Transm. Agency of Northern CA v. FERC ( 2010 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 21, 2010 Decided December 10, 2010
No. 09-1213
TRANSMISSION AGENCY OF NORTHERN CALIFORNIA,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
CITY OF REDDING, CALIFORNIA, ET AL.,
INTERVENORS
Consolidated with Nos. 09-1216, 09-1217,
09-1245, 09-1246, 09-1247
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
Michael Postar and Harvey L. Reiter argued the cause for
petitioners. With them on the briefs were Bhaveeta K. Mody,
Jon R. Stickman, Abigail Briggerman, Sean M. Neal, John
McCaffrey, Peter J. Scanlon, and Jason T. Gray. Lisa S. Gast,
Matthew R. Rudolphi, and Marie D. Zosa entered appearances.
2
Joseph B. Nelson, Deborah A. Swanstrom, and Lodie D.
White were on the briefs for intervenors Imperial Irrigation
District and City of Los Angeles Department of Water and
Power in support of petitioners.
Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were Thomas R. Sheets, General Counsel, and Robert H.
Solomon, Solicitor.
Daniel J. Shonkwiler argued the cause for intervenors
California Independent System Operator Corporation and
Southern California Edison Company in support of respondent.
With him on the brief were Nancy J. Saracino, Roger E.
Collanton, Jennifer R. Hasbrouck, Erin K. Moore, and Mark R.
Huffman. Erin K. Moore and Mark D. Patrizio entered
appearances.
Before: GINSBURG, HENDERSON and ROGERS, Circuit
Judges.
Opinion for the Court by Circuit Judge ROGERS.
3
ROGERS, Circuit Judge: Various municipalities1 petition for
review of two Federal Energy Regulatory Commission orders
conditionally approving the California Independent System
Operator (“CAISO”)’s proposal to create an Integrated
Balancing Authority Area (“IBAA”) by combining the
Sacramento Municipal Utility District (“SMUD”) and the
Turlock Irrigation District (“Turlock”) for the purpose of pricing
transactions. We deny the petitions for review.
I.
The court has recently summarized much of the pertinent
background in Sacramento Municipal Utility District v. FERC,
616 F.3d 520, 523-24 (D.C. Cir. 2010), a related case. Following
the Commission’s promulgation of Order No. 888, which called
for nationwide deregulation of electricity transmission and
encouraged public utilities to participate in regional transmission
organizations and independent system operators, the California
legislature in 1996 created the CAISO to operate transmission
and other ancillary services on parts of the California electric
power system. In response to the 2000 California energy crisis,
the CAISO, at the Commission’s behest, began redesigning the
California electricity market to foster greater reliability and
1
Petitioners are the Sacramento Municipal Utility District, the
Turlock Irrigation District, the Modesto Irrigation District, the City of
Redding, the City of Santa Clara d/b/a Silicon Valley Power, and the
Transmission Agency of Northern California (“TANC”), a joint
exercise of powers agency partially comprised of the other petitioners.
Petitioners are considered “municipalities” under the Federal Power
Act, see 16 U.S.C. § 796(7). This is also true for municipal
intervenors (“Municipals”), such as the Imperial Irrigation District and
the City of Los Angeles Department of Water and Power. For ease of
reference, the opinion does not identify individual parties.
4
economic efficiency on its system.2 In 2008, the CAISO filed
proposed revisions to its existing tariff and the Market Redesign
and Technology Upgrade Tariff, which it described as “a
comprehensive redesign of the California electricity markets . . .
aimed at enhancing reliability and increasing the efficient
utilization of the CAISO Controlled Grid.” CAISO,
Amendments to MRTU Tariff Provisions, at 1, Docket No.
ER08-1113-000 (June 17, 2008) (“IBAA Proposal”). The
amended tariff would: (1) implement locational marginal
pricing3; (2) implement a full network model of the transmission
system to improve dispatch efficiency; (3) include day-ahead and
real-time energy markets; and (4) ensure that day-ahead
schedules are physically feasible. The Commission has
approved the market redesign in a series of orders, two of which
concern the CAISO’s IBAA Proposal and are challenged here.
Order Conditionally Accepting Tariff Changes and Directing
Compliance Filing, 124 FERC ¶ 61,271 (Sept. 19, 2008)
(“Order”); Order on Rehearing and Clarification, 128 FERC ¶
61,103 (July 30, 2009) (“Rehearing Order”).
2
“An [Independent System Operator (“ISO”)] is an
independent company that has operational control, but not ownership,
of the transmission facilities owned by member utilities. ISOs provide
open access to the regional transmission system to all electricity
generators at rates established in a single, unbundled, grid-wide tariff
. . . .” NRG Power Mktg., LLC v. Maine Pub. Utils. Comm’n, 130 S.
Ct. 693, 697 n.1 (2010) (ellipsis in original) (citation and internal
quotation marks omitted).
3
Under a locational marginal price rate design, energy prices
vary by location and time in order to reflect the cost of energy,
including the cost of transmission losses and congestion, at each
location on the CAISO-controlled grid. Sacramento Mun., 616 F.3d
at 524-25. As such, “prices are designed to reflect the least-cost of
meeting an incremental megawatt-hour of demand at each location on
the grid.” Id. at 524.
5
According to the CAISO, the “most important objective” of
its proposal was to “protect CAISO ratepayers from unjust and
unreasonable prices that may result in the absence of the CAISO
having accurate information . . . to verify the location of external
resources.” IBAA Proposal at 2. The CAISO’s inability to
verify the location of external resources stemmed from
California’s and the Pacific Northwest’s electricity transmission
infrastructure. The California-Oregon Intertie, which delivers
electricity from the Pacific Northwest to central California, is
comprised of three 500 kilovolt power lines that run parallel to
each other. The first line, the California-Oregon Transmission
Project (“COTP”), runs from the Captain Jack substation in
Oregon to the Tesla substation in central California, ending at the
Olinda substation. TANC is a participant in, and the project
manager of, the COTP. The COTP is generally located within
the SMUD balancing authority area and is not part of the
CAISO-controlled grid. The remaining two lines, known
collectively as the Pacific AC Intertie (“PACI”) and at times
referred to individually as “PACI-P” and “PACI-W,” run from
the Malin substation in Oregon to the Tracy substation in central
California, ending at the Round Mountain substation. The PACI
is physically located within the geographic area of the CAISO-
controlled grid, although the CAISO is not an owner of the
PACI. The Captain Jack substation and the Malin substation are
electrically connected; likewise the Tesla substation and the
Tracy substation are electrically connected. The basic structure
6
of the California-Oregon Intertie looks like this:
The IBAA Proposal focuses on SMUD and Turlock, two
independent but interconnected “balancing authority areas,” see
Sacramento Mun., 616 F.3d at 524 n.2, that draw power from the
Pacific Northwest over the California-Oregon Intertie when
purchasing this power is cheaper than generating it locally.
