The crux of the dispute lies in whether SunPeak has met the first two elements of the three-pronged Farmers Union test (workable market, just and reasonable ceiling and monitoring). How much weight to give the state review process underlies that question, since the Nevada Public Service Commission reviewed the transaction and eventually approved it. Indeed, the state did so only after forcing the parties to renegotiate a cheaper deal.

In this docket the Nevada Public Service Commission submitted a Statement of Support for the Sun-Peak Application. There, the state commission explained it found in the end that Nevada Power had alternates to Sun-Peak: (1) constructing the plant itself as it will supply the land, fuel and water anyway according

to the utility's own cost calculations; (2) building the plant under the estimates derived from a report from Ebasco; and (3) contracting for the services of Bechtel and General Electric, two major firms in the field, at a cost based on estimates the state required Nevada Power to obtain.

The Nevada commission ultimately found that Sun-Peak would provide electricity at a price substantially lower than any of these choices, including Nevada Power constructing the plant itself. True, the state commission failed to pronounce the Sun Peak rate, or the other alternate rates, just and reasonable. Yet, the Nevada regulators did hold that, in the context of the state's well established integrated resource planning process, Sun-Peak represented the "least cost" possibility for Nevada Power meeting an admittedly imminent need for electricity in the Las Vegas area. (I hasten to add no one disputes the need for power in the area, one of the fastest growing in the United States.)

Should we as the federal commission accept these findings? I think so. I submit that the rates pass the just and reasonable test. As I mentioned earlier, we all agree that calculating the seller's cost plus a fixed return does not represent the only way to regulate. The Farmers Union formulation allows other restraints to substitute for costs as the underpinning of just and reasonable rates. The "workable competitive market," the "just and reasonable ceiling" and the monitoring also operate to curb excessive charges. I submit that these rates, which three Commissioners reject, meet the requirements set out in Farmers Union.

First, "real world" economic forces operated to constrain Sun-Peak's economic room for maneuver. We all agree, slip op. at 9, that Nevada Power could, in fact, have constructed the plant itself. That possibility acted as a competitive restraint. In simple terms, to win

(In some situations, of course, the buyer has no realistic possibility to build, either for insufficient time, exorbitant cost or difficult certification process. This case presents none of these. I find, therefore, the dismissive comment in the order, slip op. at 9, that “[s]elf-construction, is, of course an option to any power purchase," a rhetorical flourish.)

Beyond that, the state required the parties to renegotiate a cheaper contract. They did. The state process itself served to hem in Nevada Power and Sun-Peak. I believe that the parties have met the first test of Farmers Union.

Finally, the rates meet the second criterion as well. The rate Sun-Peak will charge falls below a just and reasonable ceiling. Nevada Power's construction cost represents a reasonable estimate (Statement of Support at 6) and if the utility were to build the plant a commission would accept rates based on those figures. By definition we cannot find the Sun-Peak's lower rates excessive. Moreover, nobody claims the rates to be confiscatory. These rates, therefore, fall within the zone of reasonableness the courts outlined for us in FPC v. Hope Natural Gas Company, 320 U.S. 591 (1944) and more recently, Jersey Central Power & Light Co. v. FERC, 810 F.2d 1168, 1177 (D.C. Cir. 1987).

I require an additional finding to reach the result I advocate. Because the majority relied on the rationale that Nevada Power failed to conduct a competitive procurement, it avoided dealing with the Mission Energy affiliate relationship link. Since I accept the procurement, I must decide the next question. I find the Mission connection irrelevant.

The Mission Energy link refers to the fact that the company happens to be Sun-Peak's parent and the parent of a part owner of the one pre-Sun-Peak facility that will accelerate operation to help meet Nevada Power's needs (see, Loudon affidavit at 9). During deliberations on this case, I heard the claim that this common ownership taints the Sun-Peak transaction because Mission supposedly used the facility as bait to lure Nevada Power into buying from Sun-Peak.

