214 F.3d 888 (7th Cir. 2000)
City of Kaukauna, Wisconsin, Inter Lake  Papers, Inc., and Wisconsin Electric Power Company,    Petitioners,v.Federal Energy Regulatory Commission,  Respondent.
No. 99-1770
In the  United States Court of Appeals  For the Seventh Circuit
Argued December 1, 1999
Decided June 6, 2000

On Petition for Review of Orders of the   Federal Energy Regulatory Commission.  80 FERC para.para. 62,232, 62,233, 62,234 and 86 FERC para. 61,096.
Before Bauer, Cudahy and Flaum, Circuit Judges.
Cudahy, Circuit Judge.


1
Central Wisconsin and its  medial artery, the Fox River, are a rich source  of history, as this case reveals.


2
In this case, the petitioners each operate  hydropower projects at federally owned dams on  the Lower Fox River (the part of the river below  Lake Winnebago). All of these projects are  located downstream of the government-owned dam at  Menasha (the Menasha dam), which controls the  level of Lake Winnebago and regulates the flow of  the Fox River as it leaves the lake. In September  of 1997, the Federal Energy Regulatory Commission  (FERC or the Commission) exercised its power  pursuant to sec. 10(f) of the Federal Power Act  (FPA), 16 U.S.C. sec. 803(f), and assessed the  petitioners a total of $338,984 in charges for  "headwater benefits." These hydropower  enhancements were realized at the petitioners'  projects as a consequence of the more even flow  of the river attributable to the improvement of  the Menasha dam's storage-and-release capability  in 1937. FERC also required the petitioners to  begin paying annual "headwater benefit" charges.  The petitioners argued to FERC that these charges  were unjustified because they already owned the  rights to "headwater benefits" as a result of a  series of conveyances beginning in the mid-  nineteenth century--starting with a grant from  the United States to the State of Wisconsin in  1848. FERC rejected this argument, and the  petitioners filed for review in this court. We  agree with the petitioners and reverse.


3
I.  The History and Development of the Fox River1


4
In 1634, the French explorer Jean Nicolet  became the first European to set foot in  Wisconsin, claiming it for France. He began his  exploration at Green Bay, where the Fox River  flows into Lake Michigan, and traveled up the Fox  in a southwesterly direction through Lake  Winnebago as far as the site of the present city  of Berlin, Wisconsin. Forty years later, Father  Jacques Marquette and Louis Jolliet traveled  farther up the Fox, eventually reaching the  portage between the Fox and Wisconsin Rivers,  where the two rivers are only about a mile apart.  From that portage--where the city of Portage,  Wisconsin, is now located--the Fox River flows  northeastward into Lake Michigan, and the  Wisconsin River (which Marquette and Jolliet then  followed) runs southwestward into the Mississippi  River. For more than a century after Marquette  and Jolliet discovered it, European fur traders  used the portage as a link in their passage  westward.


5
In September of 1828, three companies of the  First United States Infantry arrived at the Fox-  Wisconsin portage to build Fort Winnebago. One of  the main reasons for establishing this strong  point was to prevent the Winnebago Indians from  closing the commercially important trail between  the rivers. This military presence encouraged  settlers to come to the area, and travelers  eventually became dissatisfied with the well-worn  but marshy trail. This path was virtually  impassible during times of high water, and  eventually the idea of a canal gained attention.  Given the recent success of the Erie Canal and  the great interest in canals in this pre-railroad  era, a Fox-Wisconsin canal seemed like a splendid  idea. If the canal and other improvements to the  Fox River were successful, there would be a  continuous waterway from the Atlantic coast to  New Orleans, by way of the Great Lakes. In 1837,  the Winnebago Indians were somehow induced to  give up all their lands in Wisconsin, and a group  of New York and Wisconsin businessmen formed the  Portage Canal Company. Construction of a canal  between the Fox and Wisconsin Rivers began, but  it stalled after the expenditure of $10,000.  Years passed.


6
Joel R. Poinsett,2 President Martin Van  Buren's Secretary of War, saw military value in  completing the Fox-Wisconsin waterway, and he  urged Congress to appropriate money to complete  its construction. Morgan L. Martin, territorial  delegate from Wisconsin, suggested that money  could be saved by giving land and water rights to  Wisconsin and letting it build the canal and  improve the Fox River. See Ina Curtis, Early Days at  the Fox-Wisconsin Portage 48 (Columbia County Hist.  Soc. 1981). Congress favored Martin's idea, and  in 1846, Congress passed a law granting to  Wisconsin, upon its becoming a state (which  happened two years later), all public lands and  water rights necessary for the construction of  the canal and the improvement of the Fox River,  including land "on each side of the said Fox  River, and the lakes through which it passes"  from the portage to Green Bay. Act of Aug. 8,  1846, 170 Stat. 83 (1846). On August 8, 1848, the  brand new State of Wisconsin gave its assent to  this Act of Congress, accepting the offer. See  Act of Aug. 8, 1848, 1848 Wis. Laws 58. As part  of its acceptance, Wisconsin declared,  "[W]henever a water power shall be created by  reason of any dam erected or other improvements  made on any of said rivers, such water power  shall belong to the state subject to future  action of the [Wisconsin] legislature." Id. at  sec. 16, 1848 Wis. Laws at 62. Work on the canal  and other improvements began in June of 1849  under the direction of the newly created  Wisconsin Board of Public Works, but progress was  slow because of mix-ups between the Board and its  contractors. In 1851, the first dam was built  across the natural outlet of Lake Winnebago at  Menasha. See Ellen Kort, The Fox Heritage 74 (Windsor  Pub. 1984). The canal between the Fox and the  Wisconsin was completed by May of 1851,3 but  the State was buckling under the financial  burden.4 Morgan Martin then reentered the  scenario, taking over as a new contractor and  attempting to complete the improvements along the  Fox River from Lake Winnebago to Green Bay.


