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Consumers Energy Company v. Federal Energy Regulatory Commission

May 14, 2004

CONSUMERS ENERGY COMPANY, PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT ONTARIO ENERGY TRADING INTERNATIONAL CORPORATION AND INDEPENDENT ELECTRICITY MARKET OPERATOR, INTERVENORS



On Petition for Review of Orders of the Federal Energy Regulatory Commission

Before: Ginsburg, Chief Judge, and Randolph and Roberts, Circuit Judges.

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

Argued March 8, 2004

It was a close thing, but Benedict Arnold's bold plan to capture Canada for the Revolution fell short at the Battle of Quebec in early 1776. As a result, the Federal Energy Regulatory Commission must now decide when affiliates of Canadian utilities -- utilities not subject to FERC jurisdiction -- may sell power at market-based rates in the United States. In a purely domestic case, FERC requires an applicant for market-based rates to show that it and its affiliates do not have or have adequately mitigated market power in generation and transmission, and cannot erect other barriers to entry. An applicant with a transmission-owning affiliate must show that the affiliate has filed an open access, non-discriminatory tariff for transmission service. See Progress Power Marketing, Inc., 76 FERC ¶ 61,-155, at 61,919 (1996).

FERC does not presume to tell foreign transmissionowning utilities what tariffs they must file. If a marketing affiliate of such a utility wants to sell power at market-based rates in the United States, however, the utility must offer transmission service comparable to that required of a utility in the United States. Just as a domestic transmission-owning utility must allow competitors of its marketing affiliate to use its transmission services on a non-discriminatory basis to compete with the marketing affiliate, so too a foreign transmission-owning utility must allow companies that would compete with its marketing affiliate to use its transmission services to reach the United States market and compete on a level playing field with its marketing affiliate. See Energy Alliance P'ship, 73 FERC ¶ 61,019, at 61,030-31 (1995).

In this case, Ontario Energy Trading International Corporation (Ontario Energy) sought authority to sell power in the United States at market-based rates pursuant to Section 205 of the Federal Power Act, 16 U.S.C. § 824d. Ontario Energy's application was opposed by Consumers Energy Company (Consumers), a public utility providing service in Michigan and potentially facing competition from Ontario Energy across the border. Consumers argued that the Ontario Independent Electricity Market Operator (IMO) was an affiliate of Ontario Energy and did not offer open access, nondiscriminatory transmission service comparable to that required of power companies in the United States. Specifically, Consumers complained that the IMO did not offer transmission service from point A to point B at all, as a United States utility would, but instead required companies seeking such service to sell power into the system at point A and buy it back out at point B. FERC nonetheless found the IMO service comparable to that required of companies in the United States, and granted Ontario Energy the requested authority to sell power at market-based rates. See Ontario Energy Trading Int'l Corp., 99 FERC ¶ 61,039 ( Initial Order ), on reh'g, 100 FERC ¶ 61,345 (2002) ( September 2002 Order ), on reh'g, 103 FERC ¶ 61,044 (2003) ( April 2003 Order ). Finding that substantial evidence supports the Commission's decision and that the decision is otherwise reasonable, we deny Consumers' petition for review.

I. Background

In its landmark Order No. 888, FERC required public utilities subject to its jurisdiction that own, control, or operate transmission facilities to guarantee non-discriminatory transmission service to all market participants. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, FERC Stats. & Regs. ¶ 31,036, at 31,635-36 (1996) (Order No. 888). To ensure non-discriminatory service, the Commission required public utilities (1) to functionally unbundle wholesale power services -- separating generation, transmission, and ancillary services, id. at 31,654, and (2) to file open access, non-discriminatory transmission tariffs, id. at 31,635. See generally New York v. FERC, 535 U.S. 1, 11 (2002).

Foreign market participants may also obtain transmission service through a public utility's open access tariff. Id. at 31,689. Participants with foreign affiliates that own or control transmission facilities, however, may obtain open access transmission only if those affiliates comply with tariff reciprocity requirements. Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888-A, FERC Stats. & Regs. ¶ 31,048, at 30,290 (1997) (Order No. 888-A). Those reciprocity requirements mandate that the foreign transmission-owning affiliate also provide open access, non-discriminatory transmission service in the same manner as a public utility in the United States. Id.

A. Restructuring the Ontario Energy Market

In 1997, Ontario Hydro, a government-owned utility servicing the Province of Ontario, sought a stay of Order No. 888's reciprocity requirement. See Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 79 FERC ¶ 61,182 (1997). The utility claimed that it would be irreparably harmed by the requirement because it could not allow open access into Ontario without the approval of the Provincial Government of Ontario. Id. at 61,866. The Commission rejected the stay, Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 79 FERC ¶ 61,367 (1997), and the Province of Ontario elected to restructure its electricity market in order to secure access to that of the United States.

At that time, the provincial energy market was dominated by Ontario Hydro, a vertically integrated utility. Ontario Hydro generated most of the Province's power, owned and operated the bulk electricity transmission system, owned and operated much of the distribution system, sold power at wholesale rates to municipal utilities in urban areas, regulated those municipalities' retail rates, and sold electricity directly to retail customers in rural and suburban areas. See Initial Order, 99 FERC at 61,145.

To establish a competitive market, the Ontario Energy Competition Act of 1998 unbundled the functions of power generation, power transmission, and control of the bulk power system. The Act separated those functions and transferred them to three new entities: (1) Ontario Power Generation, Inc. (OPG) owns and operates power generation facilities; (2) Hydro One, Inc. owns and operates the transmission system and portions of the distribution system; and (3) the IMO operates the bulk power system and the wholesale electricity market. Application of Ontario Energy Trading Int'l For Order Approving Market-Based Tariff, at 3-4 (Ontario Energy Application). The Provincial Government holds all the shares of both OPG and Hydro One, appointing the directors of both. September 2002 Order, 100 FERC at 62,580. Ontario Energy -- an electric power marketing company that buys and sells electricity, but itself owns no power generation or transmission assets -- is a wholly-owned subsidiary of OPG. The Provincial Government also appoints the directors of the IMO, a not-for-profit transmission and market operator. Those directors may be removed only for cause. Id. at 62,581.

The IMO assumed operational control of Hydro One's transmission assets, and became responsible for establishing and operating a provincial electricity market. See Ontario Energy Application at 7-9. The Act required the IMO to develop rules to open the market to competition on an open access, non-discriminatory basis. Id. at 9. The IMO complied, promulgating rules that created a bid-based electricity market in which the cost of electricity is set by market participants bidding to buy or offering to sell electricity. Id. Much like a stock exchange, the IMO administers the market, and is neither a ...


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