Turlock Irrigation District v. Ferc

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TURLOCK IRRIGATION DISTRICT; No. 16-71380
MODESTO IRRIGATION DISTRICT,
Petitioners, FERC No.
EL15-55-001
TRANSMISSION AGENCY OF
NORTHERN CALIFORNIA; THE M-S-R
PUBLIC POWER AGENCY; THE CITY OPINION
OF REDDING, CALIFORNIA;
SACRAMENTO MUNICIPAL UTILITY
DISTRICT,
Intervenors,
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent,
PACIFIC GAS AND ELECTRIC
COMPANY; CALIFORNIA
DEPARTMENT OF WATER
RESOURCES,
Intervenors.
On Petition for Review of an Order of the
Federal Energy Regulatory Commission
2 TURLOCK IRRIGATION DIST. V. FERC
Argued and Submitted May 14, 2018
San Francisco, California
Filed September 6, 2018
Before: Sidney R. Thomas, Chief Judge, Michelle T.
Friedland, Circuit Judge, and Thomas S. Zilly, * District
Judge.
Opinion by Chief Judge Thomas
SUMMARY **
Federal Energy Regulatory Commission
The panel granted a petition for review brought by the
Turlock and Modesto Irrigation Districts, and held that the
Federal Energy Regulatory Commission (“FERC”)’s orders
denying the Districts’ complaint and denying rehearing were
arbitrary and capricious.
To supply power to their service areas, the Districts use
transmission and generation facilities both within and
outside of their individual electric systems. In order to
import and export power into and out of their systems, the
Districts use the California-Oregon Transmission Project,
*
The Honorable Thomas S. Zilly, Senior District Judge for the U.S.
District Court for the Western District of Washington, sitting by
designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
TURLOCK IRRIGATION DIST. V. FERC 3
which was constructed by the Transmission Agency of
Northern California with a group of public and private
utilities, including Pacific Gas & Electric Company
(“PG&E”) and federal agencies.
PG&E entered Interconnection Agreements with the
Districts, providing the terms under which the
interconnected utility systems owned by the respective
parties coordinated their operations. The complaint alleged
that PG&E breached the notice and study provisions of these
agreements.
The California Department of Water Resources entered
into a State Water Contract with PG&E in 1982 to provide
interconnection services of the Department’s plants and
facilities in PG&E’s service area. The Department agreed to
participate in the Remedial Action Scheme, which was an
automatic protection system designed to detect abnormal or
predetermined system conditions on a transmission grid and
take corrective actions to maintain the reliability of the
system. The State Water Contract expired on December 31,
2014, and in the Spring of 2014 the Districts raised concerns
about the impact to their systems. When PG&E determined
there was not a reasonable likelihood of any Adverse Impact
to the service territories of the Districts, the Districts filed
their complaint, which FERC denied.
The panel held that FERC misinterpreted the definition
of Adverse Impact, and thus improperly disposed of the
Districts’ complaints without determining whether changes
to the Remedial Action Scheme may result in reductions in
transmission over the California-Oregon Transmission
Project. The panel further held that FERC applied the wrong
standard for initiating a study when making its factual
findings.
4 TURLOCK IRRIGATION DIST. V. FERC
On remand, the panel directed FERC to apply the
broader definition of Adverse Impact that included
reductions in import capability over the California-Oregon
Transmission Project and the proper standard for requesting
a study in determining whether PG&E breached the
Interconnection Agreements.
COUNSEL
Jon R. Stickman (argued) and Kenneth Holmboe, Duncan &
Allen, Washington, D.C.; Sean M. Neal, Duncan Weinberg
Genzer & Pembroke P.C., Sacramento, California; for
Petitioners.
Carol J. Banta (argued), Ross R. Fulton and Susan Y. Chu,
Attorneys; Robert H. Solomon, Solicitor; James P. Danly,
General Counsel; Federal Energy Regulatory Commission,
Washington, D.C.; for Respondent.
Alyssa Koo (argued), Pacific Gas and Electric Company,
San Francisco, California, for Intervenor Pacific Gas and
Electric Company.
Lisa S. Gast and Peter J. Scanlon, Duncan Weinberg Genzer
& Pembroke P.C., Washington, D.C.; Michael R. Postar,
Matthew R. Rudolphi, and Tyler E. Mansholt, Duncan
Weinberg Genzer & Pembroke P.C., Washington, D.C.;
Harvey L. Reiter, Stinson Leonard Street LLP, Washington,
D.C.; for Intervenors Transmission Agency of Northern
California; The M-S-R Public Power Agency; The City of
Redding, California; and Sacramento Municipal Utility
District.