7
Still under financial pressure, Wisconsin  decided to "privatize" the project. The Wisconsin  legislature issued a special charter to the Fox  and Wisconsin Improvement Company (Improvement  Company), and on July 6, 1853, Wisconsin  transferred "the works of improvement  [contemplated by the Act of Aug. 8, 1848 and  related acts], together with all and singular  rights of way, dams, locks, canals, water power  . . . to the same extent and in the same manner  that the State now hold[s] . . . ." Act of July  6, 1853, sec. 2, 1853 Wis. Laws 92, 93. Thus, the  State of Wisconsin disposed of its entire  interest in improving the Fox and dumped the  associated financial burdens of improvement by  transfer to the Improvement Company, which  continued the undertaking.


8
Carrying on the tradition of difficulty and  failure, the Improvement Company found itself  bankrupt by 1864. In 1866, the property of the  Improvement Company--consisting of the works of  improvement, the water powers and the lands--were  sold to a group of investors from New York at a  court-ordered foreclosure sale. The purchasers  were later incorporated as the Green Bay &  Mississippi Canal Company (Canal Company) with  the mission of expanding the canal and  improvements to make way for much larger craft.  See Act of April 12, 1866, sec. 2, 1866 Wis.  Private & Local Laws 1493, 1494. The Canal  Company operated for several years, but during  that time very little work was done on the Fox  River improvements. Instead, the Canal Company  focused on soliciting assistance from the federal  government. The anomaly of a public waterway's  being held in private hands created some concern  in the halls of power, and eventually, none other  than Morgan Martin, together with others,  suggested that the rights and franchises of the  Canal Company come full circle and be surrendered  to the United States government.


9
In 1870, Congress authorized the Secretary of  War to enter into arbitration with the Canal  Company to determine what compensation should be  paid for the assets the United States required to  continue the improvements of the Fox River for  the purpose of navigation. See Act of July 7,  1870, 16 Stat. 189, ch. 210 (1870). Wisconsin  authorized the sale, see Act of March 23, 1871,  1871 Wis. Private & Local Laws 973, and the  arbitrators fixed the appropriate compensation at  $325,000 to be paid to the Canal Company. This  sum reflected the following valuations: water  powers, $140,000; personal property, $40,000; and  the improvements, $145,000. The Secretary of War  determined that the Canal Company's water power  rights and personal property were not necessary  to the maintenance of navigation along the Fox  River and recommended to Congress that it acquire  only the property necessary to maintain  navigation, leaving the water power rights and  personal property in the hands of the Canal  Company. On June 10, 1872, Congress authorized  the purchase of the improvements only,  compensating the Canal Company in the amount of  $145,000--the prescribed $325,000 less the value  of the water power rights and personal property.  The Canal Company deeded the improvements to the  United States in September of 1872, transferring:


10
All and singular property and right of property  in and to the line of Water Communication between  the Wisconsin River aforsaid and the mouth of the  Fox River, including its locks, dams, canals and  franchises saving and excepting therefrom and  reserving to [the Canal Company] the following  described property right and portion of  franchises, which in the opinion of the Secretary  of War are of Congress and not needed for public  use . . . .


11
Deed from Green Bay & Mississippi Canal Company  to United States of America (Sept. 8, 1872) at 3  (1872 Deed), J. App. at 18 (emphasis in  original). What was "not needed for public use"--  i.e., not needed for navigation--was thus  reserved by the Canal Company, and the deed  described the reserved property as follows:


12
[A]ll that part of the franchise of [the Canal  Company] viz. the water power created by the  dams, and by the use of the surpluse [sic] water  not required for the purpose of navigation with  the rights of protection and preservation  appurtenant thereto and the lots, pieces or  parcels of land necessary to the enjoyment of the  same and those acquired with reference to the  same all subject to the right to use the water  for all purposes of navigation . . . .


13
1872 Deed at 3, J. App. at 18. After the  execution of this deed, the United States owned  all the dams and controlled the waterway under  its paramount interest in navigation. The Canal  Company owned all the water power rights created  by the dams, subject to the United States's  navigation interest.5 The Canal Company leased  water power to several paper mills along the  Lower Fox River, and the United States maintained  navigation along the entire Fox River. However,  with the advance of the railroads, commerce on  the Fox River above Lake Winnebago dwindled, and  the canal was eventually abandoned. Improvement  along the Lower Fox River (below Lake Winnebago  and the Menasha dam to Green Bay) continued, and  in 1937 the government increased the spillway  capacity of the Menasha dam. This permitted more  effective control of the water level in Lake  Winnebago and, concurrently, stabilized the flow  in the Lower Fox River. Today, the Fox River is  used partly for navigation but mostly for water  power, which since the turn of the century means  hydroelectric power. And hydroelectric power is  a major focus of federal regulation.

II.  Regulatory Background

14
In 1920, Congress enacted the Federal Water  Power Act (FWPA), 41 Stat. 1063 (1920), in order  to promote "the comprehensive development of the  water resources of the Nation, in so far as it  was within the reach of the federal power . . .  ." First Iowa Hydro-Electric Cooperative v.  Federal Power Commission, 328 U.S. 152, 180  (1946). In 1930, Congress created a five-member,  independent Federal Power Commission (FPC) to  exercise licensing authority over dams and other  projects on navigable waters. See Act of June 23,  1930, 46 Stat. 797 (1930). Five years after that,  Congress amended the FWPA to provide for  regulation of wholesale electric power in  interstate commerce, renaming it the Federal  Power Act (FPA). See Public Utility Act of 1935,  49 Stat. 839 (1935). In 1977, the FPC was renamed  the Federal Energy Regulatory Commission. See  Department of Energy Organization Act, Pub. L.  No. 95-91, 91 Stat. 565 (1977).