A brief recitation from the record easily demolishes that claim. Nevada Power obtained Mission's agreement to accelerate its first facility "shortly after" April 1989. Id. The utility tried other means to obtain electricity and only in "late November" did the company conclude

it needed a new plant at the site involved here. Id. at 11. Finally, the particular Mission subsidiary does not control that facility's operations, id. at n.17, and Mission derives benefits from accelerating its other facility. To profit from helping Nevada Power it need not resort to overpricing the electricity from Sun-Peak.

B. The Case For The $18 Bill

At the Commission meeting, a colleague suggested that the state's findings compared to the $1.50 price a store charges for liver it does not keep in stock. In effect, this view holds that the state engaged in a poker game bluff, as Cool Hand Luke would say, "betting on a hand and nothing." I disagree completely.

To me, a better analogy lies in the story an erstwhile presidential candidate used to tell on the stump. It involves a federal bureaucrat asking a "country hick" for change of an $18 bill. The "hick" inquires whether he wants it in three $6's or two $9's. The reasoning in this order resembles that request for change of an $18 bill. I now show why.

The order acknowledges, slip op. at 7, "In an increasing number of instances, the Commission has approved rates based not on the supplier's costs but on a competitive market rate for the supplier's energy." Anyone who understands, let alone follows, the Commission knows how we came to approve those rates. We never, in fact, undertook any independent review of whether competition existed in an electric procurement market or of the legitimacy of any rate ceiling we embrace. Rather, a majority has used proxies for both - many times effectively taking the state commission's word for it.

Exhibit A: Ocean State

This case concerned four New England utilities purchasing electricity from a partnership that included affiliates of three of them at above cost rates. The majority approved the arrangement. It relied heavily on the advisory opinions of the Massachusetts and Rhode Island Commissions for both the market and rate ceiling findings. The Commission assured (44 FERC at p. 61,982, footnotes omitted):

Ultimately, however, [the unaffiliated purchasing utility] and its consumers are protected against excessive rates both by Ocean State's lack of leverage over [the buyer] and by the fact that the rate. . . is expected to [fall] below [the purchaser's] avoided cost. The fact that the rate to Boston Edison is expected to be below avoided cost has been confirmed by the Massachusetts [commission] in its investigation of the propriety of... the purchase. ...

As for the affiliated purchasers, the Commission found comfort as well. In particular, the

majority relied on (44 FERC at p. 61,984, footnotes omitted):

However, in this case, the affiliates' projections of their avoided costs are corroborated by other considerations. First, the Rhode Island Commission established that Ocean State's rates are the lowest cost alternatives available Rhode Island utilities, which include [other utilities].

True, I dissented from approving the rates, even in the face of those findings. I disagreed, 44 FERC at p. 61,989, about the adequacy of the data, but not the principle involved. Exhibit B: Doswell Limited Partnership

Doswell Limited Partnership, 50 FERC ¶ 61,251 (1990) involved a solicitation in which the purchasing utility announced in advance the price it would accept in a bid (as it may under the different statutory scheme for alternate power facilities under the Public Utility Regulatory Policies Act (PURPA)), only to have the transaction fall through. The parties resurrected it as a transaction subject to the Federal Power Act, but maintained the same price.

The Commission found, although without any evidence (since none existed) that, "[t]his transaction was clearly the product of a market process," 50 FERC at p. 61,757. The order dressed up that conclusion with economic jargon about a subsequent, hypothetical negotiation concerning terms and conditions, even though the prior (PURPA) avoided cost rate remained fixed. As I wrote in my concurring opinion, 50 FERC at pp. 61,761-61,762, the state's approval provided the only factual and rational undergirding for the Commission's decision to accept the rates.

Moreover, even the majority derived the rate ceiling from the state commission's findings. Unlike here, where Nevada used the costs for the actual plant as the measure, the state in Doswell found that a (somewhat different model) power plant built later represented a reasonable benchmark for the utility's cost of construction. The cost of that plant became the cap we adopted.

Exhibit C: Commonwealth Atlantic Limited Partnership

Next came Commonwealth Atlantic Limited Partnership, 51 FERC 61,368 (1990). This involved the next solicitation Virginia Power Company conducted. Unlike Doswell, the competition involved price as a factor. Commonwealth Atlantic emerged as the winner and we all affirmed the rate as just and reasonable. I concurred separately, 51 FERC at pp. 61,251-61,257, because I thought the Federal Power Act required this Commission to make an explicit finding that the rate fell below a

just and reasonable ceiling. Because the state commission had provided the means for making that calculation, I accepted the result.

