inc. v. Exxon Coro.,
586 F.2d 7 26 (9th Cir. 1978) ...................... 44 Gordon v. New York Stock Exchange, Inc.,
422 U.S. 659 (1975) ............................... 44 Gulf States Utilities Co. v. FPC, 9 Fed. Pwr. Serv. 5-100 (1976) .................... 29 Gulf Sta tes Utilities Co. v. FPC, 411 U.S. 747 (1973) .............................. 5,13,29 Gunter Harz Soorts v. United S ta tes Tennis Ass'n, 511 F. Supp. 1103 (D. Neb.), aff'd, 1981-2 CCH Trade Cases 1 64,381 (8th Cir . December 2, 1981) ........ 125 Hallmark Industry v. Revnolds Me tals Co. ,
1971 CCH Trade Cases t 73,409 (N . D. Cal.
1970), aff'd, 489 F.2d 8 (9th Cir. 1973),
cert. denied, 417 U.S. 9 32 (1974) ................. 170 Xi
~/ Page Hodason v. Board of Commissioners, 614 F.2d 601 (8t.i Cir. 1980) ...................... 41 Huches Tool Co. v. Trans World Airlines, Inc.,
409 U.S. 363 (1973) ............................... 43-44 In re Airport Car Rental Antitrust Litigation, 521 F. Supp. 568 (N . D. Cal. 1981) ................. 46 Ivanhoe Irrigation Dist. v. McCrackere, 357 U.S. 275 (1958) ............................... 98,99 Kansas ex rel. Stephan v. Adams, 608 F.2d 861 (10th Cir. 1979),
cert. denied, 445 U.S. 963 (1980) .................. 41-42 Metro Cable Co. v. CATV of Rockford, Inc.,
516 F.2d 220 (7th Cir. 1975) ...................... 46 Missouri Power & Light Co.,
16 Fed. Pwr. Serv. 5-265 (1978) ................... 13 Municipalities of Groton v. FERC, 587 F.2d 1296, 1299 (D . C . Cir. 1978) .............. 28 Natural Resources Defense Council, Inc. v. NRC, 582 F.2d 166 (2d Cir. 1980) .................................... 41 New England Power Pool Agreement, 10 Fed. Pwr. Serv. 5-594 (1976) ................... 137 New York State Electric & Gas Coro. v. FERC, 638 F.2d 388 (2d Cir. 1980), cert. denied, 50 U.S.L.W. 3237 (1981) .......................... passim Northern California Power Agencv v. FPC,
[
514 F.2d 134 (D.C. Cir.), cert. denied, i 423 U.S. 863 (1975) ............................... 5,29,146, 152 Northern Light & Power Co. v. Stacher, 13 Cal. App. 404, 109 P. 896 (1910) ............... 31 Northern Natural Gas Co. v. FPC, 399 F.2d 953 (D.C. Cir. 1968) ..................... 14,15,29 Otte r Tail Powe r Co. v. United Sta tes, I')
4l0 U.S. 366 (1973) ............................... passim l \_-
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\/ Page Pacific Gas & Electric Co.,
72 Cal. P.U.C. 705 (1971) ......................... 5 Pacific Gas & Electric Co.,
75 Cal. P.U.C. 101 (1973) ......................... 5 Permian Basin Area Rate Cases, l 390 U.S. 747 (1968) .............................. 11,12 Richmond Power & Light v. FERC, 574 F.2d 610 (D.C. Cir. 1978),
affirming New Encland Powe r Pool Particioants (Coal-bv-Wire),
52 F.P.C. 410 (1974), rehearing denied in pertinent cart, 54 F.P.C. 1375 (1975) ............................ cassim Richmond Power & Light v. FPC, 4
481 F.2d 490 (D.C. Cir.),
cert. denied, 414 U.S. 1068 (1973) ................ 11,12,15 South Carolina Generating Co. v. FPC, 249 F.2d 755 ( 4 th Cir . 1957),
cert. denied, 356 U.S. 912 (1958) ................. 11 Tcwn of Massena v. Niagara Mohawk Power Coro., 1980-2 CCH Trade Cases 1 63,526 (N . D.N .Y . 1980) ................................... 171 Towns of Norwood, et al. v. FPC, 546 F.2d 1036 (D.C. Cir. 1976) .................... 14 UMW v. Pennincton, 381 U.S. 657 (1965) ............................... 45,46 United Gas Pice Line Co. v. Mobile Gas Service Coro., 350 U.S. 332 (1956) ................ 11,12,70 United States v. Columbia Steel Co.,
334 U.S. 495 (1948) ............................... 170 United States v. Emoire Gas Coro.,
537 F.2d 296 (8th Cir. 1976),
cert. den ied , 429 U.S. 1122 (1977) ................ 170 United S ta tes v. Grinnell Coro.,
384 U.S. 563 (1966) ............................... 170 United S tates v. Kennedy,
() 278 F.2d 121 (9th Cir. 1960) ...................... 41 xili
O)
\_ Pace United States v. United Shoe Machinery Corp. 110 F. Supp. 295 (D. Mass. 1953),
aff'd cer curiam, 347 U.S. 521 (1954) ............. 170 Wisconsin v. Duluth, ~
96 U.S. 379 (1678) ................................ 41 United Sta tes Constitution U.S. CONST. amend. I ................................ 45 STATUTES Federal Clean Air Act, 42 USC SS 7401 et seg (1978) ...................... 44 Federal Power Act Section 202, 16 U.S.C. S 824(a) ................... 26,37,98 Section 202 (a) , 16 U.S.c. S 824 (a) ................ passim Section 202 (b) , 16 U.S.C. S 824a(b) ............... 22,24 Section 202 (c) , 16 U.S.C. S 824a(c) ............... 22 Section 203 (b) , 16 U.S.C. S 824b(b) ............... 25 Sect ion 20 5 (c) , 16 U.S.C. S 824d (c) ............... 20 Section 206, 16 U.S.C. S 824e ..................... passim Section 205 of PURPA, 16 U.S.C. S 824a-1 .......... 23 l
l Section 210 of PURPA, 16 U.S.C. S 824i ............ 22,23 Section 211 of PURPA, 16 U.S.C. S 824j ............ 18,19,20 Section 212 of PURPA, 16 U.S.C. S 824k ............ 18,19,20, l 23 i Federal Trade Commission Act. S 5 ................. 164 i
l In ters tate Commerce Act, 49 U.S.C. S 1 etseg. ........................... 70 O
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( Pace Keating Amendment, Public Law 82-136, Title I, 65 S ta t . 248 (1951) .................... 50 Northwest Regional Preference Act, 16 U.S.C. S 837 et seg. ......................... 60,61 Public Works Appropriations Act, (Pub. L. No .88-511 ; 7 8 S ta t . 682) .............. 43,60 Reclamation Project Act of 1939, S 9(d), 43 U.S.C. S 485h(d) (1964) .............. 102 Rivers and Harbors Act of 1937, S 2, 16 U.S.C. S 695d (1974) .................... 99 Securities Exchange Act of 1934, 15 U.S.C. S 77b et seg. ......................... 44 Sherman Anti-Trust Act, 15 U.S.C. S 1 etseq. ........................... 15,44,45, 170 California State Cal. Pub. Res. Code SS 25216 (b) ,
25500,, 25502, 25510, 25514 ....................... 32 Cal. Pub. Util. Code S 451 ............................................. 31 S 1001 ............................................ 32 SS 10001, 10005, 12801, 12804 ..................... 32 Congressional Bills S. 1725, 74th Cong., 1s t Sess. (1935) ............... 25 S. 2050, H.R. 8 209, 8 8 th Cong . ,
1st Sess. (1963); S. 1621, H.R. 6485, 39 th Cong . , 1st Sess. (1965) ..................... 26 S. 2796, 7 4 th Cong. , 1s t Sess. (1935) ............... 25 i
H.R. 54 2 3, 7 4th Cong . , 1st Sess. (1935) ............. 25 H.R. 6485, 89th Cong., 1s t Sess. (1965) ............. 26 w: ,
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\-) Pace Concressional Recorts S. Rep. No. 621, 74th Cong.,
1st Sess. (1935) .................................. 25,26,27 S . Rep. No. 7 26, 88th Cong. ,
1st Sess. (1963) .................................. 50 H.R. Rep. No. 1318, 74th Cong.,
1st Sess. (1935) .................................. 25,26,27 H.R. Rep. No. 437; 7 9 th Co ng . ,
1st Sess. 18 (1945) ............................... 50 H.R. Rep. No. 2038, 80th Cong.,
2d Sess. 220 (1948) ............................... 50 H.R. Rep. No. 1027, 88th Cong.,
1st Sess. 24 (1963) ........................ ...... 50 H.R. Rep. No. 1794, 88th Cong.,
2d Sess. (1964) ................................... 43,60 House Conference Report No. 95-1750, 9 5th Cong. , 2d Sess., reprinted in 1978 U.S. Code Cong. S Ad. News 7797 .............. 22 Books and Articles 1 P. Areeda S D. Turner, Antitrust Law S 224 (1978) ...................................... 44 J.S. Sain, Industrial Orcanization (1959) ........... 158 W.R. Hughes, " Scale Frontiers in Electric Power" in Technolocical Change in Reculated Industries (W. Capron ed. 1971) .............................. 157 W. Pr imeaux , "A Reexamination of the Monopoly Market Structure for Electric Utilities,"
in Promoting Comoetition in Regulated Marke ts 19 2-9 3 (A. Phillips ed. 1975) ............. 156
?.M. Scherer, Industrial Market Structure and Economic Per formance (2d ed. 1980) ............ 159,160, 161 D
O m
Page Sims, " Antitrust Law Is No Business Equal Opportur.ity Act," Legal Times of Washington, March 10, 1980 at 12, cols. 2-3 ..................................... 164 Miscellaneous 45 Fed. Reg. 81865 (1980) ........................... 101,118 46 Fed. Reg. 21522 (1981) ........................... 100 46 Fed. Reg. 51227 (1981) ........................... 52,101, a
106,119 FPC, 1955 Annual Report 183; 1956 Annual Report 20; 1958 Annual Report 19; 1961 Annual Report 3-4; 1962 Annual Report 17 ......................................... 26 NCPA Answer to PGandE Interrogatory No. 140 ......... 133 NCPA's Motion for Extraordinary Relief (March 11,1980) .................................. 178 Order Accepting Rate Schedule for Filing and Denying Requests for Suspension and Hearing (November 6, 1968) ................................ 65 Pacific Gas and Electric Company, Docket No. E-7777, Order Granting Motion for Extraordinary Relief and Instituting Investigation (March 14, 1974) .................... 16 Pacific Gas and Electric Company, Docket Nos. ER76-296 and E-7777 (Phase II), Order Accepting Proposed Amendment for Filing, Providing for Section 206 Investigation, Permitting Intervention and Consolidating Proceedings (March 22, 1976) ...................... 16 Pacific Gas and Electric Company, Docket No. E-7777, " Order on Motion to Compel Filing of Certain Documents" (June 2, 1980) ....... 19 Report of the Conference Committee on the Northwest Regional Preference Act ............. 61 0
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Annual Report of Financial Transactions, l Concerning Cities of California, Fiscal- i Year'1979-80, Table-2 ............................. 178 4
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O UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATOP.Y COMMISSION Pacific Gas and Electric ) Docket No. E-7777(II)
Company, et al. ) and
) Docket No. E-7796 FIRST POST-HEARING BRIEF OF PACIFIC GAS AND ELECTRIC COMPANY TO: Presiding Administrative Law Judge Thomas L. Howe:
Pacific Gas and Electric Company ("PGandE") submits this initial post-hearing brief, as directed by the Presiding Judge.
INTRODUCTION On March 14, 1974, the Federal Power Commission instituted this proceeding as an investigation under section 206 of the Federal Power Act into the justness and reasonable-ness of certain contracts. Although parties and contracts have been added since then, the nature of the case is still enat established by the March 14, 1974 Order. Complainants and the Staff have the obligation to specify their objections to the justness and reasonableness of the contracts at issue and have the burden of proving those allegations.
In this proceeding the parties are aligned on two sides. On the def ense are PGandE, Southern California Edison Company (" Edison") and San Diego Gas and Electric Company
(" San Diego"). Each is an investor-owned utility that cenerates, transmits and distributes electric power. Together with a non-party, the Los Angeles Department of Water & Power
(" LADWP" ) , they implemented in California the Intertie plan approved by Congress. For convenience, where appropriate to the text, they are referred to herein as " Companies."
Opposing the Companies are two sets of parties--the
" Cities" s md " Staff." Cities are municipalities who operate electric distribution systems. They purchase firm power from f one of the companies at wnolesale and sell it at retail. Also i
aligned against the Companies are the several Staff counsel of
O enis Commission participating in this proceeding, referred to here as " Staff."1 At the outset, we invite the Presiding Judge to recollect the general nature and the quality of the evidence presented, particularly of the witnesses. PGandE presented as witnesses not only representatives of the Company, but also representatives of the parties with whom PGandE was negotiating during the events in question and independent third persons as well. Thus, PGandE presented the testimony of Floyd Goss, the former chief executive of the largest municipal electric system in the United States, of former Congressman Chet Holifield, who had been personally designated by President Johnson to mediate some of the final disputes concerning the Pacific Intertie, of Morgan Dubrow and Bernard Goldhammer (through his deposition), who were two of the three primary negotiators of the Intertie arrangements on behalf of the Federal Government, and of William Keating, former Assistant Secretary of the Department of Interior. By way of contrast, the direct cases of complainants and Staff were virtually all " expert" witnesses without first-hand knowledge of the events which they discussed. There is no mystery to this dramatic contrast.
The plain historical facts do not support the theories put forth by complainants and Staff, and they accordingly attempted to avoid them. As striking, NCPA failed to present a single employee of the Agency itself or a representative of any of its member cities in their entire direct case.2 1 It is sometimes necessary to distinguish between those municipal systems located in the PGandE service area and tnose located in the Edison service area. The former are l
members of the Northern California Power Agency, a joint powers agency established under California law with eleven city members and one REA Coop associate member. Six of these city members are parties--Alameda, Healdsburg, Lodi, Lompoc, Santa Clara and Ukiah. The balance of the agency members are the cities of Palo Alto, Redding, Roseville, Biggs and Gridley and the Plumas-Sierra Rural Electric Cooperative.
The Northern California Power Agency is itself a party to the proceeding. For convenience we will refer to the Agency and its members as NCPA. Those municipal system parties operating in the Edison service area are the cities of Anaheim, Riverside, Colton and Azusa. They have normally been referred j to during the hearing as Southern Cities and will be so here.
2 In fact, it was only in rebuttal to Mr. Michaels, NCPA's
'f ormer General Manager who was presented by PGandE, that any sucn persons appeared and even then their testimony was largely l
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(]) limited to an attack upon Mr. Michaels' testimony, as opposed to sucstantive discussion of the issues between PGandE and NCPA.
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Frcm a historical perspective, consider the fact that PGandE has for years had, in place and operating, cooperative arrangements with a variety of systems, large and small, public and private. Ev en in the 19 50 's and early 1960 's ,
an era when the rhetoric of the advocates of both governmentally-owned utility systems and investor-owned utilities was sometimes bitter, PGandE's ultimate actions were cooperative, and generally considered progressive and enlightened. For instance, PGandE's early, pre-Intertie agreements with the federal government rega rding the coordinated operation of the Central Valley Project ( " C VP " ) and PGandE generation were modeled along the lines suggested by Congressional committees.
(Ex. 4255; see CH-27,906/8 to 27,907/7.) The Intertie arrangements themselves have been characterized as the product of enlightened cooperation. (E.g., Ex. 4043 at 3.) Similarly, during the course of this proceeding it was learned through the testimony of Mr. Luce that PGandE's integration agreement with Sacramento Municipal Utility District ( "SMUD ") was characterized by SMUD as its " declaration of independence." (CH-38,631/4-8.)
PGandE's cooperation has not been limited to " global" a rrangemen ts . At the operational level also PGandE has regularly extended its cooperation. One example in the record was the case where Redding, a member of NCPA that had switched to direct service from CVP, lost its transmission link to CVP and suf fered a major outage. PGandE promptly provided the equipment to interconnect itself with Redding and restore service. (Kaprielian, CH-22,479-481.)
The electric utility industry in California is one of the most diverse and pluralistic in the nation. The largest
( LADWP) and fif th largest (SMUD) municipal electric systems in the nation are both located in California. Transmission lines in northern California are owned not only by PGandE, but also by such other entities as USBR, City and County of San Francisco, and SMUD. Generating plants are owned by a' wide variety of entities in nor thern Calif ornia, including CVP, SMUD, City and County of San Francisco, and a variety of irrigation districts. Distribution systems are also owned by a variety of entities, including some of those listed above and others such as the member cities of NCPA.
While it would be wrong to suggest that the pluralism of' the electric utility industry in northern California is solely the result of PGandE's cooperation with other entities, it would be equally incorrect to ignore the fact tha t PGandE's cooperation has contributed to that pluralism. This is not to say tha t there have been no disputes or disagree-ments between PGandE and neighboring electric systems, nor that PGandE has been less than vigilant in protecting its in te re s ts and those of its customers. The Company has an
("N
(-) obligation, both legal and moral, to its ratepayers to provide 3
O reliable and economic service, and the self-interest of other entities is oftentimes at odds with those obligations.
Inevitably, disputes arise, but the end result historically has been some reasonable accommodation of conflicting interests.
The Stanislaus Commitments express in binding terms PGandE's willingness to enter into arrangements which would assist other entities in their electric power operations and develop-ment. This case has its origin in a present day dispute cetween PGandE and NCPA. The record reveals, however, that PGandE has negotiated in good f aith with NCPA to reach a cooperative arrangement.
This history of accommodation of diverse interests has developed reasonable and workable arrangements. This is borne out by the fact that the resulting arrangements, including many of the contracts at issue in this case, have been reviewed, in some instances repeatedly, by Congress, the Department of the Interior, the Antitrust Division of the Department of Justice, the FPC and the California Public Utilities Commission. In this brief, we discuss some of the legal consequences of those prior reviews, including the effect of Congressional ratification of the Intertie arrange-ments. The point here, however, is the more basic proposition that if these contracts were as bad as claimed by Cities and Staff, the agencies involved would have prohibited them or, at the very least, would have raised objections. Instead, they repeatedly approved them.
The overall result of these arrangements in northern and central California has been the provision of electric service at a very high level of reliability (see, e.g. Exhibit 4253) and at a very reasonable cost. The arrangements have thus achieved precisely those goals of economic and reliable service which are the ultimate objective of electric utility regulation in general and the Federal Power Act in particular.
A Two-Year Perscective Looking back over the record, the only thing about it that may be troublesome for the Companies is that it is the longest in Commission history. There will be a tendency to assume, given nearly two years of smoke, that there must be a fire. There may be an impulse to award mere perseverance. The emanations from Hearing Room D do not, however, signal violations of the Federal Power Act. There are other explanations for the tenacity and length of the fight.
The 1970's was a decade of turmoil for electric companies. The turmoil extended to the legal arena where rs Otter Tail Power Co. v. United States, 410 U.S. 366 (1973),
(_) ansettleo estacilsned views aoout the application of antitrust 4
O law to utilities, and Gulf States Utilities Co. v. FPC, 411 U.S. 747 (1973), th rust this Commission into the unsettled legal climate which Otter Tail created. This case, begun as it was early in the decade of the '70's, was for the Cities a gamble that the newly developing interest in competition in the electric power industry could be turned to their financial advantage.
The legal turmoil af f ecting the industry was modes t compared to the economic dislocation. OPEC induced increases in oil and gas prices coupled with general inflation had a dramatic impact on the economics of the industry. Decisions on
" facilities investments and contractual commitments like those associated with the Pacific Intertie, which were viewed as somewhat speculative et the time made (Daines, CH-1335/5-46) 3 have proven immensely valuah?,e. Other decisions, whose prudence could not have been questioned when made, such as investment in efficient oil-fired units, now are costly to the customer. The events which caused these economic dislocations were unpredictable and certainly beyond the control of any party to the proceeding.
As the record has developed over the past two year s, it has become increasingly apparent that NCPA is not interested in competition. (E.g., Fontes, Helms Tr. 4452-53.) If antitrust I
were the real issue, this case would be in federal court.
Ra the r , this proceeding is but one of a series of regulatory proceedings in which NCPA has sought some financial advantage or objective by raising the spectre of antitrust. To da te these ef forts have been consistently unsuccessful. See Northern California Power Agency v. FPC, 514 F . 2d 18 4 (D . C. Cir.)
cert. denied, 423 U.S. 863 (1975); Pacific Gas & Electric Co.,
72 Cal. P. U.C. 705 (Decision No. 79402, Nov. 23, 1971);
Pacific Gas & Electric Co., 75 Cal. P.U.C. 101 (Decision No. 81186, March 27, 1973).
NCPA's objective in the present case, as revealed particularly in the Statements of Relief and in the Westf all and Daines discussion of the PGandE-NCPA negotiations
- (CH-44,774/30 to 44,776/11), is, unde r the guise of promoting compe t it ion , to create a contractual and regulatory environment 3 The format we have adopted for citations to the record is to identify the witness, followed by a CH page ref erence.
Where appropriate, line ref erences are given following a slash mark (/) a f ter the page reference. The name of the witness is omitted where his identity is clear from the text. Thus "(Daines, CH-1335/5-46)" is a reference to the testimony of Nolan Daines appearing at transcript pag e CH-13 3 5, O-s lines 5 through 46.
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O in which they can insulate themselves as much as possible from the adverse cost impact of the economic dislocations of the '70's at the expense of PGandE's retail customers.4 As full requirements wholesale customers of the Companies, Cities now share proportionally with other customers in both the benefits and the burdens of plant investment and contracting decisions made over the years by the Companies.
Through the mechanism of regulated rates, NCPA members, for example, now share with other PGandE customers in the benefits of scale economies in generation, low energy cost hydroelectric plants, 600 Mw of reserves from southern California, favorable contracts and cost saving energy transactions with the Northwest. (Daines, CH-1343/3-5; CH-25,545/20 to 25,547/11. )
Through that same mechanism of regulated rates Cities share in the relatively high energy costs of oil and gas fired thermal plants. In this case (and also in Helms) Cities seek to establish rights to service or " access" to the good things while diverting to other customers the bad and in the process reforming favorable contracts like 2948A so that they become even more favorable. PGandE has no objection to NCPA's independence; it only seeks to protect the legitimate interests of its other customers. (Daines CH-44,774/44-44,775/15.)
Legal rights and obligations aside, we submit that there is no public interest in transferring wealth
, from the many PGandE, Edison and San Diego customers to the relatively few Cities customers. Such a transfer would not result in the greatest good for the greatest number.
4 NCPA's initial objective in raising antitrust issues in this proceeding was more limited. It was described by a former presiding judge in this docket, in the order entered September 28, 1973:
The main advantage of intervenors in their presently chosen course appears to be the greater possibility of settlement arising from prolonging, perhaps for years, the time during which the rate increase remains subject to refund. To tie up a public utility's funds in this way exerts considerable leverage on it. . . .
, It is not suitable that the proceedings of a rate increase be treated as ransem for relief not related l to tne increase. (Mimeo , p. 3.)
This initial oojective was thwarted by the Commission's t
(]) order oifurcating this case.
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O C l There were several factors affecting the length of the proceeding.
Initially a decision was made by Cities to try the case on a low budget, thus underscoring its speculative nature. There was no careful marshalling of witnesses to the relevant historical events. Rather, a few advocates appeared to present an economic and legal argument on Cities' beha lf . As it turned out, this strategy substantially delayed the proceeding. Much of the " expert" testimony was, with justification, stricken. As a result, Cities' counsel spent substantial hearing time seeking to "rehabilitace" incompetent testimony and conducting discovery of PGandE employees on the stand, fishing for some admission to bolster extravagant claims for relief. Delay also allowed Cities to pursue concurrently with this hearing a major document discovery program in the Stanislaus proceeding before the Nuclear Regulatory Commission, NRC Docket No. P-564-A. Time and again documents produced in that process were offered in evidence here by the Cities or Staff, constantly raising new issues or suggesting new lines of examination. Collectively these factors extended the case.
The key to Cities' perseverance lies in their extrav-agant claims for relief. While the odds of success may not be gcod, if they succeed, the winnings could be substantial. In the age of California's Proposition 13, sources of funds not subject to direct voter control, such as those generated by reductions in power supply costs, are a valuable commodity to any municipality.
(Ex. 4488.) Cases poor on " liability" but big on " damages" are always difficult to settle, and so the litigation has continued.
To reward the Cities merely for playing the game will only encourage others to roll the dice. The Commission ought not be a casino, and unless Cities have established by competent evidence that a challenged contract violates the Federal Power Act, there is no basis for this Commission to take action on their behalf. They have not met that burden and accordingly the decision in this case should f avor the Companies on all issues.
For Staff counsel and their economists, this case was a misguided attempt to move the electric utility industry in California towards a structure more like that of a naive theoretical model for a competitive industry. They are apparently willing, as a part of this effort, to favor municipal systems and to go beyond the boundaries of the Commission's jurisdiction. In particular, as their Statement of Relief discloses, they seek to impose virtually unlimited obligations on the companies to provide wneeling and support services.
'~N Crusades are fought, not settled, and for this reason too, the case has proceeded.
7
O For the Companies, the case posed a direct threat to their customers. As discussed below, the remedies sought would not increase efficiency or competition. They would allow Cities to exploit statutory preferences to low cost power supplies. They would directly change the balance of bargained for consideration in existing contracts against the Companies. They would require the Companies to assume
" common carrier" obligations in the provision of transmission services. All of this would ultimately result in a diversion of money f rom the Company's customers to the Cities.
One final notable factor that has contributed to the length of this case has been a f undamental dif f erence of opinion on the authority of this Commission directly or indirectly to grant relief in the form of wheeling.
The Statements of Relief filed by Cities and Staff in the summer of this year, if nothing else, underscored the fact that a key objective of this case for them has been the expansion of Cities' rights to transmission service. That is the ultimate objective of most of the remedies sought.
That is also one thing that the Commission cannot give.
As discussed in more detail below, during the pendency of this proceeding three diff erent courts of appeals have considered the question of the Commission's authority to order wheeling in a section 206 proceeding. Twice the Commission has tried. Twice it has been reversed. New York State Electric & Gas Corp. v. FERC, 638 F.2d 389 (2d Cir.
1980), cert. dented, 50 U.S.L.W. 3237 (1981); Florida Power &
Light Co. v. FERC, 660 F.2d 668 (5th Cir., Unit B, 1981). On ene otner hand, twice when the Commission has declined to impose a general wheeling obligation and declined to change voluntary transmission service agreements so as to expand the obligations of the parties, it has been upheld. Central Iowa Power Coop. v. FERC, 606 F.2d 1156, 1169 (D .C . Cir. 1979);
Ricnmond Power & Light v. FERC, 574 F.2d 610, 623 (D.C. Cir. 1978).
Collectively these cases coreclose every theory asserted in this proceeding to justify a requirement that the Companies or some of them be required to provide transmission service.
Collectively they stand for a relatively simple proposition:
- ne Commission can take no action, modify no contract, order no filing if the direct or indirect result of such action, modification or order is to compel a company to provide transmission service beyond that which it has agreed to provide voluntarily.
I. NATURE OF THE PROCEEDING By any standard this is a big case. In such cases, em it is particularly important to focus on the issues that
(_) are legally significant so as to avoid getting lost in the l
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O mass of detailed testimony and exhibits. In this brief, PGandt will seek to identify those issues which are significant to the outcome in this case and then will detail the legal authorities and evidence relevant to those issues.
To identify the significant legal and factuel issues requires, among other things, an understanding of the nature of this particular Phase II proceeding and the confluence of legal doctrines which establish the legal criteria to be applied in it.
A. Procedural History.
This docket began on September 29, 1972, as a wholesale rate filing by PGandE. Several municipalities which are wholesale customers of PGandE intervened and, in addition '
to raising more traditional rate issues, charged that various contracts between PGandE and other utilities were anticom-Petitive. The Commission, in an order issued March 14, 1974, in effect split the proceeding into two parts--one to consider tne traditional rate issues and a second, Phase II, to determine under section 206 of the Federal Power Act, 16 U.S.C. S 824e, whetner the challenged contracts were just and reasonable.
Order Granting Motion For Extraordinary Relief And Instituting Investigation, March 14, 1974, mimeo at 7. It is this Phase II of Docket E-7777 with which we now deal.
Suosequent Commission orders joined additional parties, such as Southern California Edison Company, and expanded the number of contracts to be reviewed, but have not changed the basic nature of the proceeding. Thus, this proceeding is one under section 206 of the Federal Power Act to evaluate the reasonableness of certain contracts in, light of charges that those contracts are anticompetitive.3
- 3. Applicable Legal Standards.
The Federal Power Act encourages utilities to develop voluntarily pooling and interconnection agreements.
l See Federal Power Act S 202(a), 16 U.S.C. S 824(a); Central l Iowa Power Cooo. v. FERC, 606 F. 2d 1156, 1162 (D.C. Cir. 1979).
In rne instant proceeding, the Commission is reviewing under 5 A more detailed account of the procedural history seems unnecessary here. Mindful of the Presiding Judge's admonition against incorporation by reference, we merely note that a more detailed discussion is available in the opening Trial 3rief of Pacific Gas and Electric Company, dated June 26, 1979, at pages 2-4. Copies of Commission orders in this
(]
doc.<et defining the scope of the proceeding were attached as exhinits to that brief.
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section 206 of the Act 3 , number of these voluntary agreements, all of which have been in~cperation for some time. The burden rests on those challenging the contracts to show that they
-violate the standards of section 206. See'American Louisiana Pipe Line Co. v. FPC, 344 F.2d%525, 529-32 (D . C . Cir. 1965);
Central Iowa _ Power Coop., supra, 506 F.2d 1156, 1161 n.11.
To formulate properly the issues to be addressed in such an inquiky requires an understanding of both the basic egulatory role of the Commission and (the way that competitive considerations are pertinent to it'. 'In this segment of the brief we review those questions. In general, the review will establish that, contrary to the apparent objectives of both 5taff and Cities in this case, -the Federal Power Act does not
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create a-yegulatory scheme 4 undec which transmission, coordi-nation and operating agreements' among utilities are designed in Washington and then provided to utilities for implementation.
Whether the expressed objective of Staff and Cities be the preservation of competition!,or optimal engineering efficiency or the public interest makes no dif f erence. The yederal Power Act, reflecting the. traditional American suspicion of central government planning of' commercial activity,, creates a different regulatory (atructure. Under it, utilities are generally free to negotiate their cwn agreements with other utilities-and, significantly, free not to deal with others at all . s Only when the negotiated _ agreements transgress the rather broad bounds imposed byJthe Act on negotiated agreements is the Commission empowered to act. That the role played by the Commission is so limited is evident in both judicial decisions and~in the very structure of the
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' Federal Power Act itself, particularly in the carefully circumscribed grant of remedial powers to this Commission.
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- 1. The Sierra-Mobile Doctrine.
In order to revise a voluntary agreement under \,
section 206 the Commission must first conclude that the agreement as written is contrary to the public interest. 'See FPC v._ Sierra Pacific Power Co., 360 p.S. 348, 355 (1956).
Uncer tne Federal Power Act, parties afe-free to develop arrangements suitable to their particular needs, and such voluntary contractual arrangements may not be revised by the Commission unless there is an " unequivocal public necessity" ,
for such revision. This essentialnpoint is merely a' restate ment of the words of the Supreme Court: ,d The regulatory systnm created .by the ace is pedmised on contractual agreements i voluntarily devised by the regulated '
r~g ccmpanies; itscontemplates abrogation V , . .
a y
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O of these agreements only in circumstances of unequivocal public necessity.
Permian Basin Area Rate' Cases, 390 U.S. 747, 822 (1968).
See also Borough of Lansdale v. FPC, 494 F.2d 1104, 1113 (D.C. Cir. 1974); Richmond Power & Light v. FPC, 481 F.
492-93 (D . C . Cir.), cert. denied, 414 U.S. 1068 -(1973) .gd 490, l The supervisory nature of Commission review was clearly described by the court in Linsdale, supra:
Contracts govern the legality of filings not because the contracts may themselves have been previously, filed but because the regulatory, statutes permit "the relations between the parties ' toLbe established initially by' contract,Lthe protection of the public interest being afforded by supervision ofithe individual contracts,
, which to that end must*be filed with the Commission and made' public." United Gas I .' Pipe Line Co. v. Mobile Gas Service Corp.,
supra, 350 U.S. at 339, 76 S. Ct. at 378.
494 F.2d at 1113. ,
4 /
,. 6 South Carolina Generating Co. v. FPC, 249 F.2d 755 (4th Cir. 1957), cert. denied, 356 U.S. 912 (1958), should be mentioned. That case did '.Mt concern' the Commission's power to act to modify a contract but whether there was sucstantial evidence sufficient to support a finding by the Commission that a split-the-savings rate was unreasonably high and should be replaced by a cost-based rate. 249 F.2d at 762. The holding that the' Sierra-Mobile cases would
! not limit the Commission's authority to reduce as opposed to l increase a rate is not pertinent here when no rate adjustments are at issue. While that ruling in this early split-the-saiings case is itself questionable, the Fourth Circuit's narrow reading of the rationale of the Sierra and Mobile cases is clearly inconsistent with the subsequent Supreme r
Court analysis in the Permian Basin Area Rate Cases quoted in the t2xc and with the D.C. Circuit's decisions in Lansdale and' Richmond Power & Light.
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O A rule limiting Commission intervention tc cases of clear public necessity is supported by the policy considerations underlying the Sierra-Mobile doctrine. The electric power industry is characterized by a need for long-term commitments of large amounts of capital, and, as a result, long-term power contracts. An important consideration in inducing sucn long-term commitments is some reasonable assurance that, once made, they will not be subject to change by regulatory
- authority absent an unusual and exceptional public need l for doing so. As stated by the D.C. Circuit in the Richmond Power & Light case
Because the wholesale transactions regulated under the Natural Gas Act and the Federal Power Act " require sub-stantial investment in capacity and f acilities for the service of a particular distributor" both acts provide for individual arrangements between sellers and wholesale buyers, with the relations between the parties established initially by contract.
See United Gas Pioe Line Co. v. Mobile Gas Service Corp., supra, 350 U.S. at
~
339, 76 S. Ct. at 378 . . . the Mobile-Sierra-Memchis doctrine "preserv[es]
the integrity of contracts" and " permits the stability of supply arrangements which all agree is essential to the health of . . . industry." Id. at 344, 76 S. Ct. at 380.
l 481 F.2d at 496-97.
We start with the Sicrra-Mobile doctrine because its rationale is important to in understanding of the Commission's
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role and is sometimes overlooked. In the context of this case, its practical significance is that it is not enough for Cities to show here that they can build a better mousetrap.
There may be better powe r pools than the California Power Pool. Tha t is not the issue. The rationale of Sierra-Mobile means that it is not enough for Staff to demonstrate that enere is a "more procompetitive" or "less restrictive" way of achieving a legitimate result. That is not the issue either. The question is not whether the Commission can, with benefit of hindsight, devise better ways or contracts; the question is whether the contracts under review are so cad that the finding can affirmatively be made that there is an " unequivocal public necessity" that they be changed.
- See Permian Basin Area Rate Cases, suora, 390 U.S. at 822.
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(J The Sierra-Mcbile doctrine follows f rom and is but one manifestation of a more general proposition. Congress gave the Commission only limited control over the operations of the electric utility industry, leaving it primarily in the hands of the utilities. As the Supreme Court put it, " Congress rejected a pervasive regulatory scheme for controlling the interstate distribution of power in favor of voluntary commercial relation-ships." Otter Tail Power Co. v. United Sta tes, 410 U.S. 366, 374 (1973). The Federal Power Act gave the Commission no manda te to reorganize the industry to conform to its conception o f the ideal. It is not the general of an army of utilities, deploying the troops to implement a grand strategic plan, but rather a policeman, enforcing minimum standards of acceptable behavior thereby to protect the public interest.
- 2. The Role of Antitrust Considerations.
In de termining whe ther there is an " unequivocal public necessity" to change the contracts under review, the Com-mission has the " responsibility to consider . . . the anticom-petitive effects" of matters before it. Gulf Sta tes Utilities Co. v. FPC, 411 U.S. 747, 758 (1973); Conway Corp. v. FPC, 510 F.2d 1264, 1270 (D.C. Cir . 197 5) , aff'd, 426 U.S. 271 (1976). Gulf S ta tes , however, did not repeal the Sierra-Mobile doctrine nor amend the public interest standard of section 206 of the Federal Power Act. Accordingly the question presented is whether a matter 'c efore the Commission for review has an anticompetitive ef f ect of sufficient significance tha t there is an " unequivocal public necessity" for removing the t eff ect. To present evidence sufficient to satisfy such a standard is a burden that Cities and Staff have not come close to meeting.
l The Commission has taken the Supreme Court at its l word, stressing tha t it is to consider the actual competitive l impact, not motive or intent. Missouri Power & Licht Co., 16
! Fed. Pwr. Serv. 5-265, 5-27 2 to 5-27 3 (1978). Although
- the MP&L ruling was made in a price squeeze case, the precedent l is pertinent to any section 20C inquiry into the "iustness and reasonableness" of contracts. Given tha t the ultimate l objective of a section 206 investigation is to determine j whether contracts are la the public interest, the necessary l focus is on the actual effects of the agreements, not the motives of the contracting parties. Bad motives do not render the contracts contrary to the public interest if the agreements in fact serve the public interest. The testimony of the Staff witness Dr. Holmes is pertinent on this issue
Q. Did you find it necessary to give l consideration to any past anticompetitive j
(~% conduct by the three CPP companies
! (_) in preparing your tes t imony?
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1 A. No. Conclusions as to the potential for anticompetitive ef f ect in this case do not depend on being able to establish the existence of anticompetitive conduct by the three CPP companies in the past. The provisions of the agreements and related practices at issue in this case are either anticompetitive or not anticompetitive.
The economic ef fects are not conditioned by the presence or absence of anticom-petitive conduct in the past.
(CH-1047/37-49.)
The approach of the Commission and the Staf f is, in this regard, consistent with the cases which describe the Com-mission's duty to consider antitrust matters in terms of weighing the competitive imoact or effects of the matter being reviewed by the Commission. See City of Huntinoburg
- v. FPC, 498 F.2d 778, 783 et sea. (D. C. Cir. 1974); Towns of Norwood, et al. v. FPC, 546 F.2d 1036,1038 (D.C. Cir.
1976).
In addressing the question of whether a particular contract f alls outside the " zone of reasonableness," the competitive impact of the challenged contracts is not the sole consideration. It is well established that the Commission can and does approve actions which violate antitrust policies where other economic, social or political considerations lead to the conclusion that the contracts are not outside the zone of reasonableness. Northern Natural Gas Co. v. FPC, 399 F.2d 953, 961 (D.C. Cir. 1968). Moreover , actions having some effects on competition that might be deemed improper in other industries are expressly contemplated by the Federal l
l l
14
O V
Power Act. See Central Iowa Power Coco. v. FERC, suora, 606 F.2d at 1162-63.'
Merging the cases on the relevance of antitrust with those describing the general role of the Commission in a section 206 proceeding provides a general standard by which to evaluate charges of anticompetitive effect. Those making such a charge must establish the existence of an actual impact on competition, not related to or justified by other public interest considerations, which has a suf ficiently harm-ful impact on the public good that there exists an unequivocal public necessity for eliminating it.
- 3. Statutory Limits on the Commission's Remedial Authority Serve Further to Define the Nature of the Commission's Review Function.
The D.C. Circuit has observed that the Commission has not always wholeheartedly embraced Congress' limited conception of its role and has on occasion " attempted what may charitably be termed an 'end run' around" its limitations.
Richmond Power & Light v. FPC, 481 F.2d 490, 495 (D.C. Cir.),
cert. denied, 414 U.S. 1068 (1973). Staf f and Cities attempt another "end run" here, this time under the rubric of "competi-tion." Such an "end run" would violate not only Sierra-Mobile, but also specific statutory strictures imposed on the Commission i by Congress consistent with its conception of the Commission's l limited regulatory role. The limitations Congress put on the 7 Th is is not an antitrust case and it is not the role of the Commission to enforce the antitrust laws. See California l v. FPC, 369 U.S. 482, 485 (1962); Northern Natural Gas Co. v. FPC, l 399 P.2d 9 53, 960 (D . C . Cir. 1968). There is, however , a parallel between the burden imposed on one seeking to change a voluntary arrangement in a section 206 proceeding and one seeking to establish that a contract viola tes the antitrust laws. Within the specific domain of antitrust law, not all restraints on competition are proscribed. So long as
- cer se violations are not involved, section 1 of the Sherman l Act forbids only unreasonable restraints of trade; private parties are free to develop arrangements which they deem appropr iate within the limit imposed by the prohibition against unreasonable restraints. Board of Trade of Chicaco
- v. Un ited S ta te s , 246 U.S. 231 (1918); continental T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). Just as the evidence presented in this case f ails to establish that the contracts at issue are unreasonable or contrary to the
' puolic interest, so too does it fail to establish that any of the contractual restraints are unreasonable under the
() antitrust laws.
l l 15 l
4 i
I
($)
Commission's role with regard to wheeling and coordination are especially pertinent here. They underscore the fact that Congress did not design the Federal' Power Act as a statutory mechanism for promoting competition.
- a. The Commission is powerless to modify contracts in a way that expands transmission obligations even in the interest of promoting competition.
Except as prcvided by the Public Utility Regulatory Policies Act (PURPA) , the Commission lacks any pgwer to order wheeling under Part II of the Federal Power Act. As
! the Supreme Court said in Otter Tail Power Co. v. United
- S ta te s , 410 U.S. 366 (1973)
So f ar as wheeling is concerned, there is no authority granted the Commission under Part II of the Federal Power Act to order it, for the bills. originally
, introduced contained common carrier provisions which were deleted.
- 410 U.S. at 375 (footnote omitted) .
The Commiss proceeding.gon has acknowledged that lack of power in this 4
Recent cases make it clear, moreover, that the Commission's authority to review contracts under section 206 cannot be construed to permit it to expand transmission I
3 Although PURPA permits the Commission to order wheeling when its elaborate procedural and substantive requirements can be met, this is not a PURPA proceeding but a section 206 invest iga t ion . Had it been a PURPA case, PGandE would have pre-sented additional evidence directed to the issues pertinent to the issuance of wheeling and interconnection orders under PURPA.
l 9 Pacific Gas and Electric Company, Docket No. E-7777, Order Granting Motion f or Extraordinary Relief and Instituting Investigation (Ma rch 14, 1974), mimeo. at 5 (". . . with re s pect to wheeling, it has been de termined that the Commission does not have the authority to order wheeling (citing Otter Tail]."); see also Pacific Gas and Electric Comoany, Docket Nos. IR76-296 and E-7777 (Phase II) , Order Accepting Proposed Amendment for Filing, Providing For Section 206 Investigation,
() Perni tting Interven tion, and Consolidating Proceedings (March 22, 1976), mimeo. at 5, n.9.
I l
l O
obligations voluntarily undertaken by utilities, even for the pur pose of promoting compet ition.
The conten tion that the Commission could do so was rej ected in Richmond Power & Light v. FERC, 574 F.2d 610 (D.C. Cir. 1978), affirming New Encland Power Pool Participants (Coal-bv-Wire), 52 F.P.C. 410 (1974), rehearing denied in pertinent part, 54 F.P.C. 1375 (1975). Richmond and others there urged the Commission to modify transmission tarif fs filed by various utilities participating in the so-called " coal-by-wire" program so as to institute "through rates" requiring intermediate utilities to wheel if capacity were available on their lines. Richmond also contended that the alleged refusal of neighboring utilities to transmit its power, while instead wheeling power for other utilities, was unlawf ully discriminatory. See 52 F.P.C. at 428.
The Commission held it was not empowered to do what Richmond asked, even on the basis of Richmond's allegations of anticompe titive discrimination. 52 F.P.C. at 420-22. The court of appeals agreed. It noted that the Commission was not empowered to order wheeling directly and rejected Richmond's ar gumen ts :
Richmond assumes that the proff ered rates were unreasonable because they did not guarantee that utilities will a
wheel. Yet Cong ress ' as-vet unamended curpose was to indulge utilities that very freedom. If Congress had intended that utilities could inadvertently boot-l strap themselves into common-carrier status by filing rates for voluntary service, it would not have bothered to reject mandatory wheeling in favor of a call for just such voluntary wheeling.
Wha t the Commission is prohibited from
, doing directly it may not achieve by l ind ir ect ion .
l 574 F.2d at 620 (footnotes omitted; emphasis added) .
The court also rejected Richmond's claim that "the mere failure to wheel energy to and from Richmond while whee ling for any other utility was unlawful discrimination."
l 574 F.2d at 6 23 (footnote omitted) . Of this it said the f o llow ing :
[T]he Commission correctly ruled that since Congress made wheeling voluntary (,]
() an individual decision to wheel for one 17
l n
v customer but not f or ano ther is not automatically discriminatory. This rejection o f a per se rule follows logically from the congressional ref usal to impose common-carrier duties on electric utilities.
574 F.2d at 623 (footnotes omitted) .
New Yor k State Electric & Gas Coro. v. FERC, 638 F.2d 388 (2d Cir. 1980), cert. denied, 50 U.S.L.W. 3237 (1981)
("Penn Yan") laid to rest any possibility latent in Richmond that the Commission could have modified the neighboring utilities' tarif fs to require wheeling for Richmond, if. Richmond had actually made a f actual showing that the tariffs were unduly discriminatory. The subject of that case was a contract between NYSEG and the Power Authority of the State of New I York (PASNY) in which NYSEG agreed to transmit power from PASNY to PASNY's customers, one of which was the Village of Penn Yan. The particular provision that was litigated obligated NYSEG to wheel to Penn Yan only that power necessary to serve customers within the limits of the village as they ex is ted on the da te of the contract.
The Commission, in a section 206 proceeding, fou nd the limiting provision unreasonable and anticompetitive and declared it unenforceable. It rejected NYSEG's contention that the ef f ect of its order was to compel wheeling. Instead, it characterized its order as one that removed an anticompeti-tive contractual " restriction" on the use of wheeled power rather than one that actually compelled wheeling.
