Cpuc v. Ferc

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CALIFORNIA PUBLIC UTILITIES No. 19-72897
COMMISSION; TRANSMISSION AGENCY
OF NORTHERN CALIFORNIA;
SACRAMENTO MUNICIPAL UTILITY
DISTRICT,
Petitioners,
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent,
______________________________
CALIFORNIA DEPARTMENT OF WATER
RESOURCES STATE WATER PROJECT;
PACIFIC GAS AND ELECTRIC
COMPANY; SAN DIEGO GAS &
ELECTRIC COMPANY; SOUTHERN
CALIFORNIA EDISON COMPANY,
Intervenors.
2 CPUC V. FERC
CALIFORNIA PUBLIC UTILITIES No. 20-71335
COMMISSION; CALIFORNIA
DEPARTMENT OF WATER RESOURCES; FERC Nos.
NORTHERN CALIFORNIA POWER ER14-2529-005
AGENCY; SACRAMENTO MUNICIPAL ER15-2294-004
UTILITY DISTRICT; TRANSMISSION ER16-2320-005
AGENCY OF NORTHERN CALIFORNIA,
Petitioners,
OPINION
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent,
______________________________
PACIFIC GAS AND ELECTRIC
COMPANY,
Intervenor.
On Petition for Review of an Order of the
Federal Energy Regulatory Commission
Argued and Submitted April 16, 2021
San Francisco, California
Filed March 17, 2022
CPUC V. FERC 3Before: Ryan D. Nelson and Danielle J. Forrest, Circuit
Judges, and Janis Graham Jack, * District Judge.
Opinion by Judge Forrest
SUMMARY **
FERC
The panel denied petitions for review filed by the
California Public Utilities Commission and other state
agencies (“California”), and concluded that several Federal
Energy Regulatory Commission (“FERC”) decisions,
awarding “incentive adders” – upward adjustments to
utilities’ rate of return on equity – to three California-based
public utilities, were lawful.
On remand from this court’s prior decision, Cal. Pub.
Utils. Comm’n v. FERC, 879 F.3d 966 (9th Cir. 2018)
(CPUC I), FERC concluded that membership in the
California independent system operator (CAISO) was
voluntary under California law.
California argued that FERC’s orders on remand
disregarded and contradicted CPUC I because CPUC I
definitively held that California law prevented the Utilities
(intervenors PG&E, Southern California Edison Co., and
*
The Honorable Janis Graham Jack, United States District Judge for
the Southern District of Texas, 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.
4 CPUC V. FERC
San Diego Gas & Electric) from leaving CAISO without
approval. The panel held that CPUC I did not resolve this
state law issue. In CPUC I, the court addressed whether
FERC could ignore the CPUC’s assertion that membership
in CAISO is not voluntary, but the court did not reach the
merits of that issue. The panel concluded that in deciding on
remand that California law allowed utilities to voluntarily
leave CAISO, FERC did not decide an issue that this court
had already decided. Furthermore, the panel held that FERC
did not deviate from this court’s mandate.
Next, the panel reviewed the merits of FERC’s orders on
remand for arbitrariness and capriciousness.
First, California argued that it was error for FERC not to
apply the Erie doctrine and defer to California’s
interpretation of its own statute. The panel held that Erie
does not apply here. The incentive adder and the
requirement that a utility be a voluntary member of an
independent system operator (ISO) to qualify for the
incentive adder arose from federal law. The panel held that
it was not arbitrary or capricious nor contrary to law for
FERC to conclude that the Erie doctrine did not strictly
apply here and not to employ all the requirements of that
doctrine.
Second, California argued that FERC’s interpretation of
California law as allowing the Utilities to leave CAISO
voluntarily was erroneous. Concerning the standard of
review used to determine whether FERC properly
interpreted state law, the panel held that FERC’s
interpretation of California law was not entitled to deference.
The panel applied de novo review. The California Supreme
Court has not decided whether membership in CAISO is
voluntary under California law. Although the panel’s review
CPUC V. FERC 5
was de novo, in CPUC I, the court previously interpreted
Order 679 as creating a rebuttable presumption that
membership was voluntary. Therefore, California bore the
burden of showing that state law made membership
involuntary. The panel noted that there was no provision in
the California Code that mandates CAISO membership, and
no case law that decides or discusses whether utilities who
become CAISO members must remain such. A CPUC 1998
Decision stated that future transfers of operational control of
transmission facilities would be subject to review under Cal.