The majority rejected the concept of a rate ceiling as unnecessary. Instead, the order recited, 51 FERC at p. 62,249, that, "Virginia's solicitation has yielded a competitively determined avoided cost that demonstrates that the... purchase will leave Virginia Power no worse off than if [it] would have generated the power itself. . . ." Nevertheless, Note 84, attached to that sentence says:

We note that the S[tate] C[orporation] C[ommission], in evaluating Commonwealth's revised . . . proposal, . has found that a comparison between [that] and the cost of Virginia Power's . . . [hypothetical] generic combustion turbine option (a selfgeneration option) shows the Commonwealth facility to be less expensive. . . .

Exhibit D: Dartmouth Power Limited Partnership

Dartmouth Power Limited Partnership, 53 FERC 61,117 (1990), involved a Massachusetts solicitation. There, 53 FERC at p. 61,360, the Commission made a cryptic finding that the rates "are within the legally mandated zone of reasonableness." (Footnote omitted). The background section offers some illumination.

The order recites, 53 FERC at p. 61,357 n.17, that Dartmouth argued in favor of our approving the rates, citing, among other things, to the fact that the Commonwealth's regulatory agency had approved the agreement. In doing so, the state commission held the rate to be lower than the utility's avoided cost. I relied on the state's findings in my concurring opinion, 53 FERC at p. 61,362.

C. Summation

These cases show the way matters stood from the time the Commission started with the generic federally determined Electric NOPR approach to solicitations until today. While our orders never stated that policy in so many words, in fact, we generally acted in a manner that resulted in a relative consistency between our Commission and state regulators on the issue of power procurement. This Commission exercised its Federal Power Act responsibility to approve rates for these wholesale transactions at or below avoided costs, while the states continued to regulate the electric generation aspect.

The majority's vote today effectively changes that for the worse.

[ 61,264

II. FERC And Power Procurement: Flexibility To Be Uniform

A. The Last Time The Commission Tried That Tack

Only a short time ago this Commission tangled (to put it mildly) with the states over electric power procurement. The 1988 Competitive Bidding NOPR laid down federally mandated requirements for those states deciding to use bids, rather than administrative proceedings, as the method for establishing utilities' avoided costs (the rate ceiling for alternate power projects under PURPA). I thought all that transpired since made the information on the yellowing pages of that document interesting only perhaps to trivia buffs or those studying what might have been. I thought the Commission had learned its lesson. Sadly, it has

not.

The NOPR rather openly imposed federal fiat; this order, rather subtly. The NOPR flatly stated, mimeo at 39 (footnote omitted), "The legality of bidding requires that the bidding process take into account all potential sources of supply," (emphasis added) in the actual bidding, or at least in establishing the benchmark, mimeo at 42. Further, the NOPR argued that in order for a bid to be competitive, the prospective participants need information.

The NOPR, mimeo at 50-53, contained detailed list of requirements. Relevant to this case, the NOPR required “the quantity and characteristics of capacity . . ., the criteria for participation and the criteria for bid selection be publicly announced and broadly publicized well in advance of the date for bid submission." (Emphasis added.) The NOPR also mandated a "full des[cription]" (id. at 51) of the criteria for eligibility and disqualification, as well as dictating "equal treatment" for all bidders (id. at 52). Also, id., "evaluation of the bids [had to] be in writing."

Finally, the NOPR severely limited negotiation as a means for utilities to obtain power. Under the heading of "Simultaneous Bidding And Negotiation," (mimeo at 45-47) the Commission understated, mimeo at 45, "When a bidding system [i.e., solicitation] is chosen as a means of acquiring additional capacity, some restriction on the use of negotiations to satisfy the block of capacity that has been subjected to the bidding system may be appropriate."

In plainer terms, the NOPR considered disallowing negotiations that may occur before the utility selected the winning bidder. Or, the Commission would have limited the "degree" of negotiations between utilities and their potential suppliers, such as making the parties wait until after the offers came in. The NOPR seemingly died on the vine.