The court reversed, regarding the Commission's characterization as a distinction without a difference.
l It correctly concluded that, regardless of the description applied, "the ef f ect of the Commission's order is to expand NYSEG's commitment to wheel." 638 F.2d at 401. Noting that until the enactment of PURPA, the Federal Power Act l did not permit the Commission to compel wheeling, the court l held that the Commiss ion's order , issued without compliance I
with PURPA's requirements, exceeded its authority. The l
court summarized its ruling as follows:
i (We do not] suggest that the Commission is powerless to review a wheeling agreement under S 206 without following the require-men ts of SS 211 and 212 (i.e., PURPA] . If, af ter a hearing as required by S 206, the Commission determines that a particular ra te , charge, or condition is unreasonable, it can order a modification. But where, O as here, the modification amounts to an .
18
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order requiring wheeling, it must be preceded also by determinations in accordance with SS 211 and 212. Simply put, we will not allow the Commission to do indirectly without compliance with the statutory prerequisites, what it could not do directly without such compliance. Cf. Richmond Power & Licht
- v. FERC, 574 F.2d 610, 620 (D.C. Cir. 1978).
638 F.2d at 403.
Florida Power & Light Co. v. FERC, 660 F.2d 668
( 5th Cir . , Unit B 1981) , is the most recent illustration of the same principle. There it was held that the Commission cannot compel a utility even to file a tariff embodying the utility's existing wheeling- policy where the ef fect of filing would limit the utility's freedom to choose whether or not to wheel. That decision directly supports a conclusion that the Commission order requiring the filing of sections I and VII of the Stanislaus Commitments 10 in this docket did not expand the Commission's authority to order PGandE to wheel and was unlawful.
The Commission ordered FP&L to file a general interchange transmission tariff in place of twenty-three rate schedules FP&L had filed providing for interchange transmission services to particular cities. It also ordered FP&L to include in the tariff filing certain conditions of availability taken from FP&L testimony in another proceeding.
The Commission contended that the order did not compel wheeling because it did not expand FP&L's obligation beyond that which it had voluntarily undertaken; that FP&L's availability policy was a " practice" required to be filed by section 205; and that the order was justified as a remedy for FP&L's past anticompetitive activities.
The court reversed the Commission. While acknowledging the Commission's power to review and modify transmission contracts under sections 205 and 206, it cautioned:
10 Pacific Gas and Electric Co., Docket No. E-7777 " Order on Motion to Compel Filing of Certain Documents" (June 2, 19o0).
O 19
}
Uq In performing these functions with respect to a wheeling contract, though, tne Commission must he especially careful not to overstep its authority and require the involuntary wheeling of electricity, absent compliance with the new SS 211 and 212 of the FPA.
660 F.2d at 673.
Because requiring FP&L to file its policy as a
" practice" undes section 205(c) in effect made FP&L a common carrier, in violation of Congressional intent, the court rejected the Commission's interpretation of " practice" as including such a policy:
Having held that the FPA prevents the imposition of common carrier status on utilities for wheeling services, it would make no sense to permit the imposition of this status by the device of requiring a utility to file any policy of availability as a practice. It is reasonable to assume that any well-managed utility will have a policy governing the availability of wheeling services and will act on this policy. Giving the Commission the authority to order a policy of availability to be filed as a " practice" could vitiate Congress' desire to leave utilities free to make wheeling decisions.
660 F.2d at 677.
In response to the Commission's argument that it ordered the filing to remedy past anticompetitive activity, tne court also opined that "the Commission may not take action to remedy anticompetitive conduct when it lacks authority l
to take such action," citing Penn Yan and FPC v. Conway Corp., 426 U.S. 271, 276-77 (1976). 660 F.2d at 677-78.
i
' Tne court expressly ruled, moreover, that the goal of fostering competition was not in itself sufficient to provide authority to compel wheeling. 660 F.2d at 679.
It is clear from these decisions that in this I
section 206 proceeding the Commission cannot modify the l Companies' contracts in such a way as to require them to wneel for other entities or otherwise expand their transmission coligations set forth in the contracts. Insofar as Staff O
l 20 c . - _
O and Cities see this proceeding as a means to tha; end, they misapprehend the Commission's role.
- b. The Commission cannot modify contracts in a way that expands obligations to coordinate operations.
The underlying principle of the Richmond, Penn Yan and FP&L cases, simply put, is that the Commission cannot exercise powers it was not given and in fact was explicitly denied even in the guise of remedying alleged discriminatory or anticompetitive practices under section 206.11 Moreover, to the extent the action propcsed is equivalent to the exercise of a power Congress gave the Commission but circumscribed with procedural and substantive limitations, the Commission can-not stray beyond those limitations. The same principle applies in the area of power pooling and interutility coordination.
Both the language of the Federal Power Act and its legislative history make it plain that the Commission does not enjoy broad control over the provision of coordination services and the sale and exchange of energy among utilities.
On the contrary, Congress rejected proposals to give the Commission pervasive control over coordination in the industry and made it a voluntary matter, with only limited and carefully circumscribed authority on the part of.the Commission to direct it.
As in the wheeling context, the Commission cannot exercise powers that Congress denied it in the guise of remedying "anticompetitive effects." The Commission can modify agreements voluntarily undertaken in such a way as to expand a utility's coordination obligations only within the narrow substantive and procedural limits set forth in the Act .
I 11 FPC v. Conway Corp., 426 U.S. 271 (1976), provides another example. There, the Supreme Court required the Commission to investigate retail rates that fell outside its jurisdiction in order to determine whether the retail and wholesale cates taken together put a " price squeeze"
- on wnolesale customers. However, the court cautioned the
! Commission that it could not regulate the retail rates as a remedy. 426 U.S. at 276-77.
O
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21 t
O (i) The provisions of the Federal Power Act deny the Commission broad power to order interutility coordination.
Section 202(a) of the Federal Power Act, 16 U.S.C.
S 824a(a), empowers the Commission to divide the country into regional districts for the " voluntary" interconnection and coordination of power facilities. Nothing in that section authorizes the Commission to order interconnection and'coordi-nation; it speaks instead of voluntary measures. Section 202(b) does authorize orders for physical connection, but only if the Commission finds no " undue burden" is placed on the utility subject to the order and only where the connection would not " impair" a utility's ability to provide adequate service to its customers. Federal Power Act S 202(b);
16 U.S.C. S 824a (b) .
Section 202(c) offers a useful contrast to the limited authority conferred by section 202(b), providing that in times of war or emergency the Commission may assume the complete control of the industry it is normally denied:
(t]he Commission shall have author-ity, either upon its own motion or upon complaint, with or without notice, hearing, or report, to require by order such temporary connections of facilities and such generation, delivery, interchange, or transmission of electric energy as in its judgment will best meet the emergency and serve the public interest.
Federal Power Act S 202(c); 16 U.S.C. S 824a (c) .
Although this is not a PURPA case, provisions of that Act are instructive. They show that even when expanding the Commission's powers in that recent statute, Congress maintained intact the basic scheme of . limited Commission j intervention in the voluntary arrangements of utilities.
Section 210 of PURPA, 16 U.S.C. S 824i, added to the Commission's authority to order a utility to interconnect with certain facilities, such as cogeneration units, and to provide certain transmission services. The Commission i cannot, however, order sales, exchanges or other coordination l among utilities that are already interconnected. Joint l Explanatory Statement or tne Committee or Conterence set I
fortn in House Conference Report No. 95-1750, 95th Cong.,
l 2d Sess., reorinted in 1978 U.S. Code Cong. & Ad. News 7797.
(
i 22 i
i O Moreover, the Commission's power under section 210 is limited procedurally by other provisions, and it is also limited in substance by subsection (c) which requires that an order of interconnection:
(1) is in the public interest, (2) would-(A) encourage overall conservation of energy or capital, (B) optimize the efficiency of use of facilities and resources, or (C) improve the reliability of any electric utility system or Federal power marketing agency to which the order applies, and (3) meets the requirements of section (212] . . . .
Section 212, 16 U.S.C. S 824k, further curtails the substance of the new interconnection authority, prohibiting orders which would result in " uncompensated economic loss" or place an " undue burden" or " impair the reliability" or impair
" adequate service" to the customers of any utility aff ected by an order. These limitations are inconsistent with any notion that the Commission has unlimited freedom to order increased interutility coordination.
Finally, it is pertinent to note that section 205 of PURPA, 16 U.S.C. S 824a-1, required the Commission to study opportunities for conservation of energy, optimal use of resources, and increased reliability through pooling l arrangements. It provides that "[t]he Commission may recommend to electric utilities that such utilities should voluntarily enter into negotiations where the opportunities referred to . . . exist." (Emphasis added.)
These provisions show that even under PURPA, with I
only minor exceptions, pooling and coordination are envisioned as voluntary activities of electric utilities under the O
l l
23 l
t
1 O Act. The Commiss to require them of utilities isstilllimited.{gn'spower (ii) The legislative history shows Congress denied the Commission broad power to order coordination.
The legislative history of Part II of the Federal Power Act firmly establishes that the Commission's intended role in securing coordination among utilities is restricted.
Congress considered and rejected proposals that would have given the Commission pervasive authority to direct coordinated operation of the electric utility industry. Among the proposals rejected were these:
That electric utilities operate as common carriers, with an obligation to sell, exchange, and transmit energy for others on request.
That the Commission have authority over generation and energy production.
That the Commission have authority to direct pooling and determine the uses of pooled facilities.
That the Commission have authority to direct additions, extensions, and changes in utility facilities.
That the Commission have authority to require a utility to permit use of its f acilities by others, to use the facilities of other utilities, and to sell , purchase ,
12 The point we make here does not deprecate the Commission's j authority under section 202(b) to order interconnections.
! See, e.g., Gainesville Utilities Department v. Florida Power
& Lignt Co., 402 U.S. 515 (1971). That decision confirmed One Commission's prescription of terms for an interconnection
, arrangement (specifically the compensation due) in a case that satisfied the statutory prerequisites for an interconnection order. Where such conditions can be satisfied, the Commission's power to require interconnection is by no means trivial.
But it is exercisable only in the limited circumstances defined in the statute.
24
()
exchange, and transmit energy as d ir ec ted .
Part II of the Federal Power Act had its origin ir. Title II of H R. 5423 13 and its companion bill in the Senate, S. 1725,14 both introduced in early 1935. The Senate Interstate Commerce Committee made such extensive amendments to S. l 25 that it decided to substitute a completely new bill, S. 2796.{3 Upon its introduction in the House, theHouseCgmmitteeonInterstateandForeignCommercefurther amended it. It was enacted substantially in that form.
As originally proposed, H.R. 5423 and S. 1725 would have given the Commission extensive control of electric
- utilities. The amendments cut it back sharply. Section 203 (a) ,
for example, would originally have empowered the Commission to establish regional districts "for the control of the creduction and transmission of electric energy, including interchange of energy, interconnection of facilities, and determination of the uses to be made of the facilities in such districts." Except in time of war or emergency, such control war to be "by voluntary coordination," but only "as f ar as practicable" and "under the supervision and direction of the Commission." The Senate rewrote the section to sub-stantially its present form, making coordination voluntary.17 Section* 203 (b) as first proposed would have empowered the FPC, whenever it deemed it " desirable" in the public 13 H.R. 5423, 74th Cong., 1st Sess. (1935). Title I of the bill dealt with public utility holding companies; Title III, with natural gas. Title II was divided into three sections, which were themselves confusingly styled " titles. "
14 S. 1725, 74th Cong., 1st Sess. (1935).
(
15 S. 2796, 74th Cong., 1st Sess. (1935). See S. Rep.
l No. 621, 74th Cong., 1st Sess. (1935).
16 See H. Rep. No. 1318, 74th Cong., 1s t Sess. (1935).
17 5. Rep. No. 6 21, suora , a t 19.
l O
25
O interest, to direct a public utility to "make additions, extensions, repairs or improvements to or changes in its facilities . . . to permit the use of its f acilities by one or more persons, or to utilize the facilities of, sell energy to, purchase energy from, transmit energy for, or exchange energy with, one or more other persons. " The Senate eliminated these provisions; according to the Report, "thes matters are left to the voluntary action of the utilities. "g8 The House then restricted the interconnection authority tha t remained, adding the current provisos prohibiting imposition of an undue burden, eni or impairment of adequate service.gggement of generation, These and other revisions to Part II in the course of its enactment make it clear that Congress deliberately chose to give the Commission only a narrowly defined role in controlling utility operations and in effecting interutility coord ina tion. Subsequent events reinforce tha t conclusion.
Repeatedly af ter the enactment of Part II, the Federal Power Commiss ion, in its annual reports to Congress, recommended legislation that would amend section 202 to authorize the FPC to compel the interconnection and coordinatico of electric power facilities as it it appropriate or necessary in the public ig{erest.ggund During several years, such leg isla tion was introduced, but no Committee hearings or floor debates took place. Congress chose not to give the Commission that power.
- c. The courts have affirmed that the scope of the Commission's power to order interutility coordination is limited.
As the Supreme Court put it in Otter Tail Power Co. v. United Sta tes, 410 U.S. 366 (1973), upon reviewing the legislative history of Part II briefly sketched 'above, 18 Ibid.
19 H. Rep. No. 1318, suora, at 25 n.16.
20 See, e.g., FPC, 19 55 Annual Report 183; 1956 Annual Report 20; 1958 Annual Report 19; 1961 Annual Report 3-4; 19 6 2 Annu al Repor t 17.
21 E.c., S. 2050, H.R. 8209, 88th Cong., 1s t Sess. (1963);
S. 1621, H.R. 6485, 8 9:5 Cong . , 1st Sess. (1965).
O 26 i
"It is clear . . . that Congress rejected a pervasive regulatory scheme for controlling the interstate distribution of power in favor of voluntary commercial relationships." 410 U.S. at 374.
The lower courts have also acknowledged that Congress' intent was to leave utilities in control of their own facilities and make interutility coordination and the provision of coordination services a voluntary matter.
In Central Iowa Power Coco. v. FERC, 606 F.2d 1156 (D.C. Cir. 1979), the court ruled that challenges that the MAPP agreement was discriminatory and anticompetitive had to be considered in light of Congressional intent to make coordination voluntary, and upheld the Commission's judgement that provisions reasonably necessary to valid purposes of a pool could not be revised as unduly discrimina-tory. It also agreed with the Commission's refusal to require the participants to achieve a higher degree of coordination:
Section 202(a) recognizes that powat pooling can yield benefits of effic -ncy and economy. Notwithstanding the de 'rability of coordination of electric systems however, Congress decided to make sucn coordination voluntary, with limited exceptions. See S. Rep. No. 621, 74th Cong., 1st Sess. 19, 49 (1935); H. Rep. No. 1318, 74th Cong., 1st Sess. 8, 27-28 (1935).
Congress was convinced that " enlightened self-interest" would lead utilities to engage voluntarily in power planning arrangements, and it was not willing to mandate that they do so. S. Rep.
No. 621, 74th Cort., 1st Sesa. 49; see Otter Tail Power .o. v. United States, 410 U.S. 366, 374, 93 S. Ct. 1022, 35 L. Ed. 2d 359 (1973). Given the expressly voluntary nature of coordination under section 202(a), the Commission could not have mandated adoption of the Agree-ment, and failure of the MAPP partici-
- pants to establish a fully integrated
! electric system could not justify rejection of the Agreement filed.
606 F.2d at 1167-68 (footnotes omitted). The court also
- explained that the Commission could not modif y the agreement j under section 206 simply in order to achieve a higher level i of coordination
l
[T]he Commission should consider the
() policies of the Federal Power Act in 27 I -
O O
making a determination under this section.
This does not mean, however, that a pooling plan is unlawful under section 206 merely because a more comprehensive arrangement might better achieve the purposes of section 202(a). To so conclude would undermine Congress's determination that coordination under section 202(a) be voluntary.
606 F.2d at 1168.
See also, Municipalities of Groton v. FERC, 587 F.2d 1296, 1299 (D.C. Cir . 1978), upholding the Commission's refusal to add a provision for firm power sales to the NEPOOL agreement.
Central Iowa and Municipalities of Groton could be read to leave open the possibility that the Commission could modify an agreement in such a way as to expand the parties' obL gations to provide coordination services if the agreement were found to be unjust, unreasonable, or unduly discriminatory. The Richmond case was open to a similar interpretation in the wheeling context. Penn Yan and FP&L, both decided after Central Iowa and Municipalities of Groton, have foreclosed that possibility as far as wheeling is concerned. Both held the Commission to strict observance l of the statutory limits on its jurisdiction whether it seeks i
to exercise its powers directly or indirectly by modification of a tariff or contract under review.
The same rationale requires the same result in the area of interutility coordination. Congress generally denied the Commission power to order such arrangements, just as it denied it broad power to order wheeling. In each case, however, provision has been made for a very limited exercise of power by the Commission under prescribed procedural and substantive limits. There is no basis for differentiating between these two contexts. In each, the Commission can exercise its power to modify contracts under review in such a way as to expand the obligations voluntarily undertaken by the utilities only if it could directly order them to do the same things in the absence of any agreement--and only if it complies witn the procedural and substantive statutory requirements for l such a direct order.
l The point of the foregoing discussion is that while the Commission's touchstone is the public interest, Congress determined that some things are not the Commission's to decide even if it believes the public interest is implicated. In particular, Congress left the scope of transmission and
{} coordination ocligations of utilities to one another largely a l 23 l
\
()
matter of choice for the utilities themselves. It deliberately decided not to make them a subject for Commission decision except in narrowly defined circumstances.
Much of the substance of Staf f's and Cities ' attacks on the contracts at issue concerns the scope of the trans-mission and coordination services for which they provide.
These are subjects that are simply beyond the ambit of the Commission's regulatory role in this proceeding. The fact that Staf f's and Cities' contentions are couched in antitrust terms does not bring them within it. "(T] he antitrus t laws are merely another tool which a regulatory agency employs to a greater or lesser degree to give ' understandable content to the broad sta tutory concept of the "public interest. "'" Northern Natural Gas Co. v. FPC, 399 F.2d 953, 961 (D.C . Cir . 1968).
They are not an independent source of power. The' Commission itself has put it as follows:
We do not adjudicate nor do we enforce antitrust law. California v. FPC, 369 U.S. 482, 486 (1962). This Commission's duty to consider allegations and evidence of anticompetitive conduct arises as a consequence of, and in conjunction with, our regulation of public utilities and their activities subject to our jurisdiction. Gulf States Util. Co. v.
F.P.C., 411 U.S. 747 (1973). The propriety of our consideration of allega-tions of anticompetitive conduct turns, then, on a showing tha t the alleged conduct is materially furthered by the transactions subject to our regulatory j ur isdict ion . This " nexus" principle is a prerequisite to any investigation of anticompetitive issues by this Com-mission to guard against a usurpation or bootstrap by the Commission of the I powe r to adjudicate and enforce antitrust law, doing by indirection that which cannot be done directly. Northern California Power Acency v. F.P.C., 514 F.2d 184, 189 (D . C. Cir. 1975.)
Gulf S tates Utilities Co. v. FPC, 9 Fed. Pwr. Serv. 5-100, 5-119 to 5-120 (1976) (f ootnote omitted) .
As a result, whe ther their contentions are phrased a3 ant it rus t claims or in some other way, Staf f and Cities bear the burden of showing that there is an unequivocal
(])
29
public necessity to modify these contracts in ways that Congress made the Commission's concerns and did not leave to voluntary action. We now turn to the evidence that shows that they have not carried their burden.
II. A GENSRAL PERSPECTIVE ON THE CONTRACTS There is no substantial evidence in the record that the contracts at issue violate the Federal Power Act, the antitrust laws or any other law. The evidence establishes the contrary; the contracts at issue are very much in the public interest.
The Pacific Intertie Agreement, Contract 2948A, and the SMUD contracts, for instance, are examples of cooperative arrangements negotiated with PGandE that have provided substantial benefits to other parties to the contracts and to the public. The California Power Pool Agreement is a sound example of a relatively early pooling agreement that has with-stood the test of time and events, contributing substantially to the reliability and economy of all interconnected systems in California, including those of non-parties.
These agreements work and work well. The inter-connected systems in California have developed a reliable and efficient electric power system. Mr. Kaprielian and others have described the high level of reliability which the systems have achieved under the auspices of the California Power Pool, including an extraordinary ability to respond to emergency conditions on the system. (See, e.c., Kaprielian, CH-1446/27-52; 1459/40-1462/20.) The present design of the cool as an agreement for the coordination of indeoendentiv reliable systems has contributed to the reliability of the pool as a whole. (Kapr ielian , CH-14 6 2/22-14 6 3/9 ; CH-14 64/4-16. )
The Pacific Intertie has been carefully developed to a point of maximum utilization both as a result of the basic design of the Pacific Intertie Agreement (Daines, CH-1339/37-11) and as a result of the careful operations of the facility under the eye of the Pacific Intertie Agreement Coordination Committee. (Kaprielian, CH-20,561-569 and 20,605-607; see also Ex. 4409.) As discussed more fully below, the PGandE-SMUD and PGandE-CVP contracts contribute to the ef ficient utilization of resources in northern and central California.
The Commission should not tamper with arrangements which have worked in practice and have secured for the public the bene fits of interconnection and contdination which the Federal Power Act seeks to foster. That is especially true when the alleged benefits to be achieved by modification p3 are as echemeral as those advanced in this case. It becomes
(/ unglestionable when, as here, the necessary result of the 1
30
]
modifications will be a substantial redistribution of the benefits from the many to the already privileged few.
The need for stability in existing, working contracts is one of the quiet but important policy considerations which tend to get overlooked. Perhaps for this reason the Supreme Court has stressed the responsibility of this Commission to assure "a reasonable accommodation between the conflicting interest of contract stability on the one hand and public regulation on the other." United Gas Pioeline Co. v. Mobile l Gas Service Corp., 350 U.S. 332, 334 (1956). Critical decisions in the electric utility industry are predicated on long-term arrangements. Lacking a high degree of assurance of contractual stability, utilities will be reluctant or unwilling to make those investments essential to meeting the energy needs of the nation.
In the instant case, it would be particularly inequitable and discouraging to new investment for the Commission to adopt the arguments being made that the Pacific Intertie arrangements be revised. As the record reflects, there were economic and technological risks in developing the Intertie. The economic risks of insufficient asage to amortize the massive investment should be apparent, and are discussed be low . Those constructing the Pacific Intertie were pioneering at the outer limits of technology. All of those who sought to participate in the Intertie at the time that its benefits were uncertain were, in fact, accommodated. Today, when it is clear that the Pacific Intertie has been a great success, Cities seek additional direct participation in the benefits of the project after it has been proved a success. To rob i the innovator of the fruits of his invention and risk would l substantially deter such investment.
In the sections of the brief which follow, we review the more significant evidence pertinent to the contracts at issue. In reviewing the evidence, there are some points of general relevance to keep in mind.
A. The Companies Are Regulated Electric Utilities.
l PGandE, Edison and San Diego are all regulated public utilities. Among other things that means they have a legal obligation to provide, by construction or contract, the generation and transmission resources necessary to serve their customers and load growth. Cal. Pub. Util. Code S 451; Northern Light & Power Co. v. Stacher, 13 Cal. App. 404, 407-08, 109 P. 896 (1910); Engel v. Henry, 59 Cal. P.U.C. 457, j 460 (1962). -
l 31 i
O Under California law, certificates of public conve-nience and necessity are required for the construction of major facilities by PGandE. Cal. Pub. Util. Code S 1001.
Since 1975 a demonstration to the California Energy Commission that the construction of new generation is needed to serve load has been a necessary prerequisite to the construction of new generation by any entity in California. See Cal. Pub.
Res. Code SS 25216(b) , 25500, 25502, 25510, 25514. As a result, California utilities not only must provide for the l
resources necessary to serve their customers , but are restricted f rom constructing resources that are not necessary to serve them.
This general statutory scheme, together with natural economic f orces, has led to an industry where the great majority of the generation and transmission resources in operation at any given time is committed to particular uses and customers, either through vertical integration or by means of long term contracts for the use of the resource.
(Johnson, CH-1652/34 to 1653/51; 32,735/3 to 32,736/1; see FPC v. Sier ra Pacific Power Co. , 350 U.S. 348 (1956).)
That is the natural result of the regulatory and economic f acts of life in the industry not some sinister plot by the Companies. PGandE's ownership of generation and transmission facilities is largely the result of the state regulatory system described above or , in some cases, as shown below, is the result of federal government decisions.
Municipal systems are generally authorized to supply only their own residents and can sell only " excess" or " surplus" power outs ide their bounda ries. See Cal. Pub. Util. Code l SS 10001, 10005, 12801, 12804. Moreover, while not regulated, municipal systems must, like investor-owned systems, obtain Energy Commission (ERCDC) approval of new generating facilities.
The ERCDC seeks to conserve resources by prohibiting construction of excess capacity. See Cal. Pub. Rc3. Code S 25 216(b) . The result of those regulatory restrictions on the companies and on municipal systems such as SMUD is that there is not generally any sizeable uncommitted amount of generation available.
B. PGandE Has Coooera ted Reasonably with Other Utilities.
PGandE's practice is to use the resources it owns and controls in cooperation with other entities. (Ex. 2562 at 50-51.) The contracts under review have assisted others, i s uch a s SMUD and CVP, to make the best use of their independently l
owned resources. Thus, the contracts are fundamentally and af firmatively procompet itive because they extend to competitors of PGandE services which the Company had no obligation to
-w provide.
32
(
O V
Cities and Staff generally argue that the contracts at issue contain various anticompetitive restrictions.
Upon examination, these " restrictions" often turn out to be either the absence of a contractual obligation to provide a service or some limit on PGandE's obligation to provide service. For example, the so-called wheeling area " restriction" in Contract 2948A is merely a definition of the geographic scope of the obligation of PGandE to wheel power for the Central Valley Project. Similarly, the "non-assignability without consent" clauses in the EHV Contracts in essence mean that the Companies are not obliged without consent to afford Intertie transmission service to entities other than those which are parties to the EHV Contracts. These contracts provide service to specific entities at a specific price. They cannot be changed in the ways sought by Cities without altering their fundamental scope.
Limits on obligations are not restrictions. PGandE 's rights to decline to provide services, except as contracted for, arise not from the contracts but from the Company's ownership of generation and transmission. Cities' and Staff's complaint, therefore, is that a glass PGandE has filled three-quarters full is one-quarter empty.
C. The Stanislaus Commitments.
In spite of the economic and regulatory conditions in the industry, Cities have a wide range of alternatives available to them under existing arrangements if they choose to develop power sources of their own. NCPA witnesses, for example, have testified regarding the array of generating options they are now pursuing. (VonRaesfeld,2gH-43,723/1-13; 43,772-773; 43,775/14 to 43,777; Fontes, Helms Tr. 4432-4453.) As PGandE cooperated reasonably with the development of generation resources by SMUD, so too is it prepared to cooperate reasonably with NCPA. The Stanislaus Commitments provide legally binding assurance of this. The Commitments require PGandE to provide a range of transmission and other coordination services. They ensure that the cooperation PGandE has in the past extended to other utilities in its service area will continue into the future.
The argument over the propriety of limits on service obligations arising from the contracts at issue can be avoided where tne desired service is available from the Companies through alternative means. The availability of a suitable 22 References to the Helms transcript involve only those pages designated as part of the E-7777(II) record by order of
() the Presiding Judge.
33
O alternative renders academic the question of whether limits on obligations arising from the contract under scrutiny are anticompetitive. Many of the attacks on contract provisions at issue here are deprived of practical significance by tne availability of specific services under the Stanislaus Commitments. (Ex. 2347.) Even in the unquestionably pro-competitive view of the Justice Department, the Stanislaus Commitments assure northern California entities such as NCPA reasonable opportunities to develop competitive bulk power supply sources. (Ex. 4124.) The Commitments effectively preclude any " market power" that , in the view of Cities and Staff, PGandE possesses despite regulation by FERC and CPUC.
- 1. Background of the Commitments.
The Stanislaus Commitments were negotiated between PGandE and the Antitrust Division of the Justice Department following a lengthy investigation by the Department into the bulk power supply situation in northern and central California. (Kuder, CH-1432; Ex. 4124.)
In the view of the Department of Justice, the Stanislaus Commitments " moot the questions of anticompetitive conduct by PGandE which have come to our attention." (Ex. 4124.)
NCPA, in extended correspondence, attempted without success to persuade the Justice Department that the Commitments were inadequate. The Department rejected these arguments.
(Ex. 2349, 2353, 2355 and 4129.)
Because of delays in the Stanislaus project, the Commitments were imposed as conditions on the Diablo Canyon t Nuclear Power Plant construction permit in 1978. (Kuder, CH-1432; Ex. 2347; 43 Fed. Reg. 59934.) Their reach extends far beyond any particular power plant: "In substance (the Commitments] set forth a series of principles or guidelines wnich PGandE will follow in its dealings with other utilities in northern and central California." (Kuder , CH-14 31. )
As recently as July 1981, NCPA's counsel indicated their opinion that the Commitments were bind oy tne Nuclear Regulatory Commission.2jng (See and enforceable Ex. 4500 at 41.)
23 In fact, on December 4, 1981, NCPA filed a " Petition to Enforce and Modify (the Stanislaus] License Conditions"
. witn the NRC, the agency with j urisdiction over the Commitments.
A 34
- 2. Benefits of the Commitments.
The Stanislaus Commitments provide transmission and coordination services generally to any utility whose principal operations are in northern and central California.
(Kuder, CH-1432.) The Commitments apply not only to NCPA and its members (Ex. 4500 at 41; Ex. 2353 and 2354) but also to SMUD (Kuder, CH-1434) and CVP (Ex. 2354 at 2).
According to Mr. Kuder, The Commitments were designed to assure that PGandE would provide, on terms and conditicns that would not unreasonably burden the Company or its customers, a range of services that would enable smaller utilities to develop their own generation resources or seek independent sources of power supply, while continuing to enjoy the principal benefits of inter-connection with the larger PGandE system.
(CH-1433.)
Services under the Commitments include interconnection arrange-ments; reserve sharing; sales of reserve capacity and maintenance capacity and energy by PGandE; guarantees of emergency power and other kinds of capacity and energy transactions by PGandE; obligations to sell full or partial requirements power; transmission obligations including construction of additional transmission capacity as needed; and offers of participation in nuclear plant construction. (Ex. 2347.) Under an inter-connection agreement negotiated according to the Commitments, smaller utilities can obtain the benefits of economies of scale in matters ranging from emergency support to reserve saaring. (Kuder, CH-1433-1434.) As a result of these and other benefits, the Justice Department concluded that:
"The implementation of these policies should provide competitors of Applicant with reasonable opportunities to develop competitive culk power supply sources." (Ex. 4124.)
The Commitments are relevant to various provisions of the contracts under scrutiny in this proceeding. For example, if SMUD found fault with its 1970 integration contract witn PGandE, it could cancel that contract and replace it witn an interconnection agreement negotiated on the basis ot tne Stanislaus Commitments. (Kuder , CH-1434. ) Similarly, the Commitments can be used to supplement Contract 2948A by providing CVP witn transmission service outside the wheeling area specified in that contract. (K uder , CH-14 36. ) In
() adcition, the Commitments ameliorate Contract 2948A's alleged l
35
_)
O restrictions on CVP's ability to deal with third parties, since CVP qualifies for service under the Commitments.
(Gerber , CH-1228. ) As for the California Power Pool, the Commitments provide an appropriate alternative to membership in the CPPA for entities such as Cities. (Gerber , CH-1221-1222.) And Cities' purported concerns about the Pool's reserve requirements are mitigated by the reserve-sharing provisions of section III of the Commitments. (Kaprielian, CH-1485 and 1491.)
! Apart from the specific contracts, it is beyond doubt that support services to back up NCPA's proposed generation are adequately provided for in the Stanislaus Commitments.
(Gerber , CH-1221; Hill, CH-709/48-51 and CH-7106-7107; cf.
Ex. 4193; Ex. 4500 at 41.) The Commitments also enable NCPA members and other neighboring entites to make bulk power supply transactions with Southern California. (Ger be r ,
CH-1221; see also, Ex. 4135 at 2.)
- 3. PGandE Has Complied with the Commitments.
The argument was made during the hearing that the Commitments did not resolve any of the issues raised by Cities and Staff because PGandE refused to comply with them. It was further suggested that this non-compliance was masked by bad faith negotiations, intentionally delayed by PGandE. (See, e.g., CH-22,156/7-9; CH-22,157/18-21; CH-37,159-160.)
In order to respond to these charges in the most definitive way, PGandE provided testimony from a negotiator on the ocoosite side of the bargaining table, NCPA's former I general manager Philip Michaels. Whatever one's view about particular positions taken by PGandE and NCPA in the negotiations, the record is clear that the Company has negotiated in good faith. NCPA's principal negotiator has confirmed this under oath. (Michaels, CH-41,537/2-3.) One offer made by PGandE to NCPA has been introduced in evidence. (Ex. 4300.) As Mr. Michaels testified, the offer gave NCPA what it needed to get into the power business. (CH- 41,550/13-16 ; see also CH-42,378). The testimony further establishes that disarray j within NCPA has been a major stumbling block to agreement.
(Micnae ls , CH-41,537/35-40. ) In spite of the difficulties, PGandE was able recently to conclude negotiations on a contract t with NCPA to provide interruptible transmission service I over the Intertie. That contract is on file with this Commission.
The record thus shows that PGandE has sought to comply with tne Commitments. It would be error to ignore them in any analysis of tne contracts at issue in this case.
O 36
J O
D. The Procer Framework for Contract Evaluation.
In the sections which follow, evidence regarding the contractual provisions at issue is reviewed. Proper ',
analysis of these provisions requires consideration, at '
least initially, of the whole contract. This followe from the fact that the contracts under review are voluntary inter-connection or coordination arrangements, of the type not only permitted but encouraged by section 202 (a) of the Federal Power Act. If the contract on the whole is in the public interest, individual contractual provisions reasonably related to the beneficial functions of the contracts are lawful even though they impose negative restrictions on competition.
Central Iowa Power Coco. v. FERC, 606 F.2d 1156, 1163 (D.C. Cir.
1979). Thus, individual provisions cannot be analyzed in isolation, but must be tested by reference to their relation to the overall contract. As will be shown, each contract at issue, on the whole, serves the public interest as contem-pla ted by section 202 (a) , and provisions criticized by Cities and Staf f are not only reasonably related but necessarv -
to the achievement of legitimate goals advanced by the contracts.
Cities and Staff have attempted to isolate various e contractual provisions for scrutiny, arguing that they contain g unnecessary restrictions which should be modified. In each ,
case, however, these provisions are either directly related !
to section 202(a) purposes of the contract, or are inseparable _s f rom other provisions which advance those goals. For example, Intervenors have objected to paragraph 7.02 of the Pacific Intertie Agreement as a market sharing arrangement. (See, e.g., Miller , CH-13,99 3. ) Intervenor s f ail to recognize, however, tha t this provision allows the parties to share l equitably in the benefits of the Intertie, and cannot be divorced from other provisions under which the Companies share in the costs and obligations of the Intertie. (See section IV.B, infra.) The cooperative arrangements in the Agreement are the kind of voluntary coordination measures contempla ted by section 202 (a); under them, both the benefits and burdens of Intertie operation are apportioned out.
This balanced coordination of contract provisions also appears in the EHV contracts, where the Companies' right to use transmis- 7 sion capacity unused by DWR, SMUD, or the Bureau are closely linked with the low transmission rate afforded these agencies. ,
(See section IV. A, infra.) Modification or invalidation s of one contract provision necessarily affects the overall balance of consideration in the contract.
This is no t to say that no provision of any contract at issue in the proceeding can be separated out. Wha t it
() means, simply, is that the analysis of allegedly restrictive contractual provisions cannot occur in isolation. Where ,
p 37 s
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, s contract provi'alons are interdepe'ndent,, attention must be given to whether these provisions as.'a whole advance the coordination, goals of.Section 202 or otherwise serve the puolic interest. In tnis context, the issue is whether or ,, I not there exists an unequivocal public necessity to change .
the' contract as'a whole.24 Viewing the contracts in I:his fashion comports not only with applicable legal principles but also proper economic analysis. Under the framework provided'by Mr. Gerber for contract analysis, a determination is first made whether the contract "makes possible more efficient' operation of the systems of the contracting parties and, if so, whether the increased efficiencies outweigh any negative consequences, such as impairment of competition which might result from the contract."
(CH-1207.) According to Mr. Gerber: , ,
[A]s a practical matter, it is not
, usually possible to , divorce a particular m s provision from che rest of the contract.
The need for particular -'ntract provisions is frequently a aatter siness or 5 '
engineering judgment X eten reflects .
the compromisejmorig conf',licting positions
. eq -
which have been' resolved thropgh lengthy i and difficult bargaining.n..- n. Where l
J \ a particular provision is in an integral -
. y '
part of the arrangement set forth in ,
i b ancontract, economists.and, indeed, e i
\
ot!hers as well, can only wsigh the economic s ,
i s -
- n. t .1,
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l ,
l
~
l l + '
i7 ,
g ,
l 24 Analyzing contractual provis' ions in relation to the l overall purposes of'the contract is also important to an
- understanding of the contract's 'f undamental scope. To the
( , extent that individual provisionseare criticized as unduly restrictive, attention must be given to.whether the proposed modification would expand obligat19ns under the contract.
The Commission is not empowered.tc enlarge the basic scope
% of voluntary coordination and interconnection arrangements, i Central Iowa Power Coco. v. FERCi supra, at 1168-9; see
, section 1.B.3(c), supra. -
s
- s
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s s
,4 S [
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.: . t
, 38 -
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c advantages and disadvantages of the contract as'a whole.
4 (CH-1207/21-41. ) 25
~
The analyses presented in the ensuing sections follow these principles. We shall show that each contract, as a whole, is reasonable and in the public interest. Component provisions at iss'ue are not isolated or severable but are closely tied to eqher provisions--indeed, to the fabric
~
of the contract. Even if the provisions are analyzed separately, however, the evidence of record supports their reasonableness.
III. THE INTERTIE CONTRACTS
A. Congressional Approval of the Intertie Program Immunizes It from Other Federal Law.
a In this section of the brief we discuss in some detail the history of events culminating in the signing of contracts related to the Pacific Intertie. These include,
', among others, the California Companies Pacific Intertie
, Agreement (" PIA"); the United States Bureau of Reclamation J Contract with Pacific Gas and Electric Company for the Sale, Interchange and Transmission of Electric Capacity and Energy, Contract No. 14-06-200-2948A (" Contract 2948A"); the United States Department of Interior (Bureau of Reclamation) Contract with California Companies _for Extra High Voltage Transmission and Exchange Service, Contract No. 14-06-200-2947A ("CVP EHV Contract" or " Contract 2947A"); the Contract Between the California Companies and Sacramento Municipal Utility District For Extra High Voltage Transmission and Exchange Service ("SMUD EHV Contract") ; and the Contract between ene State of California and California Companies for the Sale, Interchange and Extra High Voltage 2ransmission of Electric Capacity and Energy ("DWR EHV Contract") .
25 Apparently, Cities' economist Ralph Miller initially had no "suostantial disagreement".with this proposition (see CH-2106/26-29). His later critique, which by his own testimony must not have been substantial, was that Mr. Gerber did not attempt to determine whether less "anticompetitive" arrangements could be found to secure the benefits involved.
Miller acknowledged, however, that economists lacked expartise in determining whether or not specific provisions were essential to achieve economic benefits of the contract as a whole.
(CH-2111.)
39 i
O The evidence presented regarding the history of these contracts establishes several important points. The evidence demonstrates the reasonableness of the contracts.
The fact that the Intertie arrangements and contracts were in their essential parts designed by the federal government, not the Companies, is in itself evidence that they are in the public interest and are not part of a scheme by the Companies *.o monopolize. In addition, tnis evidence establishes tnree legal defenses to the claims asserted by Cities and Staff. First, Congress approved and legally ratified the Intertie arrangements and contracts. Second, the Department of the Interior, acting pursuant to specific congressional directives, supervised and negotiated the Intertie contracts and, as a result, they are impliedly immune from modification pursuant to the Federal Power Act. Third, the actions and l agreements of the Companies in connection with the Intertie were all taken to secure Congressional and executive branch action in their favor. As a result, those actions are consti-tutionally protected under the principles referred to as the Noerr-pennington doctrine and cannot serve as a basis for action against the Companies by this Commission. -
The relevant facts to be determined in this historical evidence are not, then, the motives of the Companies. The issue is rather what did the federal government do.
- 1. The Federal Government's Participation Demonstrates that the Intertie Arrangements Are in the Public Interest.
This Commission is not the only agency of the federal
, government responsible for protecting the public interest.
l The Department of Interior, the Justice Department, and Congrcss itself determined that the Intertie arrangements at issue here are in the public interest and should be implemented.
The evidence shows that they did so after considering the key issues about those arrangements that have been raised before tnis Commission. For example, ' prominent among the objections articulated during the Intertie negotiations was the " monopolistic" transmission control supposedly accruing to the Companies f rom the Intertie arrangements. (See section III.B.3, infra.)
Allegations of monopolistic control resulting from private construction of the Intertie surfaced in Congressional hearings as early as 1959. (Id.)
The evidence also shows that Congress, Justice, l and Interior were largely responsible for the form the Intertie l arrangements took, and they fashioned them to meet the objections tnat were raisea. Ultimately, they approved and implemented them as measures designed to advance the public interest.
i The Commission cannot presume that they were neglectful V(~T 40
3 (J
in executing their puolic trust or wrong in their conclusions.
The approval of Congress and the executive departments is potent evidence that the arrangements serve the public interest well.
- 2. The Doctrine of Congressional Ratification.
The federal courts have on many occasions acknowledged tne power of Congress to ratif y, by appropriation or by some other indication of congressional awareness and approval, activities or projects said to conflict with applicable law. See, e.g., Brooks v. Dewar, 313 U.S. 354 (1941);
Wisconsin v. Duluth, 96 U.S. 379 (1878); Alabama ex rel. Graddick
- v. TVA, 636 F.2d 1061 (5th Cir. 1981); Hodgson v. Board of Commissioners, 614 F.2d 601 (8th Cir. 1980); Kansas ex rel. Stephan v. Adams, 608 F.2d 861 (10th Cir. 1979), cert. denied, 445 U.S. 963 (1980).
The Fifth Circuit has recently emphasized that
" continued congressional funding of allegedly improper agency action can be viewed in appropriate circumstances as a ratifi-cation of that agency practice." Alabama ex rel. Graddick
- v. TVA, supra, 636 F.2d at 1069 (citations omitted). See Friends of the Earth v. Armstrong, 485 F.2d 1, 9 (10th Cir. 1973),
cert. denied, 414 U.S. 1171 (1974) (" Appropriation acts are just as effective a way to legislate as are ordinary oills relating to a particular subject. An appropriation ,
act may be used to suspend or to modify prior Acts of Congress").
Congressional approval is a complete defense to a charge tnat the approved conduct or action violates other laws where Congress was aware of the charge and nevertheless gave its approval. Wisconsin v. Duluth, supra, 96 U.S. at 386.
I As one court has noted, "the awareness of Congress needed to support its tacit approval of agency action is not requ ired to be measured in decibels." Natural Resources Defense Council, Inc. v. NRC, 582 F.2d 166, 173 (2d Cir. 1978).
Congressional Knowledge will suffice for ratification if it is specific and relates directly to the activity in question.
l See, e.g., Brooks v. Dewar, supra (action of Secretary of l
Interior in issuing temporary licenses to stockowners for grazing of livestocs on public lands ratified by congressional appropriation given that "(t]he information in the possession I of Congress was plentiful and from various sources." Id. at I 361); Hodgson v. Board of Commissioners, supra, 614 F.23 at 614 (Hyae Amenament neld to have been ratified by Congress, i given " ample evidence of general congressional awarenees of the . . . Amendment's substantive significance"); United States v. Kennedy, 278 F.2d 121, 126 (9th Cir. 1960). Courts nave found tne requisite degree of congressional knowledge
(])
41
b in such sources as departmental, conference, and committee reports, and in authorizing legislation itself. See, e.g.,
Brooks v. Dewar, supra, 313 U.S. at 360-61; Kansas ex rel.
Stechan v. Adams, supra, 608 F.2d at 864-66.
In the case of the Intertie, cor.gressional knowledge and authorization is manifest. The history of the Intertie is dominated by the role of Congress and its agent, the Department of the Interior. From its inception, Congress and the Department guided, scrutinized, and modified the Intertie program and the contracts which resulted. Testimony and exhibits in the record are replete with references to Congressional overview and approval. Dozens of hearings, involving numerous congressional committees, were held over a six-year period. Virtually all of the Congressmen and Senators from the Pacific Northwest and California had a role in shaping the program. A decisive part was played by legislators and executive agency officials representing many of the same municipal systems which have appeared in this proceeding. Many of the contentions made here regarding the justness and reasonableness of the Intertie arrangements and their antitrust implications were thoroughly aired in the process.
The full context of Congressional action is described below. However, these key Congressional actions are more than sufficient to establish ratification:
- 1. In June 1963, Congress appropriated funds for initial engineering work on a federal intertie but specifically instructed the Secretary of the Interior not to begin construction unless (a) legislation was passed giving the Northwest a preference on all federal hydroelectric power generated there and (b) the Secretary was unable to negotiate arrangements for private construction of the Intertie providing equivalent benefits to the national interest.
- 2. Pursuant to this explicit direction, the Interior department negotiated a plan with the California Companies that provided they would jointly construct most of tne Intertie lines in California, and other Intertie portions would be built by various governmental agencies.
- 3. This plan was submitted by the Secretary to Congress for approval.
- 4. Congress reviewed and, at the urging of the President of the United States, modified the plan.
O 42
gs 0 5. Congress expressed approval of the modified plan through two legislative actions--the passage of the Appropriations Act necessary to federal participation in the plan (Pub. L.88-511; 78 Stat. 682) and passage of the Northwest Regional Preference Act (Pub. L. No.88-552; 78 Stat. 756). In the Senate Report to the Appropriations cill, approved by the Conference Committee (H.R. Report No. 1794, 88th Congress, 2nd Session, 1964), funds were recommended to initiate Intertie construction " based upon acceptance by the Secretary of the Interior" of the amended proposals of the three California Companies and others.
(Item by Ref. E-1 at 37.) According to the Conference Committee Report to the Northwest Regional Preference Act, Section 8 of the Act "provides Congressional authority for the electrical interconnection of the Pacific Northwest and the Pacific Southwest and for construction of" the lines that are included in the recommended plan. . . . (Ex. 4038 at 4.)
