United States Court of Appeals, District of Columbia Circuit
December 1, 2017
Petition for Review of Orders of the Federal Energy
Lee Shepherd, Jr. argued the cause for petitioner. With him
on the briefs were Clifford M. Naeve, James P. Danly, Heather
H. Grahame, M. Andrew McLain, and Timothy T. Mastrogiacomo.
E. Cafer, Senior Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were David L. Morenoff, General Counsel, and Robert H.
Christina F. Gomez argued the cause for intervenors. With her
on the brief were Kathleen L. Mazure, Thorvald A. Nelson, and
Michelle Brandt King. John P. Coyle, Natalie M. Karas, and
Justin W. Kraske entered appearances.
Before: Kavanaugh and Wilkins, Circuit Judges, and Randolph,
Senior Circuit Judge.
Kavanaugh, Circuit Judge.
Federal Energy Regulatory Commission requires utilities that
transmit electricity to supply extra power generation in
order to balance moment-to-moment variations in demand for
electricity. Utilities must add power to, or withdraw power
from, the grid in real time as actual demand for electricity
exceeds or falls short of projected demand. That extra power
generation is known as regulation service.
allows utilities to recover costs associated with the
provision of regulation service. Utilities may recover those
costs by charging them to customers, as long as the utilities
charge rates that are "just and reasonable." 16
U.S.C. § 824d(a).
is an electric utility that is subject to FERC's
regulation-service requirement. Before 2011, NorthWestern
lacked the generating capacity to provide its own regulation
service, so it met the requirement by purchasing regulation
service from other utilities. With FERC's approval,
NorthWestern then passed on the cost of that purchased
regulation service to its wholesale and retail customers. But
purchasing regulation service from other utilities eventually
became too expensive, so NorthWestern built a new generating
station dedicated to providing regulation service.
NorthWestern then proposed to revise the rate that it charges
customers for regulation service in order to recover the
costs of providing that service from the new station.
determined that NorthWestern's proposed rate was not just
and reasonable. FERC therefore modified NorthWestern's
proposed rate and ordered NorthWestern to refund its
customers the difference between the proposed rate and the
modified rate. NorthWestern challenges FERC's decision as
arbitrary and capricious under the Administrative Procedure
Act. The arbitrary and capricious standard requires that an
agency's decision be reasonable and reasonably explained.
We conclude that FERC's decision in this case was
reasonable and reasonably explained, and we therefore deny
the petition for review.
1996, FERC issued Order 888. 61 Fed. Reg. 21, 540 (May 10,
1996). Among other things, Order 888 requires electric
utilities to provide their customers with certain ancillary
services - services that supplement the basic service of
transmitting electricity. Id. at 21, 579-80. One
such ancillary service is "regulation service."
Regulation service is extra power generation that responds to
"moment-to-moment variations" in demand for
electricity in a given area. Id. at 21, 582. In
other words, regulation service is "the injection or
withdrawal of real power" into or from the electric grid
in response to fluctuations in demand for electricity. Order
No. 755, 76 Fed. Reg. 67, 260, 67, 260-61 (Oct. 31, 2011).
Regulation service helps to prevent blackouts and equipment
damage by keeping the frequency of the electric current at
close to 60 Hertz, the standard frequency in the United
States. Id. If a utility fails to maintain that
frequency, FERC may impose civil penalties on the utility.
See 16 U.S.C. § 825o-1.
utility charges customers for regulation service under
Schedule 3 of the utility's Open Access Transmission
Tariff, which is filed with FERC. FERC must examine the rate
that a utility proposes to charge Schedule 3 customers in
order to ensure that the rate is "just and
reasonable." 16 U.S.C. § 824d(a), (e). A just and
reasonable rate must be fair both to the utility and to its
customers: It "should be based on the costs of providing
service to the utility's customers, plus a just and fair
return on equity." Alabama Electric Cooperative,
Inc. v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982); see
also FPC v. Hope Natural Gas Co., 320 U.S. 591, 603
case concerns an attempt by petitioner NorthWestern to revise
its Schedule 3 rate. NorthWestern is an electric utility
subject to FERC's regulation-service requirement. As
relevant here, NorthWestern transmits electricity to
wholesale and retail customers in Montana. When NorthWestern
first began operations in 2002, NorthWestern did not possess
sufficient generating capacity to provide its own regulation
service. So NorthWestern complied with Order 888 by
purchasing regulation service from other utilities.
NorthWestern contracted with those other utilities for a set
amount of regulation service and passed the cost of that
regulation service on to customers under Schedule 3. From
2002 to 2010, NorthWestern purchased, and passed on the cost
of, 60 megawatts of regulation service each year to its
Schedule 3 customers.
NorthWestern eventually decided that purchasing regulation
service from other utilities was inefficient. So NorthWestern
built the Dave Gates Generating Station, a station dedicated
to providing regulation service to NorthWestern's
customers. The Gates Station has three generators, each with
a maximum capacity of 50 megawatts, for a total nominal or
"nameplate" capacity of 150 megawatts. The Gates
Station began operating in January 2011.
NorthWestern had previously passed on to its Schedule 3
customers the cost of purchasing regulation service from
other utilities, NorthWestern now wanted to recover from its
customers the cost of providing regulation service from the
Gates Station. So NorthWestern filed a proposed revised
Schedule 3 rate for FERC's approval. NorthWestern filed
its rate pursuant to Section 205 of the Federal Power Act,