Before penetrating the language here, I should add one more background fact. Once before in an adjudication, the Commission started down this path of specifying rigid criteria for solicitations. The majority in the original TECO case applied what I referred to (in the debate at the Commission meeting) as a "sparseness test" to conclude that eight responses and three realistic choices still left the procurement "uncompetitive."

On rehearing, the majority beat a retreat. The Commission said, 53 FERC 61,202, at p. 61,810 (1990) "[we] did not intend to apply a rigid numerical test . . . nor [do we] consider [one] appropriate [in evaluating a solicitation]."

That victory lasted for a short time.

B. How Soon They Forget, Or What The Commission Giveth In November It Taketh Away In February

The majority "speaks in conclusions" on the question what should Nevada Power have done differently. Therefore, my exposition requires reading between the lines. The order, slip op. at 9, finds that we have no record evidence that Nevada Power "considered any feasible alternative to Sun-Peak, except self-construction," then dismisses the latter.

In fact, as I cited earlier in this opinion, we do have record evidence about "feasible alternatives" that which the state required Nevada Power to consider (the General Electric-Bechtel combination). Moreover, even on self-construction, Nevada Power had two choices. The state record reveals an Ebasco estimate, as well as the company's internal figures.

We cannot, therefore, take the Commission's finding literally. What, then, does the majority want in a procurement? Having no first-hand knowledge, I venture to deduce. I think another sentence on page 9 better reveals the holding in this case. "Nevada Power chose to look no further than Sun-Peak, and thus, there is no evidence that genuine alternatives. were available." (Emphasis added.)

Even though the state commission made the procurement process work and urged us to approve the rates, in truth, the company followed a path different from what some economic theorists may consider to be competition. (1) Nevada Power, of course, operating under severe time constraints, did not "publicly announce" or "broadly publicize" its quest for electricity. (2) Moreover, Nevada Power may not have specified its requirements or criteria in the degree of detail the NOPR required. (3) Also, the utility had but two or (if one counts the Ebasco self-construction estimate separately from Nevada Power's own

figures and includes Sun-Peak) three choices, rather than the usual multitudes of the bidding programs. (4) Finally, the company negotiated from the start, rather than taking bids.

Whether all of these perceived departures from the theoretician's notion of the competitive norm, or some, or even just one brought about the rejection makes a big difference in practice. For my purposes, however, it matters only in degree. By refusing to find the SunPeak rate just and reasonable on the facts in the record the state commission developed, the majority has imposed a significant federal restriction on electric power procurement, a traditional province of the states.

If this decision stands, in order now to pass muster, either utilities must "publicly announce and broadly publicize" their need for power (conduct formal solicitations), or they must elicit a minimum number of responses (unspecified as yet but more than one plus selfconstruction), or they must use bidding at least in the first stage (rather than exclusively negotiate). Perhaps the Commission will require a combination of some or all of these steps.

In any case, today's holding carries broad implications, for not all states employing solicitation procedures use bids. To answer that utilities can overcome the majority's handiwork because they "can always" build on their own without a procurement process may well not be true universally. Even if it were, each of the electric utilities and their states should make that decision within its jurisdiction. The federal government has no business laying down a rule for the entire nation.

In a nutshell, I agree that the state cannot substitute for us in establishing just and reasonable electric rates at wholesale. I disagree that means we must substitute for the states in managing procurement of electric generation. Today's decision stands for the proposition that we afford discretion only as long as the state uses the same standards as would a majority of this Commission. I cannot accept that.

I think the concept - which the National Energy Strategy (NES) embodies of maximum flexibility, including discretion to the states to decide how to obtain electricity to fill this country's growing needs for power, must encompass more than the apparently prevailing FERC view on what constitutes competition in procurement. I also believe it is flat wrong to suggest, as some argued in this case, that the competition principles contained in the NES somehow require the result here of rejecting the Sun-Peak rate. The NES makes clear that the electric policy objective is to ensure sufficient power supply with adequate reliability at reasonable cost to the electric consumer. The NES also emphasizes repeat

edly the important role state commissions must fill in that effort and the responsibility of FERC to support state integrated resource planning and power procurement policies. Here, the majority asserts the competition factor (one aspect of the NES) to frustrate the overall NES objective-timely and cost-effective power at the Nevada Power bus bar.