TURLOCK IRRIGATION DIST. V. FERC 5
Lisa G. Dowden and Katharine M. Mapes, Spiegel &
McDiarmid LLP, Washington, D.C., for Intervenor
California Department of Water Resources.
OPINION
THOMAS, Chief Judge:
In this petition for review, we consider whether the
Federal Energy Regulatory Commission (“FERC”) acted
arbitrarily and capriciously in denying a complaint brought
by the Turlock and Modesto Irrigation Districts
(collectively, the “Districts”). The complaint alleged that
Pacific Gas & Electric Company (“PG&E”) breached
agreements between the Districts and PG&E. We conclude
that FERC’s orders denying the complaint and denying
rehearing were arbitrary and capricious, and we grant the
Districts’ petition.
I
A
PG&E provides wholesale and retail electric service in
northern and central California. PG&E owns an extensive
electric transmission system within that area, which was
turned over to the operational control of the California
Independent System Operator (“Cal-ISO”) in 1998. Cal-
ISO provides transmission service over PG&E’s system.
The Districts generate, transmit, and distribute electric
power within their service areas. Each District retains
operational control of its own transmission system. The
Districts jointly own Westley Substation and three 230 kV
transmission lines, the Westley-Parker, Westley-Walnut,
6 TURLOCK IRRIGATION DIST. V. FERC
and Parker-Walnut lines. These lines move power from the
Westley Substation to the Districts’ service areas. Westley
Junction is the point of interconnection between PG&E’s
system and each District’s system. In addition, the Districts
jointly own the Westley-Tracy Transmission Project, which
interconnects with the Western Area Power Administration
(“Western”) system at Tracy Substation.
To supply power to their service areas, the Districts use
transmission and generation facilities both within and
outside of their individual electric systems. In order to
import and export power into and out of their systems, the
Districts use the California-Oregon Transmission Project
(“California-Oregon Project”). The California-Oregon
Project is a 500 kV line that extends approximately
340 miles from the Captain Jack Substation in southern
Oregon to the Olinda Substation in northern California and
then on to its terminus near PG&E’s Tesla Substation in
central California. The California-Oregon Project was
constructed by the Transmission Agency of Northern
California (“Transmission Agency”) with a group of public
and private utilities, including PG&E and federal agencies.
Neither of the Districts has an ownership share in the
California-Oregon Project. However, each District is a
member of the Transmission Agency, and their interests in
the California-Oregon Project arise through their
membership in the Transmission Agency. This membership
gives each District the right to use a share of the California-
Oregon Project’s transmission capacity. The California-
Oregon Project provides the District with access to power
generators in Oregon and Washington. The Districts rely on
power imported from Oregon and Washington to reliably run
their electric systems.
TURLOCK IRRIGATION DIST. V. FERC 7
B
PG&E has entered into an Interconnection Agreement
with Modesto and another with Turlock. The
Interconnection Agreements provide the terms under which
the interconnected utility systems owned by the respective
parties coordinate their operations. The two agreements
contain nearly identical terms, and we refer to them
collectively. 1
At issue in this case are the notice and study provisions
in Section 9.11 of the Agreements. Section 9.11.1(a)
requires a “Primary Party” to notify a “Coordinating Party”
if the Primary Party intends to make a “Modification, New
Facility Addition, or Long-Term Change to Operations” that
“may reasonably result in an Adverse Impact to the System
of the Coordinating Party.” A “Primary Party” is a party that
proposes to enact the Modification, New Facility Addition,
or Long-Term Change to Operations; here, that party is
PG&E. The “Coordinating Party” is the party whose System
may be subject to an Adverse Impact from the change; here,
those parties are the Districts.
A “Modification” is the “removal of, or physical change
to, any element of either Party’s then currently existing
System”; this includes changes to any “electric transmission
facility.” A “Long-Term Change to Operations” is an action
taken by a party that “materially alters, on a long-term basis,
the configuration or other operational characteristics of its
System.” One action that may qualify as a Long-Term
1
Following the practice of the parties, we capitalize terms that are
defined in the Interconnection Agreements.
8 TURLOCK IRRIGATION DIST. V. FERC
Change to Operations is “materially modifying a Remedial
Action Scheme.” 2
An “Adverse Impact” is an effect on the Coordinating
Party’s “System” that either “materially degrades reliability”
or “materially reduces” the ability of the Coordinating Party
to “physically transfer power into, out of, or within” its
System. A party’s “System” consists of all properties and
assets “which are leased to, licensed to, owned (or jointly-
owned) by, or controlled” by that party.
