Public Utilities Commission v. Federal Energy Regulatory Commission , 474 F.3d 587 ( 2006 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PUBLIC UTILITIES 
COMMISSION OF THE STATE OF
CALIFORNIA; CALIFORNIA ELECTRIC
OVERSIGHT BOARD,
Petitioners,
PACIFIC GAS AND ELECTRIC
COMPANY; NEVADA POWER
COMPANY; SOUTHERN CALIFORNIA
EDISON CO. (“EDISON”);
DEPARTMENT OF WATER AND
POWER OF THE CITY OF LOS
ANGELES, PUBLIC SERVICE
DEPARTMENT OF THE CITY OF No. 03-74207
BURBANK, PUBLIC SERVICE
FERC Nos.

DEPARTMENT OF THE CITY OF
GLENDALE, AND WATER AND POWER EL02-60
DEPARTMENT OF THE CITY OF EL02-62
PASADENA (COLLECTIVELY
“LADWP, ET AL.”); SEMPRA
ENERGY; MIRANT AMERICAS ENERGY
MARKETING, L.P.; CORAL POWER;
PPM ENERGY; PUBLIC UTILITY
DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON; DYNEGY
POWER MARKETING INC.,
Intervenors,
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent.

19615
19616 PUC v. FERC
CALIFORNIA ELECTRIC OVERSIGHT 
BOARD; CALIFORNIA PUBLIC
UTILITIES COMMISSION,
Petitioners,
NEVADA POWER COMPANY;
SOUTHERN CALIFORNIA EDISON CO.
(“EDISON”); DEPARTMENT OF
WATER AND POWER OF THE CITY OF
LOS ANGELES, PUBLIC SERVICE
DEPARTMENT OF THE CITY OF
BURBANK, PUBLIC SERVICE
DEPARTMENT OF THE CITY OF No. 03-74246

GLENDALE, AND WATER AND POWER FERC No.
DEPARTMENT OF THE CITY OF EL 02-60-000
PASADENA (COLLECTIVELY
OPINION
“LADWP, ET AL.”); SEMPRA
ENERGY; MIRANT AMERICAS ENERGY
MARKETING, L.P.; PPM ENERGY;
PUBLIC UTILITY DISTRICT NO. 1 OF
SNOHOMISH COUNTY, WASHINGTON;
DYNEGY POWER MARKETING INC.,
Intervenors,
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent.

On Petition for Review of an Order of the
Federal Energy Regulatory Commission
Argued and Submitted
December 8, 2004—Pasadena, California
Filed December 19, 2006
PUC v. FERC 19617Before: James R. Browning, Harry Pregerson, and
Marsha S. Berzon, Circuit Judges.
Opinion by Judge Berzon
19620 PUC v. FERC
COUNSEL
William J. Kayatta, Jr. (argued), Arocles Aguilar, Sean Gal-
lagher, Jonathan Bromson, Public Utilities Commission of the
State of California, San Francisco, California; William J.
Kayatta, Jr., Jared S. des Rosiers, Louise K. Thomas, Deborah
L. Shaw, Christopher T. Roach, Pierce Atwood, Portland,
Maine; Erik N. Saltmarsh, Erin Koch-Goodman, California
Electric Oversight Board, Sacramento, California (on the
brief) for the petitioners.
Dennis Lane (argued), Cynthia A. Marlette, Dennis Lane,
Lona T. Perry, Federal Energy Regulatory Commission,
Washington, D.C. (on the brief) for the respondent.
Richard P. Bress (argued), John N. Estes III, W. Mason
Emnett, Skadden, Arps, Slate, Meagher & Flom, LLP, New
York, N.Y.; Jeffrey D. Watkiss, Bracewell & Patterson,
Washington, D.C.; Richard P. Bress, Michael J. Gergen,
David G. Tewksbury, Latham & Watkins, LLP, Washington,
D.C. (on the brief) for the intervenors-respondents.
PUC v. FERC 19621Roger A. Berliner, Stephen M. Ryan, Manatt, Phelps & Phil-
lips, Washington, D.C.; C. Stanley Hunterton, Hunterton &
Associates, Las Vegas, Nevada, on the joint brief for interve-
nors Public Utility District No. 1 of Snohomish County,
Washington, Nevada Power Company, Sierra Pacific Power
Company, and Southern California Water Company.