Together they have twelve interconnections with the CAISO-
controlled grid. The CAISO was concerned that it would be
unable to model power flows and calculate locational marginal
prices accurately for these entities due to “parallel flows,” also
known as “unscheduled flows.” Although a “scheduled” or
“contract” flow is planned between two points over a specific
path, the power does not always flow over the scheduled route if
there are other paths; it flows over the path of least resistance,
creating a parallel flow. In some instances, as in the California-
Oregon Intertie, the presence of parallel lines means that when
a scheduled flow occurs there will necessarily be an unscheduled
flow over parallel lines.
The CAISO’s proposed solution in the IBAA Proposal was
two-fold. It first combined SMUD and Turlock into a single
IBAA for purposes of the full network model. And, second, to
7
rectify concerns regarding market manipulation and to model the
IBAA connection points more accurately, the IBAA Proposal
used a “single hub” approach whereby one default proxy price
would be selected for all twelve connection points: All imports
into the CAISO system from the IBAA would be priced as if
they originated at the Captain Jack substation in Oregon; all
exports from the CAISO system to the IBAA would be priced at
a hypothetical “SMUD hub.” Alternatively, SMUD and Turlock
or future IBAA entities could enter into individual market
efficiency enhancement agreements (“MEEAs”) with the CAISO
to receive a more accurate pricing structure upon providing the
CAISO with information allowing it to verify the location and
operation of the resources used to carry out interchange
transactions between the CAISO-controlled grid and the IBAA.
The CAISO explained that the elements of its single hub,
default pricing point proposal were justified by and “result[ed]
directly from the limited type and amount of information the
CAISO expects to receive from the IBAA [e]ntities.” IBAA
Proposal at 5. The Commission agreed, concluding that “by
using a more accurate representation of the locations of external
resources used to implement interchange transactions in the
CAISO’s full network model the IBAA [P]roposal will help to
ensure that interchange transactions from the SMUD and Turlock
balancing authority areas are appropriately valued for purposes
of managing congestion on the CAISO-controlled grid, and
reduce the likelihood of significant differences between
scheduled flows and actual flows.” Order ¶ 5. Accordingly, the
Commission found the CAISO tariff, as amended by the IBAA
Proposal, was “just and reasonable” under the Federal Power Act
(“FPA”), 16 U.S.C. § 824d, but conditioned its approval on the
modification of the IBAA Proposal in several ways, including
that the CAISO address potential over-collection for charges
based upon losses of energy during transmission due to the
modeling of parallel flows, specify in its tariff the information to
8
be provided for establishing MEEAs, and treat such information
as confidential. See Order ¶¶ 6 & n.6, 8. The CAISO satisfied
the conditions in additional filings and the Commission denied
rehearing, rejecting various challenges, some of which are
renewed in the pending petitions. See Rehearing Order ¶ 1.
II.
Petitioners challenge the Commission’s jurisdiction to
review and approve a tariff amendment governing the pricing of
electricity in the CAISO market, and also contend that the
Commission’s acceptance of the IBAA Proposal amending the
CAISO tariff was neither a reasonable exercise of its discretion
under the FPA nor supported by substantial evidence of record.
The court “review[s] [the Commission’s] orders under the
arbitrary and capricious standard and uphold[s] [the
Commission’s] factual findings if supported by substantial
evidence.” Am. Gas Ass’n v. FERC, 593 F.3d 14, 19 (D.C. Cir.
2010) (citation and quotation marks omitted). The court must
affirm the Commission’s orders “so long as [the Commission]
examine[d] the relevant data and articulate[d] a . . . rational
connection between the facts found and the choice made. In
matters of ratemaking, our review is highly deferential, as
[i]ssues of rate design are fairly technical and, insofar as they are
not technical, involve policy judgments that lie at the core of the
regulatory mission.” Alcoa Inc. v. FERC, 564 F.3d 1342, 1347
(D.C. Cir. 2009) (second, third, and fourth alterations and ellipsis
in original) (citations and internal quotation marks omitted).
Nonetheless, the Commission must respond to objections and
address contrary evidence in more than a cursory fashion. See
NorAm Gas Transmission Co. v. FERC, 148 F.3d 1158, 1163-65
(D.C. Cir. 1998). In reviewing the Commission’s assertion of
jurisdiction under the FPA and its interpretation of a
Commission-approved contract, the court applies the familiar
9
two-step analysis under Chevron, U.S.A., Inc. v. NRDC, 467 U.S.
837, 842-44 (1984). See S. Cal. Edison Co. v. FERC, 502 F.3d
176, 181 (D.C. Cir. 2007); Transmission Agency of N. Cal. v.
FERC, 495 F.3d 663, 673 (D.C. Cir. 2007) (“TANC”).
A.
Jurisdiction. FPA Section 201(f) provides that “[n]o
provision in . . . subchapter [II regulating electric utility
companies engaged in interstate commerce] shall apply to, or be
deemed to include . . . any political subdivision of a State . . . or
any agency, authority, or instrumentality of . . . the foregoing . .