If a Coordinating Party has a “reasonable belief” that a
Primary Party did not provide the notice required by Section
9.11.1(a) and proceeded with a Modification, New Facility
Addition, or Long-Term Change to Operations that “may
result or may have resulted in an Adverse on the System of
the Coordinating Party,” then the Coordinating Party may
demand that the Primary Party conduct a study pursuant to
Section 9.11.1(b). Moreover, pursuant to Section 9.11.2,
any party can request a joint study of any proposed
Modification, New Facility Addition, or Long-Term Change
to Operations of its System that “may reasonably be
expected to result in an Adverse Impact.”
C
The California Department of Water Resources (“the
Department”) entered into a contract with PG&E in 1982
(the “State Water Contract”). Under the State Water
Contract, PG&E provided the Department with
interconnection services of the Department’s plants and
facilities in PG&E’s service area and firm physical electric
2
No party contends that a “New Facility Addition” is at issue in this
petition.
TURLOCK IRRIGATION DIST. V. FERC 9
transmission service. In order to address the Department’s
needs to transmit large amounts of electric power, the
Department agreed to participate in a Remedial Action
Scheme.
A Remedial Action Scheme is an automatic protection
system designed to detect abnormal or predetermined system
conditions on a transmission grid and take corrective actions
to maintain the reliability of the system. A Remedial Action
Scheme typically consists of controllers or advanced
microprocessor devices that monitor the system and that
issue digital signals to initiate the operation of transmission
devices. The Department’s participation in the Remedial
Action Scheme entailed interrupting the Department’s
pumping loads and generation. Its participation had the
effect of increasing the transfer capability of the California-
Oregon Intertie 3 to the benefit of all users.
Under its own terms, the State Water Contract would
expire on December 31, 2014. Before the termination, the
Department notified PG&E that it would not continue
participating in the Remedial Action Scheme upon the
expiration of the State Water Contract. Though the
Department would stop participating, the physical Remedial
Action Scheme infrastructure would remain in place. PG&E
would not modify or remove any of the physical assets of the
Remedial Action Scheme system when the State Water
Contract terminated. PG&E would only re-program the
3
The California-Oregon Intertie is the northern part of a three-line
system that transfers electricity between the Pacific Northwest and
central California. The California-Oregon Project is one of the three lines
that is part of the California-Oregon Intertie.
10 TURLOCK IRRIGATION DIST. V. FERC
controllers’ logic so that system conditions would no longer
initiate actions that cut off the Department’s facilities.
In spring 2014, the Districts approached Cal-ISO and
PG&E to raise concerns regarding the potential impact to
their Systems from losing The Department’s participation in
the Remedial Action Scheme upon the termination of the
State Water Contract. The subsequent discussions among
the Districts and PG&E focused on two areas where the
Districts were concerned that Adverse Impacts might occur:
(1) in the service territories of each District (including the
jointly-owned Westley substation and 230 kV transmission
lines), and (2) at the California-Oregon Intertie, including
the California-Oregon Project.
PG&E determined there was not a reasonable likelihood
of any Adverse Impact to the service territories of the
Districts due to the termination of the Department’s
participation in the Remedial Action Scheme. Based on the
design of the Remedial Action Scheme, PG&E determined
that the expiration of the State Water Contract would not
impact the transmission lines that interconnected to the
Districts’ Systems. In addition, while there could be
minimal impacts to the grid south of the Districts’ Systems,
PG&E determined that Cal-ISO would manage the grid
through congestion management without affecting the
Districts’ Systems. PG&E concluded that losing the
Department’s participation in the Remedial Action Schemes
was not likely to impact the reliability of either District’s
service territory or reduce either District’s ability to
physically transfer power into, out of, or within either its
service territory.
Nonetheless, the Districts maintained concerns about the
potential impact on the California-Oregon Project and, in
turn, their ability to transfer power into their Systems.
TURLOCK IRRIGATION DIST. V. FERC 11
PG&E responded that the California-Oregon Project was not
a part of the Districts’ Systems and therefore not covered by
the Interconnection Agreements. PG&E also noted that the
majority owner of the California-Oregon Project, the
Transmission Agency of Northern California (of which the
Districts are members), was studying impacts to the
California-Oregon Project. PG&E felt it was unnecessary to
perform additional studies with the Districts to assess the
potential loss of The Department of Water Resources’s
participation in the Remedial Action Scheme on the
California-Oregon Project. PG&E refused to participate in
the studies requested by the Districts.