Public Utility Code § 851, thus making ongoing membership
involuntary. The panel held that California courts would not
defer to the CPUC’s 1998 Decision because it was
inconsistent with the relevant California statute, § 851. The
panel found no error in FERC’s conclusion that membership
in CAISO was voluntary under California law despite the
suggestion to the contrary in the CPUC’s 1998 Decision. As
such, FERC’s decision was not arbitrary, capricious, or
contrary to law under the Administrative Procedure Act.
COUNSEL
Stephanie E. Hoehn (argued), Arocles Aguilar, and Christine
Jun Hammond, San Francisco, California, as and for
Petitioner California Public Utilities Commission.
Harvey L. Reiter, Stinson LLP, Washington, D.C., for
Petitioner Sacramento Municipal Utility District.
Michael R. Postar, Duncan Weinberg Genzer & Pembroke,
Washington, D.C., for Petitioner Transmission Agency of
Northern California.
6 CPUC V. FERC
Katharine M. Mapes, Spiegel & McDiarmid, Washington,
D.C., for Intervenor/Petitioner California Department of
Water Resources and Petitioner Northern California Power
Agency.
Anand R. Viswanathan (argued), Attorney; Robert H.
Solomon, Solicitor; David L. Morenoff, Acting General
Counsel; Federal Energy Regulatory Commission,
Washington, D.C.; for Respondent.
Matthew W. Dwyer (argued), Rosemead, California, as and
for Intervenor Southern California Edison Company.
Alexandra J. Ward, San Francisco, California, as and for
Intervenor Pacific Gas and Electric Company.
Ross R. Fulton, San Diego, California, as and for Intervenor
San Diego Gas & Electric Company.
CPUC V. FERC 7OPINION
FORREST, Circuit Judge:
This case returns following our remand to the Federal
Energy Regulatory Commission (FERC) in 2018. See Cal.
Pub. Utils. Comm’n v. FERC, 879 F.3d 966, 980 (9th Cir.
2018) (CPUC I). At issue are several FERC 1 decisions
awarding “incentive adders”—upward adjustments to
utilities’ rate of return on equity—to three California-based
public utilities. FERC regulations allow for these incentive
adders to induce voluntary membership in independent
system operators. In CPUC I, we concluded that FERC
improperly awarded incentive adders to Pacific Gas &
Electric Co. (PG&E) without considering the California
Public Utilities Commission’s (CPUC) 2 assertion that
PG&E’s membership in the California independent system
operator (CAISO) is mandated. On remand, we directed
FERC to “inquire into PG&E’s specific circumstances, i.e.,
whether it could unilaterally leave the C[AISO] and thus
whether an incentive adder could induce it to remain in the
C[AISO].” Id. at 979.
On remand, FERC concluded that membership in
CAISO is voluntary under California law. The CPUC and
several other state entities (collectively, California) petition
for review of FERC’s orders on remand, arguing that FERC
violated this court’s mandate and that the orders are arbitrary
and capricious. FERC and intervenors PG&E, Southern
1
FERC is a federal agency with general regulatory authority over
the interstate market for electricity. 16 U.S.C. § 824(a)–(b).
2
The CPUC is a California state agency tasked with regulating
privately owned utility companies. See L.A. Metro. Transit Auth. v.
CPUC, 343 P.2d 913, 917 (Cal. 1959).
8 CPUC V. FERC
California Edison Co., and San Diego Gas & Electric Co.
(collectively, “Utilities”) disagree. We deny the petitions for
review, concluding that FERC’s decisions were lawful.
I. BACKGROUND
A. Transmission of Electricity
A brief discussion of the transmission or delivery of
electricity sheds some light on the arguments before us.
Historically, any consumer who wanted to obtain electrical
power had to purchase electricity from a single, local utility
company. See Midwest ISO Transmission Owners v.
FERC, 373 F.3d 1361, 1363 (D.C. Cir. 2004). This was
largely due to technological limitations related to power
generation. See New York v. FERC, 535 U.S. 1, 7–8 (2002).