. unless such provision makes specific reference thereto.” 16
U.S.C. § 824(f). Section 205 requires the Commission to ensure
that the rates and charges “made, demanded, or received by any
public utility” are “just and reasonable.” Id. § 824d(a). Section
201(e), in turn, defines “public utility” to be “any person who
owns or operates facilities subject to the jurisdiction of the
Commission.” Id. § 824(e). The court has concluded that by
these provisions “Congress has . . . specifically exempted
governmental entities from subchapter II of the FPA.” TANC,
495 F.3d at 674.
Petitioners, joined by intervenor Municipals, contend that
the Commission exceeded its jurisdiction in approving the IBAA
Proposal because FPA Section 201(f) “unequivocally exempts”
governmental entities from the Commission’s rate-setting
authority under FPA Sections 205 and 206, id., and their
voluntary participation in such markets does not give the
Commission authority to regulate their rates, Bonneville Power
Admin. v. FERC, 422 F.3d 908, 924 (9th Cir. 2005). The
Commission rejected this challenge, concluding that approving
the IBAA Proposal was within its “core authority” for four
principal reasons: (1) the amended CAISO tariff applied only to
scheduled transactions that affect the CAISO-controlled grid and
the IBAA Proposal “establishes only the rates, terms and
10
conditions for sales in the CAISO’s market”; (2) in National
Association of Regulatory Utility Commissioners v. FERC, 475
F.3d 1277 (D.C. Cir. 2007) (“NARUC”), the court upheld the
Commission’s authority to regulate all aspects of wholesale
energy sales; (3) an IBAA entity’s voluntary choice to participate
in the CAISO market includes a choice to operate under the
CAISO tariff; and (4) Bonneville, which addressed the
Commission’s authority to order refunds under FPA Section 206,
does not limit the Commission’s jurisdiction here because it was
not ordering a non-jurisdictional entity to issue a refund. See
Rehearing Order ¶¶ 20-25. Petitioners and Municipals maintain
that these four bases for exercising jurisdiction impermissibly
focus on the nature of the transactions and not the identity of the
sellers. As noted, the court affords Chevron deference to the
Commission’s interpretation of its jurisdiction under the FPA.
See TANC, 495 F.3d at 673.
Although the jurisdictional line was more easily drawn when
the electricity world was “neatly divided into spheres of retail
versus wholesale sales, and local distribution versus transmission
facilities,” the “unbundling” of services and the general
restructuring of electricity markets in the last two decades has
made line-drawing more complex. Transmission Access Policy
Study Group v. FERC, 225 F.3d 667, 691 (D.C. Cir. 2000).
Rather than allowing the mere presence of a governmental entity
to defeat the Commission’s assertion of jurisdiction over a public
utility, the court has accepted that jurisdictional and non-
jurisdictional entities are regularly integrated co-participants in
modern power markets. Thus, in NARUC, 475 F.3d at 1281,
where facilities were jointly owned by private firms and states,
the court held that the Commission’s “assertion of jurisdiction
over specified transactions, even though affecting the conduct of
the [state] owner(s) with respect to its facilities, is not per se an
exercise of jurisdiction over the facility,” observing that the
contract modifications mandated by Order No. 888 forced non-
11
jurisdictional owners to permit certain transactions to occur over
the jointly owned facility. Id. at 1281-82. The court observed
that the Commission was “exercising jurisdiction only over
‘interconnections to a “distribution” facility when the facility is
included in a public utility’s Commission-filed [Open Access
Transmission Tariff] and the interconnection is for the purpose
of facilitating a jurisdictional wholesale sale of electric energy.’”
Id. at 1282 (emphasis added in opinion) (quoting Order No.
2003-A, 106 FERC ¶ 61,220 (2004), at 31,075 P 730). Likewise,
“[the Commission] may analyze and consider the rates of non-
jurisdictional utilities to the extent that those rates affect
jurisdictional transactions.” TANC, 495 F.3d at 671 (citation and
quotation marks omitted).
In Sacramento Municipal, 616 F.3d 520, the court rejected
a challenge to the Commission’s jurisdiction to approve the
initial, pre-IBAA Proposal phases of the CAISO’s market
redesign, including its decision to implement locational marginal
pricing. The Imperial Irrigation District argued in that case that
the Commission exceeded its authority in assessing marginal loss
charges to transactions involving Imperial’s use of transmission
ownership rights, i.e., contractual entitlements to use facilities it
owns within the CAISO balancing authority area. See id. at 535-
36. The Commission responded by making clear that marginal
loss charges would be applied “only to transactions that . . .
involve injections and withdrawals from the [CAISO] grid and
could not be assessed where the [transmission ownership rights]
holder has no point of interface with the [CAISO].” Id. at 536(ellipsis and second alteration in original) (citation and internal
quotation marks omitted). The court upheld the Commission’s
assertion of jurisdiction:
Far from compelling Imperial [Irrigation District] to
become a participating transmission owner of
California ISO, [the Commission] merely permitted the
12
ISO to charge Imperial for the costs incurred by the ISO
when Imperial conducts transactions that cause
transmission losses on the ISO’s grid. The
Commission’s proper exercise of its power to regulate
California ISO’s rates was not transformed into a
violation of its statutory jurisdiction by dint of its
incidental effect on Imperial.
Id. The Commission was not charging Imperial to use its own
facilities; rather, the charges stemmed solely from Imperial’s use
of CAISO-controlled facilities and attendant services. Id. at 537.
The court noted a similar distinction had been drawn in Michigan
Public Power Agency v. FERC, 405 F.3d 8, 13 (D.C. Cir. 2005).
The same reasoning controls here. In denying rehearing, the
Commission emphasized that “[t]he IBAA Proposal is . . .
limited, only applying to scheduled transactions that impact the
CAISO-controlled grid.” Rehearing Order ¶ 21. And “since the
IBAA Proposal only applies to scheduled transactions that
impact the CAISO-controlled grid, only a party that chooses to
use the CAISO-controlled grid is affected.” Id. ¶ 23. In short,
“the IBAA Proposal establishes only the rates, terms and
conditions for sales in the CAISO’s markets.” Id. ¶ 25.