D
In March 2015, the Districts filed a complaint against
PG&E. The Complaint argued that: (1) PG&E breached the
notice requirement of Section 9.11.1(a) by failing to provide
reasonable and timely notice of its actions; (2) PG&E
breached the study requirements of Sections 9.11.1(b) and
9.11.2 by refusing to participate in the requested study; and
(3) PG&E anticipatorily breached the mitigation and
compensation requirements of Section 9.11.3 by refusing to
mitigate any Adverse Impacts that the requested study might
identify.
In July 2015, FERC issued the Complaint Order denying
the Complaint. Modesto Irrigation Dist. and Turlock
Irrigation Dist. v. Pac. Gas & Elec. Co., 152 FERC ¶ 61,016
(2015) (“Complaint Order”). FERC held that because the
California-Oregon Project is not a facility within the
Districts’ Systems, any reductions on transfer capability
caused by reprogramming of the Remedial Action Scheme
would not qualify as Adverse Impacts on the Districts’
Systems. FERC also found that the record did not reflect
any “likely” downstream Adverse Impacts on the Districts’
12 TURLOCK IRRIGATION DIST. V. FERC
Systems from reprogramming of the Remedial Action
Scheme. FERC adopted findings of the Cal-ISO
Transmission Planning Process studies and PG&E’s own
analyses that reprogramming of the Remedial Action
Scheme “was not likely” to impact the Districts’ Systems or
their ability to transfer power into, out of, or within those
Systems. In August 2015, the Districts requested rehearing
of FERC’s Complaint Order. In March 2016, FERC denied
rehearing and affirmed its ruling from the Complaint Order.
Modesto Irrigation Dist. and Turlock Irrigation Dist. v. Pac.
Gas & Elec. Co., 154 FERC ¶ 61,215 (2016) (the “Rehearing
Order”). The Districts timely petitioned for review of
FERC’s two orders.
II
We have jurisdiction over this petition pursuant to
16 U.S.C. § 825l. We review FERC’s orders determine
whether its action was “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.”
5 U.S.C. § 706(2)(A); see also Fall River Rural Elec. Coop.,
Inc. v. FERC, 543 F.3d 519, 525 (9th Cir. 2008). “A court
is not to ask whether a regulatory decision is the best one
possible or even whether it is better than the alternatives.”
FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760, 782
(2016). Rather, the court must uphold a decision if the
agency has “examined the relevant considerations and
articulated a satisfactory explanation for its action, including
a rational connection between the facts found and the choice
made.” Id. (alteration brackets omitted) (quoting Motor
Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Our review “is
limited to . . . the administrative record,” Envtl. Coal. of Ojai
v. Brown, 72 F.3d 1411, 1414 (9th Cir. 1995), and to those
“grounds upon which . . . the record discloses that [the
TURLOCK IRRIGATION DIST. V. FERC 13
agency’s] action was based.” SEC v. Chenery Corp.,
318 U.S. 80, 87 (1943).
We generally review FERC’s interpretations of contracts
de novo, but we defer to FERC’s interpretation when it relies
on FERC’s technical expertise. See Pac. Gas & Elec. Co. v.
FERC, 746 F.2d 1383, 1387 (9th Cir. 1984) (holding that
FERC’s interpretation was entitled to deference because it
was “clearly based upon the agency’s expertise in electricity
transmission regulation”); cf. Texas Gas Transmission Corp.
v. Shell Oil Co., 363 U.S. 263, 268–70 (1960) (affirming the
de novo standard of review applied by the appellate court to
an agency’s interpretation of a non-technical contract
clause); Nicor Expl. Co. v. FERC, 50 F.3d 1341, 1347 (5th
Cir. 1995) (in natural gas context, noting that “we generally
do not defer to the Commission’s interpretation of gas
supply contracts unless the Commission relied on its factual
or technical expertise in reaching its conclusions.”).
III
FERC’s orders were based on its interpretation of the
term “Adverse Impact” in the Interconnection Agreements.
FERC concluded that PG&E had not breached its obligations
under the study requirements, because the California-
Oregon Project was not part of the Districts’ Systems and
thus any transmission constraints on the Project would not
be Adverse Impacts. This conclusion depended on FERC’s
overly narrow interpretation of an Adverse Impact., and we
thus hold that FERC’s orders were arbitrary and capricious.
A
Section 4.2 of the Interconnection Agreements defines
an Adverse Impact as:
14 TURLOCK IRRIGATION DIST. V. FERC
An effect on a Coordinating Party’s System
resulting from a Modification, New Facility
Addition, or Long-Term Change to
Operations to the Primary Party’s System
that: (1) materially degrades reliability of the
Coordinating Party’s System or
(2) materially reduces the ability of the
Coordinating Party’s System to physically
transfer power into, out of, or within said
System as compared to the transmission
system and generation facilities that are
agreed by the Parties to be in service before
implementation of the proposed
Modification, New Facility Addition, or
Long-Term Change to Operations . . . .