Julie Simon, Electric Power Supply Association, Washington,
D.C.; Andrew B. Brown, Ellison, Schneider & Harris, LLP,
Sacramento, California, on the amici curiae brief for the Inde-
pendent Energy Producers Association, Electric Power Sup-
ply Association, and Western Power Trading Forum.
Marcus Wood, Jennifer E. Horan, Stoel Rives, LLP Portland,
Oregon, on the brief of intervenor PPM Energy, Inc.
OPINION
BERZON, Circuit Judge:
As in Public Utility District No. 1 v. FERC (“PUD”), Nos.
03-72511, et al. (9th Cir. Dec. __, 2006), a related case also
decided today, the petitioners — here, the California Public
Utilities Commission (“PUC”) and the California Electric
Oversight Board (“CEOB”) (collectively, “Public Utilities
Commission”) — challenge the statutory validity of electric
power rates in certain wholesale power contracts. Again as in
PUD, that challenge hinges on whether the Federal Energy
Regulatory Commission (“FERC”) was correct to apply the
Mobile-Sierra1 “public interest” doctrine or whether in doing
so it failed to meet its statutory obligation to provide “just and
reasonable” review. See 16 U.S.C. § 824e(a).
1
This shorthand takes its name from two Supreme Court cases decided
on the same day: United Gas Pipe Line Co. v. Mobile Gas Service Corp.
(Mobile), 350 U.S. 332 (1956), and Federal Power Commission v. Sierra
Pacific Power Co. (Sierra), 350 U.S. 348 (1956).
19622 PUC v. FERC
In PUD, we explained that Mobile-Sierra represents a pre-
sumption “that private parties to a wholesale electric power
contract have negotiated a ‘just and reasonable’ contract over
a designated period of time, lawful under the FPA throughout
that period.” PUD, Slip Op. at 19554. That presumption, how-
ever, “can be rebutted by establishing that the contract
adversely affects the public interest.” Id., Slip Op. at 19554.
We concluded that, to establish the Mobile-Sierra presump-
tion, “three prerequisites are necessary: (1) the contract by its
own terms must not preclude the limited Mobile-Sierra
review; (2) the regulatory scheme in which the contracts are
formed must provide FERC with an opportunity for effective,
timely review of the contracted rates; and (3) where, as here,
FERC is relying on a market-based rate-setting system to pro-
duce just and reasonable rates, this review must permit con-
sideration of all factors relevant to the propriety of the
contract’s formation.” Id., Slip Op. at 19555-56. In PUD we
found two of these prerequisites lacking and remanded to
FERC for it to consider the propriety of applying the Mobile-
Sierra mode of review to the contracts at issue. We held, in
the alternative, that even if Mobile-Sierra properly applied,
FERC’s “finding that the challenged contracts do not affect
the public interest was based on a substantively erroneous
mode of analysis.” Id., Slip Op. at 19549.
Applying PUD to the challenged contracts in this case, we
grant the petition to review and remand to the agency to apply
the modes of review outlined in PUD.
I.
Much of the relevant background to this case is described
in PUD. See id., Slip Op. at 19567-83. We therefore will sum-
marize only those facts relevant to the present case.
A. California Energy Crisis
California responded to the energy crisis outlined in PUD
in several ways, although not until after “rolling blackout”
PUC v. FERC 19623became a household phrase and several of California’s largest
utilities bordered on insolvency. Governor Gray Davis
declared a state of emergency on January 17, 2001, and
ordered the California Department of Water Resources
(“CDWR”) to purchase forward power “as expeditiously as
possible.” On February 1, 2001, the California Legislature
passed Assembly Bill 1 of the 2001-2002 First Extraordinary
Session (“AB1X”), which authorized CDWR to purchase
power through the end of December 31, 2002.