15
Under the FPA, now codified at 16 U.S.C. sec.  791a et seq., a private party cannot build or  operate a dam or reservoir on navigable waters of  the United States for the purpose of developing  electric power without first obtaining a license  from FERC. See 16 U.S.C. sec. 817. Nor can an  unlicenced hydropower project use the "surplus  water" or "water power" from a government-  operated dam. See id. The Commission issues  licenses to parties, like the petitioners, that  have hydropower projects at government dams under  sec. 4(e) of the FPA.6 See 16 U.S.C. sec.  797(e). Section 10(e) of the FPA authorizes FERC  to charge licensed hydropower projects annual  fees for the occupancy and use of government dams  or other structures. See 16 U.S.C. sec.  803(e).7


16
At issue in the present case, however, is  FERC's power under sec. 10(f) of the FPA. See 16  U.S.C. sec. 803(f).8 Section 10(f) authorizes  the Commission to charge appropriate fees to any  hydropower project, whether licensed or not, if  the project is benefitted by an upstream dam or  other upstream improvement. Congress enacted sec.  10(f) as a means of requiring power projects--  like the petitioners' projects--to compensate  upstream dam owners for "headwater benefits"  conferred as a result of "a storage reservoir or  other headwater improvement." 16 U.S.C. sec.  803(f). As the Tenth Circuit has explained:


17
The term "headwater benefits" refers to the  situation in which an upstream reservoir, through  a program of water storage and subsequent  controlled release, alters the natural flow of a  river in such a way as to allow a downstream  hydroelectric facility to generate more electric  power than would otherwise be possible. This is  accomplished primarily by augmenting the natural  flow of the river with released storage water  during seasons when the natural flow would  otherwise not be sufficient to allow the  downstream facility to operate at full capacity.


18
Public Service Co. of Colorado v. FERC, 754 F.2d  1555, 1561 (10th Cir. 1985). See also 18 C.F.R.  sec. 11.10(a)(2) (defining "headwater benefits").  The system of assessing fees for "headwater  benefits" ensures that downstream power stations  "participate in the financial burden" shouldered  by upstream projects whenever storage-and-release  programs, that provide benefits to downstream  owners, are created or improved. In re Southern  California Edison Co., Ltd., 1 FPC 567, 574  (1939). See also Farmington River Power Co. v.  FERC, 103 F.3d 1002, 1004 (D.C. Cir. 1997).


19
While FERC clearly has authority to assess  water-power-related charges under both sec. 10(e)  and sec. 10(f) of the FPA, this authority is not  without limit. The FPA states that it is not  intended "in any way to interfere with the laws  of the respective States relating to the control,  appropriation, use, or distribution of water . .  . or any vested right acquired therein." 16  U.S.C. sec. 821. Thus, FERC cannot assess charges  for the use of water or water rights to which a  party has a vested right under state law. See  Public Service Co. of Colorado, 754 F.2d at 1566.

III.  Headwater Benefits Assessment

20
In 1992, FERC informed the petitioners that it  would be conducting a "headwater benefit" study  on the Lower Fox River and would then assess  charges for benefits realized by projects  downstream of the government-owned dam at  Menasha, Wisconsin. As has been noted, the  Menasha dam is located where the Fox River leaves  Lake Winnebago and regulates the river's flow as  it has done since its construction in 1851. All  of the petitioners' hydropower projects are  located below the Menasha dam. Since 1937, when  its spillway capacity was increased, that dam has  provided "headwater benefits" to these downstream  projects through its storage-and-release  program.9 In 1994, FERC's Office of Hydropower  Licensing issued a report suggesting that a total  "headwater benefit" fee of $338,984 be assessed  for past benefits10 with additional charges  to be assessed in the future. The Director of the  Office of Hydropower Licensing, over the  petitioners' objections, accepted this  suggestion, and on September 12, 1997, issued an  order imposing charges. See Wisconsin Electric  Power Co., 80 FERC para. 62,232, 64,399-400  (1997); City of Kaukauna, 80 FERC para. 62,233,  64,405 (1997); Repap Wisconsin Inc., 80 FERC  para. 62,234, 64,409-10 (1997). The Director  found that the petitioners were exempt from  "headwater benefit" charges prior to 1937, but  that their rights under the 1872 Deed did not  cover the incremental generation attributable to  the 1937 improvements to the Menasha dam. See  Wisconsin Electric Power Co., 80 FERC at 64,399;  City of Kaukauna, 80 FERC at 64,404; Repap  Wisconsin, 80 FERC at 64,409. The petitioners  sought a rehearing on the ground that, as  successors in interest to the Canal Company, they  already owned, even after 1937, all rights to  "water power" and "surplus water" not required  for navigation and employed in power production  at any dam or other improvement on the Fox River.


21
In its Order on Rehearing, the full Commission  rejected the petitioners' argument. In making  this determination, FERC did not adopt the  Director's reliance on the recent vintage of the  1937 improvements to the Menasha dam. Instead,  the Commission relied on three arguably  independent justifications: (1) the right to  "surplus water" and "water power" reserved in the  1872 Deed applied only to the "water power"  available at the individual dam sites where the  petitioners' projects are located and therefore  did not extend to the upstream Menasha Dam; (2)  under the FPA, the petitioners' rights to "water  power" and "surplus water" did not include  benefits attributable to the storage and release  of water from an upstream project; and (3) the  Canal Company did not in fact own any water power  rights at the Menasha Dam, and therefore could  not have assigned such rights to its successors.  See Wisconsin Electric Power Co., 86 FERC para.  61,096 (1999). The petitioners seek review in  this court.