FERC never offers an explicit interpretation of this
provision. However, we can discern FERC’s interpretation
from the conclusions in its orders and from its assertions at
oral argument. As FERC interprets the provision, an
Adverse Impact must be a direct, physical effect on a line or
component inside a District’s System. It cannot be a
physical effect on a line or component outside of a District’s
System that makes it more difficult for a District to transfer
power into its System. For example, a Long-Term Change
to Operations that causes constraints on the California-
Oregon Project and reduces the Districts’ ability to transfer
power over from the Pacific Northwest into their Systems
would not be an Adverse Impact. This implicit interpretation
can be found in FERC’s Rehearing Order, where it states that
it “found it dispositive that the California-Oregon
Transmission Project was not part of the Districts’ Systems.”
Rehearing Order at P 26. FERC concluded that the Districts
had not shown that PG&E had breached the Interconnection
Agreements “because the Districts failed to establish that an
TURLOCK IRRIGATION DIST. V. FERC 15
Adverse Impact to their Systems might result in the first
instance.” Rehearing Order at P 27.
This interpretation is grounded in a distinction between
“reliability impacts” and reductions in import capability. By
“reliability impacts,” FERC seems to mean the degradation
of physical components of the Districts’ own Systems. By
reductions in import capability (sometimes referred to as
“operational” impacts), FERC seems to mean transmission
constraints on the broader power grid that make it difficult
for the Districts to access the power from where they want,
when they want, within their contractual rights. 4 For
example, FERC’s Rehearing Order states:
Moreover, while there may be capacity
reductions on the California-Oregon
Transmission Project, the Districts’
allocation of transmission capacity on that
facility is governed by the Districts’
membership in TANC and TANC’s rights
and obligations under the Operation
Agreement. Those rights are not considered
4
As FERC notes, this distinction has appeared in prior orders. See
Transmission Agency of N. Cal. v. Pac. Gas & Elec. Co., 148 FERC
¶ 61,150, 61,782 (2014) (distinguishing system reliability concerns from
“concerns regarding a potential reduction in import capability that could
follow the discontinuation of the . . . remedial action schemes”);
Transmission Agency of N. Cal. v. Pac. Gas & Elec. Co., 150 FERC
¶ 61,133, 61,948 (2015) (“While operational flexibility is related to
reliability in a general sense, the concepts are not interchangeable. We
reemphasize that there is a difference between impacts to reliability and
impacts to operational flexibility stemming from potential reductions in
import capability.” (footnotes omitted)).
16 TURLOCK IRRIGATION DIST. V. FERC
part of the Districts’ Systems as defined in the
Interconnection Agreements.
Rehearing Order at P 27. FERC later stated that it
“recognize[s] the significance of import capability over [the
California-Oregon Transmission Project] and the associated
benefits of accessing economy capacity and energy and
coordinating actions; however, these operational aspects are
separate from reliability impacts.” Rehearing Order at P 34.
Under FERC’s interpretation, only reliability impacts can
qualify as Adverse Impacts.
FERC’s orders thus distinguished between impacts to the
internal reliability of the Districts’ Systems and impacts to
the Districts’ ability to import power into their Systems.
Under FERC’s interpretation, only the former can qualify as
Adverse Impacts.
B
As noted above, we may defer to FERC’s interpretation
of a contract when that interpretation reflects the agency’s
expertise. Pac. Gas & Elec. Co., 746 F.2d at 1387. Here,
FERC’s specialized knowledge of interconnected electrical
systems may very well have informed its understanding of
what qualifies as an “Adverse Impact” and, specifically, as a
“reliability impact.” But FERC forfeited any deference it
might otherwise have been owed by failing to demonstrate
how its interpretations reflect its expertise in this area, or are
typical of how those terms are used in the industry—or,
indeed, by failing to even explain clearly how it interprets
the terms at all. 5 There in fact is a statutory definition of the
5
Because, as we explain below, FERC’s apparent understanding of
“reliability impacts” necessarily informs the understanding of the
TURLOCK IRRIGATION DIST. V. FERC 17
term “reliable operation,” Federal Power Act, 16 U.S.C.
§ 824o, that arguably supports FERC’s understanding of
“reliability impacts,” but it was not mentioned in FERC’s
orders or in its briefs. See Orr v. Plumb, 884 F.3d 923, 932
(9th Cir. 2018) (“The usual rule is that arguments raised for
the first time on appeal or omitted from the opening brief are
deemed forfeited.”). Because FERC’s interpretations are
therefore not “clearly based upon the agency’s expertise in
electricity transmission regulation,” our review is de novo.
