Opinion for the Court filed by Circuit Judge WILLIAMS.
The Federal Energy Regulatory Commission rejected a provision of a tariff filed by Florida Power & Light (“FPL”), proffered by FPL as a means of preventing an inefficient interaction between its sales to certain wholesale (“partial requirements”) customers and those customers’ activities on an automated “economy energy” market, the Florida Coordinating Group Broker. The Commission acknowledged that FPL’s proposal would properly thwart some inefficient transactions, but rejected it as “overly broad,” because there were other, efficient transactions thаt it said the proposal would also frustrate.
Florida Power & Light Co.,
FPL sells power both retail and wholesale. Among its wholesale transactions is “partial requirements” service, under which municipal utilities and rural electric cooperativеs augment their self-produced power supplies with FPL’s as necessary to meet
their
customers’ demands. FPL’s rates for these wholesale buyers are based on average costs — a demand charge based on the average cost of generation and transmission resources, and а per-unit energy charge based primarily on FPL’s average fuel costs. FPL asserts, and the Commission acknowledges,
Order on Rehearing,
Another type of wholesale transaction takes place through the Florida Broker, whiсh enables utilities in Florida to make bulk sales of “economy energy” to each other. On an electronic bulletin board the utilities make hourly postings of amounts of electricity they are interested in selling or buying, along with the incremental costs of producing what they are offering for salе, or the “decremental” costs that they would avert by a purchase. (These costs are evidently the variable costs of production, largely fuel, sometimes with a contribution to fixed capital costs.) The Broker automatically matches up the offers, linking the lowest incremental costs with the highest decremental ones, so that the first match made will be the one that averts the most net costs. The transaction price is midway between the proposals of each member of a matched pair, so that the value of the gain is split evenly between them. The Broker evidently keeps on matching until all economizing possibilities have been exhausted. Some of the net savings by utilities are flowed back to their customers. See
Order on Rehearing,
FPL and the Commission appear to agree that, unredressed, the interaction of its partial requirements tariff with the participation of FPL’s partial requirements purchasers in the Florida Broker market will lead to some inefficient sales. In an example used by both parties, FPL might at a given hour be able to produce energy at 12 mills per kWh (its incremental cost) but be selling it to its partial requirements customer at 6 mills (its аverage cost). The latter would offer it to the Broker at 6 mills. Where another utility faced a decremental price of 10, the Broker would dutifully match them up. The transaction goes forward, causing a 12-mill cost to be incurred for a need that could have been satisfied for 10 mills.
FPL propоsed solving the problem with a provision in its proposed comprehensive wholesale power sales tariff, limiting bulletin board sales by partial requirements purchasers:
The Customer may resell capacity and energy purchased under this Rate Schedule; provided, however, that ... thе Customer shall not resell energy purchased under this Rate Schedule to other entities pursuant to an economy ... sale [i.e., an “economy energy” transaction] ... without FPL’s consent. FPL will consent to such sale for any hour during which FPL’s incremental cost for such resold power is expectеd to be equal to or less than the incremental revenue received under this Rate Schedule in connection with FPL’s sale of such power to the Customer.
In rejecting the provision, FERC said that it was overly broad, prohibiting some hypothetically efficient trades on the economy enеrgy market in addition to the inefficient trades of the sort hypothesized above. For example, it explained, where a partial requirements customer was buying at 6 mills, FPL’s incremental cost was 8 mills, and the Florida Broker had a proposal to buy at 10 mills, FPL’s rule would prevent the sale.
Order on Policy Issues,
Of course, one answer to the Commission’s hypothetical seems laughably simple, and FPL made it: There appears no obstacle, in such a case, to
FPL’s
making the sale. See
Order on Rehearing,
On rehearing, the Commission recited FPL’s argument and then brushed it aside. While reiterating the claim that FPL’s solution was “overly broad,” id. at 61,486, it did not deny that FPL would be able to trade its own power perfectly well, thus making possible the efficient transactions that the Commission had said FPL’s rule would stymie. Rather it switched to a new theme — thаt this would hamper FPL’s partial requirements customers’ ability to sell their own resources via the Florida Broker. It offered no reason to think that would be so. Assuming that the partial requirements customers can distinguish between their own and FPL’s resources, it would seem that they could simply refrain from sales in the Flоrida Broker market when (1) their own resources were not sufficient for the sale, 1 and (2) FPL’s incremental energy cost was higher than its tariffed average cost.