IV.  Discussion

22
When we review a FERC order, we must ordinarily  determine "(1) whether the Commission abused or  exceeded its authority; (2) whether each  essential element of the Commission's order is  supported by substantial evidence; and (3)  whether the Commission has given reasoned  consideration to each of the pertinent factors in  balancing the needs of the [regulated parties]  with relevant public interests." Central Illinois  Pub. Serv. Co. v. FERC, 941 F.2d 622, 627 (7th  Cir. 1991) (quoting Peoples Gas Light and Coke  Co. v. FERC, 742 F.2d 1109, 1111-12 (7th Cir.  1984)). A Commission order should not be reversed  if FERC has provided "a sound, well-reasoned  justification, based upon the evidence in the  record, for its action." Central Illinois Pub.  Serv. Co., 941 F.2d at 627 (quoting Northern  Indiana Pub. Serv. Co., 782 F.2d 730, 746 (7th  Cir. 1986)). Our review is usually quite  deferential, but, when asked to review FERC's  interpretation of a contract as we are here,  focusing on the nineteenth-century conveyances,  we review with less deference. See Amoco Prod.  Co. v. FERC, 765 F.2d 686, 690 (7th Cir. 1985).  Thus, we will affirm FERC's order only if we find  its "interpretation of the [conveyances] was  reasonable and in full conformance with law." Id.  (citing Texas Gas Transmission Corp. v. Shell Oil  Co., 363 U.S. 263, 268-69 (1960)).


23
The petitioners make the same argument before  us as they did before FERC. This argument, at its  core, is very simple: they claim without dispute  that they are the successors in interest of the  Canal Company and then argue that they already  own the water rights for which FERC has charged  them. Nothing in the language of the relevant  conveyances, they continue, supports the  Commission's narrow constructions of the terms  "water power" and "surplus water." To the  contrary, say petitioners, the plain language of  the conveyances reserved to the Canal Company all  actual and potential water power interests along  the Fox River, including those that would later  be labeled "headwater benefits" in accordance  with sec. 10(f) of the FPA. In 1872, the  "headwater benefits" created by the Menasha  improvements were potential only, but, whenever  created, came within the applicable language of  the conveyances.


24
The petitioners' thesis is that the "headwater  benefits" for which FERC charged them are merely  part of the "water power" and "surplus water"  they own as a result of the reservation in the  1872 Deed. To elaborate, their argument goes like  this: the State of Wisconsin claimed "water  power" "created by reason of any dam . . . or  other improvement" along the Fox River; then the  Improvement Company received the State's entire  interest, including rights to "water power;" then  the Canal Company got the Improvement Company's  entire interest, again including the rights to  "water power;" and finally, when transferring the  improvements to the United States, the Canal  Company kept the rights to "water power." Thus,  the petitioners conclude, because the Canal  Company's interest in "water power" derives from  the State's original claim over "water power"  "created by reason of any dam," the "water power"  (and "surplus water") reserved by the Canal  Company--and later acquired by the petitioners--  includes what has at some point in the evolution  of the river been labeled "headwater benefits."


25
The petitioners have a very strong argument.  Beginning with the grant of land from the United  States to the State of Wisconsin in 1848, the  State validly claimed ownership of all "water  power [that] shall be created by reason of any  dam erected or other improvements made on any of  said rivers." Act of Aug. 8, 1848 sec. 16, 1848  Wis. Laws 58, 62. See Kaukauna Water Power Co. v.  Green Bay & Mississippi Canal Co., 142 U.S. 254,  276 (1891) (holding, when asked to determine the  validity of the 1848 Act, that "we think it  within the power of the state to retain within  its immediate control such surplus as might  incidentally be created by the erection of the  dam"). Wisconsin later validly transferred its  entire interest to the Improvement Company. See  Green Bay & Mississippi Canal Co. v. Kaukauna  Water-Power Co., 35 N.W. 529, 531 (Wis. 1887)  (describing transfer). Then, in 1866, the Canal  Company acquired the Improvement Company's entire  interest through a foreclosure sale. See Green  Bay & Mississippi Canal Co. v. Patten Paper Co.,  172 U.S. 58, 74 (1898) (describing transfer as  including "the property of [the Improvement  Company], consisting of the works of improvement,  lands and water powers"); Green Bay & Mississippi  Canal Co., 35 N.W. at 532. Thus, in 1866, the  Canal Company held the same property and rights  along the Fox River as the State had claimed  under its Act of August 8, 1848.


26
The crucial conveyance is the transfer  memorialized in the 1872 Deed. By that document,  the Canal Company "transferred and conveyed the  works of improvement to the United States,  reserving to itself the personal property and the  water powers . . . ." Patten Paper, 172 U.S. at  75. Specifically, recall that the United States  wanted only property necessary "for the purpose  of navigation" and that the deed reserved "the  water power created by the dams, and by the use  of surpluse [sic] water not required for the  purpose of navigation." 1872 Deed at 3, J. App.  at 18. See also Patten Paper, 172 U.S. at 75  (quoting deed and discussing the transaction).  Thus, under the reservation clause in the 1872  Deed, "whatever title the Canal Company had to  such water power and such surplus water at the  time of the conveyance, it kept . . . ." Kaukauna  Water Power Co., 142 U.S. at 278. As we have  noted, the Canal Company had title to "water  power . . . created by reason of any dam . . . or  other improvements" along the Fox River. Act of  Aug. 8, 1848, 1848 Wis. Laws 58, 62 (emphasis  added). The sheer breadth of the rights reserved  in the 1872 Deed suggests that the petitioners  already own all water-power-related rights along  the Lower Fox River. And it is noteworthy that  the United States, in 1872, took only property  necessary for the purpose of navigation. The  Commission has not argued that the energy-related  benefits of the storage-and-release program at  the Menasha dam are necessary for the purpose of  navigation.