Although petitioners and Municipals would distinguish
Sacramento Municipal because the IBAA Proposal’s regulation
of the rate at which non-jurisdictional entities may sell energy to
the CAISO is not, in their view, an “incidental effect” of
regulating jurisdictional entities, the fact remains that the
Commission is only regulating the CAISO’s actions and the
manner in which it calculates rates on the CAISO-controlled
grid. Petitioners’ and Municipals’ rates are not the object of the
Commission’s Orders, and the Commission does not purport to
interfere impermissibly with the manner in which these
municipalities calculate their own rates. See NARUC, 475 F.3d
at 1280. In the highly integrated and complex California energy
13
market, the Commission’s regulation of a jurisdictional entity,
such as the CAISO, “may, of course, impinge as a practical
matter on the behavior of non-jurisdictional ones.” Id. But, as
in Sacramento Municipal, this is not a basis for concluding that
the Commission has exceeded its jurisdiction under the FPA.
Contrary to petitioners’ position, neither the Ninth Circuit’s
opinion in Bonneville nor this court’s opinion in TANC preclude
the Commission from asserting jurisdiction over the IBAA
Proposal. Bonneville simply holds that the Commission may not
order a non-jurisdictional entity to issue a refund, 422 F.3d at
920, and, more critically, the Commission is not regulating
petitioners’ rates; it is regulating only the CAISO’s. Indeed,
Bonneville distinguishes a circumstance in which the
Commission orders the CAISO, as opposed to a governmental
entity, “to operate the market in a different fashion or to set a
market-clearing price for power on a going-forward basis.” Id.For the same reason, the Commission does not run afoul of the
prohibition in Bonneville, adopted by this court in TANC, that the
Commission’s “refund authority under the FPA is ultimately
determined by the ‘identities of the sellers subject to the refund
order.’” TANC, 495 F.3d at 674 (quoting Bonneville, 422 F.3d
at 911).
Petitioners and Municipals also miss the mark in faulting the
Commission for justifying its assertion of jurisdiction on non-
jurisdictional entities’ voluntary participation in the CAISO
market. In denying rehearing the Commission was not
suggesting that it was asserting jurisdiction by agreement; rather,
the Commission was illustrating that governmental entities are
affected by the IBAA Proposal only insofar as they choose to
transact within the CAISO-controlled grid. See Rehearing Order
¶ 22. Thus, petitioners’ and Municipals’ reliance on Columbia
Gas Transmission Corp. v. FERC, 404 F.3d 459, 463 (D.C. Cir.
2005), is misplaced.
14
Municipals fare no better in responding that the IBAA
Proposal is not limited to the CAISO-controlled grid because it
incorporates prices at Captain Jack outside of the grid and makes
reference to modeling “external” resources. Although the
CAISO’s full network model uses proxies and data from outside
the CAISO-controlled grid, the IBAA Proposal sets rates only for
transactions on the CAISO-controlled grid. Moreover, the
Commission may properly “analyze and consider the rates of
non-jurisdictional utilities to the extent that those rates affect
jurisdictional transactions.” TANC, 495 F.3d at 671 (citation and
quotation marks omitted).
B.
Existing Contracts. The Amended Owners Coordinated
Operation Agreement (“Agreement”) between Pacific Gas and
Electric Company (“PG&E”), participants in the California-
Oregon Transmission Project (“COTP”), and participants in the
Western Area Power Administration addresses the joint
operation of the California-Oregon Intertie, the three-line parallel
system comprised of the COTP (between Captain Jack and
Tesla) and the dual PACI-P and PACI-W lines (between Malin
and Tracy). Because the Agreement governed different subject
matter than the IBAA Proposal, the Commission rejected the
argument that approval of the IBAA Proposal violated the
Agreement. See Order ¶¶ 246-255; Rehearing Order ¶¶ 254-260.
Petitioners and the Commission agree that the Mobile-Sierra4
doctrine prohibits the Commission from approving the IBAA
Proposal if it impinges upon rights protected under the
Agreement. The issue, then, is whether the Commission’s
determination that the Agreement and IBAA Proposal do not
conflict was reasonable.
4
See United Gas Pipe Line Co. v. Mobile Gas Serv.
Corp., 350 U.S. 332 (1956); Fed. Power Comm’n v. Sierra Pac.
Power Co., 350 U.S. 348 (1956).
15
A variation of the two-step Chevron analysis frames the
arbitrary and capricious review. See Entergy Servs., Inc. v.
FERC, 568 F.3d 978, 981-82 (D.C. Cir. 2009). The court “first
consider[s] de novo whether [the Agreement] unambiguously
addresses the matter at issue. If so, the language of the
Agreement controls for [the court] must give effect to the
unambiguously expressed intent of the parties.” S. Cal. Edison,
502 F.3d at 181 (citation and internal quotation marks omitted).
Familiar contract interpretation principles apply. Thus,
ambiguity arises where an agreement “is reasonably susceptible
of different constructions or interpretations.” Iberdrola
Renewables, Inc. v. FERC, 597 F.3d 1299, 1304 (D.C. Cir. 2010)
(citation and quotation marks omitted). Further, “[i]n construing
tariffs, courts and agencies must look to the four corners of the
tariff and consider the entire instrument as a whole.” Consol.
Gas Transmission Corp. v. FERC, 771 F.2d 1536, 1545 (D.C.
Cir. 1985). And “[t]he purposes for which a tariff was imposed
should be considered . . . for ‘to decide the question of the scope
of [a] tariff without consideration of the factors and purposes
underlying the terminology employed would make the process
of adjudication little more than an exercise in semantics.” Id.(second alteration in original) (quoting United States v. W. Pac.
R.R., 352 U.S. 59, 67 (1956)).
Section 5 of the Agreement provides:
This Agreement governs the coordinated operation of
the PACI and COTP. It is the intent of the Parties to
maintain the System as coordinated facilities to benefit
its Transfer Capability. Except as to the use of the
Tesla ByPass provided under this Agreement and as
necessary to perform curtailment sharing obligations
under Section 11 of this Agreement, no Party provides
or shall be required to provide any transmission or other
electric service to another Party under this Agreement.
