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California Public Utilities Commission v. Federal Energy Regulatory Commission

United States Court of Appeals, Ninth Circuit

January 8, 2018

California Public Utilities Commission, Petitioner,
v.
federal energy regulatory Commission, Respondent, California Department of Water Resources State Water Project; Sacramento Municipal Utility District; Transmission Agency of Northern California, Petitioners-Intervenors, Pacific Gas & Electric Company, Respondent-Intervenor.

          Argued and Submitted October 13, 2017 San Francisco, California

         On Petition for Review of an Order of the Federal Energy Regulatory Commission

          Traci L. Bone (argued), Harvey Y. Morris, and Arocles Aguilar, San Francisco, California, as and for Petitioner.

          Harvey L. Reiter (argued), Stinson Leonard Street LLP, Washington, D.C.; Michael R. Postar, Duncan Weinberg Genzer & Pembroke, Washington, D.C.; Katharine M. Mapes, Spiegel & McDiarmid LLP, Washington, D.C.; for Petitioners-Intervenors.

          Mark Patrizio (argued), San Francisco, California, for Respondent-Intervenor.

          Anand Viswanathan (argued), Attorney; Robert H. Solomon, Solicitor; Max Minzner, General Counsel; Washington, D.C.; as and for Respondent.

          Before: Sidney R. Thomas, Chief Judge, and Stephen Reinhardt and Stephen S. Trott, Circuit Judges.

         SUMMARY[*]

         Federal Energy Regulatory Commission

         The panel granted the California Public Utilities Commission's ("CPUC") petition for review and held that the Federal Energy Regulatory Commission ("FERC") arbitrarily and capriciously determined that Pacific Gas & Electric was eligible for an incentive adder for remaining a member of the California Independent System Operator Corporation when state law prevented PG&E's departure without authorization.

         Section 219(c) of the Federal Power Act required FERC to provide incentives to induce utilities to join regional transmission organizations. Accordingly, FERC adopted Order 679 which established upward adjustments, or "incentive adders," to the rate of return on equity of utilities that participate in transmission organizations. In 1998, the CPUC approved PG&E's transfer of operational control of certain transmission assets to a newly-created California Independent System Operator Corporation.

         The panel held that FERC did not reasonably interpret Order 679 as justifying summary grants of adders for remaining in a transmission organization. The panel also held that FERC's interpretation was neither entitled to Auer v. Robbins, 519 U.S. 452 (1997), deference nor persuasive in its own right. The panel further held that because its interpretation was unreasonable, FERC's grants of adders to PG&E were an unexplained departure from longstanding policy, which provided that incentives should only be awarded to induce future voluntary behavior. In addition, the panel held that FERC created a generic adder in violation of Order 679's requirement of case-by-case review of adders.

         The panel held that the CPUC's petition was not an impermissible collateral attack on Order 679.

          OPINION

          THOMAS, Chief Circuit Judge.

         In this petition for review, we consider whether the Federal Energy Regulatory Commission ("FERC" or "Commission") arbitrarily and capriciously determined that Pacific Gas & Electric Company ("PG&E") was eligible for an incentive adder for remaining a member of the California Independent System Operator Corporation ("Cal-ISO") when state law prevented PG&E's departure without authorization. We conclude that it did, and we grant the petition.

         I

         Section 201 of the Federal Power Act ("FPA") gives FERC jurisdiction over the rates, terms, and conditions of service for the transmission and sale at wholesale of electric energy in interstate commerce. 16 U.S.C. §§ 824(a)-(b). Section 219 of the FPA, added in 2005, directed FERC to promulgate a rule providing incentive-based rates for electric transmission for the purpose of benefitting consumers through increased reliability and lower costs of power. 16 U.S.C. § 824s(a). As relevant here, section 219(c) required FERC to provide incentives to induce utilities to join regional transmission organizations. 16 U.S.C. § 824s(c). FERC did so in 2006 through the adoption of Order 679 and the rehearing orders that followed. Promoting Transmission Investment Through Pricing Reform, Order No. 679, 116 FERC ¶ 61,057 ("Order 679"), order on reh'g, Order No. 679-A, 117 FERC ¶ 61,345 (2006) ("Order 679-A"), order on reh'g, Order No. 679-B, 119 FERC ¶ 61,062 (2007) ("Order 679-B").