See Pac. Gas & Elec. Co., 746 F.2d at 1387.
Interpreting the contract de novo, we conclude that the
contract’s use of the term Adverse Impact can include
reductions in import capability over the California-Oregon
Project.
1
As relevant here, Section 4.2 defines an Adverse Impact
as an effect on a District’s System from a Long-Term
Change to Operations that “(1) materially degrades
reliability of the [District’s] System or (2) materially reduces
the ability of the [District’s] System to physically transfer
power into, out of, or within said System . . .” (emphasis
added). The disjunctive “or” makes clear that reliability
degradation is only one type of Adverse Impact. A reduction
in the ability to transfer power into or out of a District’s
System is a second, and distinct, type of Adverse Impact.
FERC and PG&E urge us to read the second prong as
essentially a repetition of the first: that is, as only concerning
degradation of the physical components of a District’s
“ability to physically transfer” aspect of the definition of “Adverse
Impact,” the ambiguity in FERC’s order infects its interpretation of the
entire definition.
18 TURLOCK IRRIGATION DIST. V. FERC
System. However, the use of “or” makes clear that if
reliability impacts involve degradation of physical
components internal to the Districts’ Systems (as FERC
asserts), then reductions in transfer capability must involve
something different. We conclude that the plain meaning of
Section 4.2 includes impacts outside of the Districts’
Systems that reduce their ability to transfer power over the
California-Oregon Project and into their Systems. These
“operational” effects, although they do not directly impact
the physical components of the Districts’ Systems, are
effects on those Systems under Section 4.2, and they can
constitute Adverse Impacts.
2
The interaction between Section 4.2 and Appendix B of
the Interconnection Agreements bolsters this conclusion.
Section 4.2 of Modesto’s Interconnection Agreement
provides that “the Parties agree that the projects listed in
Appendix B shall not result in an Adverse Impact on either
Party’s System.” Section 4.2 of Turlock’s Interconnection
Agreement provides that certain commitments made
elsewhere “act to mitigate any Adverse Impacts caused by
the projects listed in Appendix B,” and thus that “Adverse
Impacts caused by projects under construction and listed in
Appendix B will not need to be further mitigated.” The clear
implication of these provisions is that the projects listed in
Appendix B are the kinds of projects that otherwise could
cause Adverse Impacts.
Significantly, Appendix B includes the Panoche Energy
Center (“Panoche”). The Districts submitted an affidavit
from Larry Gilbertson, Assistant General Manager for the
Turlock Irrigation District, who explained that the
interconnection of Panoche to PG&E’s System would not
cause any overloads on the Districts’ facilities within their
TURLOCK IRRIGATION DIST. V. FERC 19
service areas. Gilbertson Aff. at ¶¶ 30–31. However, the
interconnection of Panoche could have exacerbated loading
on PG&E’s System, which would in turn reduce the
Districts’ ability to transfer power into or out of their
Systems. Id. PG&E agreed to preempt such Adverse
Impacts by undertaking a project to rebuild one of its lines
to prevent constraints on power transfer. Id.
Thus, the parties included Panoche in Appendix B
because it was the kind of project that could have caused an
Adverse Impact, but which the parties agreed to exempt from
notice and study requirements of the Interconnection
Agreement. That the parties believed that Panoche could
cause an Adverse Impact even though it would have no
physical effect on components of the Districts’ Systems
suggests that the definition of an Adverse Impact
encompasses not merely physical effects within the
Districts’ Systems, but also effects outside the Districts’
Systems that constrain their ability to transfer power into or
out of their Systems.
3
Furthermore, FERC’s definition of an Adverse Impact
would render meaningless another provision of the
Interconnection Agreements. One of the events that can
trigger an Adverse Impact is a “Long-Term Change to
Operations.” The Interconnection Agreements provide a
non-exhaustive list of “examples of actions and events that
qualify as a Long-Term Change to Operations,” the first of
which is “disarming or materially modifying a Remedial
Action Scheme.” Turlock Interconnection Agreement,
§ 4.24; see also Modesto Interconnection Agreement,
§ 4.23. As FERC acknowledged in its Rehearing Order, the
purpose of the Remedial Action Scheme is to support daily
operating limits of north-to-south imports through the
20 TURLOCK IRRIGATION DIST. V. FERC
California-Oregon Intertie, which includes the California-
Oregon Project and two other PG&E lines. Rehearing Order
at P 2. All of these lines are external to the Districts’
Systems.