27
The view that what are now known as "headwater  benefits" as recognized by the FPA remained with  the Canal Company in 1872 is buttressed by the  absence from the record before us of any  indication that at the time of the nineteenth-  century conveyances a discrete water power  interest called "headwater benefits" was  recognized or that there was recognition then, by  some other name, of a separate interest in what  is now described as "headwater benefits." Neither  party specifically addressed this question, but  so far as anything before us discloses, what have  now been separately identified as "headwater  benefits" were in 1872 part and parcel of the  larger category of "water power" and "surplus  water." This is not surprising since the  stabilization of flow that constitutes a  "headwater benefit" achieves its only actual  energy impact in making available a net increase  in "water power" at the various downstream dams.  A "headwater benefit" is therefore essentially an  enhancement of what is conventionally referred to  as "water power" at the various dams. In 1920,  sec. 10(f) of the FPA apparently carved out  "headwater benefits" as a separate  interest.11


28
FERC presents three arguments to challenge the  petitioners' ownership of the "headwater  benefits." We will address them in turn. First,  the Commission found that the reservation clause  in the 1872 Deed applied only to "water power"  and "surplus water" developed at the petitioners'  individual dam sites. See Wisconsin Electric  Power Co., 86 FERC at 61,346. Although FERC  concedes that the 1872 Deed did reserve to the  petitioners "water power" and "surplus water"  rights at their individual dam sites, it in  addition believes that the "water power" and  "surplus water" rights are limited to these  particular dam sites. FERC argues that, based on  "historic origins and usage," both of the terms  "water power" and "surplus water" refer to the  "head and flow that a dam makes available at the  dam site."12  Id. In support of this finding, FERC cites Chemehuevi Tribe of Indians v. Fed.  Power Comm'n, 420 U.S. 395 (1975), which states  that "[t]he phrase 'surplus water or water power  from any Government dam' had its origins in  legislation enacted in the late 19th and early  20th centuries, conferring on the Secretary of  War the authority to lease at individual dam  sites excess water for power development." Id. at  414. FERC quotes the Supreme Court's language in  dicta accurately, but, of course, the context of  the quotation from Chemehuevi is entirely  different from that in which we address the  present issue; Chemehuevi discussed legislation  that was by its own terms site-specific, and  there was no room in the Chemehuevi discussion to  consider the enhancement of "surplus water" or  "water power" by systemic improvements. The  legislation analyzed in Chemehuevi involved  "surplus water" and "water power" that was  identified as being at dams, with no focus on the  enhancement of these interests by upstream  improvements. See, e.g., H.R. 16053, 63d Cong.,  2d Sess., sec. 14 (1914) (proposed amendment to  Dam Act referring to "the right to develop power  from the surplus water . . . at any navigation  dam") (emphasis added); S. 3331, 64th Cong., 1st  Sess., sec. 10 (1915) ("right to utilize the  surplus water-power . . . at any navigation dam)  (emphasis added); H.R. Rep. No. 404, 64th Cong.,  1st Sess., at 6 (1915) ("for the use of surplus  water and water power generated at dams . . . .")  (emphasis added).


29
But in all its discussion of how the terms  "surplus water" and "water power" were typically  used, FERC never directly addresses the fact that  the conveyances relevant to this case used  markedly different language than the proposed  legislation referred to by Chemehuevi. Here,  Wisconsin did not claim rights at a particular  dam or even rights at all dams along the Fox  River. The State claimed ownership of "water  power" created "by reason of any dam . . . or  improvement." Act of Aug. 8, 1848 sec. 16, 1848  Wis. Laws 58, 62 (emphasis added). "Water power"  created by reason of any dam or improvement  suggests a more expansive category than merely  "water power" at particular sites, as FERC would  have it; instead, "by reason of" seems to denote  a claim on "water power" as a systemic concept.


30
This conclusion is reinforced by the elementary  physics of water power. Water power, in the  physical sense, is the "[p]ower developed from  movement of masses of water . . . through the  force of gravity." McGraw-Hill Encyclopedia of Science &  Technology, vol. 19 at 396 (8th ed. 1996). At a  hydropower station, "potential energy from the  weight of water falling through a vertical  distance is converted to electrical energy." Id.,  vol. 6 at 34. The amount of power (usually  measured in kilowatts or megawatts) varies  directly with the "runoff" and the "head" at a  particular dam. See id., vol. 19 at 398. The "runoff"  is, quite simply, the volume of water that flows  past a point during a given period of time. See  id., vol. 6 at 34. The "head" is, again in simple  terms, the height of the dam from which the water  falls. See id. Thus, the "water power" at a  particular dam is the product of the dam's height  and the rate of flow of the water.13 FERC has  already conceded that the petitioners own the  right to use the "head" created by the federal  dams at which they have projects. See note 8,  supra. But FERC overlooks something when it  suggests that "water power" and "surplus water"  only concern the energy produced by the head at  a particular dam site.