16
Section 8.4 provides, in pertinent part, that
[t]he System shall be operated as a coordinated three-
line transmission system. No Party shall be charged
any rate and PG&E shall not be charged any
transmission loss for any power, which flows over the
System or over the Tesla ByPass. . . . Except to the
extent necessary for sharing Curtailments, no Party
shall have a right under this Agreement to have any of
its power delivered on or otherwise have the use of
transmission facilities owned by another Party.
Although the CAISO agreed to “honor” the Agreement, see
Order ¶ 247, the extent to which the Agreement restricts the
CAISO is unclear. Insofar as it is binding, the Commission
concluded that the Agreement, which provides for shared use,
coordinated operation, maintenance, and planning of the
California-Oregon Intertie, “does not concern how energy is
priced once it enters the CAISO-controlled grid” and therefore
presents no conflict with the IBAA Proposal. Id. Viewing
section 5 to “denote[] the scope of the Agreement,” the
Commission concluded that the prohibition on charges in section
8.4 was limited to the coordinated operation and maintenance of
the PACI and COTP. Id. ¶ 248; see also Rehearing Order ¶ 225.
Petitioners contend that section 8.4 unambiguously
precludes the CAISO from “charg[ing] any rate . . . for any
power, which flows over the System.” As they see it, section 8.4
“reflects the Parties’ intent to shield one another from charges
that might otherwise be imposed as a result of their coordinated
operations, even where the power flows through the CAISO-
controlled grid.” Reply Br. 8. But section 8.4 must be read in
conjunction with section 5, as they are both part of a single
agreement. See Consol. Gas Transmission, 771 F.2d at 1545.
On its face the Agreement does not concern the manner in which
17
the CAISO sets rates in its own market. Although section 8.4
refers broadly to “any rate” for power flowing over the system,
the reach of this provision cannot extend beyond the scope of the
Agreement itself, which is stated in section 5.
Seeking to avoid the effect of section 5, petitioners maintain
that the Commission has erroneously presumed a conflict
between the two sections. But the Commission simply read one
section in light of the other. See Order ¶ 248. In addition, the
Commission’s interpretation is consistent with the Agreement’s
general purpose, see Consol. Gas Transmission, 771 F.2d at
1545, to ensure the combination of the three power lines (COTP,
PACI-P, PACI-W) does not result in parallel flow charges to the
Parties, which they would otherwise incur. Indeed, petitioners
acknowledge that “[t]he Agreement prohibits the Parties from
assessing each other for ‘any’ such power flows.” Reply Br. 8.
The IBAA Proposal does not permit a party to the Agreement to
charge another party for flows over the three-line system. It is
irrelevant, as the Commission maintains, that the PACI is part of
the CAISO grid.
Petitioners relatedly contend that the Commission’s
adjustment of the IBAA Proposal to prevent potential
overcollection of losses, see Order ¶¶ 106, 252, shows that the
Commission is permitting losses to be charged for parallel flows
in violation of the Agreement. The Commission directed the
CAISO to remove these charges, however, in order to avoid
having COTP customers that transact in the CAISO market pay
the cost due to losses of energy during transmission reflected in
the Captain Jack locational marginal price in addition to the same
cost reflected in the existing COTP tariff. See Order ¶ 106.
Such action has no relation to whether the parties to the
Agreement may charge one another for parallel flows on the
California-Oregon Intertie. The Commission acknowledged that
section 8.4 of the Agreement “provides that parties cannot charge
18
a rate for these [parallel] flows.” Order ¶ 252. But its decision
to direct the CAISO “to revise the IBAA proposal to address any
potential overcollection of losses,” id., does not indicate that a
failure to remove these loss charges would have violated the
Agreement. The Commission explained that “the IBAA
proposal will not charge any rate for these flows over and above
what it is doing under the current tariff.” Id. (emphasis added).
On rehearing, the Commission stated that it did not find such
pricing to be prohibited by the Agreement. See Rehearing Order
¶ 258. The Commission’s position on appeal, that “this
adjustment was to make the [IBAA] rate consistent with other
rate tariffs, not the Coordinated Operation Agreement,” is thus
supported by the record. Resp’t Br. 40.
Because section 5 defines the scope of the Agreement to
govern only the joint operation of the three power lines
comprising the California-Oregon Intertie, and section 8.4 is
properly read in light of section 5, the Commission reasonably
concluded that the Agreement only prohibits the parties to the
Agreement from charging each other for unscheduled use of
another’s lines associated with parallel flows and does not reach
the IBAA Proposal, which concerns the CAISO’s ability to set
rates within its own market.
C.
Discrimination. FPA Section 205, in addition to requiring
that all rates and charges be “just and reasonable,” provides:
No public utility shall, with respect to any transmission
or sale subject to the jurisdiction of the Commission,
(1) make or grant any undue preference or advantage to
any person or subject any person to any undue
prejudice or disadvantage, or (2) maintain any
unreasonable difference in rates, charges, service,
19
facilities, or in any other respect, either as between
localities or as between classes of service.
16 U.S.C. § 824d(b). To this end, upon finding that a rate is
“unjust, unreasonable, unduly discriminatory or preferential,” the
Commission is required to “determine the just and reasonable
rate, charge, classification, rule, regulation, practice, or contract
to be thereafter observed and in force, and shall fix the same by
order.” Id. § 824e(a). “A rate is not ‘unduly’ preferential or
‘unreasonably’ discriminatory if the utility can justify the
disparate effect.” Ark. Elec. Energy Consumers v. FERC, 290
F.3d 362, 367 (D.C. Cir. 2002); see also Elec. Consumers Res.
Council v. FERC, 747 F.2d 1511, 1515 (D.C. Cir. 1984). The
court will not find a Commission determination to be unduly
discriminatory if the entity claiming discrimination is not
similarly situated to others. Sacramento Mun. Util. Dist. v.
FERC, 474 F.3d 797, 802 (D.C. Cir. 2007).