Between February 6 and August 23, 2001, CDWR executed
57 forward contracts with 28 suppliers. Some of these con-
tracts explicitly called for applying the relatively stringent
Mobile-Sierra “public interest” test, rather than the relatively
relaxed “just and reasonable” test to judge the rates included
in the contracts. Other contracts were silent regarding the test
to apply. The 57 contracts include 32 agreements with the
intervenor-respondents in this case:2
• Coral Power, for prices from $169 to $249/MWh,
for delivery in 2001 and 2002;
• Dynegy Power Marketing, Inc., for $119.50/
MWh, for delivery from January 1, 2002 through
December 31, 2004;
• Mirant Americas Energy Marketing, for $148.65/
MWh, for delivery between June 1, 2001 and
December 31, 2002;
• PacifiCorp (“PPM”), for $70/MWh, for delivery
between July 29, 2001 and June 30, 2002; and
• Sempra Energy Resources, for $189/MWh, for
2
These energy companies are all intervenors on behalf of FERC in this
case.
19624 PUC v. FERC
delivery between June 1, 2001 and September 30,
2001.
Under AB1X, the people of California must pay the cost of
these contracts through their electricity rates. See CAL. WATER
CODE § 80104 (West) (“Upon the delivery of power to them,
the retail end use customers shall be deemed to have pur-
chased that power from the department. Payment for any sale
shall be a direct obligation of the retail end use customer to
the department.”). Raymond Hart, who testified for the Public
Utilities Commission, described this statutory provision as
ensuring that costs of CDWR contracts would “be passed on
to the retail end-users of the IOUs [investor-owned utilities]
through their retail electricity rates.” In other words, CDWR
passed the costs of the power it purchased to local utilities —
such as Pacific Gas and Electric — which, in turn, passed it
on to California consumers. FERC questions whether the
challenged contracts call for rates above long-run competitive
prices, Pub. Utils. Comm’n v. Sellers of Long Term Contracts,
103 F.E.R.C. ¶ 61,354, at ¶62,415 (2003), but does not con-
test that the cost of those contracts is passed on to California
consumers.
On June 19, 2001, FERC issued a price mitigation order for
spot markets regarding several western states, which went
into effect the following day. Subsequently, prices generally
returned to pre-crisis levels in both spot and forward markets,
completing a downward cycle that had begun about a month
prior to the June 19 Order.
B. Procedural Background
On February 25, 2002, PUC filed complaints under section
206(a) of the Federal Power Act,3 16 U.S.C. § 824e(a), seek-
3
Whenever the Commission, after a hearing had upon its own motion
or upon complaint, shall find that any rate, charge, or classification,
demanded observed, charged, or collected by any public utility for any
PUC v. FERC 19625ing modification of all power contracts signed by CDWR in
2001.4 The only contracts at issue on this appeal are those
listed above, which PUC alleges overcharge CDWR and Cali-
fornia consumers by a total of $1.4 billion. In the process of
adjudicating and ultimately denying these complaints, FERC
issued a series of orders:
On April 25, 2002, FERC ordered a hearing to determine
“whether the dysfunctional California spot markets adversely
affected the long-term bilateral markets, and, if so, whether
modification of any individual contract at issue [was] warrant-
ed.” Pub. Utils. Comm’n v. Sellers of Long Term Contracts,
99 F.E.R.C. ¶ 61,087, at ¶ 61,384 (2002) (footnote omitted).
FERC announced that it would review all contracts explicitly
calling for “public interest” review under Mobile-Sierra,5
while setting for hearing the question of whether it would also
apply that standard to contracts that were silent on the issue.6
Id. ¶ 61,383. FERC dismissed the complaints with regard to
all contracts executed on or after June 20, 2001, the date its
final price mitigation order went into effect, including the
CDWR contract with PPM, which had been negotiated before
but signed after that date. Finally, the April 25 order held that
transmission or sale subject to the jurisdiction of the Commission, or that
any rule, regulation, practice, or contract affect such rate, charge, or classi-
fication is unjust, unreasonable, unduly discriminatory or preferential, the
Commission shall determine the just and reasonable rate, charge, classifi-
cation, rule, regulation, practice, or contract to be thereafter observed and
in force, and shall fix the same by order.
16 U.S.C. § 824e(a) (emphases added).
4
Much of the parties’ disagreement hinges on whether the identity of the
parties — state agencies other than those the one entered into the chal-
lenged agreements — affects the application of Mobile-Sierra to those
agreements. As we decide, applying PUD, that FERC erred for other rea-
sons by applying Mobile-Sierra, we need not reach the question of the
impact of the parties’ identity.
5
These included the Coral and Mirant contracts.
6
These included the Dynegy, Sempra, and PPM contracts.