III. FERC And Electric Strategy: Further Mileposts On The Road To Utopia? Or, A Transmission Joker Lurking In the IPP Deck?

Digging further beneath surface in this case brings me to the controversy surrounding transmission. I referred to that in my partial dissent in Public Service Company of Indiana, Inc. (PSI), 51 FERC 61,367, at p. 62,230, order on rehearing, PSI Energy, Inc., 52 FERC ¶ 61,260 (1990) as the attempt to build "The Road To Utopia," using the Transmission Task Force's Report as the blueprint. The transmission question arises because Mission Energy, the parent of Sun-Peak, has affiliations with Southern California Edison Company (SoCal), a major utility whose grid connects with Nevada Power's.

The order, at the end of Heading A.2, “Market Power in Transmission . . . " coyly recites: In determining whether to allow [un]traditional rates in past cases, the Commission has required a seller to show not only that neither it nor its affiliates [dominate generation but also that none] owns or controls transmission facilities through which the buyer could reach the seller or, [failing that] that they have adequately mitigated any ability to block the buyer from reaching [any?] other sellers. . . . In this case because [of the other rationale to reject the rates] we do not address [the issue and] make no findings regarding ... transmission.

Nevertheless, one may discern the hand of transmission policy in the way the majority makes its findings on generation. As with Sherlock Holmes and the dog that failed to bark (Doyle, "The Adventures of Silver Blaze," The Complete Sherlock Holmes (1938)), what the order omits has as much significance as what it contains. I refer particularly to the following facts:

The Commission held, for example, in Pacific Gas & Electric Company (Turlock), 42 FERC 61,406, modified on rehearing, 43 FERC

61,403 (1988) that having two choices (the one taken plus one alternative) made for sufficient competition to allow for a marketbased negotiated rate. The Commission there required the utility to show that the customer could purchase from a third party in addition to the seller before approving the market rate.

In relieving the company of that burden, the Commission explained, 43 FERC at p. 62,034, that it required the showing in the first place: P[acific] G[as] & E[lectric] is the only source of transmission [for the customer it surrounds] and the Agreement appeared to prohibit ... the use of [reserved transmission] Service for [outside] purchases. Our concern was that such limitations gave [the utility] control over [the customer's] access to [other suppliers]. Such control would greatly lessen the likelihood that competition from alternat[e] suppliers would moderate [the seller's] pricing....

Because the parties explained that the customer had access to the larger grid over reserved service, the Commission changed its mind. Id. Nevertheless, the Commission kept to the principle that two choices sufficed. Even though in my separate opinion to the initial order, 42 FERC at pp. 62,200-62,202, I would have preferred greater variety, I went along with two, given the circumstances of the case.

The Commission has counted on, or at least not objected to, the fact of a utility building the plant as a restraint on the seller's price. Recall in my recitation from Ocean State, the majority held the rate just and reasonable because the purchasers (meaning also customers) were better off than if the utilities had built themselves. That pertains here, too. Yet, the majority skips over that practical consideration in pursuit of theory.

Moreover, in several cases, the Commission has accepted customers' unreviewed declarations that purchases fall below avoided cost as proof of a competitive market. In Citizens Power & Light Corporation (Citizens), 48 FERC 61,210 (1989), for example, the majority held that kind of showing sufficient to give market rates to purchasers from a marketer.

Closer to home, because the case involved a full blown utility, in the PSI case, the Commission allowed purchasers under the PSI market rate program to certify that the price fell below avoided cost. We could never really know how many other suppliers the customers dealt with, if any at all. Yet, nobody expressed any concerns. Moreover, because purchasers under the program will be utilities, it may well be that building their own plants will form the basis for comparison.

● In Enron, the Commission accepted the purchasing utility's say-so that the negotiated rate fell below avoided cost. The majority neither inquired nor cared how (if through selfconstruction) the purchasing utility came to that conclusion.

Of course, the utility in Turlock offered transmission service to the customer; the sellers