Under FERC’s interpretation of Adverse Impact,
overloads on the California-Oregon Project could never
qualify as Adverse Impacts, even if they limited the ability
of the districts to transfer power into or out of their Systems.
Because the purpose of the Remedial Action Scheme is only
to protect against such overloads, FERC’s interpretation
would render meaningless the inclusion of “modifying a
Remedial Action Scheme” in the definition of Long-Term
Change to Operations. We will not interpret a contract so as
to render one of its provisions meaningless. See, e.g.,
Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc.,
971 F.2d 272, 278–79 (9th Cir. 1992) (rejecting
interpretation of contract that “violates a fundamental rule of
contract interpretation because it would render other
portions of the contract meaningless” (citing Cal. Civ. Code
§ 1641)).
4
The plain text of Section 4.2, in conjunction with other
provisions of the Interconnection Agreements, make clear
that FERC’s interpretation of “Adverse Impact” is too
narrow. “Reliability” impacts may be limited to effects on
the physical functioning of components internal to the
Districts’ Systems, but reliability impacts are only one side
of the Adverse Impact coin. Impacts to the California-
Oregon Project that make it more difficult for the Districts
to transfer power into their Systems from their resources in
the Pacific Northwest can also constitute Adverse Impacts.
TURLOCK IRRIGATION DIST. V. FERC 21
C
Adverse Impacts can include changes that risk
overloading the California-Oregon Project and limiting the
Districts’ ability to transfer power into, out of, or within their
Systems. FERC’s orders denying the complaint and denying
rehearing relied on a contrary interpretation. See Rehearing
Order at P 26 (holding that it is “dispositive that the
California-Oregon Transmission Project was not part of the
Districts’ Systems”). Because these orders misinterpreted
the Interconnection Agreements that FERC was construing,
they were arbitrary and capricious.
IV
In making factual findings, FERC applied the wrong
standard for initiating a study under the Interconnection
Agreements. Aside from their misinterpretation of Adverse
Impact, the orders were thus arbitrary and capricious for this
additional reason.
A
In a series of provisions, the Interconnection Agreements
set low thresholds for requiring PG&E to provide notice of
a study or for the Districts to demand a study in the absence
of such notice. Section 9.11.1(a) provides that, if PG&E
intends to make a Long-Term Change to Operations “that
may reasonably result in an Adverse Impact” to a District’s
System, it must provide that District with written notice.
Section 9.11.1(b) provides that if PG&E does not provide
such notice, a District may demand a study if it has a
“reasonable belief” that the Long-Term Change to
Operations “may result or may have resulted in an Adverse
Impact” on its System. Finally, Section 9.11.2 provides that,
if requested by a District, PG&E must participate in a joint
22 TURLOCK IRRIGATION DIST. V. FERC
study of any proposed changes “that may reasonably be
expected to result in an Adverse Impact.” This joint study
requirement is meant to verify a party’s belief that an
Adverse Impact may occur as a result of a change. Section
9.11.2 further explains that a joint study will “determine the
potential for, and magnitude of, such Adverse Impact and
identify feasible avoidance or mitigation measures for the
impact.” Collectively, these provisions set low thresholds
for the showing a District must make to demand a study or
joint study. They plainly do not require a party requesting a
study to show that an Adverse Impact is likely before the
study has been conducted.
At certain points in its orders, FERC properly recited or
paraphrased the language from the Interconnection
Agreements setting out the low standard for demanding a
study. See Complaint Order at PP 12, 25; Rehearing Order
at n.7, PP 26, 36. However, when it made factual findings,
FERC held the Districts to a higher standard. In finding that
PG&E’s actions did not constitute a breach of Section 9.11,
FERC held that “while it is possible that transmission
constraints on facilities outside the Districts’ Systems could
present reliability concerns and require mitigation measures
. . . the record does not demonstrate that changes to the
remedial action scheme discussed herein will have such a
result.” Rehearing Order at P 28 (emphasis added). FERC
also stated that “‘the record reflects no supporting evidence
regarding the likely impact on [the Districts’] Systems’ due
to the remedial action scheme reprogramming.” Rehearing
Order at P 29 (emphasis added). FERC thus appears to have
required the Districts to meet a higher threshold than that
provided by the Interconnection Agreements (and recited
earlier in its orders). Rather than requiring the Districts to
show that they have a reasonable belief that ending the
Remedial Action Scheme “may result” or “may reasonably
TURLOCK IRRIGATION DIST. V. FERC 23
be expected to result in an Adverse Impact,” FERC appeared
to require that the Districts establish conclusively that an
Adverse Impact was likely without the benefit of a study
being conducted.