31
For the 1872 Deed, which incorporated the  State's claim to all "water power" created "by  reason of any dam . . . or improvement," did not  limit "water power" to the energy output  attributable only to the head at a particular  run-of-the-river dam. In addition to the head,  there, of course, needs to be water flowing at  that site, and the water flow is partly a  function of the storage-and-release program  upstream. By increasing the flow in the Lower Fox  River during dry periods, the Menasha dam's  storage-and-release program augments the water  power available at all the individual downstream  sites, without a commensurate decrease during wet  periods,14 thus producing a net gain in  "water power" annually. This effect on water  flow, which is evident at each of the dams,  strongly supports the petitioners' interpretation  that the term "water power," as used in the 1872  Deed and in the other conveyances, includes an  enhancement of flow as well as the energy  contribution of the corresponding head. We  conclude that FERC's attempt to limit the meaning  of "water power" to exclude this enhancement of  flow at the various dam sites is an unreasonable  interpretation of the reservation in the 1872  Deed.15


32
Another way of looking at the problem is, as we  have suggested, to recall that in 1872 there was  apparently no recognition of something called  "headwater benefits" (or a variant of the term)  as a separate interest. This is not surprising.  The stabilization of flow resulting from the  storage-and-release at the Menasha dam does not  produce capturable water power except as it  affects the water flow at the individual  downstream dam sites. The fact that "headwater  benefits" were later identified as a discrete  concept and separated from the comprehensive  notion of "water power" (at least in the drafting  of the FPA) does not undermine the effect of  conveyances made many years before its enactment.


33
The Commission argues, however, that based on  the interaction of sec. 4(e), sec. 10(e), sec.  10(f) and sec. 23(b) of the FPA "headwater  benefits" cannot be part of the "water power" or  "surplus water" rights held by the  petitioners.16 This is a difficult argument  because, as we have noted earlier, we are not  aware of any recognition in 1872 of something  called "headwater benefits" as an interest  separate from "water power." Nonetheless, FERC  says that, if we adopt the petitioners' expansive  definitions, we create anomalous results in  interpreting the FPA. "Headwater benefits," FERC  explains, concern the "distinct energy benefits  to downstream projects of regulating the river  flow so that it remains even and predictable."  Respondent's Br. at 14. See also Wisconsin  Electric Power Co., 86 FERC at 61,347. This, it is contended, is somehow different from "water  power" which FERC defines as "hydroelectric power  created by the Government dam." Respondent's Br.  at 5. FERC further argues that the petitioners'  attempt to conflate these two distinct concepts  is inconsistent with the FPA's statutory scheme.  Making "headwater benefits" part of "water power"  or "surplus water," as the petitioners' propose,  would violate congressional intent with respect  to the licensing scheme in the FPA. FERC  explains:


34
A more expansive interpretation of these terms  would in fact extend the jurisdiction of this  Commission beyond its accepted limits. If a  downstream project receiving headwater benefits  from an upstream government storage dam were said  to be using surplus water or water power from  that dam, the project would be required to be  licensed pursuant to Section 23(b)(1) of the FPA.  Yet the Commission has never required the  licensing of such projects on that basis, and  some projects receiving headwater benefits from  federal dams are in fact unlicenced. Indeed, in  the 1935 amendments to the Federal Water Power  Act, Congress found it necessary to adopt a  specific provision in Section 10(f) for charging  unlicenced projects for headwater benefits. Thus,  it is clear that Congress did not consider the  use of "surplus water or water power" to include  the mere receipt of headwater benefits by a  project.


35
Wisconsin Electric Power Co., 86 FERC at 61,347  (footnotes omitted).


36
We are quick to recognize FERC's expertise in  interpreting the FPA, and we respect its concerns  about jurisdictional limitations, but we think  that this argument is misplaced. We are not  interpreting the FPA. What Congress intended in  the FPA and the scope of FERC's jurisdiction  under that statute are not our concern here  because we are interpreting the 1872 Deed and  related conveyances, not the FPA. If we were  interpreting the FPA, or perhaps even a post-FPA  conveyance, there would be some force to FERC's  argument. For if, under the statute, the receipt  of "headwater benefits" were to constitute the  use of "water power" or "surplus water," all  downstream projects receiving such benefits would  presumably require a license. This licensing  requirement would make FERC's authority under  sec. 10(f) of the FPA to charge unlicensed  facilities for "headwater benefits" redundant. If  we were construing the FPA, this would be a  problem. But instead we are construing the 1872  Deed executed at a time, so far as we know,  before "headwater benefits" were separately  thought of or given a name. There is nothing in  the record indicating that the terminology used  in the FPA was current in 1872. The FPA was  enacted long after the 1872 Deed was executed,  and there is no reason to believe that usage  under the FPA controls the much earlier  instrument. See Florida E. Coast Ry. Co. v. CSX  Transp. Inc., 42 F.3d 1125, 1130 (7th Cir. 1994)  ("Whereas the law in effect at the time of  execution sheds light on the parties' intent,  subsequent changes in the law that are not  anticipated in the contract generally have no  bearing on the terms of their agreement.").


37
Finally, FERC argues that the 1872 Deed could  not have transferred "water power" rights at the  Menasha dam because those rights belonged to the  private owners of that dam in 1855. The Canal  Company, FERC argues, could not have conveyed  what it did not own. In support of this, FERC  cites a 1922 report from the Army Corps of  Engineers to the House of Representatives that  discusses the history of the Fox River and its  projects. See H. Doc. No. 146, 67th Cong. (1922).  We agree with FERC, at least for present  purposes, that the Canal Company did not own any  "water power" rights at the Menasha dam,17  but we believe that FERC draws an incorrect  conclusion from this circumstance. As we have  earlier made clear, we are not concerned with  "water power" at the Menasha dam site but rather  with "water power" "created by reason of" the  Menasha dam. The petitioners' argument is not  that they own "water power" created by the head  and flow at the Menasha dam but that, when the  Menasha dam releases stored water, it creates  additional power potential at their downstream  hydropower projects, and the consequent  incremental energy belongs to them.18 This is  what FERC refers to as "headwater benefits" under  sec. 10(f) of the FPA, but this usage does not  detract from the concept that the increased  generation of power realized by petitioners'  projects is correctly considered "water power"  "created by reason of [the Menasha] dam." The  increase is an enhancement of the "water power"  available at the various dams downstream and was  reserved by the 1872 Deed. Therefore, the  petitioners already own the rights to that "water  power," and we find that FERC's reliance on the  ownership of "water power" rights at the Menasha  dam is unreasonable as well.19