As a result, utility companies held monopolies over their
local electricity market. Id. However, as technology
developed, it became more economically feasible for
consumers to buy electricity supplied by other sources. Id.Seeking to promote competition between electricity
producers, FERC began enacting rules to promote
competition in certain segments of the wholesale market. See
Morgan Stanley Cap. Grp. Inc. v. Pub. Util. Dist. No. 1 of
Snohomish Cnty., 554 U.S. 527, 536 (2008).
Nevertheless, monopolistic tendencies persist within the
transmission segment of the industry. New York, 535 U.S. at7–8. These tendencies result at least in part from a simple
fact: for electricity to reach a consumer’s lightbulb, it must
enter and pass through a transmission system, or
transmission grid. See Pub. Util. Dist. No. 1 of Snohomish
Cnty. v. FERC, 272 F.3d 607, 610 (D.C. Cir. 2001) (per
curiam). Consequently, the transmission-system owner has
natural gatekeeping powers and an incentive to favor its own
CPUC V. FERC 9
generation facilities in providing access to the electricity grid
(i.e., vertical integration). Id.To combat the economic harm resulting from vertical
integration, FERC encourages utility companies to transfer
operational control of their transmission facilities to regional
non-profit entities known as “transmission organizations,”
or “regional transmission organizations” (RTOs), that are
run by an “independent system operator” (ISOs). See
Midwest ISO, 373 F.3d at 1364; CPUC I, 879 F.3d at 971
n.2; see also 18 C.F.R. §§ 35.34, 35.35. Because RTOs and
ISOs are independent from market participants, FERC
hoped to ensure equal access to transmission facilities for all
producers, thereby maximizing competition. See Midwest
ISO, 373 F.3d at 1364; Morgan Stanley, 554 U.S. at 537.
B. CAISO and Federal Incentives
The federal government has not been alone in trying to
combat market inefficiencies caused by vertical integration,
which brings us to this case. In 1995, recognizing the
economic harm caused by vertical integration, the CPUC
“ordered [California’s] three largest investor-owned utilities
. . . to submit to FERC a proposal to establish an [ISO] and
to transfer operational control of their facilities to that ISO.”
CPUC I, 879 F.3d at 971; see Cal. Pub. Util. Code §§ 330,
365. The three utilities did so, and, in concert with FERC
and the CPUC, they transferred operational control of their
transmission facilities to the newly created CAISO. Id. In
approving the transfer, the CPUC asserted that any future
transfer of operational control back to the utilities from
CAISO would require the CPUC’s approval (“1998
Decision”).
Less than a decade later, FERC adopted Order 679.
CPUC I, 879 F.3d at 970; Promoting Transmission
10 CPUC V. FERC
Investment Through Pricing Reform, Order No. 679, 116
FERC ¶ 61,057, on reh’g, Order No. 679-A, 117 FERC
¶ 61,345 (2006), on reh’g, Order No. 679-B, 119 FERC
¶ 61,062 (2007) [hereinafter Order 679, Order 679-A, or
Order 679-B]; 16 U.S.C. § 824s(c). As previously explained
in CPUC I, this order established incentives for utility
companies to become and remain members of RTOs by way
of “incentive adders”:
Order 679 established upward adjustments,
or “incentive adders,” to the rate of return on
equity of utilities that participate in
transmission organizations. Order 679 set
forth the terms on which FERC would grant
the incentive adders. FERC determined that it
would “not grant outright any incentives,”
but that it would grant such incentives “when
justified” in the context of individual
declaratory orders or section 205 filings.
FERC would evaluate adder requests on a
“case-by-case basis.”
Order 679 provided that adders would be
available for utilities that “have already
joined, and that remain members of,”
transmission organizations in “recognition of
the benefits that flow from membership” and
the fact that “continuing membership is
generally voluntary.” The order stated that a
utility “will be presumed to be eligible for the
incentive” if it can demonstrate that it has
joined a transmission organization and that
its membership is ongoing.
879 F.3d at 970–71 (internal citations and footnote omitted).
CPUC V. FERC 11After FERC enacted Order 679, PG&E regularly
requested the incentive adders due to its ongoing
membership in CAISO, and FERC summarily granted these
requests to incentivize ongoing membership. Id. at 971–72;
Order 679-A, ¶ 86 n.142. But when PG&E requested the
adders in 2016 and 2017, the CPUC objected. CPUC I, 879
F.3d at 972. The CPUC argued that PG&E should not
receive the requested incentive adder because California law
mandated PG&E’s ongoing membership in CAISO, and thus
the adder could not induce PG&E to remain a member. Id.