The Administrative Procedure Act requires that agencies
engaged in “reasoned decisionmaking.” State Farm, 463
U.S. at 52. The Supreme Court has held that it is a breach of
the requirement of reasoned decisionmaking to “apply[] . . .
a standard of proof which is in fact different from the . . .
standard formally announced.” Allentown Mack Sales &
Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998). By applying
a different standard of proof than the one provided in the
Interconnection Agreements and enunciated earlier in its
orders, FERC breached the requirement of reasoned
decisionmaking. Its orders were arbitrary and capricious.
B
FERC’s arguments to the contrary are not persuasive.
FERC first argues that we should defer to its interpretation
of what is needed to show that a change “may result” in an
Adverse Impact, because it applied its expertise in electricity
regulation in determining the meaning of that phrase.
However, as with its interpretation of an Adverse Impact,
FERC did not explicitly rely on any technical expertise in
interpreting the “may result” language. In the absence of
evidence that FERC’s interpretation was “clearly based” on
its technical expertise, we do not defer to that interpretation.
See Pac. Gas & Elec. Co., 746 F.2d at 1387.
FERC then argues that while it did not recite the “may
result” language throughout its orders, it did not purport to
alter that evidentiary requirement. We cannot conclude,
however, that FERC merely overstated its factual findings.
We can only judge FERC’s orders on the basis of the
24 TURLOCK IRRIGATION DIST. V. FERC
administrative record before us, Chenery, 318 U.S. at 87, and
that record does not show FERC assessing whether the
Districts met the lower “may result” threshold.
Moreover, were we to take FERC at its word and conduct
substantial-evidence review under the “may result” standard,
we would still conclude that FERC’s orders are arbitrary and
capricious. Given the low threshold for demanding a study,
the undisputed record indicates that Districts met their
burden. The Districts established that they had a reasonable
belief that PG&E’s reprogramming of the Remedial Action
Scheme would result in transmission constraints on the
California-Oregon Project. Turlock affiant Gilbertson stated
that if the reprogramming went unmitigated, it would “likely
cause significant reductions in” transmission capacity and
scheduling capacity in the California-Oregon Project.
Gilbertson Aff. at ¶ 75. Modesto affiant Gregory Salyer
stated that reprogramming would “provide a high likelihood
of significant, decreased transfer capability” over the
California-Oregon Project. Salyer Aff. at ¶ 26. In an
affidavit submitted to FERC, PG&E even conceded that
reprogramming the Remedial Action Scheme could cause
constraints on the California-Oregon Project. Affiant
Anupama Pandey stated that “the loss of [The Department
of Water Resources’s] participation in [the Remedial Action
Scheme] will have a limited impact on the” California-
Oregon Project, including a “curtailment” of the California-
Oregon Project in certain instances. Pandey Aff. at ¶ 33.
FERC’s own orders establish that the Districts met the
low threshold for requesting a study. Immediately before
concluding that there was no evidence that changes to the
Remedial Action Scheme “will” or are “likely” to have an
Adverse Impact, FERC stated that “it is possible that
transmission constraints on facilities outside of the Districts’
TURLOCK IRRIGATION DIST. V. FERC 25
Systems could present reliability concerns and require
mitigation measures.” Rehearing Order at P 28. This
finding of a “possible” Adverse Impact alone would likely
satisfy the low threshold for requesting a study under either
Section 9.11.1(b) or Section 9.11.2. FERC also observed
that “there may be capacity reductions on the California-
Oregon Transmission Project” as a result of Remedial
Action Scheme reprogramming, before dismissing such
effects as outside the scope of an Adverse Impact. 6
Rehearing Order at P 27. This finding, too, would likely
satisfy the low threshold for requesting a study.
C
FERC applied the wrong standard for initiating a study
under the Interconnection Agreements. Its orders rested on
a conclusion that the Districts had not met a higher standard
for initiating a study. Those orders were arbitrary and
capricious.
V
FERC misinterpreted the definition of Adverse Impact,
and thus improperly disposed of the Districts’ complaint
without determining whether changes to the Remedial
Action Scheme may result in reductions in transmission
capacity over the California-Oregon Project. FERC also
applied the wrong standard for initiating a study when
making its factual findings. Thus, we grant the petition and
remand to FERC for further proceedings. On remand, FERC
should apply the broader definition of Adverse Impact that
includes reductions in import capability over the California-
6
As discussed supra section III.B, this conclusion was based on a
misinterpretation of the definition of Adverse Impact.
26 TURLOCK IRRIGATION DIST. V. FERC
Oregon Project and the proper standard for requesting a
study in determining whether PG&E breached the
Interconnection Agreements.
PETITION GRANTED.