Federal Court Turns Back FERC Native-Load Ruling

The U.S. Court of Appeals for the District of Columbia Circuit has partially vacated a declaratory ruling issued by the Federal Energy Regulatory Commission (FERC), leaving in place, at least for now, a North Carolina Utilities Commission (NCUC) decision that had prohibited a jurisdictional electric utility from treating an out-of-state municipality as a "native-load" customer for purposes of pricing a wholesale power agreement. The court indicated that the NCUC's order strikes at the very heart of an outstanding issue in the electric industry — i.e., how far a state can go in protecting local customers by limiting an electric utility's ability to sell power on the federally regulated wholesale market at favorable prices. 

In the case under appeal, the City of Orangeburg, South Carolina, had for some time been seeking a better deal for wholesale power. The municipality found a willing supplier in neighboring North Carolina, signing an agreement with Duke Energy Carolinas LLC in 2008. But according to Orangeburg, the deal was scuttled by the North Carolina Utilities Commission. 

The city claimed that the NCUC, in exercising its retail rate-making authority, had interposed itself as a "gatekeeper" for access to North Carolina's most affordable and reliable wholesale power. Orangeburg protested that the NCUC's action resulted in a preference for in-state retail consumers, in contravention of FERC's exclusive jurisdiction over wholesale transactions as set forth in the Federal Power Act (FPA). 

Under the utility's agreement with the city, Duke Energy would have treated Orangeburg as a native-load customer — i.e., a customer for whom the power supplier has undertaken a long-term legal obligation to construct and operate its system to provide expected services. Pursuant to that designation, Orangeburg would have been able to pay a lower rate for wholesale power. More specifically, the municipality would pay a rate based on the utility's lower "system average costs," rather than its higher "incremental costs." Orangeburg attested that it had estimated that, as a native-load customer under the arrangement, it would have been able to pass on approximately $10 million in savings per year to its own retail customers. 

However, Duke Energy was obligated to notify the NCUC of its arrangement with Orangeburg so as to assure compliance with certain conditions the NCUC had attached to an earlier order of approval for the merger of Duke Energy and Progress Energy. Among the conditions was a requirement that Duke Energy reserve its lowest-cost power for retail nativeload customers in North Carolina. Another provision directed it to inform the NCUC should the utility plan to treat any new wholesale customer as a native-load customer. 

Upon becoming aware of Duke Energy's arrangement with Orangeburg, however, the NCUC balked, issuing a declaratory ruling that stated in part that "[i]n any future retail ratemaking proceeding," it would not recognize Orangeburg's native-load status. Instead, the NCUC said, it would account for Duke Energy's revenue from Orangeburg as though it were "based upon incremental costs." 

The end result was that in setting future rates for North Carolina retail customers, the commission would be acting as though Duke Energy were receiving more wholesale revenue from Orangeburg than it actually was. That is, the commission said, it intended to "impute" the revenue. Although that move appeared to be but a minor accounting change for purposes of adopting retail rates, it had a disproportionate impact on Duke Energy's wholesale power sales. As a consequence, Duke Energy felt it had but little choice to withdraw from the agreement, which then caused Orangeburg to return to its prior supplier. 

Thereafter, in 2009, Orangeburg filed a petition with FERC, requesting that the commission find that the NCUC ruling intruded upon FERC's exclusive jurisdiction over wholesale rates pursuant to the FPA. Orangeburg's petition languished before FERC for six years, but eventually, in 2015, FERC dismissed the petition without addressing the merits, holding that because Orangeburg and Duke Energy had voluntarily terminated their agreement, the petition was moot and Orangeburg had no standing to bring its claim. 

In issuing its order, FERC relied heavily on one of its prior decisions, Order No. 2000, which was a rulemaking that addressed the operation of regional power markets. FERC asserted that that order had affirmed the authority of state agencies to require jurisdictional utilities, like Duke Energy and Progress Energy in North Carolina, to accord preferential treatment on native-load wholesale customers. However, the appeals court found that FERC had inexplicably cited only one line from Order No. 2000, which, without additional explanation, appeared "either unresponsive or legally unsound." 

In arriving at its conclusion, the court pointed out that by virtue of its dismissal of Orangeburg's complaint, FERC had sustained actions by the NCUC that had the effect of establishing disparate treatment between native-load and non-native-load wholesale customers. The court also drew attention to the fact that the NCUC previously had allowed a native-load designation for purchases of power at wholesale from Duke Energy under an arrangement negotiated by another South Carolina municipality. 

Finding that FERC had failed to rectify those two different outcomes, the court held that FERC had not justified its apparent approval of incongruous treatment of wholesale ratepayers. Moreover, the court expressed puzzlement that FERC's decision in the Orangeburg proceeding had rested on but a single sentence in Order No. 2000. 

The court stated that FERC had crafted Order No. 2000 so as to promote regional transmission organizations (RTOs). However, in response to concerns from low-cost states that RTO activity could result in exports of their low-cost power to other states, FERC had determined that where there is no retail choice, the rule does not affect a state commission's authority to require a utility to sell its lowest-cost power to native-load customers, as it always has. 

According to the court, though, inasmuch as FERC's response had been targeted only at areas without retail choice, there was a tacit implication that a state commission's authority pertains to disparities in retail, not wholesale, rates. The court thus concurred with Orangeburg that FERC has not provided a proper explanation for its reliance on just the one sentence from Order 2000 to support its effective endorsement of the NCUC native-load rule as it applies to wholesale transactions. The court therefore ordered the matter remanded to FERC. Orangeburg, South Carolina v. Federal Energy Regulatory Commission, No. 15- 1274, July 14, 2017 (D.C. Cir).