19626 PUC v. FERC
both the PUC and CEOB “ ‘stepped into the shoes’ of
CDWR,” which is not a party in this case, because they are
all state agencies. Id. ¶ 61,382. Accordingly, the petitioners
would both be treated as if they were the same entity as
CDWR. Id.
Before the Administrative Law Judge (“ALJ”), PUC sought
discovery regarding the sellers’ ability to exercise market
power in the spot markets. The ALJ denied this request, rea-
soning that “the hearing order in this case takes as a given the
proposition that the California spot markets were dysfunction-
al.” Additionally, the ALJ excluded some evidence, in the
form of testimony by PUC’s expert witnesses, that related to
the sellers’ market power in the forward markets.
At the conclusion of the ALJ’s hearing, FERC created a
two-track process. For contracts that had explicit provisions
calling for the “public interest” test, FERC instructed the ALJ
not to rule on those cases and instead to certify the record
directly to the Commission. For the other contracts, the ALJ
was directed to decide only whether the parties intended the
public interest test to apply. Pub. Utils. Comm’n v. Sellers of
Long Term Contracts, 101 F.E.R.C. ¶ 61,293, at ¶ 62,173
(2002).
On February 10, 2003, FERC, on remand from this court,
Pub. Utils. Comm’n of Cal. v. FERC, Order of August 21,
2002, (9th Cir. Docket Nos. 01-71051, et al.), issued an order
in a separate case relating to spot market manipulation, per-
mitting discovery for over 100 days regarding such manipula-
tion and requiring parties in that case to provide an index of
discovered material “for each other pending or proposed pro-
ceeding” where the parties so request. San Diego Gas & Elec.
Co. v. Sellers of Energy & Ancillary Servs., 102 F.E.R.C.
¶ 61,164, at ¶ 61,446 (2003). Through this “100 Days Pro-
ceeding,” PUC discovered additional evidence regarding sell-
ers’ spot market manipulation.
PUC v. FERC 19627On March 26, 2003, FERC staff issued its “Final Report on
Price Manipulation in Western Markets.” STAFF OF THE
FEDERAL ENERGY REGULATORY COMMISSION, FINAL REPORT ON
PRICE MANIPULATION IN WESTERN MARKETS: FACT-FINDING
INVESTIGATION OF POTENTIAL MANIPULATION OF ELECTRIC AND
NATURAL GAS PRICES [“Staff Report”] (2003), available at
http://www.ferc.gov/legal/maj-ord-reg/land-do cs/PART-I-3-
26-03.pdf [Staff Report]. The Staff Report concluded that the
spot market dysfunction had “significant” adverse effects on
the forward markets. Id. at V-12.
FERC issued an initial decision on June 26, 2003, rejecting
all of PUC’s claims. Pub. Utils. Comm’n, 103 F.E.R.C.
¶ 61,354 (2003). Most importantly, FERC concluded that the
“public interest” test would apply to all contracts at issue,
upholding the ALJ’s opinion that parties to all contracts
intended to trigger that test. Id. ¶ 62,409. Accordingly, evi-
dence regarding the spot markets’ adverse effect on forward
markets — the very issue FERC initially deemed to be the
purpose of the hearings — was deemed not “relevant,” as the
“just and reasonable” test did not apply. Id. ¶ 62,415. “Under
the ‘public interest’ standard, to justify contract modification
it is not enough to show that forward prices became unjust
and unreasonable due to the impact of spot market dysfunc-
tions; it must be shown that the rates, terms and conditions are
contrary to the public interest.”7 Id. Further, FERC concluded
that PUC failed to satisfy any of the three prongs of the public
interest test established by Supreme Court precedent
(described below) or “any other factor” that might go to pub-
lic interest. Id. FERC found “no credible record evidence that
the contracts at issue are placing Complainants in financial
distress.” Id. FERC based this conclusion on a comparison of
CDWR’s goal of “a portfolio that yielded a weighted average
price no higher than $70/MWh” with its actual portfolio,
7
This language appears verbatim in FERC’s PUD orders. See Nev.
Power Co. v. Enron Power Mktg., Inc., 103 F.E.R.C. ¶ 61,353, at ¶ 61,397
(2003).