V.  Conclusion

38
For the foregoing reasons, we find FERC's  interpretation of the petitioners' rights under  the 1872 Deed and other conveyances--as  successors in interest to the Canal Company--to  be unreasonable. The United States could hardly  foresee the FPA and its requirements when it  entered into the 1872 Deed with the Canal  Company. However, it did not bargain then for  "headwater benefits" (or rights to incremental  power attributable to a storage-and-release  program of a government-owned dam, however  designated), and we are only holding it to its  agreement. Therefore, we Vacate the Commission's  Order on Rehearing, and Remand for the entry of an  order consistent with this opinion.



Notes:


1
 When preparing this history section, we consulted  the briefs of both parties as well as several  historical resources. These sources included: The  Attainment of Statehood (Milo M. Quaife, ed., State  Hist. Soc. of Wis. 1928); Ina Curtis, Early Days at the  Fox-Wisconsin Portage (Columbia County Hist. Soc.  1981); August Derleth, The Wisconsin: River of a Thousand  Isles (Rinehart & Co. 1942); Thomas Huhti, Wisconsin  Handbook (Moon Pub. 1st ed. 1997); Ellen Kort, The Fox  Heritage (Windsor Pub. 1984); Wisconsin's Past and  Present: A Historical Atlas (Univ. Wis. Press 1998);  Samuel Mermin, The Fox-Wisconsin Rivers Improvement: An  Historical Study in Legal Institutions and Political Economy  (Bd. of Regents Univ. Wis. 1968); Prairie, Pines and  People: Winnebago County in a New Perspective (James I.  Metz, ed., Oshkosh Northwestern Co. 1976); Joseph  Schafer, The Winnebago-Horicon Basin: A Type Study in Western  History (State Hist. Soc. of Wis. 1937); Some Laws and  Documents Relating to Hydraulic Power of Fox or Neenah River  (Moses Hooper, ed., Sarau & Weidner 1881); John N.  Vogel, et al., Lower Fox Corridor Study (State Hist. Soc.  of Wis. 1992). Specific citations to individual  sources will be provided only for facts unique to  that source.


2
 Mr. Poinsett was immortalized by his introduction  of poinsettia plants into the United States from  Mexico. See Curtis, supra note 1, at 48 n.1.


3
 The first vessels appeared on the canal on May  24, 1851. The River Times described the event:  "The beautiful steamer, John Mitchell, near  accomplished the feat of passing through the  canal at this place on Saturday last. She came up  as far as Main Street. As the John Mitchell came  up the canal, the Enterprise came up the  Wisconsin River to the head of the canal. The  blustering rivalry between the inhabitants of  different waters (the throat of each giving its  best pull and whistle alternately) was quite  exhilarating, and called out a large concourse of  citizens to gaze upon the scene presented and  make predictions for the future. After a short  time boats and citizens withdrew, amid strains of  music and the noise and confusions were over." In  the years that followed, the canal became an  important, and better coordinated, artery for  traffic. See Derleth, supra note 1, at 162-63.


4
 The Wisconsin Constitution prohibited the  creation of a debt of any size for internal  improvement, and funds from the sale of lands  were running out. See Schafer, supra note 1, at  103-04, 104 n.12.


5
 The United States maintains dams along the Fox  River only for public purposes like navigation  and flood control. Any other use of those dams is  incidental: the United States's only obligation  is to public purposes. If the government decides  to undertake an action in the interest of  navigation and that action harms a party that is  using the water power--like the petitioners here-  -that user has no recourse: "The government may  lower the dam and embankment, or may remove the  same and destroy the water-power entirely, and  the plaintiff cannot prevent it." Green Bay &  Mississippi Canal Co. v. Kaukauna Water-Power  Co., 35 N.W. 529, 537 (Wis. 1887), aff'd Kaukauna  Water-Power Co. v. Green Bay & Mississippi Canal  Co., 142 U.S. 254 (1891). But, so long as the  United States maintains a dam for navigation  purposes, the water-power user may carry on its  use. See id.


6
 The exception is Wisconsin Electric's project at  Appleton, which operates under a pre-1920 permit.  Wisconsin Electric's other projects are federally  licensed, and, in any event, our ruling here does  not turn on whether a particular project is  licensed, so we need not distinguish between  petitioners' licensed and unlicensed projects.


7
 The Commission has never charged the petitioners  that operated licensed hydropower projects  located at government dams annual fees under sec.  10(e) because, as FERC explains, the Commission  recognizes that the petitioners' rights under the  1872 Deed exempt them from such charges for the  use of "surplus water" or "water power" at the  federal dams at which they are located. See,  e.g., City of Kaukauna, Wisconsin, 12 FERC para.  62,130 (1980).


8
 Section 10(f) of the FPA, 16 U.S.C. sec. 803(f),  reads, in full, as follows:    (f)  Reimbursement by licensee of other  licensees, etc.
That whenever any licensee hereunder is directly  benefited by the construction work of another  licensee, a permittee, or of the United States of  a storage reservoir or other headwater  improvement, the Commission shall require as a  condition of the license that the licensee so  benefited shall reimburse the owner of such  reservoir or other improvements for such part of  the annual charges for interest, maintenance, and  depreciation thereon as the Commission may deem  equitable. The proportion of such charges to be  paid by any licensee shall be determined by the  Commission. The licensees or permittees affected  shall pay to the United States the cost of making  such determination as fixed by the Commission.
Whenever such reservoir or other improvement is  constructed by the United States the Commission  shall assess similar charges against any licensee  directly benefited thereby, and any amount so  assessed shall be paid into the Treasury of the  United States, to be reserved and appropriated as  a part of the special fund for headwater  improvements as provided in section 810 of this  title.
Whenever any power project not under license is  benefited by the construction work of a licensee  or permittee, the United States or any agency  thereof, the Commission, after notice to the  owner or owners of such unlicensed project, shall  determine and fix a reasonable and equitable  annual charge to be paid to the licensee or  permittee on account of such benefits, or to the  United States if it be the owner of such  headwater improvement.