- 6. To assure completion of the negotiations ordered in June of 1963 in compliance with the plan approved in 1964, Congress directed the submission of the negotiated contracts to the Appropriations Committees not less than 60 days before they became final.
- 7. Contracts were in fact submitted to and reviewed by both appropriations committees and also the Interior and Insular Affairs Committee .and the House Government Operations Committee.
Since Congress ratified the Intertie arrangements, Congress has determined that they best serve the national interest. In the words of one congressman who championed the cause of municipal preference agencies in California, Congressional scrutiny and modification of the Intertie program resulted in "large benefits for years to come for millions of our citizens on the Pacific Coast " (Ex. 4095 at 2; see section III.B.4.6, infra.) This Commission cannot set l
aside or modify that Congressionally ratified program on the ground that it violates the antitrust laws or is otherwise contrary to the public interest under the Federal Power Act.
- 3. The Doctrine of Imolied Immunity The same facts that show congressional ratification of the Intertie also demonstrate that the Intertie Contracts are immune from the antitrust laws and not subject to revision l under the Federal Power Act. The Supreme Court has held that a particularized statutory scheme may by implication either totally or partially displace a generally applicable federal
(} law, sucn a.; the antitrust laws. Huches Tool Co. v. Trans i 43 i
O World Airlines, Inc., 409 U.S. 363, 385 and n.14 (1973).
See 1 P. Areeda & D. Turner, Antitrust Law S 224 (1978).
One such situation arises where a governmental department or agency, acting pursuant to a specific con-gressional directive, actively regulates the particular conduct at issue. This category is illustrated by Gordon
- v. New York Stock Exchange, Inc., 422 U.S. 659 (1975). There the Court rejected a claim that the SEC-sanctioned system of fixed stock commission rates violated the antitrust laws. The Court held that Congress, in enacting the Securities Exchange Act, had intended to leave supervision of commission rates to the SEC, and had therefore impliedly immunized the system from antitrust challenge. A related situation occurs where particular matters that might conceivably be regulated by one agency under a general statutory scheme have instead been entrusted by Congress to another agency's more specific jurisdiction.
Regulation under the general scheme is displaced by the specific. Thus, for example, the Environmental Protection Agency's general jurisdiction over air quality under the Clean Air Act was displaced by delegation to the Secretary of Interior of authority to prescribe air quality regulations applicable to installations in the Outer Continental Shelf.
California v. Kleoce, 604 F.2d 1187 (9th Cir. 1979), see also Get Oil Out!, Inc. v. Exxon Coro., 586 F.2d 726 (9th Cir. 1978).
In the case of the Intertie, Congress delegated development of the arrangement and the implementing contracts exclusively to the Department of the Interior, which actively supervised and directed their development. The ownership, control and use cf the Intertie were all matters specifically within the province of the Interior Department and subject
[
to Congressional oversight. In delegating this authority I
to Interior , Congress impliedly immunized the contracts Interior negotiated. Revision of those contracts under the Federal Power Act would frustrate Congress' purpose.
- 4. The Noerr-Pennington Doctrine.
The actions of the California Companies in developing the existing Pacific Intertie arrangements involved lobbying and negotiation to secure congressional approval of the Companies' Intertie proposals and, later, to secure Executive Branch acceptance and congressional approval of the contracts designed to implement the congressionally approved plan.
l These actions by the Companies to influence government action are constitutionally protected. They cannot serve as the b as is for a finding under* the Federal Power Act tha t the Companies' contracts are contrary to the public interest I because of anticompetit ive motives and ef f ect.
i l 44
O Absent a compelling state interest, statutes regulating business activities must yield when their application would significantly innibit the exercise of rights guaranteed by the First Amendment to the Constitution of the United States. See, e.g., Bates v. Little Rock, 361 U.S. 516, 524 (1960). Corporations as well as natural persons are protected in the exercise of those rights. First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978). Indeed, tne Supreme Court has recently decided explicitly that the First Amendment protects regulated electric public utilities from overzealous action in the name of the public interest by the bodies responsible for their regulation. Consolidated Edison Co. v. Public Service Commission, 447 U.S. 530 (1980);
Central Eudson Gas & Electric Co. v. Public Service Commission, 447 U.S. 557, 563 n.5 (1980).
The Supreme Court has repeatedly ruled that because of First Amendment considerations, the antitrust laws do not prohibit efforts to influence decisions by governmental officials--even if the efforts are jointly undertaken for the specific purpose of destroying competitors. Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc.,
365 U.S. 127 (1961) (Noerr); UMW v. Pennington, 381 U.S. 657 (1965) (Pennington); California Motor Transport Co. v. Truckinc Unlimited, 404 U.S. 508 (1972) (Trucking Unlimited).
Trucking Unlimited established that the conclusions reached by the Supreme Court regarding the inapplicability of the Sherman Act were a necessary result of the First Amendment rights of the defendant corporations:
We conclude that it would be destructive of rights of association and of petition to hold enat groups with common interests may not, without violating the antitrust laws, use the channels and procedures of state and federal agencies and courts to advocate their causes and points of view respecting resolutions of their business and economic interests vis-a-vis their competitors.
404 U.S. at 510-11 (emphasis supplied).
The court reiterated that rationale in City of Lafayette
- v. Louisiana Power & Light Co., 435 U.S. 389, 399 (1978).
The scope of protected conduct covers all attempts to influence governmental decisions, including decisions as to whether, with whom, and on what terms government agencies
(} enter into contracts. Thus, in Pennington, for example, 45
f t
()
attempts to get TVA to curtail coal purchases f rom certain non-union coal companies were specifically held to be immune from Sherman Act challenge . See 381 U.S. a t 660-61, 670; see also, In re Airoort Car Rental Antitrust L it ig a t io n ,
521 F.Supp. 568 (N . D. Cal. 1981). It also reaches attempts to influence governmental decisions about which private parties will be allowed to engage in business activities, and on what terms. Franchise Realtv Interstate Coro. v. San Francisco Local Joint Exec. Bd. of Culinarv Workers, 542 F.2d 1076 (9th Cir. 1976), cert. denied, 430 U.S. 940 (1977); Metro cable Co. v. CATV of Rock f ord , _Inc . , 516 F.2d 220 (7th Cir. 1975).
] These cases establish that the actions taken by the California Companies to affect decisions of Congress,
, the Department of Interior, the Bonneville Power Administration 3
and the U.S. Bureau of Reclamation could not violate the antitrust laws, even assuming that Cities' unfounded allegations about anticompetitive activity had validity. No more can they serve as a basis for finding the contracts at issue contrary to the public interest under the Federal Power Act. The constitutional and decisional principles underlying the Noerr-Pennington-Trucking Unlimited trilogy apply with equal f orce to the application of any federal statute, including the Federal Power Act. This point was recognized early in Docket No. E-7796 when PGandE's objections to NCIA discovery requests relating to PGandE political activities we. e upheld on the authority of the Noerr, Pennington, and Trucxing Unlimited cases. Docke t No. E-77 96, Tr . 256-58 (Apr il 26, 1973.) It was also recognized by the Presiding Judge in this docke t, who excluded on the grounds of relevance certain PGandE testimony regarding its activity before Congress:
"(I]t is my view that PGandE has every right to make counter-proposals and that the advocacy of a line built by private parties . . . is not improper." (CH-27, 5 71/4 -8 . )
Thus, the Conpanies' ef f orts to obtain Congressional and executive approval of the Intertie arrangements cannot be a basis of action in this proceeding.
- 3. The Evidence Establishes That the Intertie l
Arrangements Are the Products of Federal PeJ icies and Decisions.
l 1. The Development of an Intertie Plan--1959 to 19 64.
l Pertinent federal interest in an Intertie began in 1959 when the Bonneville Power Administration representa tives contacted PGandE about the possible sale of surplus hydroelectric energy. 3PA, seeking to reduce sizeable operating deficits,
[}
46
initiated negotiations leading to a PGandE/"COPCO" intercon-nection proposal submitted for Congressional review. (Kuder ,
CH 1375; Ex. 4057 at 1; Ex. L-161 a t 27-28. ) After hearings in April 1959, Congress mandated studies of a federal transmis-sion interconnection as an alternative. BRA responded with a report in February 1960 evaluating a federal line but concluding in favor of the PGandE-sponsored plan. (K ude r ,
CH-1375-6; Ex. 4057.) Congressional hearings followed in late spring, 1960. (Item by Ref. J-1.) Due to concern in the Pacific Northwest over the eff ects of the so-called
" pref erence clause" on power sold to California public agencies, however, no program gained Congressional approval. (Kuder, CH-1376; Item by Ref . J-l a t 92-111. ) This concern became a dominant consideration thr oughout the course of Intertie negotiations over the ensuing four years. It was ultimately resolved by the Northwest Regional Pref erence Act and the arrangements governing Intertie use agreed upon in 1964.
The problem is simply stated. BPA and other North-west utilities were loath to sell power to public agencies in California, f earing that sales to California preference agencies could take precedence over non-preference customers in the Northwest. (Item by Ref. J-l at 23-29, 39; Kuder, CH-1382; Dubrow, CH-1511.) Of particular concern was the prospect of power purchases by non-generating public agencies, which were more likely to become dependent on Northwest power at the expense of Northwest customers. (Luce, CH-38,573-574; Goldhammer, Ex. L-161 a t 10-11; Dubrow, CH-1512 and 1526; Kuder, CH-138 2. ) The Northwest wished only to market interruptible surplus power. (Luce, CH-38,572-5 73; Goss, CH-1266; Dubrow, CH-1511-1512.) To ensure this, BPA developed a policy to contract only with generating entities in the Southwest and to limit direct participation on the Intertie to generating agencies. (Luce, CH-38,572-576 and 38,5 Dubrow, CH-1526-27, Goldhammer, Ex. L-161 at 17.)gg-593; The federal Intertie negotiators were well aware 26 Cities cross-examined witnesses at great length regarding i this issue, apparently seeking to show tha t BPA's policy I
was not the best or only way to protect Northwest utilities or, perhaps, tha t the policy was not consistently applied.
(See, e.o., Dubrow, CH-24,198-228; Luce, CH-38,604-608 and 38,649-660; Goldhammer, Ex. L-161 a t 14-19. ) Even had Cities been successful in this showing (which they were not) , the end result would be ir r elevan t. It canno t be disputed that BPA had such a policy, and that policy helped shape the ul t ima te Inte rtie arrangemen ts. The federal government, not the California Companies, decreed which public agencies would have " direct access" and wh ich would not. (See Luce,
(,) CH- 38,5 72-5 7 6 and 38,590-593.)
47
O th2 Congressional approval would be jeopardized if non-generating agencies directly participated.27 (Dubrow, CH-1527.)
In short, if Cities seek a culprit for their " exclusion" from direct Intertie participation, they must look to BPA and the Department of the Interior. However, such a complaint is groundless, since Cities did not request direct Intertie participation. Cities never made a proposal to build the Intertie or sought to negotiate rights to transmission. (See, e.c., Hoyt, CH-37,973/1-13.) In fact, the Northern Cities viewed the Intertie arrangements ultimately negotiated on their behalf as advantageous compared to the alternative of participating in the construction of the Intertie. (Goss, CH-25,379.) The historical record is barren of evidence even of requests by distribution-only Cities for purchases of surplus power over the Intertie. There are, in fact, indications that these cities acknowledged their ggability to use Northwest surplus power. (Ex. 4266-4267.)
Following the spring 1960 Congressional hearing on the PGandE-COPCO line, attention on a Pacific Northwest /
Pacific Southwest interconnection was renewed when President Kennedy called for regional transmission interconnections in early 1961. (Dubrow, CH-1510; H.R. Doc. No. 94, 107 Cong. Rec. 2 414.) Shortly thereafter, Secretary of the Interior Udall appointed a Task Force to cond study of an EHV "Intertie" on the West Coast. ggt TheaInterior feasibility ,
Department chose a " Pacific Intertie" in response to President 27 Of course, the government made sure that non-generating agencies obtained a fair share of Intertie benefits through other means. (See sections III.B.3 and IV.C.1, infra.)
- 29 To be sure, a few cities belatedly exhibited an interest in low cost, firm power scurces in the Northwest. (Ex. 4183.)
But the terms of these requests were suf ficiently unrealistic to disavow any serious interest. (Id.; Dubrow, CH-24,407-410.) The only visible source of EIrm power, Canadian Treaty power was not available in sufficient amounts to meet even the demands of the California public agencies with generation.
(Luce, CH- 3 8,6 5 3. ) Moreover, it was known to be available only for a limited period of time and was initially higher priced than alternative power supplies. (Luce, CH-38,581/18-24; Dubrow, CH-1530/50-52; CH-24,412/24 to 24,413/2.)
i
. 29 Three of the members of that first Task Force--Charles Luce, gs Morgan Dubrow and Hugh Dugan--have testified in this proceeding,
(,) and the deposition of a fourth member, Bernard Goldhammer, is an exhibit (L-161).
48
Kennedy's instructions for two reasons: to enable BPA to reduce its deficits by finding a market for its surplus power and to remove the roadblocks to approval of the Columbia River Treaty between the U.S. and Canada. (Luce, CH-38,578-584; Ducrow, CH-1511.)
The 1961 Columbia River treaty, which witnesses Charles Luce and Morgan Dubrow helped negotiate (CH-1510 ;
38,578), called for construction of storage projects in Canada to provide major floodwater control and enhanced hydroelectric generating capability along the Columbia in the United States. (CH-1509; CH-38,578-79.) Of the resulting power benefits, some three million kW, half would belong to Canada--the " Canadian Entitlement." (CH-1509.) But Canadian ratification of the treaty hinged on finding a U.S. market for the Canadian share during the initial years of production, until the power was needed in Canada. In the U.S. Government's view, California utilities were the logical purchasers for this power. (Dubrow, CH-1510/24-34; Luce, CH-38,580-581.)
This first Task Force completed its feasibility study in December 1961, recommending construction of an Intertie. (Ex. 4004.) The key question then became: Who should build the lines? Although the Task Force report did not address this question, the Interior Department and Congress exercised strict supervision over its resolution in the ensuing three years. Congressional hearings held in the spring of 1962, featuring testimony on the proposed Intertie both by private and public sector representatives, resulted in the following Congressional observation:
It is apparent from testimony to date that specific negotiations and planning between the Federal Government and private and public utilities in the area affected must be accomplished if the Congress is to be assured that it is being presented with the most feasible and economical plan for construction and use of Intertie facilities.
(Item by Ref. A-1 at 57-58.)
Pursuant to these Congressional wishes, BPA Adminis-trator Charles F. Luce in November 1962 wrote to some 27 -
puolic and private entities inviting proposals for a Pacific Nortnwest-Southwest " power interchange" that would meet Congress's requests. (Ex. 4007 at 2, 39-40; Dubrow, CH-1515.)
According to the Interior Department, these letters were
(~T sent to all entities who had " expressed an interest in the U
49
l 1
O construction or use of a Pacific Northwest-Pacific Southwest intertie." (Ex. 4007 at 2.) In response, five offers for Intertie construction were received by February 1963.
(See Ex. 4010). No orocosals were made by NCPA member cities.
In June 1963, Congress appropriated funds for initial engineering and construction under the following restrictions: First, no construction could begin until the passage of legislation " guaranteeing electric consumers in the Pacific Northwest first call on electric energy generated at Federal hydroelectric plants in that region. . . ." Second, Congress specifically instructed the Interior Department to negotiate with utilities and other entities interested in constructing a? 1 or a part of the Intertie:
In addition, construction shall not begin unless the Secretary of the Interior finds, after good faith negotiations with utilities and other entities interested in constructing any portion of the lines involved, that their proposals will not result in benefits to the national interest at least equal to those to be derived from Federal construction, including revenues which will accrue to the Federal Government after amortization of the line or lines; has submitted his findings to the committee; and the committee has had an opportunity to review them.
(S. Rep. No. 7 1st Sess. at 39-40 (1963) .Jg6, (Item 38th Cong. , C-1.)
by Ref.
This elevated degree of Congressional involvement in scrutinizing and approving major transmission projects and in exploring non-federal construction alternatives had a tradition dating to the 1940's. For years Congress has considered appropriations requests for federal transmission line construction, yet has recognized that the federal role in electric transmission should be limited. See, e.g.,
Item by Ref. N-1: H.R. Rep. No. 437; 79th Cong., 1st Sess. 18 (1945) and H.R. Rep. No. 2038, 80th Cong., 2nd Sess. 20 (1948). This policy was reflected in the "Keating Amendment" of 1951, which provided for maximum use of non-federal transmission f acilities in areas served by wheeling contracts with the 30 This language was adopted by ,the Conference Committee.
See H.R. Rep. No. 1027, 88th Cong., 1st Sess. at 24 (1963).
l (
l 50
O Government.31 (Item by Ref. O-1 at 23.) And it was re-affirmed in the Congressional directives of 1962 and 1963 that the Interior Department negotiate with private utilities and other entities in search for Intertie proposals promising to achieve benefits equivalent to or greater than those anticipated from federal construction.
To implement the 1963 Congressional directives, the Interior Department in early 1964 established criteria, known as the " Federal Yardstick," to evaluate whether the benefits of any non-federal proposal were "at least equal" to those expected from federal construction. (Dubrow, CH-1520; Ex. 4040 at 2.) The Department also appointed a three-man team to negotiate with utilities submitting proposals. (Two of those members were witnesses in this proceeding--Charles Luce and Morgan Dubrow.) By the end of April 1964, ten organizations had submitted proposals. One of these proposals came from the three California Companies -- PGandE, SCE, and SDG&E.
Once again, no NCPA member submitted a proposal.
Since early 1962, the three Companies had been engaged in negotiations with the Interior Department to build the Intertie and had made presentations to Congress in support of their proposals. (See, generally, Kuder, CH-1379-1392.)
Publication of the Federal Yardstick prompted another proposal by the Companies in April 1964 (Kuder , CH-1392; Ex. 4017),
which was later revised extensively to meet Interior Department and Congressional wishes. (Kuder , CH-1392; Ex. 4017; Dubrow, CH-1533-1534; Ex. 4040.)
From the outset of this process, the California Companies were well aware that the Interior Department would i not approve any program unless it involved public agencies in
! California. (Kuder , CH-1380. ) In a February 1962 meeting, l Mr. Luce specified which public agencies should have direct l
transmission service--LADWP, SMUD, CVP and DWR. (Ex. 4060; Kuder, CH-1380.) These were the major public agencies in California with the generating resources necessary, under Department of Interior policies, to qualify for direct Intertie l participation. Negotiations between the Companies and these i puolic agencies began in 1962 (Kuder , CH-1381) and continued l through 1964. They culminated in a series of arrangements, l
31 This amendment has been re-enacted in Department of Interior appropriations year after year since 1951. See, e.o., Pub. L.
No.82-470, Title I, 66 Stat. 445 at 451 (1952); Pub. L.
No.93-393, Title III, 1 U.S. Code Cong. & Ad. News 889 at 392-893 (1974).
l l
51
(
approved by the Interior Department and Congress, offering substantial benefits to each of these agencies and their customers--benefits which exceeded those projected by the federal yardstick. (Ex. 4040 at 22, 32-40.)
Any suggestion that the California Companies exercised undue control or unilaterally molded the Intertie program is unequivocally refuted by the testimony of those who participated.
According to Mr. Dubrow, it was the Government that held the trump cards in these negotiations, with the Companies making frequent concessions. (CH-1524-1525 and 1533; see also Ex. 4040; Ex. 4083; CH-1199-1200.) Nor were the public agencies without negotiating leverage. According to Mr. Luce, DWR and SMUD had " great political strength." (CH-38,581; see also CH-38,636; 38,641-43; 38,606.) And LADWP participated in the construction of EHV transmission lines itself as an alternative to participation under the Companies' proposals.
(Goss , CH-126 0. )
Well an'd good for the generating public agencies; wnat about the distribution-only municipal utilities? Were they without bargaining strength and representation in this process? Absolutely not. Numerous and potent individuals and organizations at the federal and state levels vigorously represented these municipalities' interests. In Congress, the California Congressional delegation, led by John Moss and Harold T. ("Bizz") Johnson, vigilantly monitored the progress of the Intertie negotiations on behalf of their municipal agency constituents. (Luce, CH-38,585; Item by Ref. G-1 at 1032-1070.)
Their representation resulted in substantial modifications in the Intertie program benefiting preference customers--including an increase in PGandE's support of CVP's customer load; an increase in the Bureau's initial Intertie capacity; a guarantee of Canadian power to DWR; and construction of a federal Intertie line in Northern California. (See section III.B. 4, infra; Dubrow, CH-1533-34; Ex. 4040 at 48-50; Kuder, CH-1397; Holifield; CH-1197-1200; Ex. 4034; cf., Luce, CH-38,641; Item by Ref. G-1 at 1066-1071.) In the Interior Department, t Assistant Secretary for Water and Power Development Kenneth l
Holum, who supervised the federal Intertie negotiators (Dubrow, CH-1516; cf. Ex. 4013, Ex. 4026, and Ex. 4040 at 43, 47),
I was an advocate for the California municipals. (Kuder , CH-27,559-560; Luce, CH-38,644.) In northern California, the Bureau of Reclamation looked after the preference customers it served--including five of the future members of NCPA.32 32 Under CVP's most recent power marketing plan, the remaining municipal members of NCPA have also been given allocations of low-
{} cost federal power. See 46 Fed. Reg. 51229-51230 (October 16, 1981).
1 52
l (Luce, CH-38,584-585; 38,635.) In addition, the politically 1 powerful Sacramento Municipal Utility District played a key role in advancing the interests of northern California municipals. (Luce, CH-38,630; 38,642-643; cf. Ex. 4021 and Ex. 4268 at 2.) These Cities had yet another voice in the American Public Power Association (Luce, CH-38,592) and the Northern California Municipal Electric Association--
the predecessor of NCPA. (Ex. 4269; Hoyt, CH-37,972/2-14.)
l Not only were these agencies ably represented in the l
Intertie negotiations; in one fashion or another, they approved of the outcome. Following submission of the Interior Depart-ment's recommended plan to Congress in June 1964 (see sec-tion III.B.2, infra), the APPA in July 1964 testified in its favor. (Item G-1 at 1081.) Member cities of NCMEA then receiving federal power favored outright acceptance of the "Udall" plan. (Ex. 4087-4088.) Other members of NCMEA, although favoring a federal Intertie, viewed the Secretary's program as an acceptable compromise. (Ex. 4087.)
NCMEA was particularly enthusiastic over the PGandE/CVP banking plan enabling the CVP to serve, for a 40-year term, twice the customer load that would otherwise have been possible.
(Ex. 4021.)
Congressional representatives of thene municipal interests also approved the Interior Department's plan following amendments and further compromise in July 1964.
For example, Congressman Moss in a letter dated August 7, 1964 expressed "hearty concurrence" with Senator Wayne Morse's statements that the Intertie program could now be approved based on changes he and others helped make. (Ex. 4095.)
Moss' approval followed a two-month period in which he had criticized various aspects of the original Intertie proposal as providing insufficient protection to the interests of his municipal constituents. (Ex. 4034 and Item by Ref. G-1 at 1032; I see also , Ex. 4036.) Other Congressmen who had opposed the "Udall" plan due to concern for municipal preferengq customers, such as Sizz Johnson, Bernard Sisk and John McFall>J, participated l
along with Moss in negotiating final amendments to the Intertie program in July 1964. Not only did they approve the resulting pac < age, they agreed that no further concessions from the Companies would be required. (Luce, CH-38,596-97; Holifield, CH-1200.)
- 2. Developments in the Spring of 1964 l Following the initial submission of the ten Intertie i proposals in the spring of 1964, Secretary Udall on April 28, i
l l () 33 See, e.c., Item by Ref. G-1 at 1064-1070; Ex. 2154.
l 53
(
1964 requested a second round of proposals to conform more closely to the federal yardstick. (Ex. 4080; Kuder, CH-1392.) Negoti-ations involving Interior Department officials and the entities submitting proposals ensued, and various proposals were amended accordingly. (Dubrow CH-1524.) After further negotiations and recommendations by a Departmental evaluation team including Mr. Luce and Mr. Dubrow (CH-15 22-15 26 ) , Secretary Udall submitted the Interior Department's findings and recommen-dations to Congress on June 24, 1964. (Dubrow CH-1529-1530; j Ex. 4040.) In his detailed report, Udall recommended acceptance of the proposals of the California Companies, LADWP and others. ( I d _._ )
The Interior Department found that the public interest benefits provided under tne Companies' proposals were considerable. (See in general, Ex. 4040, pp. 32-40; Item by Ref. G-1 818-337.,) Including LADWP's transmission capacity over the DC line which it proposed to construct, California public agencies would have the opportunity to use over half of the total Intertie capacity on a firm basis.
1 (Ex. 4040 at 26, 34.) The charge for this transmission service, $3.35 per kilowatt / year, was identical to the federal cost estimated by the Interior Department for transmission service to Tracy over the federal yardstick system. (Kuder, CH-1395-1396: Ex. 4040 at 21-22.) In addition, PGandE offered a unique banking and support arrangement to the Bureau of Reclamation enabling it to serve a customer load level l of at least 925 mW for forty years. This arrangement more than doubled the amount of power available for sale to pref erence customers. (Kuder, CH-1395; Dubrow, CH-1531.) Both the Interior Department and the northern California preference customers considered this an enormous benefit. (Ex. 4040, pp. 35-37; Dubrow, CH-1530-1531; Ex. 4021; Ex. 4087-4088.)34 Overall, the Interior Department calculated the recommended program's benefits, exclusive of post-amortization considera-tions, to exceed those of an all-federal plan by over $500 million. (Dubrow, CH-1529; Ex. 4040 at 32.)
The Department of Interior Intertie negotiators, who were knowledgeable about the Companies ' proposals and the alternative of federal construction, concluded that the Companies' proposals not only met as closely as possible the federal yardstick (Ex. 4040 at xii-xiii; Ex. 4029),
but contained bedefits to public agencies which exceeded 34 The banking and support plan, incorporated into the California Companies' 1964 Intertie proposals (Ex. 4017),
was part and parcel of the Congressionally approved PGandE/CVP contractual modifications resulting in Contract 2948A.
(~} (See Ex. 4040 at 35-37; CH-1412-1414; section V.D.2, infra.)
54
O those anticipated from all-federal construction. (See, generally, Item by Ref. G-1 at 844-845 (statement by Charles Luce);
Ducrow, CH-1522-1531.) In addition to the banking and firming arrangement described above, prime examples were the Companies' flexibility in dealing with the " sizeable requests" of SMUD and DWR (Dubrow CH-1526; Item by Ref. G-1 at 916-917), particularly the Companies " guarantee" of Canadian Entitlement power purchases f rom DWR and SMUD by agreeing to take power which those agencies contracted for but did not need (Dubrow, CH-1529; see also Kuder, CH-1396), and the grant of options to DWR and SMUD to take transmission capacity without requiring firm commitments. (Item by Ref. G-1 at 845, 859.)
The Interior Department had other sound reasons for concluding that private construction of the Intertie in C;11fornia would better serve the public interest than federal construction. Private lines provided less exposure to direct access by non-generating preference customers in California. (Dubrow, CH-1526 and 1531.) Moreover, private construction assured a sufficient demand for BPA surplus, since the Companies' substantial investment would give them an incentive to buy Northwest power over the Intertie to recover their investment. (Dubrow, CH-1528-29; see also Goldhammer , Exhibit L-161 at 14-15.) BPA was anxious to maximize its sales to California and felt that a private rather than federal line would accomplish that goal. (Gold-hammer, Exhibit L-161 at 8-9.) Finally, acceptance of the Companies ' proposal was a key f actor in the ratification of the Columbia River Treaty, since it provided the " assured market" for Canadian power which was essential to the treaty's approval. (Dubrow, CH-1529; see also Luce, CH-38,578-584.)
- 3. 1964 Congressional Hearings.
Seven days after submission of Secretary Udall's Intertie Report, the U.S. Senate Subcommittee on Public Works Appropriations began hearings on the recommended plan.
(Item by Ref. G-1.) Secretary Udall, Assistant Secretary Holum, SPA Administrator Luce and others "were all present to testif y in f avor of the Intertie recommendations and respond to the senators ' questions. " (Kuder , CH-1397. )
During the course of two days of hearings, more than 40 witnesses appeared representing such diverse interests as the American Public Power Association, National Rural Electric Cooperative Association, private utilities in California and the Northwest, the State of California, the City of Los Angeles , and preference customers in California. Three U.S. Senators and three U.S. Congressmen also appeared as witnesses or submitted statements. Every provision of Secretary Udall's program was subject to review and questioning.
(See, generally, by Item Ref. G-1.)
(])
55
I l
O A prominent theme of the hearings turned out to be the protection of preference customers' interests in California.
Impassioned statements on behalf of these interests were made or submitted at the hearings by Senators Engle and Morse (Item by Ref. G-1 at 975 and 1133-1135) and Congressman Johnson and Moss. (Item by Ref. G-1 at 1055 and 1032. )
Congressman Moss appeared on behalf of the entire 23-member California Congressional delegation. (Id. at 1032.)
Many of the criticisms raised by these and other witnesses are strikingly similar to those of the Intervenors in this proceeding: e.g., the lack of an all-federal Intertie I
line; lack of " common carrier" provisions whereby any entity could make use of the lines; the resulting " monopolistic" transmission control supposedly accruing to the Companies; alleged jeopardy to municipal systems' preference rights to surplus power; preservation of the wheeling area under the predecessor contract to Contract 2948A; and alleged restrictions on the load level served by CVP. Indeed, Congressman Moss stated he had requested Department of Justice scrutiny of the proposed arrangements for any antitrust aspects. (Item by Ref. G-1 at 1040.)
Allegations of monopolistic control due to private construction of the Intertie did not surface for the first time at the July 1964 Congressional hearings. The same concerns were raised in Congressional hearings as early as 1959 regard!vg the Intertie's predecessor proposal, the PGandE-COPCO interocanection plan. (Item by Ref. I-l at 19.) They were raised in Congressional hearings on the Intertie year after year. (E.g., Item by Ref. J-l at 76-77 (Subcommittee on Irrigation and Reclamation); Item by Ref. M-1 at 805-809.)
Not only were these matters aired at hearings; various legislators l called attention to issues of monopoly control in direct l communication with the Interior Department. For example, t
the Chairman of the House Committee on Public Works decried the " transmission tollgate" and " complete control" supposedly threatened by the Companies' April 15 Intertie proposals.
(Ex. 4018.) See also Congressman Moss's 1964 letter to DOI, l Ex. 2154, and Item by Ref. G-1 at 1032-1045.
I
! With these protests before them, the Department of 1
the Interior and Congress still approved an Intertie plan involving primarily private ownership and control of
- transmission lines in California. The Department of Interior l chose to address concerns over undue control by ensuring that l the Intertie plan provided public and private power entities with an equitable opportunity to participate in the program's cenefits, both directly and indirectly. (Dubrow, CH-1523.)
According to Mr. Dubrow, the concept of " fair sharing" was a p),
(. consistent theme throughout the Intertie negotiations and a key j l
l 56 l -- .
O ingredient in the arrangements which resulted. (CH-1523-24; see also Ex. 4020; 4016 at 4; 4040 at 40; Item by Ref. G-1 at 851 and 1028; and Ex. 4148.) This sharing approach extended to the arrangements governing sales to California by various Northwest sellers and the allocation of Canadian Treaty power among California purchasers. (CH-15 23- 24 ;
see Ex. 4017 at 14-15.)
In Secretary Udall's Intertie Report he concluded for the Interior Department:
We do not believe that the acceptance of these proposals, and their incorporation in a total plan of service, can be said to violate Federal antitrust laws in any way. On the contrary, they provide for wide participation in intertie benefits by several regions and many publicly and privately owned utilities. But to eliminate any question of doubt on the subject, we recommend that the contracts needed to implement the proposals be reviewed with the Antitrust Division of the Department of Justice before their execution.
(Ex. 4040 at 31.)
Subsequent contracts implementing the Udall plan were reviewed not only by the Justice Department as he suggested but also by Congressional committees and the Federal Power Commission as well. (See section III-B-6, infra.)
The substantial public benefits ascribed to the Intertie proposals by the Interior Department, however, did not then fully satisfy those representing the interests of municipal electric systems. Congressman Moss, on behalf of the California delegation, urged the Committee not to approve the Udall plan unless a f aderal EHV line was built from tne Northwest to CVP. (Item by Ref. G-1 at 1045.) In the alternative, provisions for preference customer load growth should oe made. (Id.) These recommendations were echoec by Congressman Johnson (Id. at 1066) and representatives of Governor Brown, including Mr. Warne. (Id. at 902.) Approval of the Intertie program was thus delayed until this controversy could be resolved.
57
O
- 4. Negotiations in the Summer of 1964--the Final Compromises.
In an attempt to settle the controversy over approval of the Interior Department's Intertie program, the White House intervened in early July 1964. At a meeting with Chet Holifield, John Moss, Biz Johnson and other California Congressmen, President Johnson appointed Mr. Holifield head of an ad hoc committee to resolve the differences over the Intertie. (Holifield, CH-1198; Dubrow, CH-lS34; Luce, CH-38,594.)
- a. A federal transmission link between BPA and CVP.
Holifield's principal concern was the demand for an all-federal line linking BPA and CVP. (CH-1199. ) After devising a plan to pay for such a line with previously appro-priated but unspent f unds, Holifield invited PGandE's Robert c erdes to Washington to resolve the matter. On July 22, Gerdes and Holifield met with Senators Hayden, Magnusen, Jackson, Morse and Kuchel; Congressmen Bizz Johnson, Sisk, Moss and McFall; Secretary Udall, BPA Administrator Luce and Morgan Dubrow; Governor Brown's representative Irving Sprague and others. (Holifield, CH-1200. ) Testified Mr. Holi-f ield :
At the meeting, I summarized various meetings and areas of agreement which had been reached on the Intertie. I then indicated that Mr. Gerdes was tentatively willing to agree to construction of a federally-owned line between the Round Mountain substation and Cottonwood as a part of the Intertie plan, but was concerned about the possibility of additional requests. Going around the table, one by one, I asked each person in ene room if the Intertie proposal was acceptable witn the proposed amendment and witnout turther concessions by tne j companies. Everyone said it was and, witn those assurances, Mr. Gerdes agreed.
(CH-120 0/ 3 4-4 5, emphasis added.)
(See also Luce, CH-38,595-596. ) At the urging of the California Congressmen, Governor Brown's representative telephoned ne Governor and obtained his approval of the settlement.
(Luce, CH-38,597-598.) Under the settlement, a 230-kV federal N
line would ce constructed from a substation at Cottonwood to Round Mountain, linking up with a Bureau of Reclamation 58 l
O 500-kV line to the Northwest. (Dubrow, CH-1534; Ex. 4040 at 51-52.)
- 6. Additional benefits to CVP and DWR.
Separate negotiations, involving the Interior Depart-ment's negotiating team, interested Congressmen, and represen-tatives of the Companies and the participating public agencies, were held July 1964 in an attempt to resolve other concerns l that had arisen at the Congressional hearings. (Dubrow, l CH-1533.) According to Mr. Dubrow, these negotiations were
" highly successful":
. . . Thanks to the cooperation of the California Companies and others, we were able to meet essentially all of the Appropriations Committee's concerns.
The primary amendments we negotiated were as follows: (1) Provision for load growth for CVP preference customers by doubling the Bureau of Reclamation's initial share of Intertie line capacity from 200 to 400 mW, and allowance for a gradual increase in CVP customer load to 1050 mW; (2) a guarantee of 330 mW of Canadian power for the State's water project, thanks to the California companies' offer of a banking arrangement and off-peak steam support, as well as a release of 200 mW of line capacity from the State to the Bureau; and (3) clarification of federal post-amortization benefits and of review procedures for rates and service charges to the CVP.
(CH-15 3 3. )
Two of these three items came to be embodied in Contract 2948A between PGandE and the Bureau. In the Companies' proposals accepted by the Interior Department in June 1964, PGandE had undertaken to extend for 40 years the provisions of its sales and interchange and wheeling contracts with the Bureau, with various amendments including CVP load support up to 925 mW. (Exhibit 4017 at 22.) To enable this support, PGandE ex tended and supplemented the existing PGandE/ Bureau
" banking arrangements" via a new Contract, 2948A. (Kuder ,
CH-1412-1413; Ex. 4017 at 24-25; see Contract 2948A, Article 20.)
Following the Senate hearings in July 1964, PGandE agreed to accept even greater obligations by agreeing to firm up C7P power up to 1050 mW, with the door left open for CVP
() to seek even more support f rom PGandE. (Ex. 4040 at 43-46.)
l l
59 l
O PGandE also modified its proposals to allow review of its CVP wheeling ra tes under this Commission's supervision.
(I<!. a t 47; see Contract 2948A, Article 32.)
With the concurrence of Assistant Secretary Holum, the negotiating team--Charles Luce, Emil Lindseth and Morgan Dubrow--reported the negotiated amendments to Secre tary Udall, who in turn transmitted them to Congress on July 21, 1964. (Dubrow, CH-1534; Ex. 4040 at 43.)
Acclaim from all quarters heralded the amended Intertie plan. The President of the United States announced that the Intertie arrangements symbolized "a new era of cooperation between private power and public power in the United Sta tes. " (CH-1200/50 to 1201/1; see also Goldhammer ,
Ex. L-161 a t 11-12.) Governor Brown called the plan a " greatly improved package, one with which we can all live. " (Holifield, CH-1201. ) The champion of the municipal pref erence agencies in Calif ornia, Congressman Moss, sta ted tha t the success ful Congressional ef forts to modify the Intertie plan resulted in "large benefits for years to come for millions of our citizens on the Pacific Coast. " (Ex. 4095 at 2.) As a result of those changes, the Intertie program in Moss's view could now be approved. (Id.; see also Ex. 4043.)
- 5. The Intertie Plan Is Explicitly Approved by the Full Congress.
On August 5, 1964, the Senate Appropriations Com-mittee approved Secretary Udall's Intertie program as amended under the auspices of Congressmen Holifield and the negotiating te am . (Dubr ow CH-1534-1535; Item by Ref. E-1. ) This approval was adopted by the Conf erence Committee. (H.R. Report No. 1794, 83th Congress, 2nd Sess., 1964.) On August 30, 1964, President Johnson signed the Public Works Appropriations Act, which included f ederal Intertie funds. (Pub. L. No.88-511; 7 8 S ta t.
682.)
In its August 5 Report, the Senate Appropriations l
Committee directed that no appropriations for the Inte r t ie be spent until the enactment of regional preference legislation.
(Item by Ref . E-1. ) This legislation, originally proposed in 1962 (Ex. 4005) and designed to give the Pacific Northwest preference in the use of federal hydroelectric power generated there, had from the outset been considered essential to Congressional approval of the Intertie. (Luce, CH-38,587/1-17; Dubrow, CH-1511, 1519.) In 1963, the regional pref erence legislation became the subject of intense Congressional debate over federal construction of the Intertie because
(~T of the proposed "Westland Amendment" requiring specific
Congressional authorization for any federal transmission 60
line built out of the Pacific Northwest. (Dubrow, CH-1519; Item by Ref. D-1.) The legislation thus provided yet another forum for Congressional consideration of an Intertie program.
After more than two years of consideration by the House and Senate Committees on Interior and Insular Affairs, Congress passed the regional preference bill in August 1964 with a compromise version of the Westland Amendment. (Item by Ref. F-1.)
Under this compromise legislation, Secretary Udall's amended Intertie plan was specifically approved and federal construction of transmission to implement that plan was authorized. In addition, however, Congress deemed that no future transmission interconnections between the Pacific Northwest and Southwest could be constructed or financed by any federal agency unless "hereafter specifically authorized by Congress." (16 U.S.C. S 837(g); Ex. 4038; Dubrow, CH-1535.)
The Report of the Conference Committee on the Northwest Regional Preference Act underscores both the explicit approval of the Intertie plan and the Congressional will that it not be changed without explicit Congressional consent.
The conferees stated in their report that the Intertie plan:
has the approval of all parties-- private, municipal, State and Federal. . . .
The Department has recommended a final plan to the Congress and the plan has been examined by the committees of the Congress. We now know who will be constructing the lines and the cost to the Federal Government. We have detailed information relating to the operation of the inter-connected systems and the benefits which t will flow from the interconnections.
l The letter of the Secretary of the Interior, dated June 24, 1964, trans-mitting the Secretary's report on the Pacific Northwest-Pacific Southwest Intertie and the letter of July 27, 1964, modifying the plan in certain i respects, are attached as a part of l
this statement. It is the position
- of your conferees that any substantial l change or deviation in the olan recommended I to tne Congress by tnese two letters l
61
O must be reported back to the Congress for authorization.
(Ex. 4038 at 4-5, emphasis added.)
- 6. Approval of Contracts Implementing the Intertie Procram.
Congress did not end its supervision of Intertie matters with its approval of the Udall plan in 1964. It insisted on reviewing contracts involving federal agencies negotiated af ter 1964. Reflecting concerns expressed during the 1964 Intertie hearings that " Congress . . . clearly understand what is involved in these agreements," (Item by Ref . G-1 a t 851-852), the Senate Appropriations Committee stipulated that "all such cor; tracts be made public and be transmitted to the Senate not less than 60 days before their e f f ective da te s. " (Item by Ref. E-1 at 37.)
- a. Interior Department review and approval.
Before the contracts were sent to Congress, however, they had to pass the muster of the Interior Department.
Congress selected this agency to negotiate and review contracts necessary to implement the approved Intertie plan. (Luce, CH-38,598-600; see also Item by Ref. E-1 a t 37-38 ; Item by Ref. G-1 a t 857-858.) By the fall of 1966, the following contracts had been reviewed by the Department:
- 1. Contract 2948A between PGandE and the Department of the Interior (Bureau of Reclamation);
l
- 2. California Companies / State Department of Water l
Resources " Extra High Voltage" (EHV) transmission contract;
- 3. California Companies / Sacramento Municipal Utility District EHV transmission contract;
- 4. California Companies / Department of the Interior (Bureau of Reclamation) EHV transmission and exchange contract (29 47A) ;
- 5. California Companies /PP&L Use of transmission
, contract;
- 6. Contract 2949A between PGandE and The Department l
of the Interior (Bureau of Reclamation); and
/~' 7. Contract 3117A between PGandE and The Department of the Interior (Bureau of Reclama tion) .
l 62
1 O
(Kuder , CH-1404; Ex. 4100D.) No objection was lodged by the Interior Department to these contracts. Id. On behalf of the Department, Assistant Secretary Holum termed the contracts within Interior's demain (2947A, 2948A and 2949A]
as "a workable and equitable arrangement between this Depart-ment and the Companies. " (Ex. 4100A and B.)
Following Interior's review, these contracts were transmitted to the House and Senate Appropriations Committees in "accordance with the desires" of thora Committees. (Kuder, CH-1404; Ex. 4100 A-D.) They were also forwarded to interested Congressmen (including John Moss and Bizz Johnson) and the Department of Justice. (Id.) That these contracts were indeed scrutinized by Congress was made clear by Mr. Luce.
(CH- 38, 5 9 9-600. )
- b. Antitrust Division review and approval.
The Antitrust Division of the Justice Department, in a series of letters to Assistant Secretary Holum between July 1966 and January 1967, generally indicated it had "no suggestions" regarding the contracts reviewed--including Contracts 2947A, 2948A, and 2949A. (Ex. 4112.) At the urging of the indefatigable Congressman Moss, the Antitrust Division reviewed Contract 2948A a second time. In its report of June 26, 1967, the Division observed that ever since questions concerning the Pacific Intertie arrangements came to its attention in 1964, it had been " sensitive to the desirability of assuring maximum feasible participation in the plan by REA co-ops and municipalities." Concluded the Division, "It is our impression that the over-all effect of this contract is to provide certain security to preference customers which would otherwise not exist." (Id. at 2.)
Although recommending certain modifications such l
as provisions for renegotiation, the Antitrust Division generally dismissed the issues raised by Moss regarding CVP importation of power and third-party interconnections.
Those same issues have been raised again in this proceeding.
See section V.G., infra. As for Moss' suggestion of an antitrust l
problem presented by a " combination" of utilities, the Division stated:
l We earlier reviewed the joint venture i aspect of these arrangements with the i Department of Interior. The Interior l Department had concluded that the cost involved in an operation of the necessary
, efficient scale justified a joint venture of utility companies. Our investigation
()
l has not indicated any ground for questioning l
63
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this conclusion, and we therefore have focused upon assuring access to the Intertie of other utility and customer entities.
(Ex. 4113 at 3.)
Undaunted, Moss requested and received still another Department of Justice review of Contract 2948A in light of a possible interconnection between Santa Clara and CVP, raising questions all too f amiliar to the record here.
(See Ex. 4114.) In response, the Antitrust Division concluded that the proposed contract would not " seriously hamper" CVP's interconnection with new power sources and stated:
The question of CVP's ability to utilize new and alternative sources of power, and whether it would desire to extend service over PG&E's lines beyond the amount and service area specified in the subject contract is a question which the Department of the Interior has carefully studied. Here, too, we cannot say that the Department of the Interior As wrong in its judgment that its ability to service preference customers is adequately safeguarded by terms of the instant contract. If the terms should prove too restrictive, Interior indicates that it has every reason to believe that the contract will then be satisfactorily renegotiated. If renegotiation on terms satisfactory to the Government cannot then be achieved, Congress could take legislative action to deal with the situation.
(Id. at 2.)
The Antitrust Division letter appropriately recognizes the primary role of the Interior Department in reviewing the contracts implementing che Intertie. In addition, the Division's suggestion regarding Congressional action reflects Congress's command, expressed in 1964, that "any substantial change or deviation" in the amended Odall plan "must be reported
- back to the Congress for authorization." (Ex. 4038 at 5.)
i
- c. Federal Power Commission review and approval.
l Not only were these contracts the subject of multiple
.eviews by the Department of Interior and Justice; a number
()
of them were reviewed by this Commission's predecessor, 64
O)
\_
tne Federal Power Commission. On April 6, 1967, the Commission issued a report on the five Intertie-related contracts involving tne Bureau of Reclamation, including 2947A, 2948A and 2949A.
The report concluded:
In view of the potential benefits to the preference customers, and in light of the contract modifications
, negotiated by the parties to remove l certain objectionable features, the proposed contracts do not appear to be unreasonable.
(Ex. 4110 at 18.)
A year and a half later, the FPC also denied the City of Santa Clara's formal request for an investigation of the lawfulness of Contract 2948A. Order Accepting Rate Schedule for Filing and Denving Requests for Suspension and Hearing, November 6, 1968. (See also Ex. 4111.)