FERC also observed that “[t]he Commission consistently has rejected resale restrictions as an unnecessarily blunt device, given their potential anticompetitive effects and the availability of other ways to address legitimate utility concerns.”
Id.
This was the entirety of the Commission’s discussion of anticompetitive concerns. Despite the word “consistent” and occasional references to a “per se” rule in other decisions, FERC has not established rejection of resale restrictions as a universal absolute. In
Gulf States Utility Company,
Later Commission decisions havе expressed varied readings of
Gulf States. Compare,
e.g.,
Ohio Edison Company,
Here the Commission’s orders have neither invoked a per se rule (with an explicit abandonment of seemingly contrary cases) nor purported to identify any specific anti-competitive harm caused by the tariff provision. Its claim that “efficient sales are thwarted” has already been shown to be attenuated by the fact that FPL can make such transactions itself, and it has made no attеmpt to show that anticompetitive effects will naturally flow from shifting the profits of such sales from a partial requirements customer to FPL. Moreover, anticompetitive effects are not self-evidently probable when a restriction applies only to resales in an electronic market in which FPL cannot (so far as appears) identify or choose its customers.
Nor has the Commission adequately identified reasonable alternatives justifying rejection of FPL’s proposed resale restriction. One might imagine a more narrowly drawn resale restriction provision, perhaps permitting all sales of FPL power by the partial requirements customer so long as FPL’s incremental cost, rather than the average cost, is quoted on the Broker. But the Commission relies on only one alternative: a change in FPL’s rate structure for its partial requirements custоmers.
All hands recognize that the problem originates in the use of average costs for FPL’s sales to its partial requirements customers. Accordingly, both in the
Order on Policy Issues,
The Commission’s answers to FPL, within the existing regulatory framework, did not satisfy FERC’s duty to engage in “reasoned decisionmaking.” See
Greater Boston Television Corp. v. FCC,
That deficiency leaves the Commission relying on its allusions to the possibility of marginal cost pricing for FPL’s sales to its partial requirements customers. But FPL says, and FERC does not dispute, that in the course of decades of electric power regulation there is only one instance in which FERC has actually approved wholesale power rates based on marginal costs. See
New England Elec. Power Co.,
FERC counters that “significant changes are on the way for the electric industry,” and points to its intentions to “structure an orderly transition to more compеtitive markets.” Brief for Respondent at 21. Indeed, recent FERC initiatives may render the *689 whole issue moot by establishing conditions for widespread competition between power generators and thus for reliance on markets rather than regulators to constrain wholesale power prices. See Order No. 888, Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 61 Fed.Reg. 21540 (1996). While we are quite sympathetic to FERC’s implicit claim that we should cut it some slack in this era of wide-ranging reform, аllowing it to devote its intellectual resources primarily to the broader picture, we find that the Commission’s explanation here fails to meet the basic reasoned decisionmaking requirement.
The Commission’s counsel raises various arguments not mentioned within or even implied by the orders on review. But the agency runs this regulatory program, not its lawyers; parties are entitled to the agency’s analysis of its proposal, not post hoc salvage operations of counsel. We therefore do not consider these arguments. See
SEC v. Chenery Corp.,
If the Commission means to adopt and follow a per se rule against ’ resale restrictions, it must be clear as to the scope of the rule and its justification. If the rule is not per se, the Commission must point out the anticompetitive effects of FPL’s proposal, and, to the extent that availability of alternative solutions to FPL’s evidently legitimate concern remains an element of the Commission’s analysis, just what that alternative may be.
The petition for review is granted and the case remanded to the Commission.
So ordered.
Notes
. This would require some principle of priority. FPL seems implicitly to argue for the principle that the partial requirements customers should be deemed to be using their own resources first. If there is some objection to this — and there may be — the Commission has yet to state it.