FERC disagreed and summarily granted the adders over the
CPUC’s objection. California petitioned this court for
review. Id. at 972–73.
C. CPUC I
In 2018, we concluded that FERC’s summary decision
awarding an incentive adder to PG&E was arbitrary and
capricious. Id. at 973. We held that Order 679 “permits
challenges [like the CPUC’s] on the grounds that they will
not induce continuing participation in transmission
organizations,” and that Order 679 obligates FERC to
conduct a case-by-case review before awarding an incentive
adder. Id. at 977–79. Thus, our decision in CPUC I required
FERC to “inquire into PG&E’s specific circumstances, i.e.,
whether it could unilaterally leave the C[AISO] and thus
whether an incentive adder could induce it to remain in the
C[AISO].” Id. at 979. Responding to PG&E’s argument that
its continuing participation in the ISO was voluntary, we
noted that, “even if correct,” that argument could not sustain
the orders on review because it did not “appear anywhere in
those orders.” Id. at 978 n.5. We “remand[ed] to FERC for
further proceedings consistent with [our] opinion,” noting
that we “need not, and [did] not, reach any other issue.” Id.
at 980.
12 CPUC V. FERC
D. Remand Proceedings
On remand, FERC ordered the parties to brief the
following questions:
(a) Does California law require PG&E to
participate in CAISO?
(b) Is [FERC] required to defer to CPUC’s
interpretation of the relevant California
law(s) in this case that CPUC is charged with
administering when that interpretation is
presented in a pleading before [FERC]?
(c) If [FERC] is required to defer to CPUC’s
interpretation of the relevant California
law(s) as presented in its pleadings before
[FERC] in this case, what is the standard for
such deference that [FERC] must apply?
(d) If PG&E were to seek CPUC approval to
withdraw from CAISO and thus assume
operational control of its transmission
facilities or join another . . . ISO, what
standard would CPUC apply under the
California Public Utility Code in considering
this matter?
Before responding to FERC’s questions, California argued
that FERC had “misconstrued the scope of remand” ordered
in CPUC I. In California’s view, “the only outcome on
remand consistent with the Opinion and with Order 679 . . .
would be to deny PG&E the membership incentive.”
California answered FERC’s questions as follows:
CPUC V. FERC 13[T]he short answer to [FERC]’s questions is
that, under the long-settled principles
established in Erie R.R. v. Tompkins, 304
U.S. 64 (1938) and its progeny, FERC is
bound by the CPUC’s interpretation of
California law. In particular, the CPUC’s
unchallenged determination, made more than
twenty years ago, that PG&E, Southern
California Edison Company and San Diego
Gas & Electric Company must obtain CPUC
permission before they may leave the CAISO
is the controlling law of the case here.
California declined to define the level of deference FERC
owed to the CPUC’s interpretation of state law, stating only
that the CPUC’s interpretation was “binding.” California
further declined to clearly explain how it would evaluate
PG&E’s request to leave the CAISO, explaining only that it
would consider “controlling law,” “the public interest
standard,” and “specific circumstances.”
Not surprisingly, the Utilities have a different view. They
contend (1) that California law does not require them to
participate in CAISO; (2) that FERC should not defer to the
CPUC’s interpretation of the relevant statute any more than
a California court would; and (3) no approval is required for
them to leave CAISO, and even if it were, the standard that
the CPUC would apply in granting approval is unclear.
In its Order on Remand, FERC agreed with the Utilities
and reaffirmed the incentive adder. FERC determined that
the Erie doctrine did not apply because the incentive adder
is created by federal law. Still, in considering “PG&E’s
specific circumstances,” FERC considered whether
California law mandated PG&E’s participation in CAISO or
14 CPUC V. FERC
prevented it from leaving. FERC concluded that no
California statute compelled the Utilities’ membership and
that the CPUC’s 1998 Decision, stating that withdrawal from
the ISO is subject to the CPUC’s approval, was not
supported by California law. FERC relied on the plain
language of the relevant California statutes, canons of
construction used by the California Supreme Court, and a
D.C. Circuit case interpreting an analogous federal statute.