19628 PUC v. FERC
which averaged a price of $84/MWh for 2001-2005. Id. Com-
missioner Massey dissented, calling application of the “public
interest” test inappropriate. Commissioner Massey also con-
cluded that PUC proved a strong “nexus between the Califor-
nia spot market and the forward contract market,” and that
PUC met both the just and reasonable and public interest stan-
dards for contract reformation. Id. ¶¶ 62,448-49 (Massey,
Comm’r, dissenting).
FERC denied rehearing on November 10, 2003. Pub. Utils.
Comm’n v. Sellers of Long Term Contracts, 105 F.E.R.C.
¶ 61,182 (2003). One week later, PUC and CEOB filed peti-
tions for review with this court.
C. Standard of Review
We review FERC’s legal decisions de novo. Am. Rivers v.
FERC, 201 F.3d 1186, 1194 (9th Cir. 1999). “Our review of
a FERC decision is limited to whether the decision was arbi-
trary, capricious, an abuse of discretion, unsupported by sub-
stantial evidence, or not in accordance with the law.” Cal.
Dep’t of Water Res. v. FERC, 341 F.3d 906, 910 (9th Cir.
2003); see also 5 U.S.C. § 706(2)(A). The court reviews fac-
tual findings for substantial evidence, 16 U.S.C. § 825l(b),
and will uphold them so long as the agency considered all rel-
evant factors and did not make a clear error of judgment, Cal.
Dep’t of Water Res., 341 F.3d at 906. When an agency makes
an informed choice to rely on one expert opinion among com-
peting expert opinions, the agency is entitled to deference.
Bear Lake Watch, Inc. v. FERC, 324 F.3d 1071, 1076-77 (9th
Cir. 2003). FERC “is not obligated to justify deviations from
an approach suggested by its own staff” unless “the concep-
tual underpinnings of the staff’s approach [are] critical to a
reasoned resolution of the problem”; in such cases FERC
must address staff recommendations. Pub. Utils. Comm’n v.
FERC, 817 F.2d 858, 862 (D.C. Cir. 1987).
PUC v. FERC 19629II.
Application of Mobile-Sierra
[1] We hold in PUD, decided today, that FERC may apply
the Mobile-Sierra “public interest” mode of review only if
three conditions are present: “(1) the contract by its own terms
must not preclude the limited Mobile-Sierra review; (2) the
regulatory scheme in which the contracts are formed must
provide FERC with an opportunity for effective, timely
review of the contracted rates; and (3) where, as here, FERC
is relying on a market-based rate-setting system to produce
just and reasonable rates, this review must permit consider-
ation of all factors relevant to the propriety of the contract’s
formation.” PUD, Slip Op. at 19555-56. Here, it is undisputed
that the contracts at issue either explicitly call for Mobile-
Sierra review or do not preclude it. Cf. PUD, Slip Op. at
19589-93. Thus, resolution of the present case turns on
whether the second two Mobile-Sierra prerequisites were met,
permitting FERC to rely on the doctrine’s presumption of just
and reasonable rates.
1. Timely and Effective Review of Rates
[2] In PUD, we hold “that although market-based rate
authority can qualify as sufficient prior review to justify lim-
ited Mobile-Sierra review, it can only do so when accompa-
nied by effective oversight permitting timely reconsideration
of market-based authorization if market conditions change.”
Id., Slip Op. at 19593. Here, as in PUD, “the fatal flaw in
FERC’s approach to ‘oversight’ is that it precludes timely
consideration of sudden market changes and offers no protec-
tion to purchasers victimized by the abuses of sellers or dys-
functional market conditions that FERC itself only notices in
hindsight.” Id., Slip Op. at 19603.
Energy company intervenors and amici argue here, as
FERC did in PUD, that petitioners or CDWR should have
19630 PUC v. FERC
challenged the sellers’ market-based rate authority before
entering into the forward contracts, rather than agree to and
subsequently challenge the contracts. This argument fails for
the same reasons it failed in PUD. See id., Slip Op. at
19601-02 (“Any such challenge, even if successful, could not
have been a basis for reforming the challenged contracts . . . .”
).
Dynegy raises an argument unique to its contract, which it
did file with FERC, effective March 6, 2001, and which
FERC opened to the public for comments.8 Dynegy Power
Mktg., Inc., 95 F.E.R.C. ¶ 61,371 (2001). Dynegy asserts that
PUC had an opportunity, during the public comment period,
to raise a substantive challenge to this contract but declined
to do so.