9
 The petitioners do not dispute that their  projects, in fact, receive benefits from the  Menasha dam: the storage-and-release program,  which stabilizes the flow of the river, allows  the petitioners' projects to generate more  electricity than otherwise would be available. It  is significant that all of the petitioners'  projects operate on a "run of the river" basis,  meaning that they do not alter the flow of the  river but merely take advantage of the water as  the Fox River flows from Lake Winnebago to Green  Bay. This means that none of the petitioners'  projects located closer to the Menasha dam  provides any "headwater benefits" to those  farther downstream. Thus, the only "headwater  benefits" at issue in this case are those  provided by the Menasha dam.


10
 The suggested fees cover the period from 1966.  The length of the assessment period was based on  the Commission's policy of limiting retroactive  assessments to a period of 25 years, even though  the Commission asserts that it has the authority  to assess "headwater benefit" charges as far in  the past (after the passage of the FWPA in 1920)  as those benefits were received. See Louisville  Gas and Elec. Co., 58 FERC para. 61,338 (1992).  See also Wisconsin Electric Power Co., 86 FERC  para. 61,096, 61,344 at n.3.


11
 The term "headwater benefits," or some variant of  it, might have been in use somewhere before 1920,  but no such usage has been called to our  attention--certainly not a use in or before 1872.


12
 The "head" refers to the height from which water  falls, i.e. the height of the dam. The "flow"  obviously enough, refers to the quantity of water  that passes over the dam in a stated period of  time. More on this later. See, pages 19-20,  infra.


13
 This relationship is analogous to a like  relationship in electricity where electric power  in watts is the product of the electric potential  in volts (analogous to the height of the dam) and  the rate of flow of electric current in amperes.


14
 Of course, during wet periods, the Menasha dam's  storage program decreases the natural flow of the  Fox River. But apparently the loss of this flow  does not result in a hydroelectric power loss, if  any, equaling the gain in dry periods. Hence, the  more uniform flow produces a net gain in  available power.


15
 We also note that this logic applies equally  strongly to the "surplus water" reserved by the  1872 deed. As the terms of the 1872 Deed imply,  "surplus water" refers to water not needed for  the government's navigation uses. See 1872 Deed  at 3, J. App. at 18 (reserving the "surpluse  [sic] water not required for the purpose of  navigation"). FERC does not now nor, to our  knowledge, has it ever claimed that the Menasha  dam's storage-and-release program modifies the  water flow in a way important for "the purpose of  navigation." Instead, the Menasha dam stores and  releases water in order to maintain an  appropriate water level in Lake Winnebago. See  Wisconsin Electric Power Co., 86 FERC para.  61,096, 61,344 (1999). In fact, this is the  purpose for which the spillways at that dam were  improved in 1937. See id. Although our  understanding of the scope of the term "water  power" supports our holding that the water  released from the Menasha dam creates and  enhances "water power," we also believe that the  water released is properly considered "surplus  water" within the meaning of the 1872 Deed.


16
 To support this conclusion, FERC cites its  decision in Pyramid Lake Pauite Tribe v. Sierra  Pacific Power Co., 1 FERC para. 63,035 (1977).  But, because Pyramid Lake was decided using  definitions of "water power," "surplus water" and  "headwater benefits" developed under the FPA, we  do not find this persuasive. As we presently  discuss, usage in the after-adopted FPA is not  determinative of usage in the 1872 Deed.


17
 FERC's cited support for this point is ambiguous  at best, but we have found several historical  sources that confirm this fact. See, e.g., Some  Laws and Documents, supra note 1, at 161-64; Mermin,  supra note 1, at 140.


18
 The petitioners point to Kaukauna Water Power Co.  v. Green Bay & Mississippi Canal Co., 142 U.S.  254 (1891), in which the United States Supreme  Court held that the Kaukauna Water Power Company  could not divert water from a United States owned  dam (at which the Canal Company had a power  generation facility) because this would deprive  the Canal Company of its rights to all water  power created by the dam. This holding supports  the conclusion that "water power" includes the  flow approaching the dam.


19
 Although the Commission did not adopt the  Director's conclusion that the petitioners did  not have rights to "headwater benefits" created  by the 1937 improvements at the Menasha dam but  that they did have rights in such benefits  existing prior to the date of the improvements,  we believe that the Director's conclusion was  also unreasonable. This is so because the  petitioners' rights are not limited to "surplus  water" or "water power" created on or before a  specific date. Wisconsin originally claimed all  "water power" rights created or to be created by  dams or improvements along the Fox River  regardless of when those dams or improvements  were made. See Act of Aug. 8, 1848, sec. 16, 1848  Wis. Laws 58, 62 ("Whenever a water power shall  be created by reason of any dam erected or other  improvement made on any of said rivers, such  water power shall belong to the state subject to  future action of the [Wisconsin] legislature.")  (emphasis added). Therefore, just as the  petitioners are exempt from sec. 10(e) charges  for the use of "water power" at dam sites (even  though those dams have been improved or rebuilt  since 1872), they are also exempt from sec. 10(f)  charges for "headwater benefits" even though the  Menasha dam was improved in 1937.