- d. Congressional review and acoroval.
The record indicates no objections from the Appro-priations or Interior and Insular Affairs Committees following suomission of the Intertie-related contracts to Congress in the fall of 1966. Another Congressional Committee did raise questions--the House Government Operations Committee.
William Dawson, the Committee's chairman, requested the Interior Dep&rtment on November 3, 1966 to delay signing the contracts pending his committee's review. (Kuder , CH-1404.) Following extensive studies, Dawson wrote Secretary Udall in January 1967 that his committee did not object to the signing of all the proposed Intertie contracts except those to which the Bureau of Reclamation was a party. (CH-1404-1405; Ex. 4101.) Once again, attention focused on Contract 2948A.
In January and February 1967, the Bureau and PGandE negotiated various amendments to Contract 2948A and 2949A in response to comments made by Dawson's Committee Staff.
(Kuder , CH-140 5; Ex. 4103.) These changes included more latitude for the Bureau to meet CVP customer load growth, PGandE and Bureau service to pref erence customers in conjunction with service from other suppliers, and the ability to substitute 3PA power and retain CVP water in storage. (Kuder , CH-1405. )
l In the Bureau's view, the proposed contracts with these
! amendments " fully carr[ied) out the Intertie Proposal as l approved by the Congress in 1964. "* (Ex. 4109.) Following l g- these amendments, Charles Luce, then Under Secretary of
- ne Interior, assured PGandE of ficials that no further changes 65
, i i C i
_ 3
- t 4 .
.( )
O' '
2=
s would'te made--echoing similar promises made in July 1964.
(Kuder CH-1406; Luce, CH-38,603.) s
. L s Despite these assurances, and despite the FPC's apptoval of the contracts in its April 6, 1967 report described above, Assistant Secretary Holum attempted to gain more concessions. PGandE and Interior Department representatives o retarned to the drawing board in "the summer' of 1967, this time negotiating modi.fications to Contract 2948A ultimately embodied'in an exchange of letters between Secretary Udall and PGandE chairmaniRobert Gerdes., (CH-1409.) The "Udall-o Gerdes letters," whi'ch were made part of Contract 2948A (see Ex;'4117), met Inteript" Department concerns 35 by u- clarifyings'he t inter.t of the parties on matters such as non-Northwest sources of power',' f uture multi-party coordination, 3 standby arrangements for customers with outside sources 4- of, power, and periodic contract review. (Ex. 4116.)
( Exchange of the Udall-Gerdes . letters permitted the signing i'n July 1967 not only of Contract 2948A but all ene remaining Intertie-related contracts. (Ex. 4116.)
In. Secretary Udall's view, these contracts carried out "the proposals for the Intertie which were' presented to Congress
~
s s i n' 1 9 6 4 . ," (Ex. 4117.)
IV. s THE INTERTIE CONTRACTS ARE'JUST AND REASONABLE.
.3 The extensive participation by Congress, the Department of the Interior, the Department of-Justice and the FPC in the, development of the Interti_e contracts is itself strong evidince that these arrangements are in the public interest.
Other evidence in the record leads inescapably to the sa,me '
conclusion. ,
A. The EHV Contracts.
- 1. The EHV Contracts Tulf' illed the Intertie Program's Objective of Granting Options of Transmission Rights to Specific Public Acencies.
l The EHV contracts with USBR, DWR and SMUD, which were made available for Congressional and federal agency
, review, suffered virtually no criticism--even by the unflagging champicn of northern California municipals, Congressman 35 The Interior Department took into account the views and recommendations of the House Government Operations Committee.
l () (See Ex. 4117.)
l l
l 66 I
l l l
O Moss. It was apparent then, as it is now, that these contracts fulfilled the objectives of the Intertie program approved by Congress in 19 64. The public agencies directly participating in the Intertie program were af forded options to receive certain specific transmission service up to certain specified levels. The transmission rights afforded would be used for the agency's own power needs, for which each contract was designed. According to Mr. Floyd Goss of LADWP, "It was generally understood that use of the lines would be limited to bringing in surplus Northwest power to the specific public agencies participating in the Intertie as of 1964. "
(CH-1264.) These sentiments were echoed by two other Intertie negotiators, Mr. Dubrow and Mr. Kuder. (CH-15 25 and 27,559. )
Any suggestion that Congress or the Interior Department in 1964 contemplated freely assignable public agency transmission service rights over the Intertie is ref uted by the policy set up by BPA in deference to Congressional concerns. Under that policy, BPA would not sell Northwest power to entities lacking their own generation. (Luce, CH-38,572-576 ; Dubrow, CH-1512; 1526-1527.) Prov is ic n= for Intertie participation on the part of SMUD, DWR and the Bureau were made because those generating agencies qualified under Interior Department criteria. (Luce, CH-38,634-35; Dubrow, CH-1527-1528.) Allowing those agencies to open the Intertie door to non-generating entities would have been inconsistent with BPA's policy.
The April 15, 1964 Intertie proposal made by the California Companies in response to Congressional directives and Interior Department guidelines offered transmission capacity for the use of the generating _public agencies earmar ked - by the Interior Department.J (Ex. 4017 at 6; Ex. 4030; CH-1392.) Amendments to this proposal cursuant to Interior Department requests (Ex. 4080) specifically contemplated transmission service to obtain power for these acencies' resoective systems. (Ex. 4017.) These proposals were specifically accepted by the Secretary of the Interior and transmitted to Congress. (Ex. L-46 a t 41 and 4 040 a t 21-23.)
As amended in July 1964, the Companies' proposals received Congressional approval when Secretary Udall's Intertie program was accepted.
36 MWD, originally included in the Companies' proposals, later eschewed direct Intertie participation in return for a separate arrangement with SCE. (Ex. 4017, supplemental proposal at 19.) LADWP's participation ultimately resulted from the City's construction of the DC line, specifically
() contempla ted by the Companies ' 1964 proposals.
67
O Under the Companies' proposals, DWR and SMUD received ootions to take transmission service. (Ex. 4017 at 5-6 and 14.) In other words, these agencies were not saddled with transmission capacity that might have proved surplus to their needs. Even if DWR and SMUD exercised their cpticos in full, they could later reduce their take of line capacity upon sufficient notice. (Id.) In effect, these agencies were insulated from the risk--which in the mid-1960's was significant--that the Intertie would be a white elephant.
A necessary corollary was that the Companies would accept either the benefit or the burdens associated with a decision by a public agency not to exercise this option. Although all parties involved had high hopes for the Intertie's success, there was wide recognition that supply of power from the Northwest was subject to uncertainty. (See, e.g., CH-1335; CH-1843-44; Daines, CH-26,535.)
The Interior Department recognized these aspects of the Companies' proposals to be a benefit to public agencies.
In response to a question by Senator Magnuson during the 1964 hearing as to whether the Companies' offer provided more benefits to California preference customers than a federal line, SPA Administrator Luce responded:
Now, we could not, I don't think, come to this committee and ask for the money to build transmission lines of this size and present to you only an option that somebody has to use the line or not to use the line as an economic justification for it. . . . We simply couldn't give those kinds of options if this were all (sic] Federal line. We would have to say to them, either sign up for this capacity or we can't justify this line economically.
(Item by Ref. G-1 at 845.)
The EHV contracts executed in 1967 embody the transmission service arrangements proposed by the Companies, accepted by the Interior Department and approved by Congress in 1964. They provide a determinable contractual basis for Intertie access by specific public agencies, as distinct from the "ccmmon carrier" arrangements Intervenors argue should "have applied. The evidence in this proceeding inescapably establishes that unrestricted or " wide-open" common carrier operation of the Intertie, under which access would be afforded to all comers, was unacceptable to the Department of the Interior. (Luce, CH-38,633-638; Dubrow, CH-1512-1513, 1521
% and 1527-1528; Kuder, CH-1389; Item by Ref. L-1 at 14-17.)
l l
68
l O
Rather, as Mr. Luce observed, the 1964 Intertie program embodied a contract carrier operation. (Ex. 2527 at 5; Luce, CH-38,634.)
- 2. The EHV Contracts Remain in the Public Interest Today.
Simply put, the EHV contracts are procompetitive in effect and are otherwise reasonable. They were intended to, and do, provide transmission service to specific public agencies for specific purposes--enabling those agencies to make power transactions that would not be possible in the absence of those centracts. In effect, the EHV contracts limit the Companies' use of their own transmission f acilities in favor of public agencies. They are an excellent example of voluntary interconnection arrangements encouraged under the Federal Power Act. (See section I.S., supra.)
The basic complaint raised against the EHV contracts is that they fail to permit " free assignability" of transmission rights to third parties. (See, e.g., Miller, CH-826/6-10.)
Yet making the contracts " assignable" according to Intervenors' demands would require the Companies to provide transmission service for any entity designated by SMUD, the Bureau, or CWR. As recent cases make clear, this Commi.9sion has no authority to compel such wheeling beyond what is voluntarily undertaken by the utility itself. See, e.g., Florida Power &
Light Co. v. FERC and New York State Electric & Gas Corp. v. FERC, supra, discussed in section I.B.3.a. Intervenors' and Staff's tangled weo of economic, technical, and historical arguments directed against the assignability restrictions of the EHV contracts is irrelevant, since the remedy they seek I
is beyond this Commission's j urisdiction. It is also without substantive merit because it would unreasonably shift the costs and benefits of contractual arrangements reflecting prior compromises approved by Congress and upon which operating utilities (private and public) have justifiably relied.
Quite apart from availability of remedies, the "non-assignability" clauses are in all events reasonable.
i They are common in transmission contracts--even BPA and
! other govenmental agencies use them. (Ex. L-15, S 11; Russell, i
l O
l r
69
CH-4215/24 to 4218 and 4223-24; Ex. 3166, S 16.) More impor-tantly in this particular case they are tied to the f abric of
, the contract and the rate spe:ified in it. The fact that the public agencies were anticipated to make limited use of transmission allocated to them as a group enabled the Companies to provide service at the low federal yardstick rate. (Dubrow, CH-1525/21-28; Goss, CH-1264/6-22; Daines, CH-26,531/14 to 26,532/3.) This limited use is also linked with the option ascect of the c'ontracts . Under these contracts , USBR, SMUD and DWR had a position analogous to bond-holders, with only specified entitlements but without risk; whereas the Companies, akin to equity shareholders, acquired both the risks and opportunities of non-use by these agencies.
There is nothing unreasonable about the provision of a limited service at a price tailored to it. In fact, tha t is in the nature of the regulatory scheme under the Federal Power Act which, unlike the " common carrier" orientation of the Interstate Ccmmerce Act, explicitly contemplates such arcangements. United Gas Piceline Co. v. Mobil Gas Service Coro., 350 U.S. 332, 338-39 (1956); FPC v. Sierra Pacific Power Co., 350 U. S. 348, 350-351 (1956). To revise the EHV contracts according to Cities' desires would change fundamentally the nature of the service provided to the contracting agencies.
See, e.g., New York State Electric & Gas Coro. v. FERC, suora, 638 F.2d at 400-403. It would, moreover, raise a host of operating probleus which the contracts were never designed to address--problems including capacity shortages, increased reserve obligations, anc hydro spill. (See section IV.C. 4, infra.)
B. The Pacific Intet.le Acreement.
- 1. The Pacific Intertie Agreement Af f ords the Type of Sharing Envisioned under the Intertie Program.
As discussed above, the EHV Contracts implement the Interior Department's policy of "f air sharing" of Intertie capacity among public and private participants in California.
To share equitably the Intertie capacity available to them ,
and to allocate fairly their obligations under the Intertie Program and the costs and benefits of their investment in the facilities, the three Companies entered into the "Pacif ic Intertie Agreement." It should be recognized at the outset that th is ag reemen t in essence simply allocates certain rights and obligations between the three parties which would otherwise be separately enjoyed and borne by them.
To unders tand this agreement, one must apprecia te
() the nature of the transmiss ion facilities it governs. When cons t r uc ted , the Pacific Intertie was the " largest single 70 l
O electrical transmission program undertaken in the United States. . . ." (Mi tche ll, CH-184 2. ) Two 500 kV alternating current lines scretch 950 miles from John Day Dam on the Columbia River, through central Oregon and California to Lugo Substation in routhern California. An 800 kV direct current line, linking at the north near The Dalles, Oregon on the Columbia, traverses 850 miles through Oregon and Nevada en route to the Los Angeles area. (Moody, CH-1587-1588. ) Through construction of these facilities, the entire systems of PGandE and SCE became strongly l
interconnected with each other and with systems in the North-west. (Kaprielian, CH-1501/20-24; CH-2 2, 3 41- 2. ) San Diego is tied into the Intertie system through Edison.
A strong interconnection among PGandE, SCE and SDG&E was specifically envisioned by the early pooling arrange-ments among these companies. (Ex. 6107 at 3; Item by Ref.
J-ll at 134.) To ensure the reliability of this interconnected system, coordination among the Companies was vital. (See, e.c., CH-1256; CH-25,344/17 to 25,345/4.) Such voluntary coordination in transmission interconnections is encouraged under Section 202(a) of the Federal Power Act. Electric
& Water Plant Board of Frankfort v. Kentucky Utilities Co., 15 Fed. Pwr . Serv. 5-314 (1978); see section I.B.,
suora. To achieve this coordination, and to permit optimal design and reliable operation of the f acilities, the three companies from an early stage in the Intertie negotiations submitted joint proposals for construction and operation of the Intertie.
This joint approach to the Intertie not only per-mitted the coordination necessary for efficient and reliable construction and operation; it also enabled the Companies to accept the enormous risks attached to the Intertie's develop-ment. The Intertie has turned out to be a successful venture whose value was escalated by the unforeseen Middle East oil embargo of 1973 and the ensuing increases in the cost of oil-fired generation. A retrospective viewpoint can easily overlook the array of economic and technical risks f aced by the Companies in implementing the Intertie program. These included:
- 1. Investment. PG&E's outlay for its portion l of tne Intertie exceeded S185 million, i
while Edison's approached $160 million.
l (Ex. L-46; CH-25,745; Mitchell, CH-18 4 2. )
Recovering .this investment required importing i
large quantities of low-cost power from the l Northwest. (See, e.g., Goldhammer, Ex. L-161 at 14-15.) Indeed, one of BPA's reasons for favoring the Companies' Intertie proposals (g/
f- over federal construction was the prospect of a guaranteed demand for BPA surplus energy l
71
1 i:
()
stemming from the Companies' need to amortize a substantial investment. (Dubrow, CH-1528-1529.) Yet the Companies had no assurances that power would be available from the Northwest, save for Canadian Entitlement Power to be l marketed in California for some 10 years.
(Daines, CH-1335; Dubrow, CH-1530.) Regional preference legislation made it clear that only power clearly surplus to Northwest needs would be sold in California. (Mitchell, CH-1843.) Moreover, public agency participants in the Intertie had priority over the Companies in purchasing BPA surplus power under the preference laws. (Daines, CH-13~,5.) Although the availability of peaking capacity was more probable, the Companies' need for this resource was indeter-minate. (Ibid.) In short, the Companies faced the economic ~ risk that the transactions they made over the Intertie would not be sufficient to cover their costs.
- 2. Technological. The Pacific Intertie represented the foref ront in transmission technology (Daines, CH-1335; Kapriellan, Helms Tr. 6086; Hartley, Ex. 4492 at 3988-3989)--a " unique and substantial acceleration over the normal development in
- transmission technology and usage." (Mitchell, CH-1842.) The DC line, insisted on by the Interior Department (Mitchell, CH-1842) , was the first of its kind in the U.S. and the largest-in the world. (Ex. 4039; Lane, CH-2312/1-5.
.. Even the methods for designing the Intertie l 'had to be. invented. (Hartley, Ex. 4492 at 3986-3988.) As a result, extraordinary construction and operating risks were posed.
(Mitchell, CH-1843; Daines, CH-1335 and CH-26,141; l
Goss, CH-25,379-380.) In fact, without the I unique expertise of PGandE's engineering staff, the necessary technology may not have been developed. (Hartley, Ex. 4492, at 3991.)
- 3. Planning. Under the Intertie program, the
, Companies accepted firm obligations to provide up to a total of 900 mw of transmission service l to CVP, DWR, and SMUD (1100 during the period
On the other hand, the total Intertie capacity l could not be determined prior to operation.
(Mitchell, CH-1843. ) In short, the Companies faced the risk that the usable capacity available O
i 72
1 l
4 O
to them would be less than projected. (Daines, CH-1335; Mitchell, CH-1844.)
The Pacific Intertie Agreement enabled its signator ies to share equitably these risks of development and operation.
The Agreement also permitted the parties, as befits the members of any joint venture, to share equitably in the r benefits resulting from the Intertie. (See , generally, j Daines, CH-1336.) Those bene f its included the ability to l
import, over the capacity reserved to the Companies, low-cost surplus energy, peaking capacity, and Canadian Entitlement powe r . (Daines, CH-1336; Mitchell, CH-1845-1846.) Other benefits included emergency support and enhanced reliability.
( Id . ). Equitable allocation of such benefits was a goal consistent with the "f air sharing" principles which the Interior Department applied to the Intertie program. (Daines, CH-1337; see also Ex. 4016; Ex. 4148.) This type of sharing, at the Interior Department's behest, was made.a specific part of the Northwest coordination arrangements under which Northwest selling utilities would be afforded a fair share of the market in California. (Daines, CH-1337-1338.) The Antitrust Division of the Justice Department specifically commented that the nature of the Intertie justified a joint venture by the three Companies. (Ex. 4113 a t 3. )
- 2. Pacific Intertie Agreement Provisions Are Just and Reasonable.
C it ie s ' and Staf f's attack on the Pacific Intertie Agr eemen t has largely been directed at two provisions--paragraph 7.02, dealing with the sharing of Northwest power purchased by the Companies over the Intertie, and paragraph 7.01(e),
providing a right of first refus31 in transfers of Intertie capacity by the Companies. See, e.g., Exhibit 1084 and CH-1055-1066 (Holme s ) ; CH-698 (Russell); CH-13,99 2-99 3 (Miller).
No attempt, h owev er , is made by Cities or Staff to analyze these provisions in the context of the over and its purposes. This failing is serious,ggi agreement in light of the teaching of Central Iowa Power Coco. v. FERC, 606 F.2d 1156, 1163 (D.C. Cir. 1979): In a Section 206 proceeding, 37 It is also ironic, since NCPA witness Miller, when e asked about hypothetical contract provisions comparable to paragraph 7.02, claimed tha t such provisions should be analyzed with respect to their relationship to the "other parts of the agreement as a whole. . . ." (CH-14, ll4. )
Miller also agreed that a " rule-of-reason" approach should
() be taken with such provisions. (Id.)
73
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O v
contractual provisions which are found to be reasonably rela ted to the valid purposes of a cooperative pooling trans-mission arrangement encouraged by section 202 of the Federal Power Act are lawf ul if "the arrangement is, on the whole, in the public inte rest. " (See section I.B.3(c), supra.)
This principle holds true even if the provisions negatively restrict competition. 606 F.2d at 1163.
l We do not concede that paragraphs 7.02 and 7.01(e) of the Pacific Intertie Agreement restrict competition in relevant mar ke ts, but even if we assume arauendo they do, these provisions f all well within the Central Iowa s tanda rd s .
As demonstrated by witnesses for the Companies, these arrangements were reasonably necessary to the goal of equitable sharing among the Companies of the Intertie's risks and benefits--
a goal which has not been challenged in this proceeding.
Even if Cities' and S taf f's unduly narrow approach is adopted, however, the evidence of record provides no support for the view tha t these provisions contravene the public interest and merit modification.
- a. Paragraoh 7.02 Paragraph 7.02 of the Pacific Intertie Agreement provides one mechanism for each of the Companies to share the Intertie's benefits and an opportunity to recover its sizeable investment. Without sufficient assurances of obtaining power over the In te r t ie , the Companies would not have been able to commit the necessary funds. These concerns were -
evident during the Intertie negotiations. (See, e.g., Daines, CH-1335.) To help assure that each Company could recover its inves tmen t , the Companies devised paragraph 7.02. (Daines, CH-1337; Mitchell, CH-1858.) Under this provision, each Company has a right to purchase a share of Northwest power cont rac ted for by another Company for delivery over the I n te r t ie . A company may purchase an amount equal to its
" Relative Size Percen tage. " These percentages--50 % for PGandE; 4 31 for SCE, and 7% for SDG&E--correspond to the relative investments made by the Companies in the portion of Intertie costs attributable to Northwest power transmission. (Daines, CH-1334.) Sharing under paragraph 7.02 thus provided a hedge against one risk borne by the Companies--that the available power from the . Northwest would be insufficient to fully utilize the Companies ' Intertie capacity. (Mitchell, CH-1359; Daines, CH-13 37. )
Paragraph 7.02 was of special significance to SCE and SDG&E, which feared tha t PGandE's geographic location would give it an advan tage in negotiating power tran sac t ion s with the the Northwest. (Daines, CH-1337; Mitchell, CH-(-)' 1959.) Pa rag r aph 7.02 permits the Companies to stand on 74
O an equal footing, thereby facilitating coordination. (Daines, CH-1337-1338.) Most important, paragraph 7.02 is a reflection oc the " equitable sharing concepts that underlay the Intertie proposals" approved by Congress. (Daines, CH-1338.)
Because of its sharing mechanism, paragraph 7.02 of the Pacific Intertie Agreement has become the focal point for the attack on the Pacific Intertie Agreement by Cities and Staff. These allegations, principally by economists Holmes and Miller, both ignore the purpose of the provision and misconstrue its effects. Cr'oss-examination has demonstrated that there is no hard evidence of any adverse impact from this paragraph. The supposedly pernicious effects of the provision are mere theoretical speculation. By contrast, Companies' testimony regarding the salutary purposes and effects of paragraph 7.02 has not been rebutted.
(i) Objections to paragraph 7.02 are unsound.
Cities' and Staff's initial objection to paragraph 7.02 involves the pricing of Northwest power. Northwest sellers it is alleged, are deprived of the benefits of bid-ding by the three California Companies (Ho lmes , CH-105 6 ) ,
thus artificially depressing the price that Northwest sellers would otherwise obtain. (Holmes, CH-18,990-992.) As cross-examination pointed out, however, the price obtainable by Northwest sellers is not necessarily affected by the sharing provisions. (CH-18, 4 0 5-4 0 8. ) Dr. Holmes was unable to conclude that a situation posing potential adverse ef f ects on competition would be any more likely under paragraph 7.02 than situations with no adverse ef f ects. (CH-19,2 6 2. ) Of course, there was no concrete evidence that paragraph 7.02 has ever had any impact on the price at which power is sold. That is not surprising given the fact that power is sold at regulated rates.
Holmes 's analysis also f ailed to account for tne price effects resulting from the presence of other buyers of Northwest power. These buyers, including other utilities along the WSCC " doughnut" as well as the non-Company Intertie participants within California (CH- 36,06 5 ) , would have an undeniable i.1 fluence on the price for Northwest power, assuming regulation allowed it to move at all. (Johnson, CH-32,971; Moody, CH-32,205-206; Baldwin, CH-36,200-201; 36,219-220.) Holmes made no attempt to evaluate the signi-ficance of the price impact of paragraph 7.02 in the context of these buyers.
If Northwest power prices were shown to be significantly dampened by paragraph 7.02, however, there is no indication tnat the public interest would be at all disserved. Electricity
% :osts for all California utility customers would thereby 75
2 b) ss ce decreased. On the other hand, if prices for Northwest energy ware increased to or toward the " market clearing price" (i.e., the cost of electricity generated by oil),
the profits enjoyed by Northwest utility sellers as a result of the higher prices for their energy sold in California would most likely be passed on to power users in the Northwest in the form of lower retail prices for electricity. According to Dr. Hughes, the Northwest has an abundant supply of natural gas supplies at economically appropriate, but relatively high " market equilibrium" prices. Because of the unique availacility of low-cost electric power in the Northwest, these gas supplies are underused, resulting in a resource misallocation. This misallocation would be exacerbated if the selling price to California buyers was increased, permitting lower retail prices in the Northwest. (CH-34,958-961.) It is not disputed that public policy considerations such as these must be evaluated in deciding whether to take any action that would alter the price for Northwest power.
(C f . Holmes, CH-19,303-304.)
The only other attack made by Cities and Staff on paragraph 7.02 concerns this provision's effect on allocation of Northwest energy supplies among California buyers.
According to Miller, sharing by the Companies on a " fixed percentage basis" means that highest-cost generation in California is "not necessarily" displaced. (CH-2127. )
Under cross-examination, Miller asserted that fixed sharing arrangements such as paragrah 7.02 "do not permit" the Companies to direct Northwest imports to the company with the highest incremental cost of generation, which would result in greater savings in generation costs. (CH-12,599.)
Staf f witness Holmes echoed this view at CH-18,243-245.
- dhat both Holmes and Miller have ignored, however, is that highest cost generation can be displaced by means other than the Pacific Intertie Agreement. In fact, the California Power Pool Agreement provides a mechanism whereby just this result occurs through economy energy transactions among the Companies. (Item by Ref. Q-1, section 8.08.)
As a result of such transactions, the California Companies minimize the differences in their incremental ccsts and thus allocate resources ef ficiently. (Kaprielian, CH-14 45/25-29.) Both Miller and Holmes acknowledged that economy energy transactions could achieve efficient use of resources.
(CH-12, 5 9 9-6 00 ; CH-18,414.)
p d
76 J
O In short, the supposed misallocation of resources stemming frca paragraph 7.02 is nothing more than a theoretical creation of partisan " experts" divorced from the factual context in which the California Companies actually operate.
(ii) Paragraph 7.02 is an economically justified arrancement.
' Not only do Cities' witnesses fail to provide support for their criticisms of paragraph 7.02; they provide little if any response to the Companies' testimony concerning the beneficial aspects of this provision. According to Mr. Guth, a sharing provision like paragraph 7.02 is economically unavoidable given the supply and demand imbalance in surplus energy transactions. (CH-13 20-13 2 4. ) Mr. Guth demonstrates that the rates charged for the bulk of Northwest surplus energy do not reflect a competitive market situation. (CH-1317-1320.) Because BPA markets Federal surplus energy at a low, fixed rate reflecting production costs, demand in California for this energy far exceeds supply. (CH-1320-1321; Ex. 4146.) Because up to 80% of the total surplus energy supply is sold at BPA rates (Ex. 4147), and because of the large differences between hydroelectric energy production costs in the Northwest and thermal generation costs in California, a supply / demand imbalance is virtually unavoidable. (CH-1321.) As a result, some form of allocation to determine who gets what portion of Northwest surplus energy is needed.
(Id.) The existence of preference legislation also contributes to the necessity for an allocation scheme to substitute for competitive market determinations of price and quantity.
'CH-13 21- 2 3. )
l Neither Cities nor Staff contradict these conclu-sions by Company economists. Indeed, Dr. Holme3 agreed I that, where there is a limited supply and fixed price for Northwest power sales "such as does exist with Bonneville's preference power sales," some kind of allocation scheme is appropriate. (CH-18,413-14. ) In his words:
. . . I feel some kind of a sharing arrangement is in order when we are dealing with a commodity which is sold at a fixed price and in limited supply
! and I would not recommended elimination 77
1 1
O of this restriction insofar as that kind of power purchase is concerned.
(CH-18,9 9 0. ) 3 8 Even if the allocation scheme considered above were not necessary for surplus energy transactions over the Intertie, paragraph 7.02 would remain a reasonable provision and an inappropriate one for the Commission to modify.
The benefits this provision conveys f ar outweigh any deleterious aspects alleged in this proceeding.
In addition to the economically appropriate function of allocating a scarce, price controlled commodity, witnesses Nolan Daines and Russell Mitchell have testified at length about the risk-sharing purposes underlying paragraph 7.02.
No witness for either Cities or Staff has contradicted this presentation. Nor have Cities or Staff contradicted Companies' economic testimony which confirmed that contractual provisions with such purposes and effect are both reasonable and by no means extraordinary in the electric utility industry.
San Diego witness Dr. William Hughes, noting the
" substantial element of risk" posed by construction of the Intertie, concluded that the sharing of costs and benefits of commonly developed facilities such as the Intertie " provide an economic efficiency benefit in that they reduce risks, and thereby, the cost of attracting capital." Such sharing follows the " widespread practice in coordinated development of new generating capacity . . ." Prorationing of Intertie l costs and energy purchase opportunities results in an economically 38 The only circumstance in which Dr. Holmes recommends
. the elimination of paragraph 7.02 involves electricity sales where the. price is not subject to fixed rates. (CH-18,990. )
Holmes argues that the price for this energy could be
- competitively set via bidding. (CH-18,99 0 ; see also Miller, CH-2126.) Yet since non-3PA energy represents as little as 20% of the surplus energy sold over the Intertie which is sub-ject to paragraph 7.02, it remains to be demonstrated that paragraph 7.02 has a measurable effect. Moreover, Mr. Guth testifies that, given the large portion of surplus energy transactions priced at BPA rates, the market for Northwest surplus energy as a whole (which is the' relevant submarket affected by paragraph 7.02, in Mr. Guth's opinion) is not a competitive market. (CH-29,612.) In short, paragraph 7.02 cannot result in a competitive market foreclosure.
O 78
beneficial pooling of risks and benefits. The prorationing of energy purchase opportunities is accomplished under paragraph 7.02. (CH-1920-1922; see also CH-34,952-953.)
In essence, the risk-sharing purposes behind paragraph 7.02 as stated by Mr. Daines and Mr. Mitchell are confirmed as economically reasonable and appropriate by Dr. Hughes.
A second economic benefit stemming from this Pacific Intertie Agreement provision is coordination. According to Dr. Martin Johnson, the rules governing the Intertie including paragraph 7.02 serve to control costs associated with Intertie use by means of f acilitating coordination.
(CH-1680.)
In the non-surplus season, as well as others, at other times, scheduling energy purchases is frequently a very timely activity. The split 50-43-7 can reduce the time it would take a ' market' to operate clear and reach a final equilibrium.
(CH-32,963.)
Yet another benefit derives from the ef fect of paragraph 7.02 on the Northwest arrangements whereby sales of energy to California are shared and coordinated a.mong No r th we s t sellers. This pervasive coordination is accomplished by means of the Exportable Energy Agreement (Ex. L-15),
A detailed explanation of these arrangements is provided in the testimonies of Mr. Dawson and Mr. Lisbakken. CH-4284-4325; 4410-4411; 3928; 3965-3967.) Staf f witness Dr. Holmes admitted that a sharing arrangement among buyers in California could " tend to offset the undesirable economic consequences" of such an agreement in the Northwest. (CH-18,6 20. ) Dr. Holmes offered but one alternative remedy to deal with those economic consequences: to disallow the market sharing in the Northwest.
(Id.) Such a measure is, of course, beyond the scope of l this proceeding, if not this Commission's jurisdiction.
(iii) Elimination of paragraph 7.02 will not imorove comoe tit ion.
In calling for the elimination of paragraph 7.02, Cities and Staff have failed to demonstrate tha t compe tit ion in relevant markets will be beneficially af f ected. Initially, Cities and Staff fail to take into account the limited scope of paragraph 7.02's effect. Even within the segment of
()
us Intertie transactions represented by surolus energy sales, there are numerous periods when the amount of Northwest 79
(O
_/
2 energy for export exceeds the Intertie's capacity. (Daines, CH-1338/38-42.) tinder those conditions, the necessary allocation of sales is not ef fected by parag raph 7.02 but rather results directly from the capacity entitlements on the Intertie.
(Guth, CH-1323; Daines, CH-1338.) Accordingly, the elimination of paragraph 7.02 under these conditions would have no ef fect on the price of power sold to the California Companies.
(Hug he s , CH-3 6,0 6 6-0 6 7. )
Even when surplus energy supplies do not fill the Intertie, the effect on competition of removing paragraph 7.02 is at best speculative. Power sales are regulated. Because of the limitations on pricing Northwest power, the main impact of removing paragraph 7.02 could simply be a rearrangement of the quantities of power going to particular utilities.
(CH-3 4,9 36-9 37 ; Holmes, CH-38,928.)
- b. Paracraoh 7.01(e)
Like paragraph 7.02, paragraph 7.01(e) of the Pacific Intertie Agreement helps effectuate the sharing concepts underlying the Intertie program. Aimed at enabling each company to make the maximum possible use of the Intertie so as to recover its investment, paragraph 7.01(e) provides a right of first refusal under which a California Company offers its Intertie transmission capacity to the other Companies before making it available to third parties. (Daines, CH-1340; Mitchell, CH-lS58.) This provision f acilitates the productive utilization of the Intertie for the Companies, singly and as a group (Daines, CH-13 ;0) and helps protect j the reliability of the Companies' systems (Mitchell,.CH-1858). From an economic standpoint, paragraph 7.01(e) is an appropriate method for deciding who gets use of temporarily available Intertie capacity when all entities seeking such
. services are only willing, or are forced by regulation, l to pay the same price. (Gu th , CH-1325. ) For all these reasons, paragraph 7.01(e) is a reasonable provision, closely related to the achievement of coordination benefits. It should therefore be retained.
It is worth noting that paragraph 7.01(e) has never been used. (Daines, CH-1340.) In practice, therefore, it has had no adverse effect, competitive or otherwise, on the public interest.
Apart from its real-world innocuousness, para-graon 7.01(e) has been the subject of stated policies both by PGandE and Edison which further demonstrate that this crovision is not anticompet itive either in purpose or ef f ect.
l
() '?GandE witness Nolan Daines testified that paragraph 7.01(e) l 30 t
l l
(~)
was not intended to make it difficult for the California Companies to enter into additional regional coordination arrangements. (CH-1342.) According to Mr. Daines :
If Edison or San Diego wished to make a portion of the Intertie capacity available to a third party as part of some regional coordination arrangements and if they asked us not to exercise our right of l first refusal, we would take that into consideration [.] [I]f the proposed arrangement would not unduly disrupt the distribution of Intertie benefits in the PGandE service area [,] as a matter of policy, we would agree to that request."
(CH-25,5 47-5 4 8. )
(See also Opening Brief of Edison, June 26, 1979, at 31-32; CH-32,886/9-10.)
In sum, Cities and Staff fail to demonstrate that either paragraph 7.02 or 7.01(e) has untoward economic effects, much less that their elimination will result in desirable economic or other benefits. On the other hand, testimony by Company witnesses establishes that these provisions of the Pacific Intertie Agreement are important ingredients of the Companies' attempt to allocate the risks and benefits of the Intertie venture equitably. Sharing in these costs and benefits enabled the Companies to coordinate the construction and operation of a large and expensive project. The public interest has been served, not thwarted, by these contractual, arrangements.
C. It Would Be Contrary to the Public Interest to Grant Cities Additional Direct Access to the Intertie.
Of the myriad recommendations by Staff and Cities I for modifications to contracts under review in this proceeding,39 perhaps the most prominent are those directed to obtaining transmission service over the Companies' systems--specifically, 39 Tentative Statement of Relief Requested by the Commission Staff (June 22, 1981) (" Staff Statement"); NCPA Statement ot Relief Sought (June 17, 19 81) ("NCPA Statement") ; Relief Sougnt in FERC Doc.<et No. E-7777 by the Cities of Anaheim, f3 Riverside, Colton, and Azusa, California (June 17, 1981)
(J (" Southern Cities Statement").
31
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over the Pacific Intertie. Yet this Commission has no power to order the Companies to wheel for Cities or anyone else in this proceeding. As our prior discussion at section I.B.3.a made clear, the Richmond, Penn Yan, and FP&L cases confirm that proposition and foreclose any possibility of relief.
Nonetheless, the subject of wheeling over the Intertie emerged as a key issue during the proceeding.
Many of the Cities' and Staff's proposed remedies, though superficially directed to distinct contract provisions, had the common objective of requiring the Companies to provide transmission over the Intertie to Cities and others. For example, Cities have sought revisions of various provisions of the Pacific Intertie Agreement "so that California Cities may be given a share of the total Intertie capacity" (Southern Cities Statement at p. 6); modification of other sections of the Pacific Intertie Agreement which allegedly restrict alienability of the Companies' Intertie rights and thus preclude Cities from access to this capacity (Id. at p. 7);
elimination of the provisions in the SMUD, DWR and USBR EHV agreements which allegedly prevent Cities from gaining access to these entities' transmission rights (Id. at 9-10) ;
modification of still other provisions of the Pacific Intertie Agreement so that Cities and others can enjoy access to increases in Intertie capacity (Id. at 11-12); and revocation of "wneeling stipulation" waivers so that the " United States and its designees" can obtain access to the Intertie on a " common carrier" basis. (Id. a t 6. ) Each of these remedies erraneously presumes this Commission has the power to require l
wheeling in this proceeding.40 i
l The subject of compulsory wheeling was also raised by the Presiding Judge in the course of questioning numerous I witnesses about the technical and economic impacts of "re-I allocating" Intertie access f rom the Companies to the Cities.
In light of this questioning and of Cities' multif aceted quests to obtain wneeling as a remedy, we present in the follcwing discussion reasons why wheeling is an inappropriate and unreasonable remedy. Even if this remedy were in the Commission's power to grant, and assuming arcuendo that findings of unjustness and unreasonableness of relevant
.. contract provisions were made, it would not serve the public in te r e s t to order wheeling or to modify contractual provisions
! to accomplish this objective.
40 In addition to the jurisdictional bar, of course, this i Commission cannot tamper with transmission contract provisions unless those crovisions are found unj ust and unreasonable.
() As discussed in the preceding sections, such a finding cannot be made on the basis of the evidence in this proceeding.
32
A O
In brief, Cities already enjoy substantial benefits from the Intertie. Further rights would result in an inequitable distribution of Intertie benefits; would not improve competition; would exacerbate the misallocation of resources which results from the operation of the federal preference laws; and would threaten serious operational and planning difficulties.
- 1. The Cities Already Have Access to More Than a Proportionate Share of the Benefits of the Intertie.
Cities now have at least a proportionate share of the benefits of the Intertie with other customers of PGandE and Edison. In northern California, for exasple, the members of NCPA which purchase wholesale power ' rom PGandE share proportionately la the benefits of PGuitdE's Intertie transactions through the mechanism of fuel and energy cost adjustment clauses. (Daines, CH-25,545-546; Hughes, CH-1918; Russell, CH-4139-4140 and 4142. ) The remaining NCPA members, as customers of the Central Valley Project, obtain benefits of the CVP's use of the Intertie.41 (Daines, CH-1342-1343; Luce, CH-38,584/12-24; 38,591/12-21; Dubrow, CH- 2 4, 36 4-3 6 5. ) NCPA customers of CVP, in fact, obtain proportionately creater benefits from Intertie transactions than PGandE: PGandE's Intertie share is roughly 10% of its customer load, while the effective " draw" by NCPA members on the benefits of CVP's Intertie :apacity is over 30% of their combined load. (Daines, CH-1342-1343; 26,142-143; and
! 26,146.)42 The situation is not dissimilar when considering the existing distribution of benefits from direct Intertie 41 As discussed in section V.D.2, infra, these municipal systems share in Intertie benefits through the mechanism of Contract 2948A. See, generally, Luce, CH-38,584.
42 In 1979, PGandE's load was 13,000 mW; its Intertie capa-city, firm and nonfirm, was 1250 mW. (Daines, CH-1342.)
l NCPA's corresponding load was roughly 600 mW. (Daines, CH-1343.) Currently, NCPA's take from CVP represents approximately nalf of CVP's preference customer allocations. (Daines, l
CH-26,142-143 and 26,146; CH-26,500-501.) CVP uses its Intertie allocation between 80 and 100% cf the time (Russell, CH-4135); generally, all power imported by CVP over the Intertie is either sold directly to the preference customers I or banked with PGandE for later sale to preference customers (Russe ll, CH-4138) . Approximately half of CVP's 400 mW Intertie benefits, therefore, can be viewed as flowing to
() NCPA memcers--roughly one-third NCPA's 1979 load.
83
O access. As of 1979, California's Department of Water Resources has a right to use 300 mW of capacity; the Bureau of Reclamation, 400 mW; and Los Angeles Department of Water and Power, Burbank, Glendale and Pasadena, a total of 700 mW. These public agency uses amount to 40% of the firm capacity of the Intertie.
(Russell, CH-4178.) However, the relative peak loads of these public agencies represent less than 25% of the total peak loads of entities with access to the Intertie.
(Russell, CH-4178-4181. ) Far from curing a disproportionate access to Intertie capacity, Cities' proposed transmission l
remedies, to the extent they seek a transfer of ccpacity 3 f rom the Companies to the Cities, stand to augment public agencies' disproportionately large share of Intertie capacity.
, other measures of Intertie benefits produce a
! similar result. In comparison to the distribution of retail electricity sales in California, the overall distribution of Northwest surplus energy, if anything, is weighted in favor of California public agencies. While the California Power Pool companies have received, in combination, a smaller share of Northwest surplus energy than their share of total state retail sales, LADWP, Glendale, Burbank and Pasadena have shares substantially in excess of their retail sales proportion. (Guth, CH-1325-26 and Ex. 4149.)43 As for total Northwest imports over the Intertie, j the greatest beneficiaries in comparison to total retail l load are the CVP pref arence customers. These public entities, l the majority of which are NCPA members, obtain a significantly i
43 By the same measure, NCPA members shared in the ultimate distribution of Northwest surplus energy in an amount only slightly below their proportion of California retail electric sales. Of the 8 NCPA members for which data is available, the Cities which are PGandE customers have shared in Northwest surplus energy in approximately the same proportien as PGandE's other customers. (See Ex. 4149; 7108; and Miller, CH-35,815-
[ 817.) Although NCPA members which are CVP customers appeared
! to obtain disproportionately low shares of Northwest surplus l energy (Ex. 7108), this result is misleading insofar as the vast majority of Intertie imports made by CVP on behalf I' of pref erence customers involves firm energy, not surplus.
(Daines , CH-26,53 2; Moody, CH-32,060-61) As a result of this low cost energy source from the Northwest, substantial hydroelectric operations in California, and subsidies in the form of freedom from taxation and low financing costs, NCPA-member customers of CVP are able to charge substantially lower oetail rates than PGandE. See Ex. 4502; Guth, CH-1300; Miller, CH-12,815-818; CH ~.3,lS9-190; and 13,193-196; O, see also Keating, CH-1237/25-32.)
84
__ .__ _ _ _ __ ._ _ _ _ . ~ _ ..__ .. -_ _ -
O greater percentage of total Northwest imports into California than twice their percentage of the total California retail load.
In addition to these benefits, Northern Cities now have rights to direct interruptible service over the Intertie.
PGandE has contracted with Cities to provide this service.
(Kaprielian, Helms Tr . 6269.) Edison has offered interruptible Intertie service to Anaheim and Riverside.44 (Mitchell, CF 1812-1813. )
In short, NCPA is no " poor relative" which has been economically excluded f rom the benefits of the Pacific Intertie.
What it seeks in essence is to enhance its already privileged position at the expense of all other customers of PGandE.
This Commission should not countenance such a result.
- 2. Additional Direct Access to the Intertie Will not Improve Cities' Competitive Position.
Cities argue that their lack of direct access to the Intertie is one of the ways by which the Companies restrain competition b;' smaller electricity supply entities in Cald.fornia.
(See, e.g., R. Miller, CH-792.) This alleged lack of access is termed "anticompetitive." As a remedy, Intervenors seek transmission access to the Northwest "on terms that will not impede their competition with the CPP companies . . . .
(R. Miller, CH-983.) Yet the record in this case establishes that competition for bulk power resources in the Northwest will not be improved if Cities are granted additional Intertie access. If Intertie access is dcnated to Cities and unimpeded competition for these resources allowed, it would be un-economic for Cities to outbid the Companies for these resources.
Competition, in short, is not what Cities are after; it is merely a mantle of respectability disguising their true goal--exploitation of the so-called preference laws at the expense of millions of the Companies' customers.
Consider first the segment of Northwest power wnose sale is not affected by the preference clause. For 44 Not only are CVP preference customers disproportionately advantaged by virtue of CVP's imports over the Intertie; they also receive a substantially greater share in prop'ortion to their retail load of California hydroelectric generation. (Ex.
10,001; Guth, Helms Tr. 295.) Other NCPA members, which purchase wnolesale from PGandE, share in California hydro generation s in the same manner as other PGandE customers. (Id.)
l 85
O this non-preference power, Dr. Holmes recommends bidding as a method of allocation. (CH-18,9 9 0. ) But it is virtually indisputable that the California Companies, which would be among the bidders envisioned by Dr. Holmes (CH-18,991) ,
would rationally bid the highest for this energy and therefore would continue to receive it. Mr. Guth explains this situation:
(T]he opportunity costs of generating entities with fossil-fuel capacity are very high and, for those with the oldest units, they are higher still; therefore, they would be willing to pay the most, i.e., they have the highest market demands for the available surplus energy. Non-generating entities such as NCPA cities have a much lower. opportunity cost.
For them the relevant alternative oppor-tunity is to purchase wholesale power which reflects the average generating cost of their supplier, Thus, it is the generating entities for whom incre-mental generating costs are relevant,
' and to the extent that these costs exceed average costs, the opportunity cost is greater than for the NCPA Cities.
i (CH-13 27. )
Even were Cities to construct new generation, this would not change the relative opportunity costs since projects envisioned by Cities would have substantially lower operating
(
costs than the oil-fired units which are p~ art of the California Companies' systems. (Id.) Mr. Guth concludes that:
So that even in the event that such entities were to construct new capacity, I do not believe that they would be successful bidders-in a truly competitive market for Northwest surplus energy, because their demands for such energy would be less at any given market price than those of some competing buyers.
(Id.)
The evidence supporting this economic conclusion is considerable. It is undisputed that the Companies purchase Northwest surplus energy to displace their highest-cost generation. That generation, whose costs constitute the
" marginal" or " incremental" costs on the Companies' systems,
(]) is almost always oil-fired. (Russell, CH-4124.) Both Edison 86
O and PGandE have considerable capacity in high-cost gas and oil units, so that some fossil-fired generation is always
, in operation.45 (See, e.g., CH-31,903; see also Ex. 1033 at 1.) As a result, these units represent the incremental cost figure. (1d.; see also Guth, CH-1327/11-16) On the other hand, Cities have the opportunity to Durchase energy f rom PGandE at system average rates (CH-26,553-555; Guth, CH-1327/16-24), which are normally lower than PGandE's incremental costs. (Russell, CH-4125-4127.)
l for Cities to outbid PGandE for Northwest Itwouldthusbeirratiogal surplus energy Cicies clearly do not want a competitive result to govern Intertie transactions. They would not rationally try to purchase surplus energy from the Northwest unless assured of being able to purchase that energy without having to bid against a utility like PGandE. (Cf . , CH-3891. ) What they seek amounts to undeniably anticompetitive activity--cornering as much preference power as they wish, insulated from possible competition by any private company. Cities' and Staff's economists have gone to great lengths to avoid dealing with the anticompetitive implications of the preference clause.