Nothing about this circumstance, however, justifies a con-
trary result from that reached with regard to all the other con-
tracts. FERC explicitly noted that accepting the filing of the
Dynegy contract did “not constitute approval of any . . . rate
. . . ; and such action is without prejudice to any findings or
orders which . . . may hereafter be made by the Commission
in any proceeding now pending or hereafter instituted by or
against Dynegy.” Id. ¶ 62,401. FERC, therefore, did not give
prior approval to the Dynegy contract any more than it did for
any of the other contracts challenged here. Further, any chal-
lenge to the contract at the time FERC sought public com-
ments would have been hampered by limited information: At
the time Dynegy filed its contract, the full scale of spot mar-
ket manipulation and forward market dysfunction was not
nearly as fully known as it is today.
8
Dynegy’s argument on this point refers only to the prior review prereq-
uisite to application of Mobile-Sierra. Even if its argument succeeded on
this point, it would not be sufficient to overcome the other portions of our
opinion which provide independent reasons for granting PUC’s petition
for review.
PUC v. FERC 19631[3] For these reasons, we hold here that FERC “cannot use
[its] choice [of regulatory regime] to excuse its duty to main-
tain effective oversight [of rates] and then invoke Mobile-
Sierra as a ground for precluding ordinary rate review, includ-
ing review of the propriety of market-based rate authority at
the time the contracts became effective.” PUD, Slip Op. at
19603.
2. Meaningful Review of Contract Formation
[4] Even if the agency had not committed “[t]his funda-
mental procedural error[,] . . . FERC’s substantive adherence
to Mobile-Sierra without regard to the market conditions in
which the contracts at issue were formed” was error. Id., Slip
Op. at 19604. In particular, FERC refused to consider evi-
dence of forward market dysfunction caused by the spot mar-
ket, asserting that such evidence was not “relevant” unless the
“just and reasonable” test applied. Pub. Utils. Comm’n, 103
F.E.R.C. at ¶ 62,415. Because “Mobile-Sierra cannot apply
without a determination that the challenged contract was ini-
tially formed free from the influence of improper factors, such
as market manipulation, the leverage of market power, or an
otherwise dysfunctional market,” PUD, Slip Op. at 19604,
FERC’s reliance on the “public interest” mode of review here
was improper.
[5] As in PUD, FERC failed to respond to the Staff Report.
See PUD, Slip Op. at 19604-06. Rather than consider its dis-
cussion of the dysfunction in the forward market, FERC
treated the Staff Report’s conclusions as only relevant if it
was first determined that just and reasonable review is appli-
cable, the same way it treated other evidence of market dys-
function. Pub. Utils. Comm’n, 103 F.E.R.C. at ¶ 62,415 &
n.38. This was error. See PUD, Slip Op. at 19606 (“[T]he
questions raised by the Staff Report — whether and how the
manipulated spot market influenced the forward markets —
are relevant to determining whether the Mobile-Sierra doc-
trine applies, because they raise questions about the market
19632 PUC v. FERC
conditions at the time of contract formation and thus about the
propriety of relying on a regime of market-based rate author-
ity at that time to produce just and reasonable rates.”).
[6] FERC also affirmed the ALJ’s exclusion of some of
PUC’s other evidence — including testimony of expert wit-
nesses — regarding the effect of spot market manipulation on
forward prices. As PUD makes clear, such evidence is essen-
tial to the question of whether the forward energy market was
sufficiently well-functioning to apply Mobile-Sierra. See id.,Slip Op. at 19605-06.
[7] On remand, FERC should consider the excluded evi-
dence, as well as all other relevant evidence — whether part
of the “100 Day Proceeding” or not — before determining
whether the Mobile-Sierra presumption applies.
3. Effect on the “Public Interest”
[8] Consistent with PUD, “FERC’s error in its approach to
deciding whether to apply the Mobile-Sierra presumption was
compounded by it use of an erroneous standard for determin-
ing whether the challenged contracts affect the public inter-
est.” Id., Slip Op. at 19606-07. “In its efforts to determine the
impact on the public interest under Mobile-Sierra . . . FERC
relied on the wrong legal standard, applying factors taken
from the context of a low-rate challenge rather than those rel-
evant to the high-rate challenge present in this case.” Id., Slip
Op. at 19607.