         Order 679 established upward adjustments, or "incentive adders," to the rate of return on equity of utilities that participate in transmission organizations. Order 679 set forth the terms on which FERC would grant the incentive adders. FERC determined that it would "not grant outright any incentives," but that it would grant such incentives "when justified" in the context of individual declaratory orders or section 205 filings.[1] Order 679 at PP 1, 326. FERC would evaluate adder requests on a "case-by-case basis." Id. at P 326.

         Order 679 provided that adders would be available for utilities that "have already joined, and that remain members of," transmission organizations in "recognition of the benefits that flow from membership" and the fact that "continuing membership is generally voluntary." Order 679 at P 331. The order stated that a utility "will be presumed to be eligible for the incentive" if it can demonstrate that it has joined a transmission organization and that its membership is ongoing. Id. at P 327.

         FERC declined to create a "generic adder" for membership in a transmission organization. Order 679 at P 326. Commenters had urged FERC to make a "generic finding" that any entity that joins a transmission organization "automatically qualif[ies]" for an incentive adder, with at least one commenter specifically proposing a 50 basis-point incentive adder. Id. at P 318. FERC declined to adopt this proposal, electing to consider "on a case-by-case basis" what incentive (if any) is appropriate for a utility. Id. at P 326.

         In 1995, as part of its restructuring of California's electric power industry, the California Public Utilities Commission ("CPUC") ordered the state's three largest investor-owned utilities, including PG&E, to submit to FERC a proposal to establish an independent system operator ("ISO") and to transfer operational control of their facilities to that ISO.[2]Order Instituting Rulemaking on Commission's Proposed Policies Governing Restructuring California's Electric Service Industry and Reforming Regulation, 64 CPUC 2d 1, p. 95, 1995 WL 792086 at *99 (Dec. 20, 1995) ("CPUC Decision 95-12-063"). In the same decision, CPUC retained authority under California state law to review any transfer of control of transmission facilities to the ISO. CPUC Decision 95-12-063, p. 31, 1995 WL 792086 at *15 (citing Cal. Pub. Util. Code § 851). CPUC's determinations were largely affirmed in state law. See Cal. Pub. Util. Code §§ 330, 365.

         In 1997, California's three largest investor-owned utilities, including PG&E, sought CPUC authorization to turn over operational control of certain transmission assets to the newly-created Cal-ISO. CPUC approved this transfer of control. In its decision approving the transfer, CPUC stated that any further transfers of control, such as transfers of control from the Cal-ISO back to the utilities, would also require CPUC authorization under state law. Joint Application of Pac. Gas & Elec. Co., San Diego Gas & Elec. Co., and S. Cal. Edison Co., 78 CPUC 2d 307, p. 313, 1998 WL 242747 at *7 (Jan. 21, 1998) (citing Cal. Pub. Util. Code § 851).

         Since it joined the Cal-ISO in 1997, PG&E has submitted an annual "transmission owner" tariff filing to FERC pursuant to section 205 of the FPA. See Pac. Gas. & Elec. Co., 148 FERC ¶ 61,245 at P 1 n.2 (2014). Each filing establishes PG&E's transmission revenue requirement, which includes the rate of return to which it is entitled as a participating transmission owner. Id. Since 2007, PG&E has regularly invoked Order 679 in its tariff filings to request 50 basis-point incentive adders for its ongoing participation in the Cal-ISO, and FERC has summarily granted those requests.[3] Various parties, including CPUC, protested PG&E's earlier requests, but those cases settled without final resolution of the objections raised.

         In 2014 and 2015, PG&E filed its sixteenth and seventeenth transmission owner tariff filings, respectively ("TO 16" and "TO 17"). In each of those filings, PG&E requested a 50 basis-point incentive adder. CPUC filed timely protests to both of the filings. CPUC's protests claimed that because PG&E's continued participation in the Cal-ISO is mandated by CPUC order, granting it incentive adders would reward PG&E for doing something it was already required to do.

         FERC issued orders in both proceedings summarily granting PG&E's requested adders. Pac. Gas & Elec. Co., 148 FERC ¶ 61,245 at P 30 (2014) ("TO 16 Initial Order"); Pac. Gas & Elec. Co., 152 FERC ¶ 61,252 at P 23 (2015) ("TO 17 Initial Order"). The TO 16 Initial Order responded to CPUC's arguments by stating:

"[C]onsistent with previous Commissions [sic] orders, we summarily accept PG&E's request for a 50 basis point incentive ROE adder for its continued participation in [Cal-ISO] . . . Parties opposing PG&E's request . . . have presented no new evidence or circumstances to warrant ...

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