In filing a revision to a tariff, the public utility bears the
ultimate burden of demonstrating that the rate is not unduly
discriminatory. See Elec. Consumers, 747 F.2d at 1515. Yet
“[o]nly upon a [Section 205] complainant’s showing that a rate
design has different effects on similarly situated customers does
the burden shift to the respondent [public utility] to justify those
disparities.” Sw. Elec. Coop., Inc. v. FERC, 347 F.3d 975, 981
(D.C. Cir. 2003). If the Commission determines the rate is not
unduly discriminatory, as it did here, then petitioner-
complainants bear the burden of “demonstrat[ing] that [the
Commission’s] policy judgments are arbitrary or capricious, a
heavy burden indeed.” Transmission Access, 225 F.3d at 714.
This framework was made clear in Sacramento Municipal, 616
F.3d at 537-38, where the court rejected the contention that the
Commission erroneously conflated the burden of proof when it
“properly placed the initial burden of showing that the tariff
proposal [wa]s just and reasonable on [the CAISO] . . . [t]hen,
20
after finding that the [CAISO] had established that it was ‘just
and reasonable’ . . . [,] simply found that Imperial had failed to
controvert that conclusion.” Petitioners likewise overlook the
shifting burdens and the standard of review in suggesting that the
Commission impermissibly advances a post hoc argument on
appeal, that petitioners failed to show the rates were unduly
discriminatory, when the Commission had placed the initial
burden on the CAISO to justify the tariff amendment, see, e.g.,
Order ¶ 208; Rehearing Order ¶ 221.
On the merits, petitioners contend that combining SMUD
and Turlock into an IBAA constituted unreasonable and undue
discrimination, in violation of FPA Section 205, 16 U.S.C.
§ 824d. Rejecting this view, the Commission credited the
CAISO’s identification of six factors distinguishing SMUD and
Turlock from other balancing authority areas, finding that
“unique circumstances” justified the consolidation for purposes
of the CAISO’s market redesign. See Order ¶¶ 208-216;
Rehearing Order ¶¶ 216-226. Petitioners now complain that the
Commission failed to provide a reasoned response to evidence
and objections advanced by parties, see NorAm, 148 F.3d at
1163-65, but the record is to the contrary.
In response to petitioners’ objection to placing weight on the
number, rather than the size, of the connections between two
parallel systems, the Commission noted that the proposed “IBAA
does, in fact, have several large interconnection points, including
Tracy,” making the SMUD-Turlock IBAA “highly
interconnected with the CAISO with respect to the number, size,
and distance between its interconnections with the CAISO-
controlled grid.” Order ¶ 212; see also Rehearing Order ¶ 218.
Additional statements defeat petitioners’ claim that the
Commission did not conclude SMUD and Turlock connections
were more significant than other areas. The Commission noted
that the “sheer number of interconnections and the extent of the
21
parallel flows combined with its imbedded position within the
CAISO grid” make the SMUD-Turlock IBAA the “most highly
integrated interface with the CAISO.” Order ¶ 212. The
Commission also contrasted the IBAA’s twelve interconnection
points with the next largest balancing authority area, the Los
Angeles Department of Water and Power, which has only four
points. See id. Moreover, with respect to the degree of impact
on the CAISO system, the Commission found that unscheduled
flow data for SMUD and Turlock distinguished these entities
from neighboring balancing authority areas. See Rehearing
Order ¶ 220. The Commission also responded to petitioners’
objection that the former integration of SMUD and Turlock with
the CAISO was irrelevant, pointing out that this “detailed
knowledge” helped inform the CAISO’s understanding of
challenges that might arise. Order ¶ 214. In sum, petitioners fail
to show that the Commission did not examine the relevant data
or articulate a rational connection between the facts found and
the choice made, bearing in mind that the court’s review is
highly deferential. See Alcoa, 564 F.3d at 1347.
Petitioners persist, however, contending that the
Commission failed to respond to comments raising the
arbitrariness of “lumping” SMUD and Turlock together. This
contention also fails. The Commission, citing evidence of two
experts presented by the CAISO, explained that the high degree
of integration between SMUD and Turlock justified the IBAA
Proposal. See Order ¶ 210. On rehearing, the Commission
pointed out that the CAISO had presented “compelling data that
illustrates the significance of unscheduled flows between the
SMUD and Turlock balancing authority areas and the CAISO-
controlled grid.” Rehearing Order ¶ 220 (emphasis added). This
data compared SMUD and Turlock with other neighboring
balancing authority areas, and documented the amount and
frequency of unscheduled flows over a 12-month period. The
Commission found that “[t]he evidence demonstrates that SMUD
22
and Turlock both experienced large and, in many cases, frequent
deviations between scheduled and actual power flows.” Id. The
Commission noted that SMUD did not address this long-term
data and that the petitioners’ efforts to focus on individual
factors and any one particular data set “miss the larger point of
considering the totality of factors and unique characteristics of
a potential IBAA.” Id.; see also id. ¶ 221. Finally, the
Commission reasonably found that because Turlock is “uniquely
situated within the CAISO’s balancing authority area with
SMUD, making it possible for a schedule[d] [transfer] to be
made from Turlock to the CAISO for power that is actually
being sourced from within the SMUD balancing authority area
or the Pacific Northwest, . . . it is important that the CAISO be
better able to map such flows or reflect their source in its
[locational marginal prices].” Id. ¶ 224.
Petitioners’ remaining arguments fare no better. First,
contrary to their suggestion, the Commission did not
unreasonably reject evidence relating to flow rates. Rather, the
Commission discussed in detail the parties’ respective positions
regarding the accuracy of the data and the difference between
frequency, magnitude, and peak flow data. See Order ¶¶ 37-39.
On rehearing the Commission noted that “SMUD’s assertion
that we ignored evidence it provided suggesting that flow
reversals were ‘grossly exaggerated’ is incorrect. The
Commission considered all submitted evidence in the record in
making determinations regarding the IBAA Proposal.”
Rehearing Order ¶ 69. As the Commission points out, the fact
that the CAISO’s experts and data were credited over petitioners’
is no reason to grant the petition because the court,
acknowledging the Commission’s expertise, “defers to the
Commission’s resolution of factual disputes between expert
witnesses.” Elec. Consumers Res. Council v. FERC, 407 F.3d
1232, 1236 (D.C. Cir. 2005).