FERC determined that the challenged contracts in this case
did not affect the public interest because PUC:
presented very little evidence relevant to the Mobile-
Sierra standard of review. Based on the record, we
conclude that Complainants have failed to demon-
strate that any of the three prongs announced in the
Sierra case has been met or that any other factor
PUC v. FERC 19633introduced into evidence warrants a finding that any
of the contracts is contrary to the public interest and
should be modified.9
Pub. Utils. Comm’n, 103 F.E.R.C. at ¶ 62,415. FERC deter-
mined that because consumers did not face an “excessive bur-
den” whether consumers endured any burden was inapposite.
Pub. Utils. Comm’n, 105 F.E.R.C. 61,182, at ¶¶ 66-67. As we
explained in PUD, this determination fundamentally misun-
derstands the public interest inquiry in the context of a high-
rate challenge. See PUD, Slip Op. at 19607-11.
[9] Under California law, all costs of the challenged con-
tracts were passed on to consumers. See CAL. WATER CODE
§ 80104. The parties debate whether retail power rates in fact
increased after the parties signed these contracts, but this dis-
pute is not determinative. Even if rates did not increase in the
months after CDWR signed the contracts, the retail rates
charged consumers because of these contracts might have
been higher than they would have been had the wholesale
contract rates been lower. See PUD, Slip Op. at 19609 (“[I]f
a challenged contract imposes any significant cost on ultimate
customers because of a wholesale rate too high to be within
a zone of reasonableness, that contract affects the public inter-
est.” (citations omitted)).
III.
Finally, we grant PUC’s petition as it relates to FERC’s
dismissal of its complaint regarding CDWR’s contract with
9
In such circumstances [when the public interest test satisfies the Com-
mission’s duty to ensure just and reasonable rates] the sole concern of the
Commission would seem to be whether the rate is so low as to adversely
affect the public interest — as where it might impair the financial ability
of the public utility to continue its service, cast upon other consumers an
excessive burden, or be unduly discriminatory.
Sierra, 350 U.S. at 355.
19634 PUC v. FERC
PPM. FERC’s decision to dismiss the case against the PPM
contract without a hearing may be affirmed only if FERC
addressed all “relevant factors in dispute and . . . a formal
hearing was unnecessary for the Commission to reach its con-
clusion.” Pac. Gas & Elec. Co. v. FERC, 746 F.2d 1383, 1386
(9th Cir. 1984). We believe FERC failed to address all rele-
vant factors here.
[10] FERC dismissed the PPM challenge because the par-
ties entered the contract after FERC’s June 19 Order. Pub.
Utils. Comm’n, 99 F.E.R.C. ¶ 61,087, at ¶¶ 61,383-84 (2002).
FERC did not consider, however, whether some market dys-
function may have lingered after that order took effect. PPM,
intervening in this case, argues that the chronology of its con-
tract factually distinguishes it from the other challenged con-
tracts. We disagree.
[11] It is not at all clear that the forward markets had stabi-
lized by the date when the parties entered the PPM contract.
On the contrary, FERC’s Staff Report concluded that con-
tracts entered after June 19, 2001, “generally show a persis-
tence of the effects found during the crisis, i.e., statistically
significant positive elasticities of the forward price with
respect to the spot price.” Staff Report at V-14. While the
Staff Report qualified its conclusion regarding post-June 19
effects of market power, noting that, “[o]n average,” post-
June 19 contracts demonstrated a lesser effect from the spot
markets than pre-June 19 contracts, FERC should have at
least considered the possibility that ill effects remained.
Therefore, the agency’s dismissal of the challenge was inap-
propriate.
IV.
[12] For the foregoing reasons, we determine that a remand
is necessary so that FERC can apply the proper statutory stan-
dards to determine, first, whether Mobile-Sierra review of the
challenged contracts is appropriate; second, if so, to apply the
PUC v. FERC 19635modified form of Mobile-Sierra review outlined in PUD and
referenced in this opinion; and finally, if not, to apply full just
and reasonable review to the challenged contracts.
PETITION FOR REVIEW GRANTED AND
REMANDED.