and Submitted October 13, 2017 San Francisco, California
Petition for Review of an Order of the Federal Energy
L. Bone (argued), Harvey Y. Morris, and Arocles Aguilar, San
Francisco, California, as and for Petitioner.
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.
Patrizio (argued), San Francisco, California, for
Viswanathan (argued), Attorney; Robert H. Solomon, Solicitor;
Max Minzner, General Counsel; Washington, D.C.; as and for
Before: Sidney R. Thomas, Chief Judge, and Stephen Reinhardt
and Stephen S. Trott, Circuit Judges.
Energy Regulatory Commission
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.
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.
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.
panel held that the CPUC's petition was not an
impermissible collateral attack on Order 679.
THOMAS, Chief Circuit Judge.
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.
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").
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. Order 679 at PP 1, 326. FERC would
evaluate adder requests on a "case-by-case basis."
Id. at P 326.
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.
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.
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.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.
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).
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. Various parties, including
CPUC, protested PG&E's earlier requests, but those
cases settled without final resolution of the objections
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.
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