Nonetheless, there seems to be general agreement that the existence of the preference clause precludes the competitive process which Staff claims should apply on the Intertie. (See, e.g., Russell, CH-3830-33; Holmes , CH-38,917-929 ; Guth, CH-1321-22.) Unless the preference legislation is revoked, Northwest surplus energy cannot be directed to those entities which value it the most. (See Miller , CH-12,096/9 to 12,100/8.
Nowhere is this result made clearer than when the Presiding Judge questioned Staff witness Holmes beginning at CH-38,917:
PRESIDING JUDGE: What I'm trying to
( get at, I believe you testified earlier that
(
l you wanted the Intertie available to all comers so this would enhance competition.
The question is, how does it enhance competition if the preference customer as a matter of fact would be the ones that get the power by law?
45 See, e.g., PGandE FPC Form 1 for 1980, which show that eight steam-electric plants on PGandE's system, with rotal installed capacity of 8,000 mW and with generating costs ranging from 40 mills to 130 mills, were operating virtually full-time.
46 In situations where PGandE's incremantal energy costs may be less than its system average costs, Cities may indeed have an incentive to outbid PGandE for Northwest energy.
But the result would be an inefficient allocation of resources.
() See, generally, Whyte, CH-1569-1570.
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It would substitute another obstacle for those who do not have preference power, namely the legal obstacle to their obtaining it when a preference customer wancs it, is that correct?
THE WITNESS: Insofar as we are talking about the preference power but it still--I would argue that removing this obstacle by opening up the Intertie enhances competition because it removes an obstacle that now prevents some suppliers from having access to that power.
PRESIDING JUDGE: I don't think you I
answered the question. . . . How is it possible for let's say PGandE to compete for a block of power that Bonneville has available if a preference customer also wants that power and has accesa to it?
PGandE then cannot compete, can it? Price competition is not possible.
THE WITNESS: I am not arguing in the testimony that we would increase competition for preference power. I recognize that.
What I am arguing in my testimony [is]
that we remove obstacles which foreclose an existing competitor from having access to the Intertie.
PRESIDING JUDGE: And on the other hand, if you give them access to the extent to which they want the power PGandE and the other non-preference customers are being foreclosed by preference law?
THE WITNESS: That is correct. I stated that the preference laws are a matter of Federal policy and beyond the scope of my testimony.
PRESIDING JUDGE: I understand that but I'm trying to see what is left of your testimony if you do that. It is a fact, is it not, that you would eliminate one obstacle to competition but you would substitute another as far as competition
({}
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between PGandE and a preference customer is concerned?
THE WITNESS: Only insofar as we are talking about access to the preference power. . . .
PRESIDING JUDGE: My point is it seems to me, and I hope you will explain if I misunderstood, it seems you now have a situation in which the preference customers and the non-preference customers cannot compete for the power
( because the preference customers have no access to the power. They cannot get it. That is because they do not have transmission. What you propose to do would still leave us with no competi-tion between the preference customers
[and the non-preference customers] because the preference customers by law would be entitled to everything that is available that they want.
THE WITNESS: I would say that observa-tion is correct, and, again, what I am saying, is that no place in my testimony did I say that was a goal that I was seeking to achieve.
t
- 3 Who got the preference power was beyond the scope of the testimony.
t PRESIDING JUDGE: Yes. But you see what I am getting at or trying to get at, your proposal is the preference customers be given access to the intertie because this will increase competition and my l question is where is the competition? . . . .
l So you are not able to state from what I hear frcm your testimony and tell me if I am incorrect, you are not able to state whether the level of competition would be enhanced by [ admission] of preference customers to the intertie or whether it I
() would be in fact hurt, is that so or not?
l
?
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? . .
O THE WITNESS: That is true to the extent that I have not made the detailed study to allow me to say one way or the other. I generally feel that removing
, competitive obstacles enhances competition and I rest my case of competition on its theore tical merits.
PRESIDING JUDGE: My problem is, while I agree there is a general proposi-tion, it seems to me in the present case if you remove one obstacle of competition namely, the access to the intertie, what you are doing is giving effect to wha t
, is presently [another] obstacle to compe-tition, namely, the [ preference] laws so you are trading one obstacle for another in a practical situation. If I am wrong, I would like to be a&'ised.
THE WITNESS: I cannot disagree with that and a person might take a different approach. For the reasons I stated, I believe this is beyond the scope of my testimony.
(CH- 38 ,917-9 29. )
In short, Cities and Staff have wholly f ailed to meet their burden of showing that access to the Intertie by municipals would enhance competition in rel'evant markets.
( S taf f and Cities' rationale, which Dr. Holmes admits is theoretical only, is lacking in common sense. If all competitive obs tacles (including the pref erence clause) are removed and Cities are given access, Cities will be economically unable to outbid the Companies for Northwest energy. If, on the other hand, cities are given access without altering the preference clause, Cities will be insulated from competition for the resources they most eagerly seek. In no event is the public interest served by granting Cities direct access to the Intertie.
- 3. The Ultimate Economic Eff ect of Cities' Transmission Remedies Is the Transfer of Benefits to the Cities from Customers of the Comoanies.
Because of the priorities under the preference laws, Cities could capture as much Bonneville surplus energy as they wished if they gained direct access to the Pacific O Intertie. (Guth, CH-1328; cf . Russell, CH-3868/21 to 3869/17.)
If, as expected, the supply of Northwest surplus energy 90
O diminishes in the future, an increasing portion of the available supply will be directed to preference entities with Intertie access instead of the Companies, "either because of their growth or because of the establishment of additional municipal distribution entities for the sole purpose of receiving a share of this energy." (Id.) If Cities' Intertie allocation is to be taken from the Companies' existing Intertie entitlements, the retail customers of the Companies would be adversely affected at least to the same extent that the Cities would benefit.
(Guth , CH-1328-1329; Johnson, CH-1688-1690; cf.,
Holmes, CH-19,023-024; Codd, CH-30,632 and 635.)
This transfer of benefits cannot be justified on economic grounds. It has nothing to do with the efficient allocation of resources. (Guth , CH-13 28. ) It will not affect either the price or the quantity of surplus energy transmitted to California during the surplus season. (Johnson, CH-1686-1688.) Nor would it beneficially affect the efficiency of Intertie use or the price of surplus energy in the non-surplus season. (Johnson, CH-1688-1689. ) 45 The primary effect is an involuntary transfer of wealth from the Companies' customers to the Cities, resulting in a further subsidization of Cities' operations. (Guth, CH-1328-1330; Johnson, CH-1691-1692 and CH-33,188-189; see also Russell, CH-4148-4149 and 4158.) The Intertie benefits would shift f rom the many to the few:
, If California public power entities were given absolute priority of access to BPA and the Intertie, the distribution
'. of Intertie net benefits would shift radically away from the present broad sharing of the net benefits to a concen-trated distribution heavily favoring only the minority of customers who buy from preference entities.
l (Hughes, CH-1918.)
45 During the non-surplus season, Cities might, by obtaining access to the Intertie, be inclined to purchase surplus power that would not otherwise be purchased by the Companies.
(Johnson, CH-1690-91.) However, both Northern and Southern Cities are presently in a position to use the Intertie for Both Edison and PGandE have of fered the Cities this purpose.
interruptible use of the Intertie. (CH-1812-1813; CH-1691;
, CH-43,279-280.)
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Not even Mr. Russell attempted to deny this result, when asked whether shifting Intertie capacity from the Companies to the Cities would result in a concentration of cost savings in a smaller group of California users:
2
- As I said, the operations would be the same under my proposed remedies as they would under the present situation except that the savings would go into the pockets of NCPA instead of those of PGandE and so to that extent, yes, I would hope that would be the result.
By " fully concentrate," I mean the savings would be accrued by a fewer number of i
customers under my re12py all other factors remaining th1 Some than would be the case under the present circumstances.
(CH-4143-4144.)
Even over the long run, the possibility of any competitive benefit resulting from Cities' transmission recommendations is exceedingly slender. (Guth, CH-1328 and 1330; Johnson, CH-1692-1694.) In the words of Mr. Guth, "I see no net economic benefit in, in effect, focusing (benefits of access to Northwest surplus energy] on a much smaller group of customers." (CH-13 25. )
According to Dr. Johnson, allocating Intertie capacity to Cities "has nothing to do with economic efficiency." (CH-1691. )
At this point in the analysis, notions of equity must takt up where economics leaves off. (Johnson, CH-1691; Gath, CH-1329.) Here again, relevant considerations militate atrongly against enacting the transmission remedies proposed l by Cities. Under the present arrangements, the respondent l Companies share che benefits of their Intertie purchases
! with all their customers, including wholesale customers such j as Cities. (Johnson, CH-1691; Daines, CH-1341/4-6; Miller, CH-ll,932; see section IV.B.2(c), supra.) Similarly, CVP's Intertie benefits are passed through to NCPA and other preference customers. (Luce, CH-38,584; Daines, CH-26,142-143; Miller, CF-11,922; see section IV.C.1, supra.) On the other hand, the benefits from Cities' proposed access to the Intertie i would not be shared with the Companies--or, for that matter ,
l anybody else. (Johnson, CH-1691-1693.) Moreover, granting
' Intertie access to the Cities stands to confer double benefits.
Cities would have direct access to the Intertie; to the extent they purchased supplemental wholesale power from the Companies at system average rates, they would also benefit proportionately f rom the Companies ' Intertie transactions through the mechanism of the f uel price adj ustment clause. (Datnes, CH-25,545-546 and
({} 26,318-319; Codd, CH-1755.) As discussed in section IV.B.2(c) (i) ,
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supra, direct and indirect benefits which public agencies receive over the Intertie are disproportionately high in comparison to their level of retail sales. Granting additional direct access to Cities will vastly exacerbate that dispropor-tionality to the detriment of the seven million customers of the Companies. (See, generally, Hughes, CH-1918.)
- 4. Cities' Proposed Transmission Remedies Pose Serious Operational and Planning Difficulties.
It is apparent from the discussions above that Cities have failed to make a case that competitive or equitable con-siderations support the transf er of Intertie capacity from Companies to Cities. To the contrary, these considerations the argue quo.
status in f avor In of addition the continuation of, not athe to these factors, change in,ing engineer l impacts of Cities' proposed transmission remedies militate against any transfer of Intertie capacity. Such transfer poses the danger that critical transmission f acilities will be used, not for the benefit of the control area as a whole, but to serve the narrow pecuniary interests of the Cities. As a result, the Companies' service areas could undergo a range of operational difficulties, including an inability to meet total load.
In the best of circumstances, depriving a utility of a resource upon which it has planned and depended is a serious event. Investments have been made and options foregone in reliance upon that resource; expenditures have been made in other facilities to support and utilize the resource.
The existing capacity arrangements on the Intertie are an excellent example. The specific circumstances now existing make any such remedy particularly burdensome.
N In recent years, PGandE has experienced extremely low reserve margins due to factors such as adverse weather conditions and generating facility delays--notably that of Diablo Canyon Nuclear Plant. At the time of Mr. Kaprielian's initial appearance in Washington, PGandE was attempting to purchase substantial amounts of capacity f rom other areas in order to avoid negative margin situations for the summer months.
(Kaprielian, CH-20,630-633.) PGandE's Intertie capacity has been crucial in meeting PGandE's load during these peak months.
(Kaprielian, CH-20,643-644, see also Mitchell, CH-33,358/16-24.) Indeed, PGandE has been forced to pay DWR to forego use of its Intertie entitlement in order to assure sufficient reserves to meet summer load. (Kaprielian, CH-21,391-398. )
In these circumstances, shifting Intertie capacity from PGandE to NCPA could exacerbate PGandE's resource shortages. .
If NCPA used transmission rights for its own economic advantage
() at a time when the area needed capacity--for example, if it 93 1
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r ,
1 imported cheap, non-firm energy rather than capacity, or sold use of its Intertie capacity to a third party outside the area--the northern and central California area would be deprived of firm capacity essential to its needs. (Kapriellan, CH-20,68 2; CH-22,78 2-78 4; CH-20,670-671. ) The nature of NCPA's transactions could also increase the level of spinning reserves in the control area, since 100% spinning reserve would be required to cover the loss of any economy energy imported by NCPA. (CH-20,671-672; 20,682; 32,784-785.) Under present practices, this spinning reserve would be PGandE's responsibility. (CH-22,784-785.) PGandE's spinning reserve obligation could be magnified even if NCPA's share of Intertie capacity came from Edison rather than PGandE. (CH-22,787-788.)
NCPA's use could also result 11. a waste of hydro-f electric resources in the PGandE area. Depending on the time schedule NCPA adopted for importing Northwest surplus energy, northern California hydro resources may have to be " spilled" during low-load periods to avoid hazardous increases in voltage frequency. (Kaprielian, CH-22,785 and 23,271. ) This problem is made more intractable because it cannot be readily anticipated. (CH-23,279-280.) Even if NCPA's Intertie share was taken from Edison rather than PGandE, the possibility of hydro spill remains. (CH-22,789. )
Staf f's own expert witness, Xavier Baldwin, the system planning and power management supervisor for the City of Burbank's Public Service Depar'. ment, confirmed the possibility of adverse effects due to transfer of Intertie capacity. ,
Mr. Baldwin drew a bleak picture of the reliability impacts on Burbank if it were deprived of a portion of its Intertie capacity in favor of Cities. (CH-36,598-601 and 36,169. ) TO Mr. Baldwin, l the only acceptable compensation for such a loss of Burbank's Intertie capacity would be obtaining the equivalent amount of firm capacity and energy. (CH-36,601-602.) It is difficult to see how such an assurance could be given to any of the present entitlement holders on *he Intertie, should reallocation be ordered by this Commission.48 -
48 The position of Cities and Staff on the subject of technical impacts resulting from transfer of Intertie capacity is instructive.
For example, Staff witness Frank Miller testified that only if the transferee of Intertie capacity used its transmission capacity in the same way and under the same constraints as the transferor, i
would there be no engineering reason why the transfer could not occur. (CH-14, 8 21-8 26. ) Otherwise, engineering impacts such as hydro spill would have to be considered. (Id.) NCPA witness Russell was also careful to say that transfer of Intertie capacity would not affect reliability if the transmission facilities were l
(]) used to deliver power in the same manner as before. (CH-16,6 8 3. )
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Other operational drawbacks to a hypothetical !
transfer of Intertie capacity to NCPA include the need for new wholesale rates, billing, and metering arrangements to enable NCPA members to import Northwest power. Negotia-tions to this end would be required between PGandE and NCPA, CVP and its NCPA-member customers, and PGandE and CVP.
(Kapriellan, CH-22,790-792.) Additional difficulties arise to the extent that PGandE may be required to deal with each of the individual cities that make up NCPA rather than NCPA itself, since NCPA does not yet constitute a " system." (Kaprielian, CH-20,588/1-7 and 22,792-793. )
PGandE's planning would also be adversely impacted upon transfer of part of its Intertie entitlement to NCPA.
The Company's planning forecast 3 count on the availability I
of its Intertie capacity to meet its requirements. Reduction of net capacity could accelerate the need for new transmission or generation resources. (Kaprielian, CH-22,789-790; see also, Daines, CH-26,315-317.)
The fundamental issue common to the operational, reliability and planning concerns surrounding the transfer of Intertie capacity is one of responsibility. Mr. Floyd Goss, after concurring in Mr. Kaprielian's description of operating problems associated with Intertie capacicy transfer (CH- 25, 38 5 ) , stressed this icsue in pointing out the need to consider the requirements of the total integrated area rather than its components. (C3-25,387. ) According to Mr. Goss, transmission capacity in Northern California is presently used "in a manner consistent with the reliability and economy of service to Northern California as a whole."
(
(CH-25,383.) This type of operation would be jeopardized if individual utilities in Northern California used transmission capacity accordi:1 to their own "best interests." (Id.)
No crystal ball is available to forecast the precise type of usages NCPA or other California municipalities would make of transferred Intertie capacity. There are indications, however, that the Cities would deem their own economic interests, rather than responsibility to the ar,ea as a whole, to be paramount. NCPA, for example, has made it clear that its primary goal is to obtain the lowest-cost power supply possible.
(Hill, CH-700.) If NCPA faced a choice between conserving !
Northern California hydro resources and reaping substantial I economic benefits by importing Northwest surplus energy j at ir0pportune times, NCPA witness Russell testified that '
he would recommend the latter course. (CH-4230-32 and 7843-44.) NCPA apparently would also consider its use of Intertie capacity for surplus energy purchases to be more important than reliability measures such as spinning reserve use of
() the Intertie. (Russell, CH-15,113-ll4.) Perhaps the most 95
O telling sign of NCPA's insouciance about the interests of the northern California area as a whole was afforded by Mr. Russell, in commenting ca the prospect of higher overall supply costs as a result of competitive bidding for northwest imports: . . . I do not think any small utility takes the responsibilities of saving their cost (sic, the costs]
to the region as a whole." (CH-3890-91.)
Perhaps Cities' emphasis on economic benefit ahead of reliability and resource conservation is inevitable.
Cities do not have the same responsibility for reliability as PGandE, Edison and San Diego. As discussed by Mr. Kaprielian:
[ Cities) are not in a position to fully observe and comprehend the bigger problem
/ of operating the control area as against receiving power at a substation and distributing to customers. Those that distribute do not see the problems asso-ciated with reliability of the bulk system. What I am saying is that it becomes apparent not in what people or what systems say but where they are willing to spend their money and their actions in specific situations and I have identified several specific situa-
, tions . . . involving Palo Alto and l Santa Clara whion to me suggest that i
they don't have the same concern for the reliability of the area that we have." (Kaprielian, CH-23,511-512. )
( The ultimate responsibility for reliably meeting the load requirements of the control area belongs to the three Companies, not to the Intervenors. (Kaprielian, CH-20,991-998 and 21,016-17; Mitchell, CH-33,358 and 33,361. ) Transferring i
Intertie capacity from the Companies to the Cities would greatly affecc the distribution of economic benefits from Northwest power, yet it would not bring with it a corresponding shift in the allocation of ultimate responsibility to serve load. (See, e.g., CH-32,097-99.) It would be a disservice to the public interest to create such an imbalance in the benefits and burdens of power system operations in California by reallocating free use of Intertie capacity from the Companies to the Cities.
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V. CONTRACT 2948A SERVES THE PUBLIC INTEREST; ITS MODIFICATICN IS NOT JUSTIFIED BY THE EVIDENCE AND IS BEYOND THIS COMMISSION'S JURISDICTION.
A. An Overview.
The federal government operates a large flood control, irrigation and power project in California known as the Central Valley Project ("CVP"). For most of the relevar.t period, the name of the agency responsible for the project was the United States Bureau of Reclamation ("USBR"), a part of the Department of the Interior (" Interior"). Contract 2948A is a complex arrangement which, in simple terms, governs the integrated operation of the PGandE and CVP electric generation systems,.
That contract is discussed in detail in this section of the
( brief.
The record establishes that integration of the CVP and PGandE electric generation systems through Contract 2948A results in a far better, more efficient use of CVP hydroelectric resources than would have occurred without such a contract.
Even Cities principal advocates, Russell and Miller, acknowledged this fact. (Miller, CH-824/35-36; Russell, CH-657/16-17.) The record also establishes that a substantial part of the increase in the usefulness of CVP hydro resources resulting from their integration redounds to the benefit of CVP and its customers.
To the extent that any benefits from the arrangement go to PGandE, those benefits are passed through the mechanism of regulated rates to the millions of customers served by PGandE.
(See Codd, CH-1752/51 to CH-1755/12.) Given these very rudimentary
- i. and acknowledged facts, the contract serves the public interest
, and there is no " unequivocal public necessity" to change it.
(
As demonstrated below, an objective evaluation of the evidence leads to the conclusion that CVP benefits more i
from Contract 2948A than does PGandE. However, the issue of who got what benefit is largely irrelevant. As explained fully in Section I.B.1, above, it is not this Commission's responsibility to revise coordination agreements to achieve an optimum of fairness or efficiency. The principles underlying the Sierra-Mobile doctrine preclude it from doing so. Those principles apply with special force where the Commission has previously reviewed the arrangement (see section III.B.6.c.,
above) and it has operated successfully for a number of years.
The record on Contract 2948A, reviewed in this section, contains no competent evidence that the contract has had any significant anticompetitive effect in any relevant market. Indeed, the evidence shows that the contract has substantially increased competition by expanding the ability
() of CVP to sell firm power in " competition" with PGandE.
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O Some knowledge of the historical context in which the contract was negotiated is helpful in understanding why the claims that Contract 2948A is a datriment to or
" restricts" CVP are unfounded. The history of the Intertie negotiations reviewed above makes clear that the government had the upper hand in negotiating the contract. Additional concessions were extracted from PGandE after the Secretary of the Interior had negotiated what he had found to be a very favorable arrangement. (See section III B.4.b, suora.) These facts underscore the basic reasonableness of the agreement.
The historical record also establishes that the essential features of Contract 2948A were dictated by Congress, and that the contract itself was carefully negotiated by the Intarior Department to comply with the Congressional directives.
The contract is therefore immunized from modification under the principles discussed at section III.A., suora.
The case presented by Cities and Staff regarding Contract 2948A provides an archetypal example of the basic flaws in the approach of both. Staff seeks to " improve" the contract to make it procompetitive. (See Holmes CH-2280/14-34.) Cities seek to renegotiate an already f avorable arrangement through litigation, characteristically attacking PGandE's historical motives in negotiating the contract but providing no quantitive evaluation of the real impact of the contract in California today. Such approaches provide no basis, much less an unequivocal public necessity to modify the contract.
Finally, the remedies sought are meritless. Staff has the temerity to suggest contract revisions which would require PGandE to provide virtually unlimited support to
(.'
CVP loads and unlimited " banking" of power from any source, in spite of the fact that no competent witness even considered such proposals. Cities and Staff both seek modifications, including changes in PGandE's wheeling arrangements, which the Commission has no power to grant. See section I.B.3.a, suora.
For the most part, the provisions which are sought to be elim-iminated or modified actually improve the climate for competition.
In any event, they are directly related to the provision of services necessary to the achievement of coordination benefits which the Federal Power Act Section 202 seeks to encourage. Such provisions ought not be changed. (See section I.B.3.b, suora.)
B. The Central Valley Project and Its Integration Contract with PGandE.
There are descriptions of the Central Valley Project in the record and in published court opinions. (See, e.c.,
Anderson, CH-2191/38-CH-2194/22; Keating, CH-1235/34-CH-1236/2;
{} Ivanhoe Irrication Dist. v. McCracken, 357 U.S. 275, 280-84 98
(1958); City of Santa Clara v. Kleppe, 418 F. Supp. 1243, 1246-50 (N.D. Cal. 1976), modified, 428 F. Supp. 315 (N.D. Cal. 1976),
aff'd in part, rev'd in part, and remanded sub ncm. City of Santa Clara v. Andrus, 572 F.2d 660 (9th Cir.), cert.
denied, 439 U.S. 859 (1978).) We shall mention only tne more salient features of the Project.
The Central Valley Basin is one of the most distinctive economic and topographic features of California. The Besin is formed by two parallel mountain ranges running south from the California-Oregon border for approximately 500 miles. (Ivanhoe Irrigation Dist. v. McCracken, supra, 357 U.S. at 230.) The mountain ranges converge at the north and south thereby forming the perimeter . The Basin averages 120 miles in width and contains approximately a third of the surface area of California.
I Two extensive river systams drain the Central Valley, the Sacramento and the San Joaquin. (Id.) Melting snows and rainfall in the mountains to the east of the Central Valley feed these river systems. Rainfall in the Central Valley itself is scant making irrigation essential. (357 U.S. at 281.)
The CVP is a multipurpose federal reclamation project located within the Basin. " Flood control and irrigation head the list of objectives to be achieved by the Projecc." (Keating, CH-1235/42-43.) The main objective of the CVP is to regulate the flow of water from the mountains through the Valley's river systems in order to protect the Valley lands from floods, and provide a supply of water for municipal and irrigation purposes.
(357 U.S. at 281.) Several dams and large storage reservoirs have been built to accomplish this. (Id. at 282-83.) Some of the dams and reservoirs have power facilities associated with them (Anderson, CH-2191/41 to CH-2193/12), and this has k allowed CVP to produce electric power for sale. (357 U.S. at 283.) CVP recovers only a small fraction of the cost of the project from water sales. (Id.) Thus, electric power sales are the single most important means of maintaining the financial integrity of the project. (Keating, CH-1238/45-47.)
As a seller of elect . city, CVP is limited by law in two pertinent ways and by nature in at least one.
First, by law CVP has irrigation, flood control and other reclamation functions to perform before it can release water from its reservoirs for power production purposes. (Rivers and Harbors Act of 1937 S 2, 16 U.S.C.A. S 695d (1974) (CVP "shall be used, first, for river regulation, improvement of navigation, and flood control; second, for irrigation and domestic uses; and third, for power.") Thus, CVP is not free to release water in the way that would maximize the production of electric power. Staff witness Anderson described the situation this way: "Since Reclamation Law requires that 99
O CVP reservoirs be operated with major emphasis on meeting water demands associated with the other multipurpose functions, the generation of electric power is for the most part a by-product." (Anderson, CH-2193/26-30.) Second, once power is generated, CVP's sales of it is limited by the f act that
" electric power generated by CVP powerplants is dedicated first to meeting the power requirements of the project facilities, such as pumping power at Tracy pumping plant . . . ." (Anderson, CH-2193/35-43.) Only the power remaining af ter serving
- project needs is available to be sold commercially.
The natural limitation arises from the fact that the CVP plants are hydroelectric plants. Because the amount of water available to operate the plants varies from season to season within the year, and from year to year, the amount
( of firm power which the project can produce continuously is far less than the amount of installed generation capacity. While this is true of most hydroelectric systems, it is particularly acute in California where there is virtually no precipitation in the mountains throughout the summer and early fall with precipitation largely confined to the winter months.4b 49 The flow of water into the CVF's reservoirs is generally not sufficient to support the firm load of its 77 customers through an entire year. On the average, CVP is energy deficient during the f all and winter when river flows are relatively low. (46 Fed. Reg. 21522 (June 2, 1981).) CVP has only enough water to generate power at a 40% average annual capacity factor, whereas its preference customers have about a 60%
annual load factor on the average. CVP's inability to produce firm power for sale in amounts large enough to make power
( production the " paying partner" of irrigation is also due l to che f act that its system has a number of run-of-the-river hydro plants with no downstream regulation to permit CVP to produce firm power for sale without interfering with its irrigation function. (Ex. 4040 at 35; Keating, CH-1235/37 to CH-1236/2.) Even if CVP is producing power when CVP's customers can use it, they may not be able to buy it because CVP uses its power first to run the CVP pumps. (Anderson, CH-2193/35-43.) Only the remaining power is available for commercial sale. (Id.)
For the past several years CVP has imported 400 MW of thermally generated power from the Pacific MW at an 80%
l load factor to help serve CVP customer demand. (Anderson, CH-2207/32-40.) The contract making this possible expired December 31, 1981. (Anderson, CH-2201/24. ) It was not renewed or replaced. However, as explained below, Contract 2948A obligates PGandE to supply CVP with the dif f erence Os between CVP customer demand and the output of CVP's resources.
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()
Integration of the electric facilities of CVP with those of PGandE of fsets much of the adverse ef fect of these limits on the commercial value of power produced
, by CVP. Contract 2948A, which establishes and governs this integrated arrangement provides, among other things, (1) that PGandE will support the CVP hydroelectric plants (Item by Ref. U-1, Art. 21), thereby enabling the federal government to market more than twice the amount of power it otherwise could (Keating, CH-1236/36 to CH-1237/17; Ex. 4040 at 41);
(2) that POandE will transmit power for CVP to its customers
- (Item by Ref. U-1, Art. 24); and (3) that PGandE will " bank" surplus CVP power in capacity and energy accounts (Item by Ref. U-1, Art. 20). The bank accounts enable CVP to "even out" monthly, seasonal and year-to-year variations in power production, and their importance can hardly be I overstated. PGandE provides, in effect, a huge " storage I battery" for CVP. As will be quickly perceived, this solves for CVP all those economic and operational problems associated with meeting peak load or building excess capacity; electric utilities in general could only envy such a device.
As shown below, the bank accounts were also intended to allow CVP to build up a surplus in the bank in the early years of operation so as to enable it to serve the long term needs of customers it selects.
By virtue of its contract with PGandE, CVP is today able to provide firm power to 77 preference customers located in northern and central California, see 45 Fed. Req.
81865 (December 12, 1980). Currently, the maximum simultaneous demand served by CVP under contracts with its preference customers is 1050 mW, but CVP has the option and has indicated
[ ( its intention to market another 102 mW pursuant to Contract l 2948A. (Item by Ref. N-ll; Daines, CH-25,982/15-18; 46 Fed. Reg. 51229 (October 16, 1981).) (Id.) Without Contract 2948A, CVP could only serve a half or less of this customer
- load. (Ex. 4040 at 35-36 and 45-46; Keating, CH-1236/10 to CH-1237/32.)
C. Benefits of Contract 2948A to CVP.
Contract 2948A and the coordination arrangement it specifies provide substantial benefits to CVP and have made it a more effective in marketing power. For CVP the signal feature of the contract is that it solves CVP's predicament of being first, foremost and essentially a large irrigation project unable to produce an appreciable amount I of firm electric power for sale, yet in need of financing i itself through power sales. (Keating, CH-1235/6 to CH-1237/32.)
O 101
- _ . ~ _ _ _ _ _ _ _ _ _
O CVP's obligations with respect to financing this vast irrigation and flood control project stem from a federal statute which requires that the cost of constructing the project be recovered from its customers within 50 years from the date of the lastest addition to the project.
(Reclamation Project Act of 1939, S 9(d), 43 U.S.C.A. S 485h(d)
(1964).) That same law limits CVP's ability to finance the project through sales of water. In essence, it provides that CVP can only charge its water purchasers what they can afford to pay. (Id. at S 9(d) (2), 43 U.S.C.A. S 485h(d) (2);
Keating, CH-27,331/14-17.) In practice they pay very little; most of CVP's water customers signed 40 year contracts with CVP in the mid-1950's to purchase water at S2.00 or less an acre foot. (Keating, CH-27,331/20-21; Hearings before a Subcommittee of the House Committee on Government Operations,
/. 93d Cong. 2d Sess. at 43 (January 22-23, 1974).) The bulk of the cost of the project must be made up out of revenues from power sales. (Keating, CH-27,331/17-18.) Historically, so much of the cost of the project has had to come from power sales that, although subordinate to the irrigation function of the project, power production has been referred to by CVP officials as "the paying partner of irrigation."
(Keating , CH-27,331/13-14. )
In 1964, when the negotiation of Contract 2948A began, the government estimated that it could only manage firm power sales totalling less than half of what it currently is able to sell (500 mW vs. 1152 mW). (Ex. 4040 at 35.)
It was anticipated that pumping requirements would increase and the power for sale would decrease in both quantity and quality. Thus, in 1964 Secretary Udall reported to the Congress that in the year 2005 CVP could only expect to market 300 mW of firm power and, perhaps, some peaking capacity if there was a market for it. (Id.; Keating, CH-1238/9-40.) The quantity and quality of pcwer CVP was able to produce on its own throughout the repayment period was not deemed to be of sufficient commercial value to amortize the cost of the project through power sales. (Keating, CH-1236/39 to CE-1237/32.) The critical problem, as explained by CVP's chief negotiator, was that the less firm power CVP could l market, the higher the per unit price had to be in order l to meet the statutory time frame for amortizing the cost of the project. (Keating, CH-1236/47-52. ) But the higher the price, the less attractive to buyers. (Keating, CH-1237/19-32.) The result would be that CVP would not sell whatever surplus power it had and the plan to make " power the paying partner of irrigation" would never succeed.
Contract 2948A enabled the government to make f
" power the paying partner of irrigation." Witnesses spontored
() by PGandE, Staff and Cities all agreed the Contract obligates l 102
x_
A
()
PGandE to provide CVP with three valuable services: (1) backup support for CVP hydroelectric generating plants; (2) load support for the CVP preference customer load level; and (3) transmission service to C and CVP pref erence customers.}g loads,( Ande rboth son, project pumps CH-219 4/4 0-4 6 ;
Keating, CH-12 37/44 to CH-12 38/40; Russell, CH-657/13-16.)
Mr. Feating explained the benefit CVP derives from PGandE's support obligation as follows:
Since the Contract substantially increases the amount of firm power that CVP can sell, it has the effect of reducing the per unit cost of CVP power by allowing the repayment costs to be spread over a larger number of units of firm power.
(CH-1237/25-29.)
Staff witness Anderson added this elaboration:
As [PGandE's witness] Mr. Keating points out in his testimony, most of CVP hydroelectric plants are designed to operate as peaking plants. As such they operate , for the most part, during peak load periods and are shutdown during offpeak periods. Since CVP customer load (both project pumping and preterence customers) require power at times of the day when most of CVP hydroelectric plants are shutdown, a firming power supply is required during those periods
(
(the offpeak periods when most of CVP hydroelectric plants are shut down) .
- The required firm support . . . is fur-l nishied by PG&E under terms of Contract 29 48 A.
(CH-2195/50 to CH-2196/10. )
50 Should an emergency situation arise on the CVP system, the Contract also obligates PGandE, within certain limits, to "make available to the United States . . . capacity and energy . . . for loads of the Project or (CVP customer load within PGandE's service territory] being served from Project facilities." (Item by Ref. U-1, Art. 18 (1) (2) . )
O 103
O Not only is PGandE obligated to provide firming cupport to CVP, it does so at prices which are very favorable to CVP. The charge for energy delivered from Energy Account No. 1 is " '105 mills. (Item by Ref. U-1, Art. 22 (c) (2) (i) . )
One goverras.4t official testified that this was the lowest price paid by the government for energy anywhere in the United States. (Hood, CH-36,506/6-ll.) Fifteen billion kWh of energy were credited to CVP in Energy Account No. 1 when the Contract was signed. (Hood, CH-36,506/2-6; Anderson, CH-2197/3-4.) The evidence indicated that there is a sufficient quantity of energy remaining in the account to satisfy CVP's anticipa',ed deficiencies at least through 1986. (Anderson, CH-2198~5-11.) Furthermore, a second energy account was opened for CVP at the beginning of Contract 2948A's term
, to accept surplus CVP energy from both its own generation
( and that imported from the Northwest. (Item by Ref. U-1, Art. 20(c).) The Contract provides that the rate charged CVP for withdrawing energy from this account "will be based on a charge that reflects the rate paid by PGandE plus the change in PGandE's production cost between time of deposit and time of withdrawal, plus a service charge." (Anderson, CH-2198/43-46; Item by Ref. U-1, Art. 22 (c) (2) (ii) . )
Under the Contract no charge is made by PGandE for standby service provided in the event of an emergency on the CVP system, other than that CVP return the energy "at the earliest practicable time." (Item by Ref. U-1, Art. 18 (d ) . ) There is also no charge for energy supplied by PGandE to CVP pumps as long as an equivalent amount of energy is returned to PGandE by year's end. If not, CVP L pays PGandE only 3 mills /kWh. (Item by Ref. U-1, Art. 20 (d) (3)-(4) ; Anderson, CH-2199/24-30.)
(
A unique benefit of the Contract is its provision for a capacity bank account (Item by Ref. U-1, Ar t . 20(a)),
into which CVP " deposited" surplus firm " capacity" from its plants and imports. (Anderson, CH-2200/31-43.) As explained below, this arrangement was one key that made it possible for CVP to adopt a plan to market 1050 mW of firm power for a long term to selected preference customers.
The capacity bank arrangement thus substantially enhanced the commercial value of CVP power.
There is no lack of evidence that the United States has and still does derive great value from the firming, banking and support services it obtains from PGandE.
Exhibit 4188, an internal memorandum, provides insight on what benefits the government anticipated obtaining as it prepared to execute Contract 2948A. It reported on
(} what benefits CVP had already derived from the then existing 104
L .
O integration arrangement with PGandE in anticipation of the new arrangement. The memo asked the question: "[W] hat value this [PGandE] support has been to the CVP(?]" Among other things it concluded: (1) that PGandE's support " enabled the CVP to sell as firm energy . . . a larger block of power than would have been possible without the support"; (2) that this had meant "$9 per kilowatt in annual revenues for the amount of support provided" or "about $2-1/2 million more revenue per year for the CVP than would have been possible without the firming support"; (3) that without the support which PGandE had already provided the CVP would fail to meet its repayment schedule by $142 million and could not have built the Trinity River Division dams, reservoirs and powerplants , the Sacramento Canals or any subsequent f acilities; and (4) that without PGandE's support the CVP would only I- consist of the Shasta, Folsom, Contra Costa, Delta-Mendota and Friant f acilities, could only irrigate 1.6 million acres instead of 3.2 million acres, would only have a nameplate generating capacity of 629.5 mW instead of 1656 mW and could only market 190 mW of firm power instead of 875 mW.
Seven years later in 1973 the Regional Director of CVP prepared another analysis of the benefits accruing to CVP from Contract 29 48A. (Ex. 4190.) In it, he concluded that in light of the then present energy crisis and assuming an extremely conservative average market value of 9 mills /kwh between 1973-1985, the CVP would save about $77 million in operating expenses by virtue of the existence of Energy Account No. 1 alone. (Ex. 4190 at 3.) He further concluded that the CVP could only serve a commercial load of 525 mW without support like that provided under Contract 2948A
, and that the reliability of that power would be less than
( under Contract 2948A. (Id. at 4.) He determined that in order to raise the reIIability of service to an acceptable l level, CVP would have to reduce its commercial load to 425 mW with a consequent loss of almost $2 million annually.
(Id . a t 4-5. ) The bank accounts were viewed as providing bo th the opportunity to enter into long-term contracts with electric customers and a means to convert cheap NW dump energy purchased by CVP into firm power to market to its l customers. (Id . a t 4, 6-7. ) Contract 29 48A was also deemed to alleviate operating and administrative burdens that would otherwise f all to CVP in the absence of Contract 2948A.
(Id. at 5-7.)
The government's satisf action with Contract 2948 A has not diminished. In a recent issue of the Federal Register the government described Contract 2948A as "a key f acet" of i
its power marketing program:
O 105
e O
Contract 2948A is a key facet of the Sacramento Area Office's power marketing program. The entire contract and its integration and banking arrangements are very complex. Contract 2948A was negotiated in conjunction with the building of the Pacific Northwest-Southwest Intertie and Congress extensively reviewed it i
prior to appropriating funds for the intertie. The contract which was signed in 1967 provides much valued firming and support of Western's load levels by PGandE. Without such support, Western's hydroelectric resources can only support 500 to 600 mW of commercial loads.
( (Under] Contract 2948A, the current 1,050 mW or proposed 1,152 mW load level
, will be supported from the capacity and energy bank accounts. When Western's CVP generation and imported power from the Centralia coal plant. in Washington are inadequate to meet customer demands, i
PGandE sells to Western capacity and i
energy from these accounts to make up for the deficits. Western's contract for power from the Centralia coal plant expires on December 31, 1981. The loss of Centralia power means that the accounts will be called upon continuously for support in the future, u
46 Fed. Reg. 51227-28 (Oct. 16, 1981)
( (quoting a letter from Ass't Secretary of Energy Joseph Tribble to Nevada's Senate and Congressional representatives--Paul Laxalt, James Santini and Howard Canon; emphasis added.).
- D. Procompetitive Benefits to CVP's Customers.
The record shows that all CVP's 77 preference power customers materially benefit from Contract 2948A, although some benefit more than others. The evidence demon-strates that for all of CVP's preference customers Contract 2948A represents the means by which they share in the benefits associated with CVP's 400 mW entitlement to the Intertie.
It also shows that Contract 2948A affords CVP's preference customers at least one source of low-cost firm power for 40 years. In addition, the record shows that the contract af forded a group of non-generating municipal customers of
() CVP an extraordinary benefit. It made possible contracts 106
O with CVP requiring CVP to provide enough low-cost power to satisfy their full requirements until 1980 and then to maintain at least that level of service until 2005 when Contract 2948A expired. An examination of these benefits illustrates the extent to which Contract 2948A improves
" competition."
- 1. 2948A Doubled CVP's Firm Power Sales.
l Articles 14 and 20 are particularly beneficial to all CVP preference customers. Article 14 separates PGandE's obligation to support CVP's firm power sales from CVP's own load carrying capability and sets PGandE's obligation to support CVP sales at 1050 mW (planned to be increased
(
' to 115 2 mW) . As noted above, see page 105, sup r a , CVP could not carry a load even half that size without the benefit of a firming source like Contract 2948A. As a result, there is more low-cost CVP power for CVP to sell and its preference customers to buy. (Kuder, CH-1395/ll-22.) Articles 20(a) and (c), the bank account provisions of the Contract, help maintain this steady supply of low cost power for CVP's pref erence customers. Since electric capacity is only available on an instantaneous basis, any surplus capacity CVP has would disappear, its benefits lost forever, if Contract 29 48 A 's bank accounts were not available. Mr. Anderson of the CVP described the capacity bank account feature of the Contract as " unique". (Anderson, CH-2200/24-25. )
- 2. 2948A Provides CVP Customers with Indirect Intertie Access.
(' Contract 2948A also spreads the benefit of low-cost NW power to CVP's customers. The history reviewed above demonstrates that there was a conscious federal policy followed in the Intertie negotiations to prevent non-generating municipal systems from having direct transmission access to the Intertie. An alternative form of access, through CVP, was developed to extend the benefits of Intertie access to CVP customers without the disadvantages of direct trans-mir.:le" service. This form of access was what the Cities wan ted ; they had no interest in anything other than firm power at prices lower than that available in California.
Contract 2 9 4 8 .". , in conjunction with Contract 2947A, met this objective.
The evidence shows that during the Intertie nego-tiatio:ts the Cities wrote and telegraphed government negotiators insisting that the drafts of Contract 2948A include provisions whereby the benefits of CVP's entitlement to the Intertie would be shared with them. (Ex. 4021.)
D ss This was accomplished.
The municipalities successfully urged the government negotiators 107
O to " establish a condition whereby surplus northwest energy l transmitted over an intertie is permitted to be placed in the Central Valley Project energy bank." (Ex. 4021 at 1, 3, 4.) NCMEA, the predecessor of NCPA, telegraphed the Bureau of Reclamation to inform the Bureau that NCMEA "enthusias-tically supports the principle whereby surplus Northern Energy transmitted over an intertie be permitted to be placed in the Central Valley Project Energy Bank." (Id. at 5.)
Mr. Hoyt, now with Anaheim but then a representative of Santa Clara, testified that Cities believed they stood to benefit if such a provision were incorporated in 2948A.
(Hoyt, CH-37,961/12 to CH-37,962/3.) Other witresses testified that representatives of BPA and the Bureau of Reclamation intended that the customers of CVP benefit from the Intertie project (Dubrow, CH-1531/25-35; Luce, CH-38,612/9 to CH-38,613/15;
( Keating, CH-27,310/15 to CH-27,311/15) and that substantial time was given to developing an arrangement for CVP customers to share in those benefits. (Goss, CH-24,799-802; Daines, CH-26,304/15-20).
Contract 2948A, as executed, accomplishes what the Cities desired by providing that PGandE will accept up to 400 mW of capacity and associated energy imported by CVP from the NW when specified load factor criteria are met and accept all dump NW energy when it can be used beneficially in the PGandE service area. (Item by Ref. U-1, Arts. 19(d) and (e).) The Contract also provides for energy and capacity bank accounts to reflect the accumulated deposits of NW energy and capacity by the United States. (Item by Ref.
U-1, Arts. 20(a) and (c).) Thus, when CVP can't use NW power immediately to serve its own customers, including Cities, CVP can bank it with PGandE and use it at some future
( date to serve them, thereby preserving the benefit of its l low cost until there is a use for it.
These provisions carried the function of " bank accounts" f ar beyond the engineering concepts which led to their development. Bank accounts typically act as mechanisms for accounting for the uneven energy production of hydroelectric plants and matching the output of such plants to a firm load. Thus, the accounts are built up when hydro production is high and drawn down when production is low. Contract 2948A, on the other hand, allowed banking of thermal power, such as that from the Centralia coal plant located in the State of Washington. Clearly, there was no inherent necessity for such an arrangement. It was purely a negotiated benefit favoring CVP customers, preserving i for them the benefit of all CVP power generated at any time.
(Ex. 4040 at 36; 44-45.) One former government official who testified described this concept of banking power generated O in the Northwest as going "far beyond any integrated operation L 108
e O
arrangement previously offered to the Bureau [of Reclamation. ] "
(Dubrow, CH-1531/45-48.) Neither Staff nor Cities of f ered evidence to the contrary. Indeed, Cities' witnesses acknowledged they benefit from it. (Russell, CH-4138-39; Miller, CH-11,671/1-6.)
- 3. 2948A Enabled CVP Customers to Be Supplied with Long-Term, Firm, Low-Cost Power.
For several of the 77 CVP pref erence customers there is an additional benefit derived from Contract 29 48 A.
The municipal utility systems which were CVP customers in 1964, with the exception of SMUD which received a fixed allocation of more than 300 mW of CVP power for 40 years, were given an opportunity to purchase enough low-cost CVP power to serve their load growth until 1980 and then to maintain that level of CVP service until Contract 29 48A expired in 2005. It was intended that a long term, low-cost supply, including an allowance for their load growth until 1980, would enable these cities to develop their own generation.
The cities which received this f avored treatment were Pa-Alto, Biggs, Gridley, Redding and Roseville. (Keating, CH-1239/26-33.) Article 14 of Contract 2948A was a key to carrying out this plan. PGandE there agreed to separate its obligation to support CVP's power sales from the actual .
load carrying capability of CVP's plants. As a result, the government was able to negotiate for a support obligation from pGandE large enough to permit C7P to enter all-requirements contracts with these cities. Mr. Keating, explained how the extent of PGandE's obligation was set at 1050 mW:
t The 1050 MW figure came about in this way. The Secretary of the Interior de termined that if load growth could be assured for certain municipalities until 1980, they would have ample time to make alternative arrangements for an additional power supply for the time when they could no longer get all their power from the CVP. Having selected 1980 as the target date and with some at sistance f rom customers, I estimated the amount by which the Customer Load Level should be raised each year through 1980 to track the gradual increase in the interim load growth of certain of the CVP's 1964 customers. We determined that, if these customers' loads grew to 1080 megawatts by 198 0, a maximum
., Customer Load Level of 1050 megwatts l
109
O would be sufficient to serve those loads because of diversity. The Contract obligates PGandE to provide firming support for up to 1050 MW for the simultaneous demand of these CVP customers.
