## Facts

- Indiana Michigan Power Company, a utility serving parts of Indiana and Michigan, acquired low-sulfur coal reserves in Utah (the Price River properties) to satisfy expected clean-fuel demand, but demand fell short and the utility incurred significant losses.
- Wholesale customers, including members of Indiana Municipal Power Agency (IMPA), previously challenged Indiana Michigan’s efforts to pass Price River-related losses through a fuel adjustment clause, leading to a FERC-approved settlement (the McDowell settlement) that limited such recovery.
- Indiana Michigan later executed a long-term lease of the Price River properties and, at the same closing, entered long-term coal supply contracts with the same counterparty for coal from other mines.
- IMPA alleged the supply-contract prices contained embedded “sweeteners” to compensate the lessee for high lease payments, effectively shifting Price River losses back to wholesale customers contrary to the settlement and federal law.
- An administrative law judge agreed with IMPA and found the utility’s fuel-clause charges effectively recovered Price River losses, violating the settlement, the Federal Power Act, and FERC regulations.
- FERC reversed, applied its customary prudence and market-rate standards, relied on a staff market study, and found the contract prices below the weighted average of comparable contracts and attributable solely to coal (not lease-loss recovery).
- IMPA petitioned for review, seeking reinstatement of the ALJ’s findings.

## Issues

1. Whether FERC acted within its discretion under the Federal Power Act by evaluating the coal supply contracts under its established prudence and market-rate standards rather than treating the prior settlement as categorically barring recovery of any Price River-associated costs.
2. Whether substantial evidence supported FERC’s findings that the supply contracts were priced at or below market and did not embed lease-related “sweeteners,” such that recovery through wholesale rates did not breach the settlement or violate the Federal Power Act.

## Decision

- The D.C. Circuit denied the petition for review and affirmed FERC’s orders.
- The court held FERC’s choice to apply its prudence and market-rate framework to the challenged fuel contracts was within the agency’s discretion.
- The court held substantial evidence supported FERC’s determinations that the contracts were priced below the weighted average for comparable contracts and charged solely for coal.
- The court concluded Indiana Michigan’s inclusion of the challenged fuel costs in wholesale rates did not violate the Federal Power Act, FERC regulations, or the McDowell settlement.

## Legal Principles

- Under the Federal Power Act, FERC has broad discretion in ratemaking and may apply established prudence and market-based benchmarks to evaluate recoverability of fuel costs.
- A FERC-approved settlement will not be read to impose categorical ratemaking restrictions beyond its clear terms; absent explicit language, it may be construed as operating within FERC’s ongoing regulatory standards.
- On judicial review, FERC’s technical and policy judgments are sustained if reasonably explained and supported by substantial evidence in the administrative record.
- FERC may reject an ALJ’s findings if it explains the departure and its decision is record-based and not arbitrary or capricious.

## Conclusion

The court upheld FERC’s determination that Indiana Michigan’s post-lease coal supply contracts were recoverable in wholesale rates because FERC permissibly applied its usual prudence and market-rate review and reasonably found, on substantial evidence, that the contract prices reflected coal costs rather than an indirect recoupment of Price River losses barred by the prior settlement.


Ind. Mun. Power Agency v. FERC, 56 F.3d 247 (D.C. Cir. 1995)