23
Second, while petitioners correctly point out that future
approval of other IBAAs does not justify undue discrimination
against SMUD and Turlock, and that the availability of MEEAs
— an agreement between the CAISO and an IBAA entity to
share information — does not cure discrimination these
considerations are of no aid to them here. The Commission
identified no other entities suitable for IBAA treatment at the
time of the challenged orders, and thus the Commission cannot
be said to be treating similarly situated entities differently. See
Sacramento Mun., 474 F.3d at 802. If, in the future, the
petitioners or others provide information that another balancing
authority area equals or surpasses SMUD and Turlock on the
measures relied upon by the Commission and the CAISO, then
the IBAA Proposal will allow the CAISO to treat the similarly
situated balancing authority area as an IBAA. Further, the
Commission did not reject petitioners’ discrimination challenges
because MEEAs were available, but rather found the rates to be
just, reasonable, and not unduly discriminatory even in the
absence of MEEAs; it simply noted that the execution of MEEAs
would “mitigate parties’ concerns.” Order ¶ 208.
Third, petitioners incorrectly suggest that the Commission
impermissibly relied on a “totality of circumstances” approach.
Unlike in LeMoyne-Owen College v. NLRB, 357 F.3d 55, 61
(D.C. Cir. 2004), on which petitioners rely, where the court
overturned an agency decision that entirely ignored certain
arguments made by the parties, here the Commission addressed
the parties’ arguments, identifying six factors that supported its
decision and explaining how the IBAA Proposal met those
factors. See Order ¶¶ 193-216; Rehearing Order ¶¶ 197-226.
Consequently the Commission’s reference to “multiple, non-
exclusive factors,” Rehearing Order ¶ 218, is far from a “totality
of the circumstances” approach that serves as “simply a cloak for
agency whim — or worse.” LeMoyne-Owen, 357 F.3d at 61.
Instead, as the CAISO suggests, it likely imparted that even if
24
petitioners could show that another entity satisfied one criterion
for forming an IBAA, making the entity similarly situated to the
SMUD-Turlock IBAA in one respect, this was insufficient to
demonstrate discrimination because such entities, unlike the
SMUD-Turlock IBAA, did not satisfy all six criteria.
Fourth, the Commission did not, as petitioners note, directly
address some of the evidence regarding parallel flows or explain
why certain experts’ testimony was unpersuasive. But the
overall explanation the Commission provided sufficed because
it provided reasonable responses to petitioners’ objections that
were neither summary nor dismissive. See NorAm, 148 F.3d at
1163-65. The Commission could have expanded its discussion
of the evidence on undue discrimination, but a point-by-point
rebuttal is not necessarily required. Cf. Lemoyne-Owen, 357
F.3d at 60-61. As the court explained in Transcontinental Gas
Pipe Line Corp. v. FERC, 518 F.3d 916, 922 (D.C. Cir. 2008)
(citation and internal quotation marks omitted), even when the
Commission’s “explanation . . . left something to be desired, the
decision as a whole and the rehearing decision clarify its
analysis, and we will uphold a decision of less than ideal clarity
if the agency’s path may reasonably be discerned.”
D.
Proxy Prices. The Commission accepted the IBAA Proposal
to use default import and export proxy pricing points to model
the IBAA. See Order ¶¶ 82-92; Rehearing Order ¶¶ 58-70.
Imports into the CAISO, i.e., sales from the IBAA entities to the
CAISO, are given a locational marginal price as if they
originated at the Captain Jack substation in Oregon; exports from
the CAISO, i.e., sales from the CAISO to the IBAA entities, are
given a locational marginal price at a hypothetical “SMUD hub,”
a composite point representing the average location of exports.
See Order ¶ 64. As an alternative to these default locational
marginal prices, the IBAA Proposal provided for MEEAs.
25
The Commission found this model and the underlying
assumptions of the IBAA Proposal to be reasonable “given the
available information on interchange transactions,” Order ¶ 82,
and “the absence of additional information . . . verifying an
interchange transaction’s source or sink,” id. ¶ 83. It noted that
the CAISO “has appropriately chosen to make an assumption
that imports are likely to flow through Captain Jack and exports
are likely to flow through the SMUD hub.” Id. ¶ 82. It further
agreed that the CAISO’s experience from which it “anticipates
that its proposal is needed to address unscheduled flows and
effectively manage congestion,” as applied here, reasonably
supported the use of default proxy prices. Id. The Commission
noted as well that IBAA entities could avoid the proxy price by
providing confidential proprietary information on actual power
sources through MEEAs. See id. ¶ 83.
In rejecting comments that the IBAA Proposal’s use of the
Captain Jack default proxy prices was unreasonable because it
erroneously assumed Captain Jack to be the import source, the
Commission explained that the CAISO “does not assert that all
interchange transactions are sourced at Captain Jack,” but
“[r]ather, in the absence of additional information, it asserts that
Pacific Northwest resources are likely to support interchange
transactions since they are generally less expensive.” Order ¶ 83.
The Commission cited record evidence, submitted by the
CAISO, demonstrating that “[t]ransactions that source from the
Pacific Northwest (i.e. near Captain Jack) have very little flow
through Tracy” and therefore “[m]odeling these transactions as
if they source at Tracy will result in an inaccurate model of
congestion, since the transaction’s actual flows will not match
the scheduled flows.” Id. ¶ 83 n.67. Finally, the Commission
explained that “[w]hile a default pricing and modeling
mechanism may not reflect the actual sourcing location of an
interchange transaction, as the parties contend, it does reflect a
conservative proxy that allows the CAISO to better manage
26
congestion on its system and will reduce incentives for artificial
scheduling.” Order ¶ 83; see also id. ¶ 90.
Petitioners challenge as arbitrary and capricious the
Commission’s determination that the default proxy prices for the
IBAA were just and reasonable. They offer four grounds, none
of which ultimately is persuasive. First, petitioners challenge the
reasonableness of the assumption that IBAA entities use
inexpensive Pacific Northwest power to schedule imports into
the CAISO, but do not challenge the use of the proxy system
itself. Their principal objection is that the Commission failed to
address uncontradicted evidence demonstrating the IBAA
entities use power from the Pacific Northwest to serve their own
loads, rather than re-selling that power to the CAISO.