(Keating, CH-1241/1-18.)
It would seem that the government's expectation was fulfilled; two of the so-called " load growth" Cities are participants in an NCPA geothermal project and others have plans for developing or participating in additional projects on their own or through NCPA. (Ex. 4500 at 111 and 24-25; Fontes, Helms Tr. 4361/1-20; 4432/1-8; 4434/16 to 4436/10; 4444/9 to 4446/7; 4461/18 to 4462/16.) As we note in sec-( tion V.G.l. below, Staf f's mischaracterization of the Article 14 customer load level as a " restriction" on CVP's marketing ability ignores this background and misconceives the effect of this provision.
The only conclusion that can be drawn is that all 77 preference customers of the CVP benefit from CVP's arrangement with PGandE. There are several analyses which are part of the record which quantify the benefits to CVP's customers as "at least $340 million. " (See, e.g., Ex. 4039 at 9 and Ex. 4224 at 1.) These analyses were performed in the mid-1960's before the energy crisis and reflect very conservative estimates of the cost of producing thermal power. As might be expected a later analysis (Ex. 4190) sets the benefits at S453, more than $100 million higher.
(Ex. 4190 at 4). If the same analyses were performed
( today, it would set the benefits to CVP customers at an even larger figure. The precise figure is not important.
The point is that CVP's preference customers save substantial l dollars as a result of Contract 2948A and, according to Cities economis t Ralph Miller, it necessarily follows that the CVP contract improved competition in northern and central l California. (CH-13,358/7 to CH-13,359/3. )
l E.
Cities and Staff Have Failed to .
Demonstrate That Contract 2948 A Has a l
Significant Anticomoetitive Imoact.
- Government officers and economic experts alike testified that Contract 2948A augments competition rather than diminishes it. The economist most experienced in the industry, PGandE's witness Mr. Gerber, testified when asked whether Contract 2948 A was anticompetitive
( No. Without the support off ered in
() Contract 2948A, a hydro-only system
. 110
e =
such as CVP would not be as significant a contender in the requirements market.
As I have explained previously an economist weighs the costs and benefits of a given contract to determine whether it is economically desirable. Benefits and costs are measured by their centributions to efficiency. The contract between CVP and PG&E not only achieves savings through coordination, but also provides increased opportunity for competition by strengthening CVP's position as a competitor in the market for long-term capacity and energy. In my judgment,
/
therefore, the contract is procompetitive rather than anticompetitive.
(CH-1226/30-42. )
Mr. Keating, formerly Assistant Commissioner of the Bureau of Reclamation, described the same eff ect in practical terms:
Since the Contract substantially increases the amount of firm power that CVP can sell, it has the effect of reducing l the per unit cost of CVP power by allowing the repayment costs to be spread over a larger number of units of firm power.
Thus, the Contract helps the governmes t to market CVP power at a price favorable
, in comparison to the price of PGandE
( power.
(CH-1237/25-32.)
Evidence showed that the government was concerned with strengthening more than just CVP's participation in the marketplace for electric power. At the insistence of Congress, the government negotiated the terms of Cont.act 2948A so that the non-generating municipalities which were customers l of CVP in 1964 would have an opportunity to strengthen
!. themselves also. (Ex. 4040 at 45.) The government obligated l PGandE to support a CVP customer load of at least 1050 mW so that CVP's non-generating municipal customers would be assured that they would have a supply of low-cost CVP power sufficient to satisfy all of their load growth until 1980.
(Id.; Keating, CH-1239/26-33.) It was felt that providing chat much low-cost power to those customers would allow them to save enough to construct their own generation by
() 1980 to serve any further load growth. The plan was well-l 111
L O
conceived since two of CVP's municipal customers are now participants in a 55 mW geothermal steam plant (Ex. 4500 at lii) and others intend to participate in or develop other projects either on their or through NCPA. (Id. at 24-25; Fontes, Helms Tr. 4361/1-20; 4432/1-8; 4434/16 to 4436/10; 4444/9 to 4446/7; 4461/18 to 4462/16.)
The Cities' evidence on the competitive effect of Contract 2948A may charitably be described as insubstantial.
I Cities offered Ralph Miller, who had not even read the Contract l
(CH-11,667/7-23), let alone prepared a written analysis of it (CH-ll,6 9 8/22-25 ) , nor done any quantitative analysis (CH-ll,699/20-23)--perhaps because no one had told him to do a quantitative analysis (CH-ll,705/14-21). He agreed that 7
the government viewed itself as having received the " lion's share" of the benefits from the Contract. (CH-11,719/1-17.) He further agreed that the government's quantitative analysis of the benefits it derived from the Contract was definitely on the conservative side given the rise in the cost of producing thermal power since the analysis was performed.
(CH-ll,718/7-22. ) Yet, he clung to the contention the contract was anticompetitive. His argument was that CVP can be said to receive the better part of the bargain from Contract 2948A if, and only if, contracting with PGandE was the only option open to CVP when it executed Contract 2948A. (Miller, CH-13,422; CH-13,430-31.) In fact, there is no evidence whatsoever indicating that utilities other than PGandE had any interest in 1966 in negotiating an integration arrangement with CVP.
Nonetheless, Mr. Miller testified "it is quite possible, perhaps even likely that Edison would have been willing to engage in some such transaction. " (Miller, CH-13,570/7-
\
10.) Had he reviewed documentary evidence tending to show that Edison would have given CVP a .better deal than PGandE?
He admitted he had not. (Miller, CH-13,584/9-18.) Did he know whether sufficient transmission capacity existed at the time for Edison to contract with CVP in the manner he envisioned? He said he had not studied it. (Miller, CH-13,582/21-24.) Did any Edison witness suggest that Edison was inclined to contact with CVP? No. On what basis then did Mr. Miller reach his conclusion that under the " proper" circumstances Edison would have off ered a better deal to CVP? We prefer to let Mr. Miller describe it in his own
- words:
[Q]uestions of what particular players would or would not have been likely to do and this is especially true if there are not very many players at all in the game, are not questions
(} that would admit of easy or even any 112
.c
(
meaningful answers as matters of his-torical fact.
. . . (0]ne cannot in any way that I can see conveniently determine what they would have done or would have been willing to do had they not had this particular attitude, hypothetical attitude toward their role in the marketplace.
In that sense, one needs to introduce some economic concepts of how a bulk i
power supply market would work if it were an open market with non-discriminatory pooling or sharing arrangements in it and not simply rely on what you woulo
(-
call the historical f acts of what the existing participants would or would not have been likely or willing to do at the time.
(Miller, CH-13,572/12 to CH-13,573/13.)
Ignoring historical fact and proceeding on the basis of economic doubletalk may be typical of the presenta-tions of cities and Staff, but it is no basis for ordering !
relief in this proceeding. Economic speculation about what might have happened had Edison or some other utility had the transmission capacity and the inclination to integrate with CVP is not competent evidence.
Staff witness Holmes also failed to provide any pertinent testimony. He had not read through Contract 2948A l
( either. (Holmes, CH-18,354-55.) Nor, like Mr. Miller, did l he perform any quantitative analysis. (Holmes, CH-18,356/3-5; CH-18,357/9-10.) He simply assumed that Contract 2948A had the potential to restrict CVP's ability to contract
,, with others, both customers and suppliers. (Ex. 1086.)
He assumed no technical or engineering reason could justify his assumed restrictions. (CH-18,347.) He cited no empirical evidence that Contract 2948A ever had restricted CVT from doing business with anyone. (CH-18,368/3-9.) With respect to Contract 2948A he described his " basic approach" as follows:
, My basic approach was to see if there l was a potential for anticompetitive effect, to then ask myself what kinds of objectives were being sought by the restrictions and if I felt that there l were an objective, legitimate objective l- being sought, I then asked myself, can this objective be achieved in a less
(]}
113
-.-a_m ----m_____.. v --- m--- ,-r--- ,, -
restrictive manner and it did not appear to me that achieving the objectives in a less restrictive way would create a very burdensome cost or risk to the company.
(CH-18,357/10-18.)
As we discussed above in section I.B.1, supra, Sierra-Mobile makes his basic approach irrelevant.
Dr. Holmes' endeavor to fine tune Contract 2948A to high performance levels might have been interesting, albeit irrelevant, if he had bothered to investigate the facts and analyze the contract. Time and again Dr. Holmes
( displayed remarkably little knowledge about the Contract and what it provided. For example, he had contended that the customer load level provision (Article 14 (a)) , obligating PGandE to support CVP's sales of firm power to customers up to 1050 mW, had a potential to produce a " foreclosure in the bulk power market and cost squeeze in retail markets."
! (Ex. 1086, at 2.) But when examined about this provision he could not recall that it was part of the Contract.
Q. Now, would you agree or let me ask preliminarily is it your understanding that PGandE in the contract agrees to sell to CVP capacity and energy necessary for CVP to meet its customer load as defined in the contract if the CVP does not have sufficient resources of its own to meet that load?
(
A. I don't recall exactly whether that is part of the agreement.
(CH-18,3 5 0/10-16. )
Rather than read Article 14 or investigate the f acts Dr. Holmes simply assumed it gave PGandE the right to foreclose CVP from marketing power in excess of 1050 Mw. (Ho lmes ,
CH-18,356/14-22; CH-18,361/ll-17.) In fact, as explained below at pages 120-21, the function of Article 14 is entirely different. It imposes a duty on PGandE to firm up CVP sales.
(Item by Ref. U-1, Art. 14(a); Keating, CH-1241/1-39; Anderson, CH-2194/50-51.) As f ar as the Contract is concerned, CVP l can market any amount of power it wants in northern California, but it can rely on PGandE to firm up its sales only to the extent stated in Article 14. (Keating, CH-1241/1-34. )
O 114
O Dr. Holmes f ared no better when asked whether Article 14 interacted with the Article 11 provisions regarding the dependable capacity of the Project:
Q. No. I am still on the same subject but to help you respond to this question, you might want to review the third assumed restriction on page two of this exhibit (1086]. My question is, doesn't the contract as you understand it set a customer load level for sales to purchasers other than PGandE which is unrelated to the level of PDC or changes in PDC?
A. My answer to that is that i
I do not know. In the third restriction
- on page two of this exhibit 1086 that we are now discussing, I am speaking in terms of a maximum customer load cs we discussed earlier today. Now, l in the first restriction on page one, I am assuming that the project dependable capacity is lower than what it shoeld be and that this somehow does restrict the amount of sales that CVP can make.
I do not know how this takes place but this is the assumption I am making.
(CH-18,388/13 to CH-18,389/2.)
There is, of course, no interdependence between Articles 11 and 14 as the Presiding Judge observed on another
( occasion. (CH-38,4 42/10-12. ) When a correct interpre ta tion
! of the Contract was supplied to Dr. Holmes, the p.otential l for anticompetitive behavior which he had claimed to see
! evapora ted:
l Q. If the level of PDC does not limit the amount of power that CVP can sell to purchasers other than PGandE, would that eliminate the potential effect you described in Column 2 of page 1 of Exhibit 1086?
.w l A. Yes, it would because it eliminates an essential part of my assumption.
(CH-18,38 9/3-9. )
Aside from its result-criented feature, Dr. Holmes '
analysis is simply irrelevant. As we explained below,
(])
115 n- - m
I O
V see sections VIII.C-D, below, the question is not whether Contract 2948A can be fine-tuned to move it closer to some standard which would exist in a hypothetically perfect world of competition. Contract 29 48 A is to be judged on whether in fact it is unj ust or unreasonable. To this end, neither Miller 's nor Holmes' testimony was useful at all.
F. Cities and Staff Failed to Establish that i the Transmission or " Wheeling" Provisions of Contract 2948 A Are Unreasonable.
A substantial ef fort by Cities and Staff was directed at Articles 23 and 24, the so-called wheeling provisions.
Their arguments are essentially moot, given tho Stanislaus Commitments and this Commission's lack of authority to order f wheeling. Furthermore, the evidence in f act shows theAbro-visions to be reasonable and, on balance, procompetitive.
The evidence establishes that the wheeling area specified in Contract 2948 A was initially specified by the government in 1950 when the predecessor to Contract 29 48A was negotiated. (Ex. 2562 at 55-58.) The area specified in tha t original contract was reconsidered in the summer of 1964 in connection with the development of the Intertie and in the subsequent negotiation of Contract 2948A. Again the government determined not to expand the wheeling area, because the area defined complemented a federally developed and Congressionally approved policy to market CVP power to selected customers for a long term rather than to a larger number for shorter periods. (Kude r , CH-142 3/27-142 4/9. )
Article 23 provides in pertinent part that PGandE l ,
will provide transmission service to CVP for customers described in Article 24. (Item by Ref. U-1, Article 23 (a) . ) Its
, companion, Article 24, defines an area within the confines l of PGandE's service area within which the CVP can designate l preference customers to whom it wishes to have CVP power delivered. The area is larger than several of the s ta te s .
It is composed of the counties in the " Sacramento and San Joaquin Valleys and the counties of Trinity, Solano, Contra Costa, Alameda and Santa Clara. " (Id. at Art. 2 4 (a) (1) . )
A map showing the PGandE control area with the wheeling area delineated is attached to Contract 2948 A. (Item by Ref. U-1, Ex. C.) Staff seeks to make it an even larger area by rewriting Article 24(a) to require PGandE to wheel CVP power to the " loads of any customer, present or future
. . . which are located at any point on [PGandE's] system."
l S taf f Tentative Sta tement of Relief Requested at 6-7. Cities ask that Article 24(a) be eliminated completely.
l (
1 116 l
n Y
O 1. The Size of the Wheeling Area in Contract 2948A Is the Result of Federal Government Marketing Decisions.
The evidence shows that the government, not PGandE, determined the geographic area in which CVP power is to be marketed. Articles 23 and 24 merely reflect those government decisions.
As early as December 30, 1949, during negotiation l of Contract I75r-2650 (Item by Ref. I-2), the Company offered to wheel power from CVP's powerplants to "67 possible loads" throughout the entire PGandE service area f or 2.5 mills /kWh--
reduced a few days later to 1.5 mills /kWh if CVP delivered its power to PGandE at Tracy. (Ex. 7198 at 11 5 and 7;
(
Ex. 2562 at 55-56.) Within a few months of PGandE's offer the government announced that it had no intent "to contract with any customer whose power reqairements could not be delivered from the ultimate, independently planned and operated CVP transmission and subtransmission system" and that it would pay PGandE no more than 1 mill to wheel power from the Tracy terminus of CVP's existing transmission grid. (Ex. 1166 at 1 q. ) Later CVP reiterated its intention to restrict the geographic area in which it marketed power:
During the discussion Mr. Bruere pointed out that he had given some thought to definitions or qualifications to determine location of customers to be supplied transmission services by P.G.&E.
His plan was to limit the customers to be served to those that could be I
( reached in the CVP service area within
! Pacific service area within certain counties in California. After some discussion of his thought he handed us a list of his definitions or qualifications, attached.
(Ex. 4434 at 3; see also Ex. 4435.)
The list referred to appears at page 1 of the attachment to Exhibit 4434. The counties listed did not include counties in the southern San Joaquin Valley, which are within the wheeling area. At the next negotiating session PGandE noted its concern that the draft. contract provided for wheeling service for project pumps throughout the entire Valley Basin, but limited the area in which PGandE wheeled to preference customers to something smaller. (Ex. 2073 at 3.) It was a result of PGandE's concern that the contract signed provided
{) for wheeling service to preference customers in a substantially 117
_. ~
i
- o larger area than that originally proposed by the government.
(Item by Ref. I-2, Art. 9(c); Ex. 2562 at 57-58.)
In 1967 when Contract 2948A was executed the wheeling area was further enlarged to include preference customers in Trinity County and Plumas-Sierra Rural Electric Cooperative. l (Item by Ref. U-1, Article 24 (a) ; Kuder, CH-1423/31-41.)
The government saw no need to expand the wheeling area further. The chief negotiator for the government explained that further expansion would have " diluted our ability to l implement our plan to provide load growth to a specific group of our customers." (Keating, CH-1242/31-49.) The
- " plan" he was referring to is explained in Secretary Udall's report to the Congress on the Intertie. (Ex. 4040 at 44-45.)
It called for concentrating low-cost CVP power in the hands of a few-specific municipalities located within the wheeling area as then defined. (Id.)
- 2. The Wheeling Area in Contract 2948A Has not Affected CVP's Power Marketing Program.
Cities' and Staff's attack on the wheeling area isolate the wheeling provisions from the context in which they operate. A critical fact which they consistently and conveniently ignore is that cheap CVP electric power is a limited and highly desirable commodity. Even with PGandE's help CVP has only a specific amount of power to sell--not enough to meet the demand for it. Certainly, there is far too little of it to saturate the demand of the pref erence customers to whom PGandE is obligated to wheel by Contract
- 2948A. (Keating, CH-1242/44-46. ) The total load served by PGandE and the load served by CVP will not change if r
Articles 23 and 24 are altered as recommended by Staff and Cities. CVP will always sell every kW and kWh it decides to sell whether it markets its power inside or outside the wheeling area or both.
In addition, CVP is a " neighboring entity" under the Stanislaus Commitments (Exs. 2347 and 2354 at 2), with a corresponding right to transmission service to other neighboring entities and neighboring distribution systems located anywhere within the exterior boundaries of PGandE's service area.
(Ex. 2347 at 8-11. ) This is no theoretical matter. As a result of a recent agreement between CVP and PGandE (Item by Ref. N-ll), PGandE's obligation to support CVP's sales has been increased by 102 mW. (Daines, CH-25,982/15-18; f 45 Fed. Reg. 81865 (December 12, 1980).) CVP plans to market this power, using the transmission services extended to it by PGandE under the Commitments. After elaborate public hearings to select which preference ~eustomers from a multitude
[} of applicants would be awarded allocations of CVP power, 118
e CVP decided to market this additional power to, amorg others, preference customers located outside the wheeling area, including some of the intervenors here. (46 Fed. Reg. 51229-32 (October 16, 1981).) If there were any substance to Cities' and Staff's contentions that Article 24 hampers CVP's marketing program, CVP could not have pursued the course it has.
We submit that there is no basis for altering Article 24 when it is correctly viewed against the relevant case law, the history of its development, the Stanislaus Commitments and CVP's current marketing activities.
G. Other Challenged Provisions of Contract 2948A
, Are Reasonable and Reasonably Necessary to the I Coordination of the PGandE and CVP Systems.
1
- 1. Article 14 (a).
Article 14 (a) of the Contract establishes the
" customer load level. " As discussed above, this is the article which defines the total load which PGandE is prepared to support and which CVP can thus serve on a firm basis. There is flexibility built into the provision. In the event CVP wishes to increase PGandE's obligation and the parties cannot reach mutual agreement on a new level of support, the contract specifies that matter will be arbitrated and if the parties are still not satisfied after arbitration "either party may terminate this contract. " (Id., Art. 14 (a) (3) . ) While this hearing was in progress the parties to the Contract negotiated an increase in PGandE's obligation to support CVP sales to
( 1152 Mw. (Item by Ref. N-11.)
Staff indicates an intention to seek radical modi-fications to Article 14 (a) , including imposing on PGandE a virtually unlimited obligation to firm up CVP sales "unless PGandE can demonstrate that it cannot feasibly support" CVP sales at the higher level. Staff Tentative Statement of Relief Requested at 3. Cities did not join in Staff's request.
In fact, Cities did not indicate any desire to have Article 14(a) mod if ied .
Limits on support obligations are a necessary adjunct to support agreements. To have some limit on support i obligations is reasonable on its face; Staff submitted no evidence to show that the support levels specified in l Article 14 are unreasonable. Dr. Holmes testimony, reviewed at l pages 113-16 above, does not fill that gap. As discussed above, the evidence did show that Contract 2948A more than doubles CVP's current and projected ability to produce firm power (s"/} for commercial sale. See pages 110-112, suora. At no time 119 l
l __ . ._ _. . .- . -
i O did Staff offer evidence to the contrary. The rational bases for selecting 1050 mW as a support level, reviewed above at pages 110-111, were explained in Mr. Keating's testimony (CH-1241/1-39 ) and Mr. Kuder's testimony (CH-1413/34-39) .
At no time did Staff introduce evidence to the contrary.
The evidence simply does not support Staff's request to modify Article 14.
There is another relevant consideration. CVP is precluded by law from engaging in the sale of electricity except as a by-product of its irrigation and flood control activities. (Anderson, CH-2194/5-9.) Special Congressional authorization in the case of the Intertie arrangements enabled CVP to import 400 mW of Northwest power to enable it to serve a customer load level of up to 1050 mW. Simply changing Article 14 would not remove statutory constraints on CVP's power merketing practices.
- 2. Article 19(d)-(f).
I Whereas Articles 14 and 24 pertain to the relation-ship between CVP and its customers, Article 19(d)-(f) pertains to the relationship between CVP and those entities other than PGandE which supply it with capacity or energy. Basically, Article 19 (d)-(f) sets forth the extent to which PGandE is to undertake to bank capacity and energy for CVP which is not generated at CVP powerplants. Article 19 (d) provides that within certain limits PGandE treat "such capacity and energy as
! the United States may obtain from sources in the Northwest" and i import over the Intertie just as if it were generated at CVP powerplants. (Item by Ref. U-1, Art. 19(d).) Similarly, Article 19 (e) obligates PGandE to accept all " Northwest Dump i
' Energy and Exchange Energy" (defined in Articles 9 (q) and (s))
which CVP imports over the Intertie and which "can be used
! beneficially" by PGandE and treat it as PGandE must treat I energy generated by CVP itself. Finally, under Article 19(f) l PGandE agrees to treat firm capacity and associated energy from any federal hydro-electric plant as it does firm power from CVP l on a case by case basis.
ArticAes 19(d)-(f) merely set forth the extent l to which PGandE agrees to provide banking and other services
! to CVP for power not generated at CVP cowerolants. They t
do not prevent CVP from importing and marketing power at l
all. No evidence was tendered to show an unequivocal public necessity that PGandE be obligated to back up, fira up and bank any power CVP may choose to import into Northern California.
I O
120 l
t
() As explained above, capacity banking and the banking of thermal power are special coordination arrangements bargained for as a part of the Intertie arrangements. They have no engineering efficiency justifications such as may be associated with energy banking in connection with the integration of thermal and hydro plants. In any event, they are archetypal voluntary coordination agreements. Certainly PGandE has no special obligation to back up, firm or bank any power CVP may choose to buy. That PGandE has undertaken to provide CVP with such services for some of the power CVP may choose to import shows that more has been done for CVP and its customers than is necessary, not that it is necessary for PGandE to do more. Moreover, as pointed out above, CVP is prevented by law from simply importing power for resale.
Modification of Articles 19 (d)-(f) would not change those statutory restrictions.
- 3. Article 19 (g) .
This contract provision affords PGandE a minimal level of protection for its electric system in the event CVP enters into an interconnection agreement with a utility other than PGandE while the terms of Contract 2948A are in effect. It simply provides that If any capacity or energy supplied from a source or by means of transmission capability other than as specified in this Article (19] is to be obtained l by the United States for use or sale in (PGandE's] Service Area, such source or transmission means shall not be connected
( to (PGandE's] system directly or indirectly except pursuant to an agreement to be negotiated covering the terms and conditions for such connection.
l (I tem by Re f. U-1, Art. 19(g).)
The Cities insist that the Presiding Judge strike this provision entirely from the Contract, claiming they have demonstrated that " Article 19 (g) . . . has been utilized by PGandE as a veto." NCPA Statement of Relief at 19.
Staf f does not join in their request. Instead, Staf f requests the clause be expanded to include technical criteria which I would be contained in an " offer to interconnect" filed by l PGandE with this Commission. Staf f Tentative Statement d('s 121 l
p.
f 4
I
() of Relief Requested at 5.51 No credible evidence was introduced which would support either requested change.
- Article 19 (g) is a reasonable method for addressing a valid concern that reliability may be adversly affected when i an interconnected system establishes a new connection with a j previously unconnected system. As such, the provision is protected by the principles underlying the Sierra-Mobile doctrine.
The evidence established that the total elimination I
of Article 19(g) could expose PGandE to significant reliability problems. (Kaptielian, CH-20,807/14 to CH-20, 813/9.)
- Mr. Kapriellan, in response to questions from the Presiding Judge and NCPA, pointed out that failures on a system inter-
]
I connected with CVP could result in load shedding on the
The Presiding Judge summarized the testimony as
- follows
i PRESIDING JUDGE: I un'derstand that he (Mr. Kaprielian) says withott protection of this clause, without the i constraint, the consequences in the face of failure would be extremely serious
) on the PGandE system.
I
! THE WITNESS: That is a good under-l standing, sir.
I j (CH-20,813/5-9. )
(
51 Staff also asks that Article 19(g) be modified to allow CVP to review and approve of PGandE's int'erconnections. Id.
No documentary or testimonial evidence of which we are aware even remotely suggests such a modification. Certainly, no one from CVP appeared at the hearing to testify that there exists an unequivocal public necessity that henceforth CVP review any interconnections PGandE might be considering.
On the other hand, it is not difficult at all to discern why CVP would not be interested in such a change. The record shows that CVP is first and foremost an irrigation project, not an electric utility. (Anderson, CH-2194/5-9.) By entering into Contract 2948A, it passes any of the typical duties of utilities off onto PGandE.
O 122 l
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- C:)
Mr. Kapr *elian also explained that if CVP were to interconnect Ltr transmission system with even small generation sources, the transmission line losses suffered by PGandE could increase substantially. (Kapriellan, CH-22,514/12 to CH-22,518/8. )
i There was no disagreement by Cities' engineering witness with the f act that CVP's interconnections with another entity could have serious adverse consequences for PGandE.
(Russell, CH-2,967/13-18.) Mr. Russell also agreed that a contract provision was the only way a utility could try to protect itself when a utility interconnected with it interconnects with an unreliable system. He testified:
"[T]he obligation of utilities not to impose burdens on one another does not exist absent agreement . . . .
(Russell, CH-2,966/18-19.)
Similarly, the record does not support Staff's contention tht Article 19 (g) should be supplemented with specific engineering criteria. Not all potential problems can be foreseen and anticipated in general " engineering criteria." (Kaprielian, CH-20,816/1 to CH-20,817/10.)
Moreover, there is no agreement in the industry as to prudent practices covering all conceivable problems. (Kaprielian, CH-20,817/3-10.)
As if to confirm Mr. Kaprielian's view, no witness from Cities or Staff provided any specific criteria which would reasonably assure PGandE that the integrity of its system would not be threatened so long as the criteria were followed.
- More importantly, perhaps, the issue is not whether or not a universally acceptable set of criteria can be developed.
The issue is whether Article 19(g) represents one reasonable approach to the problem, not necessarily the best approach.
In sum, the record demonstrates that Contract 2948A significantly improves the commercial value of CVP's surplus hydroelectric energy and helps the United States to market CVP power. The contract provides substantial benefits to CVP customers, securing for them benefits associated with CVP's Intertie entitlement and its low-cost hydroelectric cower. No public necessity to alter this arrangement has been established.
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O VI. THE CALIFORNIA POWER POOL AGREEMENT The California Power Pool Agreement was executed on December 14, 1961. (Kaprielian, CH-1441/40-41.) Prior to the signing of the Agreement, the interconnection between the PGandE and Edison systems, small by today's standards, was used only occasionally; only limited amounts of power flowed between the two systems. (Kapriellan, Helms Tr. 6002/6-15; Ex. 4109 a t 18-21. ) The Agreement was thus the first experiment by the investor-owned utilities in California in pooled operation. When signed, the Pool Agreement represented a major step forward toward coordinated operations and planning.
The terms of the Agreement reflect its basic objective of establishing a contractual basis for the interconnected ,
( operation and coordination of three integrated electric utility companies which, prior to the Agreement, had operated essentially as independent systems.
The experiment has been a success, increasing the reliability and economy of the operations of the three members as well as those utilities with which they are inter-connec ted . There is simply no competent evidence in this long record that the Pool Agreement has ever had an anti-competitive effect. Ra ther , the evidence only supports the conclusions that the Pool Agreement is in the public interest, that there is no necessity to modify it and that the modifications proposed by Staff and Cities would adversely affect the economy and reliability of electric service in California.
A. Legal Principles.
( As a matter of law, designing an interconnection and pooling agreement to meet specifically the needs of the utilities which are to be parties is entirely proper.
As discussed at section I.B.3.b. (i)-(ii) , above, the Federal Power Act does not mandate pooling; such arrangements are voluntary. It necessarily follows that pooling agreements need not be designed for broad membership, and that membership provisions setting forth criteria for new members are not mandatory under the federal Power Act. It further follows, and has been held, that interconnection and pooling agreements may be designed to achieve limited objectives and need not provide for every imaginable service. Central Iowa Power Coop. v. FERC, 606 F.2d 1156, 1167-68 (D.C. Cir. 1979).
That such limited coordination arrangements are reasonable and lawful follows not only from our discussion of
()
124 L
l the Federal Power Act above, but also from Sherman Act cases 4
considering analagous arrangements. Even the antitrus t laws do i not require open membership in cooperative commercial
- endeavors. Thus, in Deesen v. PGA, 358 F.2d 165 (9th Cir.), cert. denied, 38 5 U.S. 846 (1966), the court ruled that the members of a golfing association had not eng aged in a group boycott in violation of the Sherman Act by promul-gating rules which eff ectively prevented the plaintif f's entry in professional golfing tournaments. The court reasoned that it was legitimate for the assocation to take steps to insure that tournaments were "not bogged down with g: Sat numbers of players of inf erior ability." 358 F.2d at 170.
The court noted that the golfing association was not compelled by the Act to give plaintiff "special treatment merely because he did not wish to accept PGA tournament entry rules and i
regulations." 358 F.2d at 172. Similarly, the Pool members are under no obligation to give Cities f avored treatment because they cannot meet and do not accept the standards set forth in the California Power Pool Agreement.
Another case in point is Gunter Harz Sports v. United States Tennis Ass'n, 511 F. Supp. 1103 (D. Ne b . ) , aff'd, 1981-2 CCH Trade Cases 1 64,381 (8th Cir. 1981). There the plaintiff, a manufacturer of an innovatively designed tennis racquet, charged that the United States Tennis Association (USTA) engaged in an unlawf ul group boycott when the USTA ref used to sanction the use of the new racquet. The USTA claimed that use of the racquet would change the character of the game of tennis as it had historically been played.
511 F. Supp. at 1109, 1111 n.3. The district court determined that the collective action of the USTA to511 of the game of tennis was legitimate.
preserve the charagger F. Supp, a t 1117.
(
In these cases the group under attack wished to raise or maintain the level of performance of those partici-pating in professional sporting events for the benefit of the public spectators either by banning the use of equipment which made it possible for less skilled players to compete or by banning the less skilled players from the competition i
52 See also, Dalmo Sales Co. v. Tysons Corner Regional Shocping Center, 308 F. Supp. 988 (D. D.C. ) , a f f 'd , 429 F.2d 206 (D.C. Cir. 1970) (rule of reason analysis to be applied where shopping center and its lessees refused to lease to plaintiff on belief that plaintif f's discount outlet "'was not in keeping with the character of the (shopping] Center.'"
308 F. Supp. at 992, 994).
O 125
l l
O I a t the outse t. Similarly, the California Pool's design, which historically has been based on including utility systems which can contribute generating resources, engineering capability and operating experience to Pool functions, is one reasonable approach to pooling. The omission of unqualified entities like NCPA from the California Pool is no more anticompetitive than omitting sincere but less competent players from PGA tournaments.
B. The Evidence Shows the Pool Agreement to Be in the Public Interest.
By its terms, the Pool Agreement provides for the interconnection, coordinated operation and planning of the I,
member systems in order to achieve even higher reliability, efficiency and economy than each Pool member could achieve on its own. The record indicates without contradiction that all electric utilities in California, large or small, publicly-owned or investor-owned, whether parties to the Agreement or not, benefit from the existence of the Pool.
(Ex. 6109 at 52; Kaprielian, CH-1445/37-39; Helms Tr. 5929/9-13 and 5972/23 to 5973/14; Thomas, CH-1938/ 38-43.) As is more fully explained below, the Pool contributes materially to achieving and maintaining dependable electric service in California. The Pool Agreement is a fair contract which materially advances the public interest and needs no adjustment by this Commission to make it just or reasonable.
The Cities and Staff offered no evidence to contradict the important contribution of the Pool to the quality of electric service achieved in California; in fact, Staff witnesses i
confirmed many of the basic points made by witnesses sponsored by the Pool members. The arguments raised seem to be twofold.
First, they object because Cities are not parties to the l Pool Agreement. (Staff Tentative Statement of Relief Requested at 26-27; NCPA Statement of Relief Sought at 7-8; Southern Cities Statement of Relief Sought at 17-18.) Second, an argument is made that various provisions of the Agreement could conceivably be interpreted in an anticompetive fashion and the Commission is invited to modify or eliminate thosa provisions. Chief among these provisions were those that set the level of reserves which Pool members must maintain (paragraphs 5.01-5.03) and those that provide mechanisms for protecting the integrity of those reserves (paragraphs 3.02 and 8.01(b) ) . (Staff Tentative Statement of Relief Requested at 28-30; NCPA Statement of Relief Sought at 8-13; Southern Cities Statement of Relief Sought at 18-22.)
As explained more fully below, many of the Cities' and Staff's objections to the Pool Agreement were not supported l
l 126
W
()
by their own witnesses. For example, as the hearing progressed it became increasingly clear that with respect to Cities' and Staf f's allegations that individual provisions of the i
Agreement were unreasonable, their witnesses were being careful
- to say that that characterization depended upon the peculiar interpretation Cities and Staff gave to those ,
provisions. There was no evidence that the signatories of the California Power Pool Agreement had ever so interpreted the contract. There was no evidence of any actual anti-
} competitive ef f ect or blocked transaction anywhere.
1 Regarding the membership issue, the Companies' Pool witnesses, principally Mr. Kaprielian who had managed the operation of the PGandE control area for 18 years and served as an alternnte on the Tool's Board of Control, testified
( that there was nothing to be gained and much to be lost i by bestowing Pool membership on the Cities or any other electric utility before they were able tr- enntribute to the reliability, efficiency and economy of the Pool. At 4
the specific request of the Presiding Judge (see e.g.,
CH-12,902/13 to 12,903/16) attention was given by various witnesses to defining what qualifications were appropriate for membership in a pool. As it developed, there was no dispute that Cities did not presently qualify even under l the benchmark described by the Cities' w i tne sse s .
- With regard to the Cities' and Staf f's attack on specific provisions of the Agreement, Pool witnesses established that the criticisms were based on tortured misinterpretations by the Cities and Staff witnesses. There was no evidence that the challenged provisions have had any actual adverse impact on Cities.
(
The testimony from Cities' and Staff's economists followed the same pattern set by their engineering witnesses.
, None of the economists supported universal membership in the Pool for non-generating utilities. Their conclusions as to the economic effect of provisions in the Agreement were all hypothetical and all assumed that the Pool Agreement would someday be misinterpreted in the strained fashion suggested by Cities.
Such " evidence" establishes no justification, much less an " unequivocal public necessity" for making Cities members of the California Power Pool or modifying or eliminating provisions of the Pool Agreement. On the contrary, the record shows that the Pool in its present form contributes significantly to the maintenance of a strong, dependable
- electric system in California.
O 127 i
()
i 1. The California Pcwer Pool Agreement Serves to i Enhance the Reliability, Efficiency and Economy of Electric Service in California. <
" Reliability in my opinion is something that the Pool members now, present, past and in the future, should i address." (CH-8568/6-7.) The . opinion is that of Cities' witness Herbert C. Westf all expressed during live testimony in this proceeding. Other record evidence establishes that his view was shared by the four original signers of the l Pool Agreement in 1961. For example, Exhibits 6109 and 6110, transcripts of the California Public Utilities Commission
- investigation of the California Power Pool Agreement, show I that a fundamental purpose for forming the Pool was to enhance t
the reliability of each member's system. (Ex. 6109 a t 5, f lines 21-26; at 7, lines 15-16; at 50, lines 20-23; at 52, l
lines 7-13.) Prior to the execution of the Pool Agreement,
, the signatories had planned and operated their systems essentially
- in isolation from one another. (Ex. 6109 a t 18-21.) The Pool Agreement was to change all that. A higher degree of reliability was anticipated once the agreement became effective because "[elach party should be able to provide more dependable service as a result of having access to i
the spinning reserves of the other parties in the event of an emergency loss of power supply sources on its own system." (_I_d2 at 50-51. )
Another fundamental objective of those who instituted the Pool was to provide more economical service to the public.
(Ex. 6109 at 5, lines 21-26; at 7, lines 13-16; at 9, lines 5-7.)
They expected that from time to time Pool members would "be able to purchase from and sell to each other various
( services at specified rates on a share-the-savings basis."
(Ex. 6109 at 7, lines 17-22.) No burdens were intended to be passed onto the Pool members' customers, only the bene f its . (Ex. 6110 at 205, lines 13-22. )
The Pool is achieving what its founders hoped it would. With respect to reliability it "has allowed California to achieve a level of reliability unequalled by most of the larger pools in existence." (Kaprielian, CH-144 0, lines 48-50; CH-22,748-749; see also Exhibit 4253.) Witnesses in this proceeding cited many instances where the Pool had avoided extended outages in opite of line losses or other electrical catastrophes f ar worse than the incidents which caused the Northeast power blackout in 1965. (See e.g.,
Kaprielian, CH-1459-61 and CH-1464; Helms Tr. 5977,29 and 5972/23 to 5973/14; Thomas , CH-19 38/12-36. ) The high level of reliability achieved in California was attributed in significant part to implementation of the California Power O Pool Agreement. (Kapriellan, CH-1441, lines 23-26.) The 128
I i e . .
1 record also shows that substantial economies and ef ficiencies !
have been achieved by virtue of the Pool Agreement. (Kapriellan, l CH-1445/14-30.) l By its very nature the Pool Agreement provides a strong incentive for building ever larger and stronger interconnections between members. (Ex. 6109 at 39, lines, 2-7. Larger interconnections mean more benefits can be shared among pool members. On the other hand, it also means graver risks should a Pool member not remain self-sufficient or interconnect with a deficient system. (Kaprielian, CH-1441/17-23.) Pooling agreement provisions to protect against such risks are therefore appropriate. Cities' witness Mr. West-fall agreed that it was fair for systems like the California Companies, which have pooled on the condition that each will remain reliable and maintain good operating practice,
( to demand the same level of performance from any system which asks to join their pool. (CH-8 420/ll-25. )
As described by the witnesses representing the Pool, one key to its success ful performance record is the fact that all members are independently reliable. (See, e.g., Kaprielian, CH-1462/21-38.) Another is the inclusion in the Agreement of provisions designed to guard against the possibility of a member interconnecting with an unreliable electric system without taking necessary steps to insure the maintenance of the same high level of reliability and service. (Kaprielian, CH-1463/4-5. )
No Cities or Staff witness disputed the performance r- record of the Pool nor did they dispute the principle of protecting against unreliable systems. The Pool Agreement has admirably served the public interest. There is thus
( no public necessity to change it.
- 2. No Basis Exists for Adding Membership Provisons to the Pool Agreement.
The California Power Pool Agreement, like some other pool agreements does not prescribe conditions for admission . The Cities ins ist that the Agreement be rewritten to include membership provisions "modeled after the membership provisions of the New England Power Pool Agreement." (NCPA Statement of Relief Sought at 7-8 (footnote omitted) .)
Those provisions of NEPOOL afford open membership to any public or private New England electric utility upon the payment of $500; ownership of generation or transmission facilities is not necessary. (New England Power Pool Agreement, 10 Fed . Pwr . Serv. 5-594, 5-597 (1976).) Staff, on the other hand, requests somewhat dif f erent relief.
p, Staff asks that a membership provision be added to the Agreement
\/
129
e .
O to allow any en' . . which owns or controls any generation to become a full member of the California Power Pool and to allow any entity " proposing in good faith to own or control generating f acilities" to become an " associate" member.
(Staf f Tentative Statement of Relief Requested at 26-27.)
The record does not support either request. Nor is there a basis in the record from which to conclude that the absence of me.abership provisions is either unjust or unreasonable.
- a. A general membership provision is not a necessary prerequisite to a reasonable pool agreement.
The record evidence shows that the Pool Agreement g contains no explicit membership provision simply because the contract was designed by the original members only to interconnect and coordinate their own systems. This was itself a big step at the time and there was no reason to consider a broader arrangement.
There is also a sound reason not to have membership criteria. It is impossible to spell out specific criteria for membership in the Pool except in "rather broad, general co nc epts . " (Kapr ielian , CH-22,810. ) The state of electrical engineering has not progressed to the point where objective reliability criteria can be specified in the abstract.
(Kaprielian, CH-22,812. ) Serious technical problems, such as subsynchronous resonance and the need for installing supplemental excitation control equipment, continue to surface
(~
and be recognized only af ter an interconnection has been installed. (Kapr ielian, CH-22,811.) Accordingly, the approach
( preferred by the California Power Pool is careful study on a case-by-case basis "to consider the impact of any additional member" on the existing members before admission is g r an ted . . (Id.)
The failure of each of Cities' and Staff's so-called " expert" witnesses to identify any consistent and specific
" membership criteria" at any time during this lengthy hearing corroborates the reasonableness of the approach taken by the Companies. This case-by-case approach is common for PGandE (Daines, CH-1336/35-43) and is a reasonable approach to the structuring of long-term contracts. Rigid criteria cannot readily be adapted to meet changing circumstances and needs. l The absence of a membership provision does not mean that PGandE and other pool members are opposed to the admission of new members. Pool membership was of f ered to both LADWP and SMUD. (Kaprielian, CH-1496/42-47; Mitchell, CH-1882/50-54.)
O The record also shows that PGandE does not oppose admitting 130
e 1
i
~ C) new members to the Pool today so long as the new member is in a position to contribute to the existing Pool. (Kaprielian, CH-22,813.) Translating principle to practice, however, would require revision of the existing contract to insure that the agreement remained equit.able to all parties. For example, at a minimum, changes in rate schedules would be necessary. (Kaprielian, CE-22,816.) Other revisions may also be necessary, see discussion in Section VI.B.3.a, below.
- b. There is no basis for requiring the admission of non-generating entitier to a power cool.
Several witnesses, some under questioning by the I- Presiding Judge, of f ered their views on what characteristics would distinguish an electric system which cculd help to advance the reliability, efficiency and economy of the California Pool from one that could not. There was also agreement in the record that entities that do not own or control generation facilities, could not co and economy of the Pool.ggribute to the Even Cities' reliability, witne sses wouldefficiency require a pool member to provide for a " substantial" portion of their own power needs. For example, Cities' witness Ralph Miller testified that it should be "a requisite of membership in the (California] power pool that an entity have some kind of long-term commitment to the use of particular generating resources." (CH-12,895/23 to CH-12,8 96/2.) His testimony prompted this inquiry:
PRES IDING JUDGE : . . . So wha t I would like to have from you if you are
( able to give it to me, is the line that should be drawn between those who may seek inclusion in the pool and those who may not.
s (CH-12,902/12-16.)
Mr. Miller responded:
, 53 Legal authority is not inconsistent with the position
! expressed by the witnesses. This Commission's decision
! on the MAPP Agreement, where the Commission approved of excluding non-generator s, is in accord. See Central Iowa Power Coop. v. FERC, 606 F.2d 1156, 1165 (D.C. Cir . 1979).
()
, 131 l
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WITNESS : With regard to generation, i I think membership should be open to entities that are in the business of l furnishing a substantial part of their own bulk power supply requirements.
I PRES IDING JUDGE : Can you define
" substantial" as you use it?
THE WITNESS: I would suggest that firms, entities should have reasonably firm plans for acquiring such as dirough participation in units under construction generation sufficient to meet, say, at a minimum, 25 percent of their own
(
power suoply requirements as a condition for membership in the pool . . . .
(CH-12,905/8-19.)
(See also , Orrechio, CH-2240/18-27 ; Goss, CH-1257/1-10.)
Later in thu proceeding the Presiding Judge asked Mr. Kaprielian to address the same issue, see CH-22,100. His response:
I believe . . . that an entity in order to qualify should either own or have under its control fifty percent of its own resources as a rough Eigure. These resources should be within the control
' area of the member or the control area of which it is a part. However, I believe strongly that if an entity does not
(- have a level of resources approaching this figure it simply does not have enough to make pooling worthwhile for it or to contribute benefits to others.
I also believe that this generation must exist in several dif f erent generating units.
l (CH-22,313. )
There is no basis in the s xisting record for concluding that the Cities presently ;ualify for pool membership,
- c. There is no competent evidence that Cities' f ailure to be included in the Pool has had any adverse effect.
Neither Cities nor their witnesses had ever performed O- any study to determine whether Cities were disadvantaged 132 L
O by their inability to join the Pool or whether Cities would gain anything by their admittance to the Pool. See NCPA Answer to PGandE Interrogatory No. 140 ("NCPA [ including its consultants] has never undertaken a study to answer this question. ") ; Westf all, CH-87 47/1-5 (". . . our firm (R.W. Beck] has never been retained or asked to make such a s tudy . ") ; Michaels, CH-42,141/7-24 ("We (NCPA] did not get f ar enough to technically evaluate the benefits. ") . The evidence does establish that Cities currently share in many of the benefits created by the California Pool by virtue of being interconnected with either PGandE or Edison. One Staff witness described NCPA as essentially a member of the pool right now because its members receive services from PGandE, which is a member of the Pool. (Orrechio, CH-40,536/6 to CH-40,537/2.) While we would not characterize
( it quite that way, we agree that Cities have been receiving these benefits. (See, e.g., Kaprielian, CH-22,746-47; Orrechio, CH-40,549/2-6; Whyte, CH-1577/6-39; Mitchell, CH-34,096-101.) Furthermore, substantial evidence established that Cities could achieve most of or all the same benefits from bilateral contracts that could be obtained from membership in the Pool. (See, e.g., Orrechio, CH-40,540/ 8-21; Gerber, CH-1216/16-20; CH-29,152/2 to CH-29,154/22.)