Petitioners’ complaint about the different assumptions that
underlie the default prices charged for imports and for exports is
misdirected; the Commission did not mistakenly treat those
assumptions as established facts. Rather, as the Commission
explained, the default prices were based on flow data used to
accomplish the CAISO’s purpose of eliminating arbitrage
opportunities. See Order ¶ 83. The use of proxy pricing, as the
CAISO explains in its brief, focused not on the intended ultimate
use of energy purchased by the IBAA entities but on the power
flow, and the CAISO studies showed that 15% or less of energy
passing through Captain Jack flowed through Tracy and “[m]ost
of the remainder, 66% of the power flows, entered the ISO
system through the Pacific AC Intertie.” Intervenor CAISO Br.
25.
The Commission adopted this analysis in rejecting
petitioners’ evidence and contrary views. See Order ¶¶ 90-92.
The Commission concluded that absent more detailed
information from IBAA entities about generation sources,
imports into the CAISO are likely to flow through the Captain
27
Jack substation, supported by resources from the Pacific
Northwest. The CAISO flow studies support this finding.
Moreover, the Commission noted, petitioners may avoid default
prices by providing accurate information to the CAISO, either
through MEEAs or otherwise.
Second, petitioners object that the Commission’s failure to
remedy duplicative congestion charges is irreconcilable with its
recognition that default IBAA prices account for parallel flows.
The Commission ordered the CAISO to prevent double-charging
for losses flowing over the COTP, one of the three California-
Oregon Intertie lines, and explained why there is no comparable
congestion duplication to be eliminated:
[T]he congestion will not arise due to capacity
limitations on the California-Oregon Intertie. Rather,
the congestion will arise due to the capacity limitations
of other elements of the CAISO-controlled grid which,
under normal operations, will be the limiting factors for
scheduling interchange transactions that also use the
California-Oregon Intertie. Said another way, any
congestion that is reflected in [locational marginal
prices] applicable to interchange transactions that use
the California-Oregon Intertie will be attributable to
binding constraints, not on the intertie, but on the other
elements of the CAISO-controlled grid.
Order ¶ 105; see also Rehearing Order ¶ 82. Petitioners maintain
that the Commission failed to address record evidence
demonstrating that their congestion charges will increase under
the IBAA Proposal, creating an “overcollection.” But such
evidence does not undermine the Commission’s point that the
CAISO charges are not for congestion on the California-Oregon
Intertie. The Commission, noting evidence submitted by the
CAISO, explained that the charges are for congestion on the
28
CAISO’s own underlying 230 kilovolt line and “other elements
of the CAISO-controlled grid,” not for congestion on the
California-Oregon Intertie. See Order ¶ 105 & n.97 (citing IBAA
Proposal Ex. ISO-1, at 88-89). Thus, a customer transacting in
the CAISO market will pay one charge for using the California-
Oregon Intertie and another charge for any congestion created on
the CAISO-controlled grid.
Third, petitioners object that the Commission’s approval of
the default price for imports was inconsistent with its finding that
such a rate design “may, in limited circumstances, create an
artificially low price” for energy. Order ¶ 120. Quoting Federal
Power Comm’n v. Texaco Inc., 417 U.S. 380, 399 (1974),
petitioners maintain the FPA “does not permit even a ‘little
unlawfulness’” with respect to rates. Pet’rs Br. 56. But Texaco
concerned a total exemption for small producers from regulation
under the Natural Gas Act, 15 U.S.C. §§ 717 et seq., see Texaco,
417 U.S. at 383, whereas the Commission’s approval of the
IBAA Proposal is based on its consistency with the FPA’s
Section 205 requirement that rates be “just and reasonable,” 16
U.S.C. § 824d(a). That a proxy price will deviate from the
market price in limited circumstances does not mean it is
necessarily unjust and unreasonable. As the Supreme Court
cautioned in Texaco, 417 U.S. at 397, in some circumstances “the
prevailing price in the marketplace cannot be the final measure of
‘just and reasonable’ rates mandated by the [Natural Gas] Act.”
See also id. at 397-99. If, as petitioners suggest, the proxy price
could never deviate from the market price without becoming
unlawful, then proxy pricing would be unlawful as a matter of
law unless it was in fact the market price at all times. The court
has recognized that proxy prices can be just and reasonable, if
supported by record evidence. See, e.g., Oxy USA, Inc. v. FERC,
64 F.3d 679, 695 (D.C. Cir. 1995). Petitioners cite no authority
to the contrary.
29
Finally, the Commission gave a reasoned explanation for
rejecting petitioners’ suggestion that the Captain Jack price could
lead to substantially reduced imports creating instability on the
CAISO-controlled grid. Essentially, the Commission concluded
that the proxy prices generate benefits to all entities using the
CAISO-controlled grid because SMUD and Turlock cannot cause
inaccurate market prices and infeasible scheduling. In the
Commission’s view, the use of locational marginal pricing would
strengthen the market by accurately reflecting market demand
across the power grid and facilitating energy transactions. As the
Commission stated, the IBAA Proposal “is unlikely to
substantially decrease imports to the CAISO.” Order ¶ 111.
Market supply and demand would prevent a decrease in imports
large enough to affect system stability, and while “trading
opportunities may be lost” when the Captain Jack locational
marginal price falls below the cost of generating power locally,
Order ¶ 108 (citation and quotation marks omitted), petitioners
offered no evidence that this would occur all or even a large part
of the time. On rehearing the Commission noted that “[n]o
evidence has been provided to support the legitimacy of the claim
that the IBAA Proposal could undermine resource adequacy
programs or harm reliability in the region.” Rehearing Order ¶
99. Further, the Commission observed, “the IBAA proposal does
not change the resource adequacy program” and thus will not
“lead to reliability or resource adequacy problems for the
CAISO.” Order ¶ 112. The Commission’s response to
petitioners’ concern was reasonable and supported by record
evidence submitted by the CAISO.
Accordingly, we deny the petitions for review.