On the other hand, there is evidence tha t the forced admission of Cities into the California Power Pool
( before they are able to contribute to the Pool would cause i significant harm to the existing members and their ratepayers.
l Mr. Kaprielian explained that if membership in the Pool is opened to all, without qualification, "the the reliability of service in California will deteriorate." (Kaprielian,
( CH-1470/6-12; see also CH-1499/41-44.) In addition to the threat posed to the area's reliability, the evidence indicated that uncontrolled admission of new members to the Pool would en-cumber the decision making process within the Pool. (Kaprielian, CH-1499/46 to CH-1500/29.) Indeed, the existence of one problem anticipated by Mr. Kapriellan, that NCPA could not speak on behalf of its members, was substantiated by later testimony. Mr. Michaels, NCPA's -former general manager, l
in response to a question from the Presiding Judge concerning NCPA's ability to commit its members on matters coming before the Pool testified: "As of the time that I left(,] NCPA could not speak on behalf of its members in those matters. "
(Michaels, CH-42,125/2-12; see also , CH-4 2,129/2-8. )
Beyond that concern, there is the additional problem that individual cities may not themselves have the legal power to function within a pool. (Go ss , CH-1248/40 to CH-1249/33) l Hence, the quick cooperation of all members on matters of l
significance will cease to exist if Cities are admitted to the Pool.
j 133
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- 3. There is No Unequivocal Public Necessity to Change or Delete Any Provision of the Pool Agreement.
In the second branch of their twofold attack on the Pool Agreement, Cities and Staff allege that certain provisions of the Agreement are anticompetitive. These criticisms generally assumed that the Cities were made parties to the Pool Agreement and hypothesized problems that would be created for Cities if the Pool Agreement were continued in its present form. Those arguments are irrelevant since Cities are not parties to the Agreement (ge;e City of Groton
- v. Connecticut Light & Power Co., 1980-81 CCH Trade Cases 1 64,329 (2d Cir. 1981) (NEPOOL provisions "had not casued the plaintif fs any injury, (a) because plaintiffs were never
( members of NEPOOL")) and no case has been made calling for this Commission to require their admission. Moreover, the hypothetical problems envisioned by Cities were frequently the result of misinterpreting the Agreement. Accordingly, we will not dwell on the arguments here with two exceptions.
Paragraphs 5.01-5.03 of the Agreement, setting forth capacity reserves, were singled out for particular criticism and so we review the evidence regarding those paragraphs here.
Paragraphs 3.02 and 8.01(b) of the Agreement were attacked in part on the theory that they had an adverse effect on the Cities whether or not they were parties to the Agreement; accordingly, we discuss those provisions also. In general,
, no unequivocal public necessity to change or delete any of these provisions was established by the evidence. Ra the r ,
, substantial evidence in the record supports the conclusion that each of these provisions is necessary if the present
( level of reliability, efficiency and economy of electric service in California is to continue.
- a. Paragraohs 5.01-5.03.
N Like the MAPP agreement, the California Power ,
Pool Agreement " seeks to promote reliable operation of the '
interconnected regional network, primarily through reserve sharing . . .. " Cen, tral Iowa Power Coco. v. FERC, 606 F.2d 1156, 1164 (D.C. Cir. 1979). The level of generation
! capability a Pool member must maintain in order to achieve this goal is governed by paragraphs 5.01-5.03.
In pertinent part paragraph 5.01 provides that )
i on any given day a Pool member must maintain the greater of either "(a) 110% of its Peak Demand for that day or (b) the sum of (1) 105% of its Peak Demand for that day and (2) its Capacity Resources out of service because of scheduled main-tenance at the time of said Peak Demand." " Peak Demand" O on a member 's system is defined as "the highest total instan-
. 134
r taneous kilowatt demand" on a member's system exclusive of the demand resulting from providing certain services to another member of the Pool. (Item by Ref . Q-1 a t 1 1.32. )
The kinds of generating resources which a Pool member can count toward meeting the paragraph 5.01 requirement are described in paragraph 1.08 and include the sum of the capabilities of all electric generating units, whether in or out of service, and purchased firm power, less the amount of firm power made available to other Pool members. (Item by Ref. Q-1 at t 1.08.) The penalty for failing to meet the requirements of paragraph 5.01 are set forth in paragraph 5.03. Testimony
- indicated that paragraph 5.01 was f ar easier for a utility to comply with than either a fixed percentage reserve requirement or a fixed loss of load probability goal. (Kaprielian, CH-4 22,637-640.)
l ( The Cities' and Staf f's attacks on paragraph 5.01(a) were based on a misinterpretation of that provision and its function. In those circumstances where paragraph 5.01(a) would govern, Cities' and Staff's witnesses claimed to see discrimination against an electric system which purchased a substantial part of its power requirements on a firm basis.
(Westf all, CH-754/49 to CH-755/3; Holmes, CH-1052/23-44; CH-19,043/19 to CH-19,044/25. ) Their criticism was that using a percentage of peak demand to compute the required level of resources without subtracting the portion of that demand served by purchased power resulted in excessive reserve levels because both the seller of the firm power and the pool member buying that power had to carry reserves for it. (Id.)
To begin with, as with so many of Cities criticisms,
' ( this problem is completely hypothetical. Because the Pool was formed by self-sufficient utilities which owned or controlled enough generation to provide for most or all of their respective peak loads, the problem perceived by Staff and Cities was t.
considered de minimis and was nevar addressed. (Kaprielian, CH-148 4/43 to CH-1485/3.) In nearly every case, a pool member's independent reserve criteria would drown out the eff ect of 5.01(a) which specifien a minimum rather than l a recommended reserve level. (Kaprielian, CH-148 4/43 to CH-1485/3. )
1 The record indicates that the existing reserve
, criteria in the Pool Agreement would probably have to be {
! revised if smaller entities are admitted. The existing l l reserve criteria are minimum requirements formulated for '
independently reliable systems to encourage each system to maintain a minimum level of reliability as an independent system. (Kaprielian , CH-148 3/45 to CH-148 4/8. ) Indeed, Cities' own witness Mr. Westf all acknowledged that it would O
135 v
j
e t
O be reasonable to require Cities to meet a higher level of reserves than specified in the Pool Agreement. (CH-44,032/
14-27.) If new entities are admitted incapable of independent operation, the existing Pool Agreement's reserve criteria and maybe others would have to be rewritten to protect the integrity of the larger members' systems. New reserve criteria would have to be developed to serve an essentially different purpose--the allocation among pool members of the the total amount of reserves needed to maintain the reliability of the pool as a whole. (Kaprielian, CH-22,816-17; Helms Tr. 6001/7 to 6002/5; 6242/12 to 6243/9.)
Cities and Staf f claimed to have found lurking in paragraph 5.01(b) a disincentive for small utilities 7
like Cities to build larger, more efficient generating units.
(Westfall, CH-755/ll-49.) If there were such a problem, it would only reflect the acknowledged f act that the existing Agreement was designed only for the parties to it. As the record developed, however, it became clear that Cities, Staff and their witnesses were simply misreading paragraph 5.01(b) .
Using SMUD as an example, at CH-21,337 Cities counsel revealed their misinterpretation in graphic detail. There Cities purported to show that SMUD would have to purchase or construct 709 mW of generation to comply with paragraph 5.01(b) if maintenance on Rancho Seco Nuclear Plant were scheduled, during SMUD's off-peak season on a day when its peak demand reached 980 mW. The gist of Cities' argument was tha t SMUD would pass up l Pool membership rather than accept such burdensome obligations.
, At CH-22,652-57, Mr. Kaprielian explained that nothing of the sort described by Cities' counsel was required by paragraph 5.01(b) . Under the circumstances hypothesized
( by Cities, that is, removing Rancho Seco Nuclear Plant from service for maintenance during SMUD's of f-peak season, SMUD would not have to purchase or construct any generation to comply with paragraph 5.01(b) . (Kapriellan, CH-22,658/1-8. )
SMUD would actually have 91 mW more than enough generation to comply with paragraph 5.01(b) . (Id.)
Furthermore, paragraph 5.01(b) is intended to influence system operation rather than system design.
Its purpose is to encourage pool members to operate their o
respective systems to conform with standard industry practice regarding maintenance schedulec. As Mr. Kaprielian explained, it is not normal utility practice to schedule maintenance during the peak season. (Kapriellan, CH-1487/15-17. ) Section 5.01(b) is aimed at encouraging Pool members to schedule maintenance during their respective off-peak seasons. (Kapr ielian ,
CH-22,634/13-24; CH-22,635/13-15; CH-22,6 75/2 to CH-22,6 77/9. )
O m 136 L 1
O Even if a Pool member found it necessary to schedule maintenance on a larger unit during the peak sea son, it could purchase short-term firm service from either another Pool member or a thi and avoid a penalty.gg-party(Kaprto satisfyCH-1488/1-18; ielian, paragraph 5.01(b)
CH-22,163/5-19; Item by Ref. Q-1 at 1 8.05.) We submit no modi-fications of paragraphs 5.01-5.03 of the Agreement are warranted on the present record.
- b. Paragraphs 3.02 and 8.01(b) .
The members of the California Power Pool intended to assure not only that ample generating capacity is installed or contracted for by Pool members but also that the generation will be available in the event of an emergency in California.
7 Paragraphs 3.02 and 8.01(b) were included in the Pool Agreement to accomplish this. The former, in pertinent part f ir st guarantees to each pool member "the right to continue or renew existing agreements and enter into additional agreements with any Third Party . . . ." This right is then qualified by the provision that, unless otherwise acreed, Pool members shall not:
enter into any . . . agreement with a [non-member whose System is not included in a Party's] Area System if the eff ect of such additional agreement would be either (a) to obligate (the Pool member) to stand by or protect any supply of power for such (non-member] unless the (Pool member] is providing Spinning Reserve equal to its obligations for t
such service in addition to that otherwise required under this Agreement . . . .
(Item by Ref. Q-1 at paragraph 3.02.)
Paragraph 8. 01(b) , provides in pertinent part tha t , unless othe rwise agreed, Pool members shall not:
54 The penalty for not complying with paragraph 5.01 is governed by paragraph 5.03. It is a flat f ee per kilowatt of deficiency. Thus, it avoids the problem perceived and corrected by this Commission in the NEPOOL Agreement which as originally written assessed smaller members more money per kilowatt of deficiency than larger members. New Encland Power Pool Agreemen t, 10 Fed. Pwr. Serv. 5-594, 5-615 to 5-616 (1976).
137 u
() take service (under the Pool Agreement]
to standby or protect any supply of power for its[ elf] or . . .
a Third-Party if such supply of pcwer is obtained from a generating source
' not included in the (California Power Pool] . . . .
(Item by Ref. Q-1 at paragraph 8.01(b) .)
The evidence indicates that these provisions are usually waived under the "except as otherwise agreed" language.
, None theless , they serve the major function of motivating the parties to the Agreement to bring to the attention of the other parties any new interconnection arrangements that 7,
may have some impact on pool reliability. Thus, they are another example of the desire to review potential problems as they arise, on a case-by-case basis and take measures to insure that no operating failure does in fact occur.
The provisions thus protect against the possibility of the Pool suddenly finding that some or all of its reserves are being used to combat an emergency on a non-members' system ^
at the same time an emergency arises in the Pool. (Kaprielian, j CH-1479/20-24.)
In this fashion, in the early years of the California Pool, paragraphs 3.02 and 8.01(b) caused the Pool members to review and familiarize themselves with PGandE's intercon-nections with Northwest utilities and Edison's interconnections with utilities located in Arizona, Nevada and New Mexico. '
" (Mitchell, CH-1869/32-42; Kaprielian, CH-22,720-721; CH-1480/1-8; CH-22,724/3-7.) In recent years these sections of
( the Agreement have continued to serve a purpose. They led, for example, to a review of a proposed interconnection between San Diego Gas & Electric Company and a Mexican utility.
(Kapr ielian , CH-148 2-8 3 ; CH-21,311-312; CH-22,213 ; CH-22,315/3-8. )
In this last instance, the Pool's Board of Control was kept
, advised of the negotiations, met with representatives of the Mexican system and personally inspected the geothermal resource which was to be interconnected with San Diego's system in order to appraise the quality of its engineering and operation. (Kapr ielian , CH-21,311-312. ) Witnesses charac-
, terized paragraphs 3.02 and 8.01(b) as contributing to the reliability in California when applied in this f ashion.
(Kaprielian, CH-1441/24-26; Westfall, CH-8545/1-5.) And it was undisputed that the benefits of paragraphs 3.02 and 4 8. 01 ( b) , applied as described above, accrue not only to Pool members but also to every utility located within their control areas, including intervenors. (Kaprielian, CH-22,741/10-23.)
O .
138
g - - - - - - - , ,
, , - - - - - - - < - - - - , - ---.-,g,, e - .n-- - r,.
O Cities' and Staff's argument concerning paragraph 3.02 and 8.01(b) was typically hypothetical. Their witnesses had no evidence that sections 3.02 or 8.01(b) had ever actually been used in an anticompetitive f ashion. (Westf all, CH-8645/7-13; Newton, CH-17,412-413.) In fact, they commented f avorably upon the er.ds to which the Pool applied paragraphs 3.02 and 8. 01(b) . (Westfall, CH-8568-69; CH-8570; CH-8573; CH-8576; CH-8578; CH-8616/14-18; CH-8539-40A; CH-8544-45; Newton, CH-17,741.) For example, Mr. Westf all acknowledged that if the Companies utilized paragraph 8.01(b) as they claim to, then they are engaged in a legitimate and reasonable pursuit of reliability. (CH-8566 to CH-8579.) His testimony about paragraph 8.01(b) on cross-examination is illustrative:
Q. Let's assume for the moment 7
that (reliability] was the only function of this provision (8.01(b)] of the Contrac t. Would you agree that that is, first of all, a legitimate function of a provisicn in the pool contract?
~
A. I do not believe that the assumption accurately reflects what all is incorporated in Section 8.01(b) .
However, I do agree as I sta ted receatedly, tha t reliability is a croper and valid purpose of this section and other sections of the agreement.
Q. So to the extent this section add re s ses that problem, you so consider it a legitimate function of this provision of the contract?
(
A. I do up to that point and when it goes beyond tha t I think it has to be considered in that context as well.
(CH-8 576 /6-21 (emphasis added) . )
! The def ect in Cities' and Staf f's cases was that they f ailed to demonstrate that paragraphs 3.02 and 8.01(b) were ever used or even intended to be used to promote anything other than the reliability of the Pool, a goal which their l cwn witnesses admitted was legitimate. All that Cities' l and Staf f's evidence amounted to was an attempt to demonstrate that conceivably somebody, someday might use these provisions in a manner which Cities chose to characterize as anticompeti-tive.
139
e s O The Pool's witnesses testified that neither para-graph 3.02 nor 8.01(b) had ever been used to prevent a transaction within the area served by the Pool. (Kapr ielian, CH-20,98 4-986; CH-21,029-30; Mitchell, CH-1861.) Neither Cities' nor Staff produced any evidence of paragraphs 3.02 or 8.01(b) interfering with a transaction within the area served by tb; Pool members. Similarly, neither Cities nor Staff produced any evidence of paragraphs 3.02 or 8.01(b) interfering with an interstate transaction. In fact, Cities' own witness Mr. Westf all admitted that the Southern Cities had been able to purchase non-firm power from Nevada Power Company without any hinderance from paragraph 3.02 and 8.01(b) at all. (CH-10, 36 7. ) Finally, the contention that paragraph 3.02 requires a Pool member to maintain an unreasonably high level of spinning reserves was shown to be patently incorrect 7
and based solely on a tortured interpretation of the contract.
The record shows that the interpretation given by the Pool differs markedly from the interpretation Cities' and Staff's witnesses characterized as unreasonable. (Mitchell, CH-1861 to CH-186 8. )
In sum, the California Power- Pool Agreement is a reasonable and workable arrangement which has achieved the reliability and economy goals which led to its creation.
Those objectives are expressly encouraged by the Federal Power Act. The contract provisions challenged here are reasonable mechanisms for achieving those benefits. There is, thus, no basis for ordering their modification in this p r oceeding.
VIII. 1970 SMUD-PGandE CONTRACT AND ITS AMENDMENTS It is ironic that the contract between the Sacramento
( Municipal Utility District ( " SMUD") and PGandE has been singled out for criticism by Cities and Staf f. The contract !
is in f act evidence of ~ the high degree of cooperation PGandE has extended to publicly owned systems in its area. By any measure, SMUD is a more significant " competitor" of PGandE than NCPA or its members. Yet, PGandE has through its contract with SMUD provided a variety of services which make SMUD's operation more efficient and less costly (Gerber ,
CH-1223/37 to 1224/35), and which have assisted SMUD to finance and operate a large nuclear generating plant. (Ex. 4120; Kuder , CH-1426/13-43.) Moreover, the contract can be terminated by either party simply by giving the appropriate notice (Item by Ref. S-1, Article 20); SMUD's hands are certainly not tied by such an arrangement. Evaluated as a whole, the contract is pro-competitive , not anticompetitive. A key passage from the testimony of SMUD's General Manager, William C. Walbridge, called by Staff as a rebuttal witness, says it all:
140
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l PRESIDING JUDGE: Have you or anyone else with SMUD taken any action toward termination of your agreement with PGandE?
THE WITNESS: No, Ne have not.
THE PRESIDING JUDGE: Why not?
THE WITNESS: Because it is my judgment also that, taken in its entirety, it best serves the District to continue the contract at this time.
PRESIDING JUDGE: Do you feel the contract on the whole is to the benefit of SMUD?
(
THE WITNESS: Yes, I do or I would
, , be recommending its cancellation.
(CH-37, 47 4/3-14. )
As explained more fully below, the record evidence unequivocally supports the conclusion expreeaed by Mr. Walbridge that SMUD benefits by its contract with PGandE. The record also supports the conclusion that " competition" has been advanced by SMUD's contract with PGandE, and there is no credible evidence to the contrary.
A. Overview of SMUD and its Integration Contract with PGandEi The SMUD system and its contract with PGandE are
( described by Mr. Walbridgg in his prepared testimony at CH-2227 through CH-22 30. SMUD is a municipally-owned, vertically integrated electric utility system with its own 55 We cite Mr. Walbridge extensively in this brief because he is the only witness both adverse to PGandE and reasonably knowledgeable about the SMUD-PGandE contract. Where his testimony is consistent with that of PGandE witnesses, it should be sufficient to establish the pertinent facts. There are, however, points of disagreement. PGandE does not accept, for example, Mr. Walbridge's testimony at CH-2228/1-13 and submits that it is incompetent evidence. During his appearance, Mr. Walbridhe admitted that his prepared testimony at CH-2228/1-13 was copied from a pre-existing document and that he had no personal knowledge of SMUD's situation in 1947. (Walbr idg e ,
CH-37, 303/22 to CH-37,305/2, CH-37,415/17 to CH-37,416/9.)
141
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()
transmission and distribution systems and generating facilities.
(Walbridge, CH-2227 to CH-2230.) The latter include six hydroelectric plants located on the American River, the last of which was completed in 1971, with an aggregate in-stalledanddeggndabledry-yearcapacityratingofapproxi-matel 650 mW. (Id.) The District's only other generating facil ty today is a FI3 mW nuclear plant (hereinafter referred to as " Rancho Seco Unit No. 1"). (Walbridge, CH-2229/1-4. )
Thus, the aggregate capability of SMUD's generating f acilities is approximately 1560 mW. (Id.) In addition, SMUD has a contractual right to purchase approximately 360 mW of firm power from the Central Valley Project. (Walbridge, CH-2232/6-12.) Depending on water availability, temperature
, and whether the nuclear plant is in operation, the capability of SMUD's resources vary between 510 and 1900 mW. (Walbridge, I- CH-37,313/15 to CH-37,314/ll.)
SMUD serves the sixth largest metropolitan area in California with electricity. (Walbridge, CH-2230/18-21.) Its service area covers 657 square miles but will soon be expanded to cover 757 square miles. (Walbridge, CH-2229/
48 to CH-2230/5.) SMUD's service area is one of the fastest growing in California. (Walbridge, CH-2223,1 [1] ) . It has a summer peak and on at least one previous occasion SMUD's peak load exceeded the aggregate capacity available to SMUD f rom all its resources. (Walbridge, CH-37,322/8-9.) In such situations and in situations when SMUD suffers a capacity deficit due to a scheduled or unscheduled outage of one of its generating f acilities, PGandE supplies the difference between SMUD's load and its resources pursuant to the integration contract. (Walbridge, CH-2231/41-51; CH-2223, 1 (5].)
(
The SMUD-PGandE integration contract itself (Item by Ref. S-1) and its 1975 amendments (Item by Ref. T-1) contain provisions for sales and exchanges of power between the parties which "are detailed and complex but their purpose is to reflect values and services exchanged." (Walbridge, CH-2231/40-42.)
The term of the contract is for approximately 22 years, but i it can be cancelled by either party unilaterally on 6 years' l notice. (Item by Ref. S-1, Article 20.)
Essentially thore are two key elements relevant here. First, PGandE is bound to purchase all of the capacity and most of the energy excess to SMUD's needs which are 1
56 Mr. Walbridge noted that the dependable dry-year capacity rating of SMUD's hydroelectric plants is being reevaluated in light of the 1976-77 drought. (Walbridge, CH-2229/35-46.)
142
1 J generated by SMUD from certain generating facilities including SMUD's existing six hydroelectric plants and Rancho Seco Unit 1. (Item by Ref. S-1, Articles 1, 9 and 10; Item by Ref . T-1, 115, 13, 14 and 15.) S econd , whenever SMUD's load exceeds the power available to SMUD from its own plants and CVP, PGandE must supply the diff erence. (Walbridge, CH-2231/
44-51; CH-2223, 15; Item by Ref. S-1, Articles 6-8; Item by Ref. T-1, 1110-12.)
The contic:t obligates PGandE to continue to provide similar benefits to SMUD if SMUD chooses to build an 1100 mW steamplant, or 400 mW of geothermal generation, or 150 mW of combustion turbine generation, or all three. (Item by Ref. S-1, Article 2 (c); Item by Ref. T-1, 112(c), 4 and 5. )
(- B. Benefits of the Contract to SMUD Several benefits accrue to SMUD and its customers as a result of the provisions of the integration contract with PGandE. In general, it can be said that this contract has permitted SMUD to achieve a unique stature in the electric l power industry in the United States. (Walbridge, CH-37,315/10 to CH-37,317/1.) It is the only municipally-owned utility in the United States with sole ownership of a nuclear generating unit with a capacity greater than 600 mW. (Gerber, CH-1224/43-46.) That nuclear unit also represents 60% of SMUD's peak load and it is not backed up by reserves built by SMUD, another f actor contributing to SMUD's unique stature in the industry. (Walbridge, CH-37,316/23 to CH-37,317/1. )
- Staff witness Walbridge explained the major benefits of the contract to SMUD in more detail. His testimony was corrobora ted by NCPA Ex. 2521.
(
t First, the contract made it possible for SMUD to
! construct a low-cost source of power in the form of a 913 mW Rancho Seco nuclear plant without building any astociated reserve units. (Walbridge, CH-37,519/6-16; Ex. 25 21 a t 1. )
Thus, when Rancho Seco Unit No.1 is out of service for refueling or out of service due to emergency or other reasons, PGandE provides sufficient capacity and energy to SMUD to serve SMUD's load. (Item by Ref. S-1, Article 6; Walbridge, CH-37,519/ll-13. )
i Outages of the Rancho Seco plant for scheduled and unscheduled maintenance, for refueling and for modifications required by the NRC as a result of the Three Mile Island accident have been f requent. (Walbridge, CH-37,311/10 to CH-37,312/13.) During an outage at Rancho Seco, PGandE does not receive revenues for capacity furnished to SMUD.
PGandE is obligated to provide capacity at "no charge" to 143 L
f- e
- ( SMUD. (Item by Ref. S-1, Art icle 6 (b) . ) The contract also obligates PGandE to provide energy on an exchange basis when Rancho Seco is not in service. (Item by Ref. S-1, Article 8(c).) Debits are recorded in a " bank" account to be paid back with energy surplus to SMUD's needs af ter Rancho Seco comes back on line. (I tem by Ref. S-1, Article 8 (c) . )
In essence, reserves for Rancho Seco cost SMUD and its customers very little.
Cross-examination of Mr. Walbridge by PGandE counsel regarding NCPA Exhibit 2039 brought out the fact that the benefits to SMUD are even greater than low-cost reserves for SMUD's nuclear plant. Whenever SMUD* s Rancho Seco nuclear plant is out of service, PGandE is obligated not only to provide reserves to SMUD but also to pay SMUD a capacity charge as if the plant were actually in service. (Walbr idg e,
( CH-37,486/25 to CH-37,487/19.) The contract requires PGandE to continue to make payments to SMUD, even if PGandE must purchase power to replace the loss of Rancho Seco. (Item by Ref. S-1, Articles 5(c), 5 (e) (3) and 9 (b) (1) . ) It should be noted that PGandE also is obligated to provide SMUD with similar benefits should SMUD elect to build any other generating f acility covered by the contract. (Item by Ref. S-1, Articles 5 (c) and 9 (b) (1) ; Item by Ref. T-1, 11 9, 13 and 14.)
o The second benefit of the contract articulated by Mr. Walbridge was that it provides an " assured market for [SMUD 's ] surplus capacity and energy." (Walbridge, CH-37,519/18-19.) In Exhibit 2521, SMUD explained it this way:
c Capacity and energy surplus to SMUD's k needs will be sold to PGandE. Surplus capacity available in any month will be purchased (by PGandE]. A great deal of energy is non-firm. With minor exceptions, s PGandE has agreed to buy it all. . . . [0] nly a large system such as PGandE could absorb our non-firm energy and pay for capacity available on a monthly basis.
(Ex. 25 21 a t 1-2 ; cf . Ex. 4120 at 2. )
The third benefit of the contract identified LY Mr. Walbridge was that . . . under the contract PGandE is obligated to provide caoacity and energy to meet SMUD load growth above and beyond our current resources in summer months and we pay for that by providing them surplus capacity and energy during our off-peak months of spring and fall."
l (Walbr idge , CH-37,519/20-25. ) The " payment" referred to 144 m
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() by Mr. Walbridge is in the form of an exchange of capacity and energy through " bank" accounts. (Item by Ref. S-1, Article 8; Item by Ref. T-1, 112.) According to SMUD, by using the bank account mechanism embodied in the contract, SMUD is able "to more fully utilize its resources and to postpone investment in new plants for many years beyond the date which otherwise would be required. " (Ex. 4120 at 2. )
In addition to the three benefits Mr. Walbridge discussed at CH-37,519, the record shows that the contract f rees SMUD from certain operating and planning concerns. For example, SMUD need not be concerned with matching a schedule for operation of its hydro generating plants to its load.
(Walbridge, CH-37,323/ll-21.) Nor , given the bank accounts, need SMUD be concerned with the same kind of precision in planning its future resources as other utilities must observe.
( (Ex. 4120 at 2; Ex. 2521 at 2.)
C. Benefits to PGandE's Customers The only record evidence on point was given by PGandE witnesses Kuder and Gerber and was not countered by either NCPA witness Russell or Staff rebuttal witness W.C. Walbridge.
According to Mr. Muder:
The (SMUD-PGandE] integratian arrangement permitted the SMUD resources to be operated in a manner most beneficial to the electrical needs of the area. Accordingly, the customers of all entities in the area, including PGandE and SMUD, would benefit from the integration arrangement.
( (CH-1426/4-8.)
Mr. Gerber expressed the same thought with this further explanation:
Since the rate PGandE pays for purchased power is passed on to PGandE wholesale and retail customers, SMUD's lower-cost nuclear power benefits all PGandE customers as well.
(CH-1223/46-49.)
In other words, the guid cro quo of the substantial obligations to SMUD undertaken by PGandE is the right to purchase excess SMUD power. Since it is a power purchase, PGandE makes no profit on the transaction but its customers benefit from cost reductions that are passed on to them O
145
O through the mechanism of regulated rates. (See Codd , CH-1752/51 to CH-1755/12.) The same commitment that gives SMUD an assured market gives PGandE a reasonably firm source of supply.
D. Intervenors and Staff Failed to Demon-strate that the SMUD-PGandE Contract Has a Significant Anticompetitive Ef fect The focus of Cities' and Staf f's attack was Articles 9 and 10 of the contract. (Item by Ref. S-1, Articles 9 and 10.)
Article 9 provides in pertinent part that cnce SMUD's nuclear plant becomes commercially operable, PGandE must purchase from SMUD and SMUD must sell to PGandE "the capacity of Sacramento (Generating] Resources . . . less the sum of
(
(i) maximum Sacramento Requirements and (ii) exchange capacity furnished to Pacific under paragraph (a) of Article 8 [ payments to the " bank" account] . " (Item by Ref. S-1, Article 8(b) . )
Article 10 provides for similar treatment of SMUD's surplus energy with the exception that PGandE is not obligated to purchase , and SMUD is not obligated to sell its surplus energy when certain conditions, specifically defined in the contract, occur. (I' tem by Ref. T-1, 1 15.)
Staf f and Cities' primary complaint seems to be that SMUD agreed to sell its surplus output to PGandE.
This argument should be summarily dismissed at the outset because it concerns a matter beyond the jurisdiction of this Commission. 16 U.S.C. SS 824(b) and (f); "orthern California Power Agency v. FPC, 514 F.2d 184 (D.C. Cir.),
cert. denied, 423 U.S. 86 3 (1975). Indeed, in its March 22, 1976 order in the instant proceeding the Commission explicitly noted at page 2 that "(s] ales by SMUD to PGandE are beyond k our jurisdiction." However, assuming arquendo Staff's and Cities' complaint could overcome the jurisdictional barrier, the record simply does not support their position. Cities and Staf f have not met their burden of establishing that i Articles 9 and 10 have a significant detrimental impact on competition. In the first place SMUD would not have
! built a plant like Rancho Seco without an arrangement of this sort. (Ex. 2521.) Second, the record does indicate that the contract will expire by its own terms in 11 years and that period may be shortened unilaterally by either 4 party on 6 years notice. (Item by Ref. S-1, Article 20.)
l Third, there is no evidence in the record from which to calculate the actual effect of Articles 9 and 10 on the marketplace. No witness for Cities or Staff nor exhibit purported to quantify the amount of surplus SMUD power committed to PGandE after, say, 1981 through the remainder of the l contract term. In addition, the evidence indicates that
! ever greater quantities of SMUD's surplus capacity and energy C:)
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i )
are , being removed from the marketplace to serve SMUD's own load, while whatever amount of power is removed from the marketplace by Articles 9 and 10 of the contract is declining and will continue to do so. (Walbridge, CH-37,366/23 to CH-37,367/3.)
Even if the Commission is prepared to make assumptions about the amount of power involved, Mr. Gerber's testimony is persuasive that the amount involved is not a significant portion of any relevant market. Noting that the surplus .
SMUD power committed to PGandE by the contract is basically a portion of Rancho Seco Unit No. 1, Mr. Gerber goes on to point out:
1 Q. Does the Rancho Seco Unit No. 1 capacity represent a significant element in the market?
('
A. This capacity represents a relatively small share of the market.
As of 1977 there were 31 steam-electric plants operating in California, 12 of which were the size of SMUD's Rancho Seco plant. During the period Rancho Seco was being constructed and operated, be tween 1970-1977, California entities have installed 14 steaa-electric generating units with total capacity of 9,400 megawatts of which 6 units with 4,863 megawatts capacity have involved joint ownership.
The total capacity of Rancho Seco represents less than 10 percent of this total capacity
- installed by the California utilities in the 1970-1977 period. In addition,
( the construction of 17 units with total capacity of about 15,000 megawatts was announced during this period. The capacity made available to PGandE from Rancho Seco
, Unit No. 1, therefore, represents a relatively small share of the total new capacity that has become available in California.
(CH-1222/48 to CH-1223/17.)
Criticism of Articles 9 and 10 seems largely based on the notion that there is a "less restrictive" or "more pro-competitive" alternative available. However, the ideal contract envisioned by Cities and Staff makes no economic sense. They would impose on PGandE all the obligations assumed in the present contract, but afford it no corresponding rights. PGandE would have an obligation to purchase from O
147
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- O SMUD whatever SMUD wanted to sell, but no right to purchase if SMUD found another buyer. PGandE would have an obligation to supply power to SMUD on demand but no right to receive power from SMUD. Nothing in the antitrust laws or the federal power act requires a company to contract on terms devoid of commercial sense.
Evidence of the counterbalancing, pro-competitive results of the existing contract is substantial. First, the record shows that Articles 9 and 10 made it possible to add a new entrant (seller) to the markets for long- and short-term capacity and energy. (Gerber , CH-1225/49-52. )
When the contract expires or if it is terminated, SMUD will own and control six hydroelectric plants on the Upper American
(
River, a 913 mW nuclear plant and any other generating facilities covered by the contract which it chooses to build. Articles 9 and 10 made it possible for SMUD to obtain its own financing f
for Rancho Seco Nuclear Project. As noted by the SMUD general manager in Exhibit 4120:
[ Articles 9 and 10 are] extremely important to us in connection with the sale of revenue bonds to finance the undertaking to construct generating facilities. Obviously the assured market for surplus power gives the prospective bond purchasers a feeling of security.
(Ex. 4120 a t 3. )
t The opportunity for SMUD to own the Rancho Seco Nuclear Plant, an opportunity made possible by Articles 9 and 10,
( has also helped make SMUD's rates to its customers some of the slowest rising retail rates in. California and the countrv. (See Gerber, CH-1223/42-44.) Another measurable benefit of Articles 9 and 10 is that as long as the contract
[ is in effect and SMUD has low-cost surplus power to sell, its advantages will be passed on directly to PGandE's customers, including the NCPA cities who purchase from PGandE. (Gerber, CH-1223/46-49.) That would not happen if SMUD exported the power outside the PGandE area au Cities and Staff re' commend.
Finally, the record shows that Articles 9 and 10 help keep
' down SMUD's cost of operatirq its f acilities, thus reducing the total costs that must bc borne by SMUD's electric customers.
(Gerber , CH-1223-2 4. )
l The conclusion is obvious. Cihies and Staff have failed to establish that Articles 9 and 10 are the source of a significant competitive harm which outweighs any counter-valling considerations. In fact, as explained above, Articles
(]) 9 and 10 afforded SMUD a unique opportunity to finance the 148 s
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O construction of a large and efficient generating f acility, to provide low-cost power to its retail customers and to become a now entrant in the markets for long- and short-term capacity and energy. We submit that the only conclusion supported by the record is that SMUD's contract with PGandE is both just and reasonable.
E. Aside from Competitive Considerations, the Contract Is Reasonable.
For reasons that to this day remain somewhat obscure, Cities and Staf f mainly attempted to show that Article 9 of the SMUD-PGandE integration contract was unjust and unrea-sonable because SMUD's hydro capacity was allegedly more I valuable to utilities in southern California, particularly a utility like Edison, than it was to PGandE.
Whatever their motive, it is clear that Cities and Staff f ailed to make the showing they intended. At least four witnesses--Nolan Daines, PGandE's Vice-President, Planning and Research; William Walbridge, SMUD's General Manager; Russell Mitchell, SCE's Manager of Power Contracts; and Whitfield Russ, ell, NCPA's all-purpose expert--testified that a decision whether SMUD's hydro capacity was more useful to any utility or utilities other than PGandE would require detailed analysis of a host of factors. (Daines, CH-26,4 56/
6-16; Walbridge, CH-37,370/10 to CH-37,372/5; Walbridge, CH-37,384/7 to CH-37,385/1; Mitchell, CH-33,904 to CH-33,905/20; Russell, CH-9440/3-16.) No evidence was ever introduced that & comprehensive study had been performed, much less that it indicated that SMUD's hydro capacity was more valuable j to southern California utilities.
Lacking any hard evidence, Cities and Staff based their argument on assertions by some of their witnesses that it was their personal view that SMUD hydro capacity would be more valuable to southern California than northern California utilities. The insubstantiality of such testimony was clearly revealed by the Presiding Judge's examination of Mr. Walbridg6. He testified that he "would feel that (southern California] would be a better market" than northern California O
s 149 l
.,~ .
.a for SMUD's surpi (CH-37,47 2/20-2 3; l
emphasis added) .gg hydro capacity.was Mr. Walbridge asked:
PRESIDING JUDGE: Is this a business j udgment (on] which you would be willing to rely in making decisions as to what to do with the SMUD power of it were free to be sold elsewhere than to PGandE?
(CH-37,47 2/7-10. )
The following testimony ensued:
THE WITNESS : It is enough of a judgment were I looking for a market g for this that would certainly be an area that I would bring its availability to their attention feeling that it does t have a high potential.
PRES IDING JUDGE : That is different from what I asked.
THE WITNESS: I thought you asked as a business judgment.
PRESIDING JUDGE: Yes, I did.
THE WITNESS: So I am saying as a business judgment I would take action
,- if this were available by contacting the Southern California Utilities because I would feel that would be a better market for it.
57 As the official responsible for selling SMUD power, it is not surprising that Mr. Walbridge took this position.
On the other hand, Mr. Whyte , the individual who is responsible for purchasing power for Edison, took the opposite view.
He testified that he would stake his professional reputation on his opinion that "it would be rather difficult to show that Edision could make better use of SMUD generation than PGandE could." (CH-30,366/10 to 3 0,368/6. ) These general opinions, a t a minimum, balance each other out. The weight
{ of the evidence plainly establishes that a study would be l required for a definitive answer on the issue. (See Daines, et al. , cited at page 149, supra.)
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l PRESIDING JUDGE: As I understood your answer and please correct me if I misunderstood you, you are indicating that the information was sufficiently reliable so you would look into the .
matter but not sufficient so you would i reach a final conclusion, is that correct?
THE WITNESS: Yes.
(CH-37,472/11 to CH-37,473/3.)
l Obviously if there isn't sufficient information available to SMUD in the world at large for it to reach a final conclusion on the comparable value of its surplus hydro to potential buyers in northern and southern California,
( no amount of conjecture by witnesses in the hearing room will provide an adequate basis for a finding by this Commission.
We surmise that Cities and Staff intended their contention regarding the comparable value of SMUD's hydro as a first step in a larger argument, namely, that the SMUD contract should be modified so that SMUD would receive a higher price for its hydro capacity from PGandE. There
, are several reasons why this argument should not prevail.
First, as we explained in section I.B.1, above, Sierra-Mobile renders it irrelevant. Second, as just explained, taere was no adequate demonstration that SMUD hydro is more valuable to any utility in southern California than it is to PGandE, or that (taking transmission losses, etc. into account) a southern California utility would pay more than PGandE does. Mr. Walbridge testified that there is
( not sufficient information available "so that (SMUD] could reach a final conclusion" as to whether SMUD's hydro was more useful to a southern California utility than to PGandE.
(CH-37,472/24 to CH-37,473/3.) In any event, when discussing the consideration flowing to SMUD under the contract, it makes no sense to look at only one provision. Assuming arquendo that SMUD could get a higher price elsewhere for its surplus hydro if sold as a separate " product," SMUD i has obviously concluded that the other benefits it receives from the contract at least make up the difference. (Walbr idg e ,
CH-37,474/3-14.) Finally, the simple fact is that the question of how much SMUD should be remunerated for selling its hydro ctpacity is beyond both the scope of this proceeding and the Commission's jurisdiction. 16 U.S.C. SS 824(b) and (f).
Both this Commission and the federal courts have recognized the SMUD-PGandE integration contract is two instruments for jurisdictional purposes, one of which is a non-jurisdictional 151 l
~ contract in which SMUD provides certain services to PGandE on terms and conditions that cannot be regulated directly or indirectly by FERC. (Commission Order Accepting Proposed Amendment For Filing, Providing For Section 206 Investigation, Permitting Intervention and Consolidating Proceedings, Docket No. E-7777 (II), March 22, 1978, at 2 (" Sales by SMUD are beyond our jurisdiction by terms ot Section 201 of the Federal Power Act."); Northern California Power Agency v. FPC, 514 F. 2d 18 4 (D.C. Cir.), cert. denied, 423 U.S. 863 (197 5) . )
Thus, Cities' and Staff's contentions (1) that SMUD hydro capacity is more valuable to a southern California utility than it is to PGandE and (2) that SMUD should be better compensated by PGandE is an argument which has no basis of support in the record, and in the last analysis, is completely irrelevant.
In the final analysis, what the record on the SMUD contract boils down to is this. There is no credible evidence
' in the record that SMUD or its customers have ever been disadvantaged by the contract; the record contains only evidence that the contract is and has been a beneficial arrangement of great value to SMUD. We submit that no intervention by the Commission is warranted in those circumstances.
VIII. CITIES AND STAFF HAVE FAILED TO PRESENT COMPETENT ECONOMIC EVIDENCE ESTABLISHING THAT THERE IS AN UNEQUIVOCAL PUBLIC NECESSITY TO MODIFY THE CONTRACTS AT ISSUE SO AS TO FOSTER COMPETITION IN THE LLECTRIC UTILITY INDUSTRY IN CALIFORNIA In a case in which the primary challenge to the contracts under review is that they have anticompetitive
, effects, a necessarily key element is the economic evidence t regarding competition and the effect of the contracts on it.
In the preceding sections of the brief, we have commented on the economic evidence directly addressing specific contracts. There are, however, significant flaws in the
! basic assumptions and analysis of the Cities' and Staf f's economists which should be noted. To establish an " unequivocal public necessity" to change the contracts, the economic case of Cities and Staff should present competent evidence I on four issues of f act which are pertinent to that broad question. First, they must present evidence that the public interest requires or at least is generally served by increasing competition among electric utilities in California. Second, they must present evidence establishing that the contracts at issue in fact impose a " negative restraint" on such competition given the factual circumstances of the industry in California.
Third, so that the value of the competition they seek to promote in this case may be weighed against the costs asso-l 152
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() i ciated with disrupting existing contracts and other f actors aff ecting the public interest, they should provide evidence of the relative value, the importance, and the practical significance of the reductions in competition specifically attributable to the contractual restraints at issue here.
Fourth, there should be reliable evidence that the contract modifications sought will in fact result in an increase in competition in an amount or manner sufficient to provide significant public benefits. In each of these four essentials, the economic evidence proffered by Cities and Staff f ails to support findings in their favor.
In this section of the brief, we will review the economic evidence pertinent to the contracts generally and evaluate the approach taken by the economists for Cities
/ and Staf f on these four issues.
A. There Is No Competent Evidence that the Public Interest Requires Additional Competition in the Electric Utility Industry in California.
No doubt the Commission will be urged to assume that additional competition in the electric utility industry
-- more specifically, additional competition between the .
Companies and smaller entities like the Cities -- would serve the public interest. While competition may be generally regarded as desirable in unregulated industries, it has been recognized by all the economists testifying in this case that the electric utility industry exhibits characteristics -
that, at least in some areas, render competition undesirable.
( E . o .,, Miller, CH-790/38-45; Guth, CH-1287/47 to 1288/9.)
, ( In this proceeding Cities and Staff have the burden of establishing an " unequivocal public necessity" for the contract modifications they seek. Such a burden is not met by assumptions; it must be satisfied by evidence. What Mr. Guth accurately describes as the " bias" of most econcmists in f avor of competition (CH-1287/21-28) does not provide
. that evidence. Our point is not that expert opinion cannot l provide substantial evidence on an issue. L.a point is, l rather, that there must be some minimal f actual basis for connecting a general theory with the industry in California, given the consensus that this industry, for a variety of reasons, is not one where competition is always and necessarily good. The point is also that cross-examination of the economic witnesses for Cities and Staff, reviewed below, has disclosed substantial evidence that additional competition in the electric utility industry in California would not serve the public interest.
O 153
O 1. There Is No Empirical Evidence that Competition Between the Companies and Smaller Electric Systems Would Improve the Performance of Utilities in California; Indeed, the Evidence Is to the Contrarv.
The first and, in our view, dispositive point to be made is that there simply is no empirical evidence that additional competition between the Companies and smaller, publicly-owned electric systems would improve performance of the utilities in California. Indeed, the empirical evidence suggests a contrary conclusion. Unless competition would improve performance and efficiency, there is no unequivocal public interest served by promoting it through modification of the contracts at issue here.
Lacking empirical proof, Cities and Staf f have necessarily relied on theoretical arguments of economists. While we demonstrate below that. the theoretical argument is flawed, the point is that no showing of " unequivocal public necessity" can be based on pure economic theory. Facts are called for ,
but none have been provided.
Dr . A. S te wa rt Holme s , the Staf f witness who addressed competition issues, explicitly acknowledged that there was no empirical evidence or studies that demonstrate competition would improve performance in the electric utility industry. (Holmes, CH-18,48 3/16 to 18,48 4/8 ; CH-18,501/21 to 18,502/3; CH-38,863/17-20.) The testimony of Louis Guth, one of the witnesses for PGandE, is in accord. (Guth , CH-1291/9-20.)
(' For Ralph Miller, the economist for the Cities, competition is an "end in itself." (CH-ll,534/15-21.) While he testified that he " believed" more competition would lead to better performance in the industry (CH-ll,533/2-6), he cautioned "it is not a principal thrust of my testimony to demonstrate the truth of that proposition. " (CH-ll,533/22-23.)
Small wonder. In his direct testimony Miller asserted that there was empirical evidence of efficiency gains resulting from competition in the electric utility industry, citing a study of the results of direct " head-to-head" competition by Walter J. Primeaux, Jr. (Miller, CH-798/9-43.)
As with many other things, Miller read the Primeaux study with less than an objective eye. To quote Dr. Lancaster:
. . . the conclusions actually drawn by Primeaux are considerably different from those represente( by Miller."
(CH-1701/2 4- 27. )
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l The Primeaux study purported to measure the gains in l "X-efficiency" resulting from competition. In simple terms "X-efficiency" is a label given to the theory that people try harder if their business f aces competition. (Miller, CH-
- 35,644/9-18.) The validity of the theory is subject to dispute among economists (Miller, CH-35,644/19 to CH-35,645/ll, discussing George Stigler, "The Xistence of X-Efficiency,"
66 American Economic Review 213 (1976).)
On cross-examination Miller acknowledged that according to the Primeaux study the cost of maintaining such competition outweighed the benefits observed for utilities above a certain size. (CH-12,24 5/2-12. ) While Miller had not considered the level of the break point where competition became more costly than it is worth (CH-12,245/19-21), Primeaux I
fixed it at 222 million kilowatt hours of annual sales. (Gu th ,
CH-1291/47-51; Lancas ter , CH-1701/49-54. ) As Miller acknowledged, this is smaller than most of the systems studied in this proceeding, including many NCPA members.
l (CH-12,246/20 to 12,247/9.) Miller went on to acknowledge that the study he relied on in his direct testimony was irrelevant to that testimony. (CH-12,247/21 to 12,248/9. )
Indeed, if any relevant conclusion can be drawn f rom the Primeaux study, it is that competition would have a negligible or even negative ef fect on the performance of utilities of the size involved in this proceeding. Miller agreed with this basic point:
[Q.] Would you agree that the Primeaux study sugges ts that the economic performance of a company cannot be
,' improved indefinitely by competitive forces, and there are practical limits on the extent of improvements in economic performance that may be derived from competition which may be outweighed in particular circumstances' by added costs, which result f rom competition?
A. With attention directed to the "particular circumstances," part of that quotation I would agree with.
(CH-12,241/20 to 12,242/4.)
l Miller generally acknowledged that some kinds of competition would impose efficiency penalties (CH-12,251/24 to 12,252/8) and even advocated " coordination" rather than competition at the bulk power supply level. (CH-790/38-45.)
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, l We need not rely on Miller's interpretation of the Primeaux study. Primeaux himself provided this analysis:
There are at least two credible explanations of the tendency for costs of competitive electric utility firm to rise as output increases. The first has to do with diseconomies of scale.
The technology of electric utilities is such that complex networks of transmission lines, distribution lines, transformers, power plants, and so forth, are so situated as to provide power to serve a particular area. The larger the area involved, the more complex the interaction within the networks must be, and competition merely compounds the complexity. Moreover, management in a competitive environment must plan, coordinate, and control firms that are operating in the face of more unknowns than monopoly firms, and these managerial problems are increased in larger cities. The combination of managerial and technological problems could tend to cause average costs to rise in a competitive environment.
Primeaux, "A Reexamination of the Monopoly Market Structure for Electric Utilities,"
in Promoting Comeetition in Regulated Mar ke ts 19 2-9 3 (A. Phillips ed. 1975) t (footnote omitted).
( In other words, in area systems of a size typical in California, technological efficiency of well-coordinated single firm operations provides a better economic result than multifirm
" competitive" systems with their attendant transactions costs. The existence of the economic cost considerations mentioned by Primeaux is substantiated by the testimony of Mr. Daines. (CH-44,77 3/4 to 44,774/11. )
In the quote above, Primeaux mentions "two cr' edible explanations" for the cost increases experienced by competitive firms. His second explanation:
Another explanation for the upward-
, sloping average cost curve for competitive firms has to do with the "X-efficiency" concept. Given the nature of the competitive situation, it is likely that the X-efficiency effect is more significant for small 156
O firms than for larger ones. To the extent that smaller firms face competition from larger rivals, the relative lack of power due to size will force them to operate more efficiently than they would in the absence of competition. In the case of larger firms, their size provides them with a relatively secure position compared with their smaller rivals, so there is less necessity to be efficient.
As the firms become larger , the X-ef ficiency eff ect would be neutralized, and finally the unf avorable effects on costs of competition will overwhelm the X-efficiency effect so that competitive firms end
( by operating at higher costs than monopolists.
Id. at 194. In other words, competition between PGandE and NCPA would empirical be worse ghan no competition. So much for the evidence.5
- 2. There Is No Reliable Theoretical Basis for a General Presumption that Additional Competition Will Improve the Performance i
of the Electric Utility Industry in California.
As indicated above, economist Miller did not undertake l
in his prepared direct testimony to demonstrate tha t increases in competition would result in superior economic performance
. by the electric utility industry in California. Of the economists for Cities and Staff, Dr. Holmes was the principal
( spokesman on this subject. He attributed to competition the benefit of improved " market performance. " (See Holmes testimony titled "Value of Competition in a Regulated Industry" at CH-1016-1020, particularly CH-1018/16-29.)
Dr.' Holmes stated expressly that "I am basing my belief in support of competition basically on the theoretical mer its. " (CH-18,502/1-3.) This point was underscored by the fact that the prepared direct testimony titled "Part I -
58 A similar theme, that competition is of questionable value in this industry and can threaten the achievement of important scale economies, emerges from another study Miller characterized as " empirical"--W.R. Hughes, " Scale Frontiers in Electric Power," in Technological Change in Regulated Industries, (W . Capron ed. 1971). See CH-12,235/10
~
to CH-12,237/4; CH-12,238/2 to CH-12,239/15.
({}
157
O Conceptual Framework" appearing at CH-1007-1033, which includes his discussion of the benefits of competition, is largely a duplicate of testimony submitted in previous cases (CH-18,310/1 to 18,311/24) and was not developed as a result of a particular study of California. (CH-18,311/24 to 18,312/4. )
Mr. Guth has pointed out that economic analysis based solely on a t.1eoretical, idealized version of competition is of little value .n making real-world decisions. (CH-1313/52 to 1314/36. Even on a theoretical level, however ,
cross-examination r egarding the particular " market performance" benefits which economic theory associates with competition disclosed little basis for belief, much less any clear evidence, that performance banefits could be expected to result from an incremental increase in competition among electric utilities in California. Dr. Holmes was asked questions regarding each of the six aspects of market performance listed in a leading industrial organization text, Professor Joe S. Bain's Industrial Organization (1959). The questions sought to identif y those elements of performance that would be improved by additional competition in the electric utility industry in California. The record on the linkage between additional competition and the six elements of performance is as follows:
- 1. The technical efficiency of production.
Dr. Holmes suggested "It is possible there could be improvements resulting from the remedies I suggest" if smaller entities' were able to construct more efficient units as a result. (CH-18,50 5/1-9. ) He viewed it as equally possible, however, that the same efficiency would be obtained by larger entities constructing units and selling power to smaller l ;
entities at regulated rates. (CH-18,505/10 to 18,506/7.)
l Mr. Kaprielian has pointed out tha t the largest scale efficient l units can be constructed within the PGandE area system under i existing arrangemen ts. (CH-1449/31-3 5 ; see also Gerber,
! CH-1218/30-40 and 28,890-891.)
t l
- 2. Relationship between price and marginal cost.
Given the fact that price is regulated, competition could not be expected to aff ect this measure of performance.
(CH-18,511/8 to 18,512/25. )
- 3. Size of industry output.
l This element of performance would not be affected by the kinds of remedies considered by Dr. Holmes. (CH-18,513/1-9.)
O 158
l
- 4. Size of sales promotion costs relative to the costs of production.
Dr. Holmes thought it reasonable to expect more competition to increase sales promotion costs, a detrimental rather than a beneficial result. (CH-18,513/17-22. )
- 5. The character of the product, including design, quality and variety.
Dr. Holmes agreed that there is little room for product dif f erentiation in the electric utility industry.
(CH-18,515/24 to 18/516/8.) Competition "might" result in a reduction of the quality of service as a result of efforts to lower price. (CH-18,517/4-13.) Dr. Holmes conducted no study from which firm conclusions could be drawn. (CH-18,517/14-20. )
(
- 6. Progressiveness.
on a purely theoretical level there is disagreement .among economists on the relationship between competition and progres-siveness. None of the theorists has specifically considered the electric utility industry. Dr. Holmes certainly presented no evidentiary basis for concluding that additional competition would lead to greater progressiveness. (CH-18,517/21 to 18,520/12.)
The thesis that competition stimulates progressiveness and the rate of technological change was identified by Ralph Miller as the basis for his belief that the remedies he suggested, and the resulting competition, would " slow the rate of increase" l of electricity rates for all electricity users in California.
, (CH-12,847/5-19.) The evidence he cited to support a connection
, between competition and the rate of technological change was
( reviewed in detail during cross-examination, using F. M. Scherer's j text titled Industrial Market Structure and Economic Performance l (2d ed. 1980). (CH-13,599 to 13,616.) Mr, Miller characterized i
the Scherer text as "the most comprehensiva and best summggy (CH-13,600/19-21.)
. of that evidence that I am aware of. "
L 59 Scherer is among those economists who acknowledge a bias favoring competition. His text was used not because he is necessarily tha ultimate authority on competitive markets but because i...s work was embraced by Mr. Miller and Scherer's bias is more balanced than Mr. Miller's.
O 159 I
() Scherer divided studies of the relationship between a competitive market and progressiveness into two ca tegories--
the " qualitative evidence" and the " quantitative evidence. "
Scherer included in the " qualitative" group the studies Miller initially identified as supporting his conclusion. i Regarding these studies, Scherer concluded:
The main lesson to be drawn from a review of the qualitative evidence is that no simple, one-to-one relationship between market structure and technological progressiveness is discernible. Indeed, it seems reasonable to infer that market structure has less influence on the pace at which innovation occurs than certain other variables.
(
Scherer, 2d ed. at 432, 1st ed. at 371.
(See also CH-13,601/5-ll. ) In other words, the " qualitative evidence" provides no basis for concluding that more competition would improve technological progressiveness in the electric utility industry in California. When confronted with Scherer's statement and asked if he agreed with it, Miller gave an argu-mentative "yes. " (CH-13,601/5 to 13,602/2.) The argumentative part of the answer was, in essence: Remember the quantitative evidence. (Ibid.)
Unfortunately for Miller and his clients, the
" quantitative evidence" is no better Scherer described the bulk of the quantitative studies &O in this fashion:
Early attempts to relate productivity
( change to some index of market concentration yielded equivocal or contradictory results--
in part, it would appear, because of differently defined variables or sample coverage, failure to take into account variables other than concentration associated with productivity growth, and the formidable dif ficulty of measuring productivity growth when product characteristics are complex and changing.
Scherer, 2d ed. at 433.
60 None of the " quantitative studies" were of the electric utility industry and thus are not " empirical evidence" of the kind whose lack is pointed out in section VIII. A.l. above. Their existence, however, illustrates that empirical studies are possible and could have been presented by economists for Cities or Staf f.
O 160
(See also CH-13,602/12-19. ) Asked whether he had suf ficient information to rgree or disagree with Scherer's statement, the witness answered no in typical Millerese:
I have sufficient general knowledge of the problems in the area to comment about Professor Scherer's statement on e general level but I do not have sufricient information about the partic-ular four articles of work that I cite to give you a completely independent i
opinion specifically with regard to those four early studies.
(CH-13,604/12-17.)
( In the recent second edition of his book, Scherer goes on to discuss the "most carefully conducted" productivity study to da te, by Douglas Greer and Stephen Rhoades. These economists compared indices of productivity growth with the concentration ratios of three large samples of industries over substantial periods of years. The result, as described by Scherer: "For all three samples, seller concentration ratios were positively and significantly correlated with the productivity growth indices, other relevant variables being equal." (CH-13,60 5/7-10 ; Scherer , 2d ed. a t 43 3.) In other
, words, the more concentrated, less competitively structured industries displayed greater productivity growth. Significantly,
! Miller was unf amiliar with this study. (CH-13,609/10.)
- 3. The Conduct Characterized as Competition 3
Is Not That Which Classical Economic
,. Theory Associates with Good Performance.
An additional flaw in the theoretical underpinnings of Staff's economic testimony is a misconception of what constitutes competition. Again Dr. Holmes was the principal spokesman. His definition of competition is satisfied so long as a particular buyer is able to choose from alternate sources of supply, even though neither supplier is interested in selling to the buyer. (CH-18,58 3/23 to 18,584/3. ) This is a dramatically dif ferent notion of competition from the classical model of competition among many sellers marketing to many buyers, as Dr. Holmes recognized. (CH-18,437/13 to 18,439/10.) While initially suggesting that his definition was essentially the same as the concept which Scherer refers to as " rivalry" (CH-18,439/12 to 18,440/11) , Holmes later admitted that his concept and Scherer's were distinct.
(CH-18,58 4/4 to 18,5 85/6.) Given the important definitional differences, there is no basis whatever for suggesting that classical economic theory supports the view that competition 161 s
- _1-
in the form sought by Staff and Cities should be promoted.
The theorists and witnesses are talking about different things. Dr. Holmes essentially acknowledged this point, testifying that if it could be shown that the existence of alternative suppliers " puts no pressure on any supplier" and that such alternate suppliers were "not interes ted" in attracting new loads, then competition as he defines it would not encourage better performance. (CH-18,585/18 to 18,586/21.)
The problem with Dr. Holmes's approach is that, while he recognizes the issue, it is one on which Cities and Staff, not the Companies, have the burden of proof.
They have not sustained their burden. Nor, given the developments in the economics in the industry in the last 10 years, should
/
utilities in California have any interest in serving additional loads. (Gerber, CH-29,210/16 to 29,211/2.) So long as the long-run marginal cost of serving the new load is likely
, to be less than the average cost-based rates charged for the service, there is little motive to compete for new load.
(See CH-38,961/10 to 38,962/9.) There is thus a real question of fact which cannot be resolved in favor of Cities and Staff on the present record.
B. There Is No Competent Evidence Establishing That the Contracts at Issue Have a Real Impact on Competition.
To demonstrate an " unequivocal public necessity" to change the contracts under review requires, at a minimum, a showing that there are real and substantial restrictions
( on actual competition in real markets and that elimination of these restrictions is important to the public interest.
If one flaw stands out f rom the others in the l economic case Cities and Staff presented, it is the near total failure to study the actual f acts and circumstances of the industry in California. As a result, there is no credible economic evidence that the contracts at issue here have or will have an adverse eff ect on competition. Similarly, there is no credible evidence regarding the value or importance of whatever competitive impacts there may be.
- 1. The Economic Evidence of Cities and Staff is Based on the Incompetent, Biased and Largely Stricken Direct Testimony of Cities' " Engineering" Advoca te s .
The absence of any study of the specific facts pertinent to California, and the resulting reliance on incompe tent tes t imo ny, was clearest in the case of the econcmic witnesses for Staff.
162
O Dr. Holmes was the Staf f witness who undertook to analyze the contracts. Cross-examination of this key Staff witness revealed an astonishing absence of any independent study of the California markets, the participants in them, and even the contracts he purported to evaluate. Dr. Holmes did not read the contracts at issue, although he reviewed parts of some of them. (CH-18 , 315/4-7. ) Nor did he accompany Staff counsel and engineers on their trip to Calif ornia to interview people in the industry there. (CH-18,326/20-25. ) Nor did he undertake to review the documents produced in this proceeding.
(CH-18,328/2-6.) Indeed, Staff counsel furnished him all the exhibits appended to his testimony (CH-18,328/7-10), and his testimony was draf ted pefore he ever saw the documents. (CH-18,331/16-18,332/18.)
Dr . Holmes ' approach was not to investigate and
( analyze the f acts in California. Instead he assumed them. It is a telling comment on the bias of the Staff in this case that the f acts he assumed were those contained in the direct testimony of the Cities' advocates--Russell, Hill, Westfall, Alexander and Miller--including their testimony stricken from the record. (CH-1047/1-3 5 ; CH-18,327/1-ll . )
It is important to understand the extent to which this approach influenced Dr. Holmes's ultimate conclusions. He made no attempt to interpret the contracts themselves.
(CH-18,315/8-15.) Rather the "intervenor 's testimony was a more important course [ sic, source] than the agreements themselves. "
(CH-18,315/1-3.) He worked from the unexpurgated testimony of Cities' witnesses. (CH-18,327/12-20.) As a result, his own testimony and the exhibits containing his analysis of the contracts (Ex. 1084-1087) are based on incompetent evidence.
, ( Alexander's testimony in Docket No. E-7777(II), as an example,
( was stricken in its entirety.) Dr. Holmes made no attempt to
- verify the truth or accuracy of the testimony filed by Cities' witne sses . (CH-18,326/13-19.) Significantly, Staff counsel 61 It is useful to contrast this approach with that of the economic witnesses for PGandE. Mr. Guth had access to a wide l
range of f actual material (CH-1285/21-36) , reviewed relevant
! contracts (CH-29,294/8 to 29,296/6) , reviewed relevant documents (CH-29,301/16 to 29,302/24) , and conducted an empirical study of the eff ectiveness of regulation on Intertie transactions (CH-29,650/9-19). Mr. Gerber, an acknowledged expert (see, e.g.,
In the Matter of New England Electric System, SEC Docket 70-4663, Initial Decision (mimeo) at 27 (July 17, 1972)) with extensive practical experience in the industry (CH-1203/48 to 1204/38),
nonetheless spent in excess of 500 hours0.00579 days <br />0.139 hours <br />8.267196e-4 weeks <br />1.9025e-4 months <br /> preparing his testimony (CH-29,007/6-7), reviewing substantial materials in the process (CH-29,08 0/11 to 29,081/5) .
163 1
,4.-, . - - . , _ - _ .-
l 9
l i
() originally guggested this approach to Dr. Holmes. (CH-18,327/21-18,328/1.)
62 Joe Sims, former Deputy Assistant Attorney General in the Antitrust Division of the Justice Department, criticized essentially this same approach to competitive analysis taken by a Federal Trade Commission Staff witness in the DuPont
)
i titanium dioxide case. According to Mr. Sims:
The staff introduced some DuPont documents and the testimony of one economist who had looked at those documents, and rested its case. The documents proved beyond a shadow of a doubt that DuPont did what it did on purpose, and the
( economist said that was bad because DuPont could have chosen other things that would have been more pro-competitive.
When pressed, the economist mentioned licensing of DuPont's technology to i
its compebitors as one option, and seemed surprised that DuPont had not chosen the lower-profit alternative over the I
higher. (DuPont pointed out tha t the economist never talked to DuPont or any of its competitors, and thus didn' t really know anything about the industry other than what the FTC told him. This is, of course , the kind of economic e
analysis that gives economists a generally undeserved reputation for ignoring the
- ( real world. In this case, that particular criticism seems to understate the problem.)
J. Sims, " Antitrust Law Is No Business Equal Opportunity Act," Legal Times of Washington, March 10, 1980, at 12, cols. 2-3.
This approach f ailed before the FTC. The case was a legal disaster for the Commission staf f because the Commission essentially accepted Staff's views of the f acts, but ruled l that the conduct thus established did not violate the antitrust laws or section 5 of the Federal Trade Commission Act.
E.I. DuPont de Nemours & Co. , - 3 CCH Trade Reg. Rep. 1 21,770 at 21,969-70, 21,982-85 (F.T.C. Docket 9108, October 20, 1980).
O 164 t . . - _
() The same approach was used by Staf f's other economic witness, Mr. Earley. Although Earley was provided with background summaries of the contracts by FERC engineers, he did not rely on them. (CH-19,131-132. ) Instead, Earley's testimony on contract " restrictions" was based on the testimony !
of NCPA witness Russell and discussions with Staf f counsel.
(CH-19 ,135. ) In other words, Earley assumed the validity of contract interpretations and f actual assertions made by Cities and his own counsel.
The economist for the Cities, Ralph Miller, proceeded in a similar fashion. Like Dr. Holmes, Miller did not read most of the contracts at issue. (CH-11,7 29/1-4; 11,737/9-22; 11,949-950; see also 11,667/7-23.) Indeed, in a curious exchange regarding the PGandE-SMUD Agreements, he seemed unaware of whether the contract to be considered was the t 1970 Contract as amended or the old 1955 Agreement. (CH-11,784/9-11,790/2.) Also like Dr. Holmes, Miller relied on the prepared direct testimony of the witnesses for Cities, principally that of Russell and Westf all, for "an understanding of the market context" of the agreements at issue. (CH-8 22/5 to
, 823/4.) Miller acknowledged that his testimony on the economic eff ects of the agreements at CH-823 through CH-827 was based on the prepared testimony and attached exhibits of Cities' other witnesses. (CH-ll,637/12-15.) The filed testimony was key to Miller 's analysis :
It is my view that all of this engineering and technical analysis is essential
- for a proper economic conclusion as to the market situation and economic eff ects of the agreements at issue in
, this proceeding.
(
(CH-11,602/8-11.)
Indeed, the " essential" and "necessary" nature of it was repeatedly reiterated by Mr. Miller. (CH-ll,602/16; CH-11,602/25; 11,604/24 to 11,605/20.)
of course, much of the prepared direct te stimony of Russell and Westf all was stricken as incompetent, thereby eliminating the f actual basis for Mr. Miller 's analysis of the contracts. For example, of the approximately 95 pages of Russell's testimony listed by Miller at CH-ll,598/5 to 11,602/4 as testimony he relied on, over 55 were stricken by the Presiding Judge in his Order on Motions to Strike Testimony, December 28, 1978. Substantial portions of Westfall's testimony cited by Miller at CH-ll,603-604 as testimony he relied on were stricken as well.
()
165
O C. The Economic Testimony Provides No Method for Measuring the Importance of the Competitive Impacts Alleged.
In general, Dr. Holmes was satisfied to deliver nothing more than a view as to whether isolated contract provisions had a " potential for anticompetitive effect."
Simply put, his threshold for finding a " potential for anti-competitive eff ect" was so low that his opinions are rendered legally and economically insignificant.
It is curious but true that while Holmes defined
" competition" in terms markedly different from the classical notion, his definition of monopoly power and anticompetitive effect were based on the classical idea of a perfectly competi-tive market. To Holmes, monopoly power meant the ability I to act in a manner different from the way an entity could act in a perfectly competitive market. (CH-18,343/18-18,344/21.)
c His definition of potential anticompetitive effect was similar:
Q. Doesn't it follow by your definition in criteria [ sic] particularly the definition of monopoly power that a potential for anti-competitive ef fect exists whenever it can be shown that a particular participant in a market has the ability to act in a way diff erent from the way it would act in a purely competitive market?
A. That is correct.
L b (CH-18,464/10-16.) He explicitly recognized that this concept included a wide range of market power, from that held by pure monopolists to that of relatively small entities engaged in real world competition. (CH-18,441/1 to 18,443/3.) By his definition, a firm could have monopoly power even if it operated in a market with numerous alternative suppliers.
(CH-18,870/7-10.) It would also be possible for a firm with a market share of less than one percent to have monopoly power in this sense. (CH-18,940/16-18,941/1.) His analysis ignored the fact of regulation, an approach which leads to " mindless" economic analysis. (Guth, CH-29,601/2 to 29,602/8.)
Dr . Ho lme s 's tes t for a potential anticompetitive
- effect was further attanuated by the remote level of potential he required. He was satisfied if there was any possibility of an anticompetitive effect, regardless of whether one had occurred, in any market that had a potential for competition, O
166
c ,
O even if no competition presently existed. (CH-18,4 57/24 to 18,458/15.) The only market he could imagine where there was no potential for competition was a market in which s tate or f ederal law "manda ted that there would not be under any circumstances alternative suppliers permitted." (CH-18,458/17 to 18,459/1.)
The sum of Dr. Holmen's examination, then, was a demonstration that his judgments were meaningless. Any restraint, by definition, would be impossible in a " purely" competitive market in the classical sense. Yet a potential restraint in a potentially competitive market is all Dr. Holmes required to meet his standards for anticompetitive effects.
The judgments of Ralph Miller regarding the impact 7
of contract provisions were equally trivial, for somewhat different reasons. For Miller, bigness is badness, and o any " impediment" to a small competitor of a " dominant" company 5 is bad. (CH-791/46 to 792/4. ) The requirement of dominance is satisfied by possession of a large market share (CH-12,130/1-6) which need not constitute a monopoly. Indeed, a market in which four firms shared 50% of the market would have four " dominant" firms as Miller used the term. (CH-12,132/2 4 to 12,133/18.) As explained in more detail below in the discussion of relevant markets, Miller blithely drew new and inconsistent geographic boundaries for his relevant market definitions so ac to establish PGandE's " dominance. "
Short of subsidies (CH-12,146/8-10), Miller basically advocated f avoritism for small competitors. (CH-12,14 7/7-17. ) Indeed, he specifically testified on redirect that anything that would lower the costs of Cities would have a beneficial ef f ect on competition, but that lowering costs of larger
( entities would have an adverse impact. (CH-13,358/7 to 13,359/3.)
D. The Economic Evidence Provides No Basis for Judging the value of Benefits to Be Achieved.
In general, the economic witnesses for Cities l and Staf f made no attempt to evaluate the costs and benefits of the changes they were advocating. (Guth , CH-1312/22-48.) Absent such analysis , there is no evidentiary basis for concluding that the public interest calls for the contract changes and other remedies they advocate. The lack was evident in the case of Dr. Holmes:
i 4
O 167
( Q. Would you say competition in the form of rivalry exists between PGandE and Southern California Edison?
A. Yes, I would but I would emphasize for the issues in this case as pointed out by Mr. Earley, it was not necessary to analyze that competition.
Q. Would you agree that it is impossible for any remedies that the Commission might impose in this case to result in the formation of perfect competition in California among the utilities there?
/ A. Yes. I would say it would be impossible and I do not believe that I have in any place stated that should be the goal of the remedivu.
PRESIDING JUDGE: Was the word "possible" or " impossible"?
THE WITNESS : Impossible .
Q. Given that some competition already exists in California and the attainment of perfect competition is impossible, is there any mechanism for evaluating the worth of such additional incremental competition that might be
.- achieved by the imposition of the remedies
( ( that have been suggested in this proceeding against which to balance the costs and difficulties that might be associated with the imposition of those remedies?
( A. Not in any quantitative sense.
(CH-18,48 9/12 to 18,49 0/10. )
l Similarly, Ralph Miller conducted no cost-benefit analysis
~
of the contracts at issue in the proceeding. (CH-ll,9 48/9-17.) Although in general, Miller argued that Cities' bulk power supply costs should be lowered to strengthen their competitive posture in the retail marke ts (CH-12,128/13 i to 12,129/4), he could not say whether any increase in competition l at the bulk power supply level would in f act increase compe tition at re tail. (CH-ll/8 96 /6-15. ) His seat-of-the-pants estimate of the structural impact of his remedies suggested modest O
168
e . .
() results (a reduction of concentration ratios by a few percentage points in the next decade) of questionable worth. (CH-12,804/13 to 12/805/15.) Regarding the bottom line question of the actual impact of the contracts on the price of power to the Cities, Miller testified as follows:
Q. At CH-791, lines 42 through 46, you state that the contracts under review place smaller entities ccmpeting for retail sales, at a disadvantage in obtaining bulk power supplies to support their retail operations.
Am I correct that you do not mean by that statement to assert that small entities in northern and central California,
/ such as members of NCPA, are unable to obtain such bulk power supplies to meet whatever retail market they serve? -
A. Tha t is correct.
Q. So, that the disadvantage you refer to is the loss of an opportunity to obtain what you refer to as " bulk power supplies" at what might possibly be a lower price?
A. That would be the thrust of my concern. My concern is directed more specifically at the constraints imposed t on these entities that' limit their freedom
- in assembling their bulk power supply
( requirements as they choose. But, the purpose of the f reedom is to have the opportunity to seek to do so at a lower price.
Q. In connection with the preparation of your prepared testimony, did you personally conduct any studies to determine whe ther the NCPA situation would enjoy low-cost power, absent the arrangements you referred to in your testimony, and the extent of the price impact tha t these arrangements have?
169 l
l .
e .
() A.
No, I did not make any quantitative study of the aggregate impact of the agreements.
(CH-12,127/13 to 12,128/12, emphasis added. )
E. The Economic Case of Cities and Staff Was Further Flawed by Unrealistic Definitions of the Relevant Markets.
Relevant market is a concept developed in anti-trust cases. Section 1 of the Sherman Act prohibits un-reasonable restraints of trade. To determine whether a particular restraint is " unreasonable," one first defines the " relevant market" and then evaluates the impact or effect
' of the challenged restraint in that market. United States v.
Columbia Steel Co., 334 U.S. 495, 524, 526-27 (1948);
Hallmark Industry v. Reynolds Metals Co. ,1971 CCH Trade Cases 1 73,409 at 89,669 (N.D. Cal. 1970), af f ' d , .489 F. 2d 8 ( 9th Cir . 197 3) , cert. denied, 417 U.S. 932 (1974).
Similarly, in section 2 cases, to determine whether monopolization has occurred, one must as a threshold step define the " relevant market" allegedly monopolized. See Acme Precision Products Inc. v. American Alloys Corp., 484 F.2d 1237, 1240-41 (8th Cir. 1973) and United States v. Empire Gas Corp. , 537 F.2d 296, 302 (8th Cir. 1976), cert. denied, 429 U.S. 1122 (1977)
(attempted monopolization); United Sta tes v. Grinnell Coro. ,
384 U.S. 563, 570-71 (1966) (actual monopolization). In implementing the Supreme Court's directive to consider the "anticompetitive effects" of matters before it, this Commission t essentially must undertake, as an initial step, the same analysis of the impact of the alleged restraint in the " relevant
( mar ket. " Florida Power & Light Co. , 18 Fed. Pwr . Serv. 5-783, 5-791 to 5-793 (1979), rev 'd on other grounds sub nom. Florida Power & Light Co. v. FERC, 660 F.2d 668 (5th Cir., Unit B, 1981).
In defining relevant markets, courts have emphasized that the realities of the marketplace must be reflected.
" Congress prescribed a pragmatic, factual approach to the definition of the relevant market and not a formal, legalis tic one. The geographic market selected must, therefore, both
' correspond to the commercial realities' of the industry and be economically significant. " Brown Shoe Co. v. United Sta tes, 370 U.S. 294, 336-37 (1962) (f ootnote omitted) . Defining relevant markets " turns on discovering patterns of trade which are followed in practice. " United States v. United Shoe Machinery Coro. , 110 F. Supp. 295, 303 (D. Mass. 1953),
aff'd eer curiam, 347 U.S. 521 (1954). This adherence to commercial realities is no less important where the electric
{} utility industry is involved. "[A]ny examination of market 170
O definition necessarily entails an intimate analysis of the commercial setting in which competition has allegedly been stifled. " Town of Massena v. Niagara Mohawk Power Coro. ,
1980-2 CCH Trade Cases 1 63,526 at 76,796 (N.D.N.Y. 1980).
What the cases contemplate, then, is a careful study of the transactions actually occurring and a survey and classification of who sells what to whom. Neither Cities nor Staff made a serious attempt to analyza markets in this f ashion.
- 1. Miller on Markets:
Q. Would you agree that would be a more valid way of looking at the question?
A. Today I might, tomorrow I might change my mind again.
(CH-12,366/12-16.)
Cities' economist Miller presented views of relevant markets that can f airly be described as both obscure and inconsis ten t. His theory of responding to questions seemed to be when in doubt or difficulty, obfuscate. Miller steadfastly refused to provide any reasoned or even comprehensible explanation of his market analysis . For example, when asked whether there was a "right way and wrong way to look at mar ke ts , in terms of identifying them with precision and determining what effects an agreement might have," Miller responded:
Not all convenient ways (of looking at markets] are necessarily equally
,' acceptable, particularly if your defini-( tion of a convenient way is any way that any economist is prepared to testify as convenient. . . . On the other hand ,
there may be several right ways or several useful ways of looking at market definitions
, for evaluating the impact of an agreement.
I My only point is the f act there may be several dif f erent ways, does not mean something is wrong.
(CH-12,344/ll-25.)
We are aware of no case that equates relevance with " con-venience" in the process of identifying relevant markets.
( )
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() Miller's " market definitions" were not grounded upon commercial realities, but rather depended on the " purposes" 1 of whatever analysis he engaged in, i.e., the outcome he I wished to reach. Consider the following remarks: l There is a separate market (for trans-mission over the Pacific Intertie] that is appropriately analyzed fyr some pur-poses." (Miller had not identified l a separate market for such transmission l in his filed testimony.] '
(CH-12,332/24-25, emphasis added.)
. . . for many pu r pose s the geographic extent of the market for supplying energy to Calif ornia potentially encompasses most of the area of Western States Coor-dinating Council (WSCC), specifically including the Pacific Northwest, most of Nevada, southern Utah, and Arizona.
(CH-815/9-13, emphasis added.)
! . . . there may be some puroose for l
which one would need to analyze each transmission line as a separate market.
(CH-12,340/20-22, emphasis added.)
i Similar remarks can be f ound at CH-12,3 42/14-16 ; 12,343/21
- k. to 12,344/4; 12,35 6/5-13; 12,357/10-13 and 12,77 4/1-18. I c
( This unprincipled approach to relevant markets i is not surprising, due to the basis for Miller's impressions i of markets in California. To develop product markets, for example, Miller did not do empirical studies of cross-elasticity
! of demand (CH-12,313); rather, he relied largely on a " general i l knowledge" of electric utility planning, construction and operation based principally on his participation in non-l California rate cases, review of various FERC and FPC reports and two of the contracts at issue in this proceeding, snd ;
the like. (See CH-12,32 4-326 and 12,316-317. ) Miller did '
not even interview his own municipal clients regarding their purchasing decisions for the purposes of determining product mar ke ts . (CH-12,329 and 12,351. ) In short, Miller viewed the concept of relevant markets as a theoretical tool to justify his conclusions rather than a reflection of commercial ,
realities. (See, e.g., CH-ll,552; Guth, CH-1296.)
(1) l 172 1
O The results of Miller's market inquiry are as elusive i as his rationale and methodology in making the analysis in the first place. The closest Miller got to a workable definition )
of any market was his discussion of the bulk power product market and its four submarkets (CH-815) , which he defined even though admitting that the scope of possible competition in those markets is substantially limited due to such factors as economies of scale. (CH-790.) Miller never delineated a geographic area corresponding to these product markets; rather, he made various suggestions as to geographical areas to
- consider. For example, for the generation and sale of energy, the State of California is "potentially" a single market, yet for "many purposes," this market stretches f ar beyond the state and into areas such as the Pacific Northwest. (CH-815.) For transmission services, "one convenient way" Miller
. sugges ted is to treat each service area as a separate geographic market area--even though there are " specialized" markets for various types of transmission that go f ar beyond these areas. (Id.) And for the integration and bulk power services and firm bulk supply markets, the gecgraphic area "does not extend far beyond the State of California. " (Id.) How f ar beyond we are not told. Cross-examination on this market
" definition" made it clear that Mr. Miller wasn' t even contending that these two markets actually do extend beyond the State of California; but only that "if it extends . . . beyond the state of California, it does not extend f ar beyond the state of California. " (CH-12,36 9/21-25, emphasis added.)
Miller was even more footloose in his treatment of retail electrical sales. According to Miller, the market for retail sales of electricity (which serves as the context for a large part of his economic analysis) has no submarkets
( which are relevant to this proceeding. (CH-78 9. ) As for the geographic scope corresponding to this allegedly important product market, however, Miller was both elusive and incon-l sistent. Compare the following:
Q. . . . Is there any way we can .
get a handle on the geographic scope of the retail market? In other words, is there one geographic scope for the retail market that you would be satis-fied with as being pertinent to our consideration or do we have to break it down in some way?
A. If you need to get into de tails and things like market share calculations, there is no one geographic scope that I would accept as correct and as suf fi-ciently useful to permit exclusion of 173 4
i
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) all other geographic scopes f rom con-sideration.
(CH-12,39 6/12-22. )
Q. . . . What is the geographic market that corresponds to the product market retail sales of electricity?
A. There are several possible geographic scopes and we need to know about the purpose for which the market is being identified. . . .
Q. . . . Am I clear you cannot identify a single geographic market with that product market?
A. That is correct unless we specify something more about the context in which we are looking at it.
Q. . . . The context that we are looking at is the context that you defined for the purpose of defining that market and taking tha t as a context, is there a single geographic market that goes with the product market retail sales of electricity?
A. There is a single one that I would accept as summarizing on the broad--
relatively broad product level of retail l sales of electricity . . . on that summary level . . . it is the state of California.
{
(CH-12,773--12,775.)
i Miller's whimsical approach to the geographic L
scope of markets was well illustrated in his testimony about the so-called " transmission services" market. In his direct testimony, Miller identified the general service area of each integrated utility system as a " convenient way to view these markets. " (CH-815. ) However, this " convenient way" turned out to be far different from a relevant way, since the geographic area thus defined did not correspond to any relevant product market:
l . . . what I mean is, that for precise analytical purposes, these different kinds of services . . . are, strictly speaking, in diff erent markets, in that
()
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the products are not substitutes to the buyers thereof.
(CH-12,343/3-8.)
Another exampl: is provided in the context of Miller's assertion that the geographic scope of the market for bulk power supply has been restricted by arrangements such as the Seven-Party Agreement and the California Power Pool Agreement. (CH-815/23-24; CH-12,362/8-15.) After questioning, Miller finally admitted that the Seven-Party Agreement probably does not affect the geographic scope of the market. (CH-12,365/14-20.) When asked whether other contracts should also be removed from his " list," he responded:
" A. I think it would be appropriate if we are talking about the geographic scope of the market for generation as a whole, and not about the possibilities for access to that market by various participants in it to eliminate all of these things that I have cited, and state that the geographic scope of the market itself is limited by the trans-mission considerations, but that other arrangements affect, not the geographic boundaries of the market, but simply the nature and extent of competition in that market, and also the access of many of the buyers to some of the 1 geographic parts of that market.
. That would be an equally valid way of looking at the considerations relating to the arrangements.
t O. Would you agree that would be a more valid way of looking at the question?
A. Today I might, tomorrow I might
- change my mind again.
, (CH-12,366/1-16.)
If the Docket No. E-7777 (II) proceeding lef t any doubt about the unprincipled approach Miller took to market definition, he removed it completely in his testimony in the Helms Docket. In concluding in the Helms proceeding that PGandE is a " dominant force" in the market, Miller relied on
" market share" calculations in his Docket No. E-7777 (II)
{} exhibit 2299. (See Helms Tr. 1255-1256.) According L
175
~' () to Miller, the geographic scope of the market on which these
{
market share calculations were based was northern and central California. (Id.) Miller asserted that northern and central l California was a relevant market. (Helms Tr . 128 3-4.) Yet in Docket No. E-7777(II) - Miller never identified northern
, and central California au a relevant geographic market for retail sales of electricity and, in the passage quoted above, identified the State of California as a whole as the relevant geographic area for his retail sales market. Indeed, Miller claimed that market share statistics (" concentration ratios")
based on data in exhibits 2299 and 2300 were irrelevant except for bulk power product submarkets coincident with the state of California as a whole. (CH-ll,549-550. )
In short, no finding whatsoever of relevant markets r- necessary to determine the economic effects of contracts at issue in this proceeding can be based upon the testimony of Ralph Miller. By treating markets as chameleons which change e colors according to the situation, Miller apparently believes that whatever economic conclusion he wishes to draw can readily be grounded in a relevant market tailor-made for the occasion. The result is that Miller provided no workable context in which to evaluate the competitive impacts of the contracts in question.
- 2. Earley on Markets.
Staff witness Earley is not a professional economist.
He holds no advanced degree (CH-10 70/15-23) and has never published any economic papers. (CH-19,12 4. ) While he presented g' a somewhat more detailed discussion of relevant markets than Miller, it was simplistic, largely circular and, by
('_ his own admission, essentially irrelevant to his conclusions.
Earley's analysis suf fered from one of the same def ects that plagued Miller's presentation--he was willing to vary the definitions of the markets according to what-f ever purpose was required. (See, e.g., CH-39,062/7-8.)
A second serious f ailing also undermined Staff's relevant market analysis. Neither of the two Staff economists evaluated the actual imoact of the contracts at issue on competition in the relevant markets. Holmes and Earley, in essence, treated relevant markets as irrelevant.
To fully understand the triviality of Staff's economic analysis, one needs an overview of the presentations of both Staff economic witnesses. Earley defined markets, but he did not discuss the contracts at all. Holmes, who addressed the contracts, claimed to devote primary attention to potential anticompetitive effects of the "four agreements" on the " relevant bulk power market. " (CH-1049/39-42.)
176
O'\ But Holmes' analysis of contractual impacts did not turn on the ef f ects of the contracts in this supposedly relevant market. For all we are told by Holmes, for example, the "poten-tial" anticompetitive ef f ects he identified (see Ex. 1084-1087) would have the same significance no matter whether the geographic market encompassed the entire west or merely a small fraction thereo f . Indeed, the Companies' market share in the supposedly relevant markets had nothing to do with his analysis. (See CH-18,756-75 7; CH-18,87 4-876. )
Earley's relevant market definitions were developed precisely backwards. First he developed conclusions about the existence of monopoly power, then he used those conclusions to establish his market boundaries. Earley's conclusions about the Calif ornia Companies' " monopoly power" were not
, affected by varying definitions of relevant markets. (CH-2285.) Nor did the Companies' share of the relevant market play any part in the evaluation of monopoly power. (CH-39,086.) To Earley, the " concluding f actor" in finding monopoly power is " strategic dominance" in transmission (CH-39,086)--or, in other words, control of transmission.
(CH-39,090/20 to 39,091/3.) Once he found " strategic dominance" in transmission, that determined the geographic scope of his markets. (CH-2 306/8-10. )
~
The Staff economists ultimately paid only lip service to relevant market analysis. They made no real a ttempt to examine commercial realities and formulate their market definitions accordingly. They made no attempt whatsoever to evaluate the impacts of contractual arrangements on relevant markets.
CONCLUSION
{
In general terms, we have sought in this brief to make two points. First, if the law generally supported the broad approach of the Cities and Staff to this litigation, the Companies. should win on the f acts. The contracts at issue are reasonable by any standard. Second, the law does l not support the kind of case presented by Cities and Staf f.
l The Commission's role is limited to one of remedying problems which the public interest requires to be remedied; that role does not encompass the " improvement" of already wor kable arrangements. Moreover, in general the law prohibits the Commission from granting the relief sought.
Given the support of the law and the f acts, the only source of concern lies with the possibility of an emotional response to the " plight" of the "small" cities and to the possible loss of their investment in this litigation. Counsel for Cities have tried to play this theme. They have sought s 177 f-
n
- L to depict their differences with the Companies as a bout between David and three Goljaths. On numerous occasions, Cities' counsel have complained of their clients' severe ,
financial limitations in comparison to the allegedly vast resources of the Companies. (See, e.g., NCPA's Motion for Extraordinary Relief, p. 62 (Ma rch 11, 1980).) Yet the se
. Cities are not charity cases; they are in fact multi-million ;
i dollar operations which have proven capable of funding harassing '
litigation in numerous fora for a decade.
The aggregate revenues of the NCPA Cities during fiscal year 1979-1980 was $140 million. (State of California, Office of the Controller, Annual Report of Financial Transactions '
concerning Cities of California, Fiscal Year 197 9-8 0, Table 2. )
southern cities are even larger, with total revenues in i
the same period totaling $170 million. (Id.) The electric utility systems of Northern and Southern UTeles produced
! in that fiscal year an additional $250 million. (Annual !
Recort, supra, Table 7.) Indeed, outside the hearing room, cities have announced their financial wherewithal. (See, e.g., Ex. 4 500 a t 17-22.)
It is not the case that Cities reluctantly turn to litigation as the last resort of a long-suffering party.
l Litigation is rather used as a tool to improve a negotiating position or to manipulate the regulatory process. NCPA i has instigated no fewer than five major proceedings against PGandE other than Docket E-7777 between 1970 and 1977, involving millions of pages of document production and months of hearings.
(Ex. 2562 at 2-5.) NCPA's latest attempt occurred within
_ the last month--a 60-page petition to the Nuclear Regulatory 1 Commission to " enforce and modify" the Stanislaus Commitments.
(- (Petition to Enforce and Modify License Conditions, December 4, 1981.) The real motivation behind Cities' litigiousness was apprent years ago. The California Public Utilities Commission in 1973 provided an apt description:
NCPA has not been able to accomplish a complete moratorium on PG&E construction. .
! It has, however, managed to significantly delay construction (and in all probability
! thereby increase the cost) of important and useful projects. There is no reason to bellave that NCPA will voluntarily abandon its practice of opposing any expansion of PG&E while indefinitely postponing consideration of its own proposals.
I
(
178
r . .
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The practice of NCPA to oppose PG&E applications for certificates of public convenience and necessity on the basis of purported anti-trust viola-tions not materially connected to the subject of the application is not to be commended.
(CPUC Decision No. 81168, March 27, 1973).
NCPA's use of litigation as a negotiating technique is evident from several exhibits. For example, one finds the following in a letter from NCPA's general counsel to Donald Vbn Raesfeld, one of NCPA's chief negotiators (Ex. 4162) :
It is the f act, though, tha t if we want to trouble SMUD, the only convenient
(- way to do it that I know is to object before the Federal Power Commission to the June 4 [1970] contract (between SMUD and PGandE] . . . . We may want to do it to trouble PG&E, even if we do not yet want to choose SMUD.
In this context, the size of the Cities does not excuse a weak case. The only relevant size issue is not financial ability but the number of customers. The Companies have many', the Cities far fewer. This makes the Companies a f ar more eff ective mechanism for spreading the benefits c of SGch things as low-cost Northwest energy. For this reason,
, the public interest and the Companies' interests are in
(~ a very real sense the same in this case.
l E
179 l
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L ])
A ruling in the Companies' favor is called for by the facts, the law and the public interest.
Respectfully submitted, ROBERT OHLBACH HOWARD V. GOLUB J. MICHAEL REIDENBACH PACIFIC GAS AND ELECTRIC COMPANY 77 Beale Street San Francisco, California 94106 MORRIS M. DOYLE TERRY J. HOULIHAN CHARLES A. FERGUSON GREGORY P. LANDIS JAMES B. LEWIS McCUTCHEN, DOYLE, BROWN & ENERS EN Three Embarcadero Center
, San Francisco, California 94111
/
i By Wh.ddU Terry J. Houlihan Attorneys for January 8, 1982 Pacific Gas and Electric Company C
180
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kJ VERIFICATION STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
TERRY J. HOULIHAN, being sworn, says: That he is an attorney for Pacific Gas and Electric Company, a corpora-tion; that he has read the foregoing document and knows its contents and that the same is true of his own knowledge, except as to the matters therein stated on information or belief, and as to those matters he believes it to be true.
N~\$PIgrry J.
S: .e. . ..
Houlihan i Subscribed and sworn to before me this 7th day of January, 1982.
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I m 0~'cA sue {
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%m h- 9 0 h,g[i ..,..~((%[E R #PW NOTARY PUBLIC
- State of California ; r
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u cm si:a eres an te. 'm t 002:::::::::::::uea m :, j CERTIFICATE OF SERVICE I hereby certify that I will serve on January 8, 1982 the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding in accordance with the requirements of Section 1.17 of the Commission's Rules of Practice and Procedure.
Executed at San Francisco, California, this 7th day of January, 1982.
- t
.6[ LJ (!.e . . .~
Terry J. Houlihan
.