Based on its reasoning in the Order on Remand, FERC
issued two Remand Rehearing Orders. 3
California sought reconsideration, which FERC denied
after reiterating and elaborating on its conclusion that
California law does not mandate the Utilities’ participation
in CAISO or prevent them from withdrawing. Addressing
Erie, FERC explained that, while it interpreted California
law the same as the California Supreme Court would, Erie
did not govern the issue of whether awarding an incentive
adder, created by federal law, was appropriate:
In this proceeding, we are acting under
federal law as authorized by section 219 of
3
The orders on review resolve five separate cases. The Order on
Remand resolves the three PG&E cases at issue in CPUC I. The two
Orders on Rehearing resolve the other two rate cases relying, as stated,
on the Order on Remand. Thus, despite there being five rate cases at issue
and two consolidated petitions for review, the parties focus exclusively
on the Order on Remand and FERC’s later Remand Rehearing Orders
(which explain FERC’s reasoning in the Order on Remand). The parties
address this nuance only insofar as California argues that the logic of the
Remand Rehearing Orders cannot support the rehearing orders involving
the two rate cases not at issue in CPUC I because the Remand Rehearing
Orders postdate those decisions. In our view, the Remand Rehearing
Orders merely elaborate on the same reasoning FERC provided in its
Order on Remand, so this opinion resolves all five rate cases and both
petitions for review.
CPUC V. FERC 15the F[ederal] P[ower] A[ct] to determine
whether PG&E is entitled to the federal
transmission rate incentive. The fact that state
law could inform our determination does not
make Erie applicable or, as argued by
California Parties, require [FERC] to defer to
CPUC’s interpretation of state law.
California now seeks review of FERC’s orders entered
after remand. It argues that FERC ignored our mandate in
CPUC I and that the remand orders are arbitrary and
capricious because FERC failed to properly apply California
law. Essentially, California argues that FERC’s authority on
remand was limited to deferring to the CPUC’s
interpretation of California law and denying the incentive
adder. FERC and the Utilities contend that FERC’s remand
orders are permissible under CPUC I and are otherwise
lawful.
II. DISCUSSION
A. Scope of CPUC I’s Mandate
We review whether an agency followed our mandate de
novo. See Olivas-Motta v. Whitaker, 910 F.3d 1271, 1275,
1280 (9th Cir. 2018). Under the law-of-the-case doctrine,
courts are generally prohibited “from considering an issue
that has already been decided by that same court or a higher
court in the same case.” Stacy v. Colvin, 825 F.3d 563, 567
(9th Cir. 2016). The mandate rule is closely related “but
broader.” Id. “[A]n administrative agency may not deviate
from a supervising court’s remand order, and the reviewing
court may review the agency’s decision on remand ‘to assure
that its prior mandate is effectuated.’” Olivas-Motta, 910
F.3d at 1280 (quoting Sullivan v. Hudson, 490 U.S. 877, 886
(1989)). But this mandate rule is limited to those issues that
16 CPUC V. FERC
were before the court and “disposed of by its decree.” Id.(citation omitted). Thus, an agency may consider on remand
“any issue not expressly or impliedly disposed of” by the
court. Id. (quoting Stacy, 825 F.3d at 568).
California argues that FERC’s orders on remand
disregard and contradict CPUC I. The thrust of this argument
is that CPUC I definitively held that California law prevents
the Utilities from leaving CAISO without approval.
California greatly overstates the scope of our opinion in
CPUC I. We did not resolve this state-law issue. It is true
that there is one introductory statement that supports
California’s reading:
In this petition for review, we consider
whether the Federal Energy Regulatory
Commission arbitrarily and capriciously
determined that Pacific Gas & Electric
Company was eligible for an incentive adder
for remaining a member of the California
Independent System Operator
Corporation when state law prevented
PG&E’s departure without authorization.
CPUC I, 879 F.3d at 970 (emphasis added and abbreviations
omitted). But the rest of our opinion is silent on the state-law
issue; we never analyzed whether PG&E could leave without
the CPUC’s authorization. See id. Indeed, we expressly
noted that the Utilities were arguing that participation in
CAISO “[was,] in fact, voluntary” but did not address the
issue because “[t]hese arguments, even if correct, could not
sustain the orders on review, as they do not appear anywhere
in those orders.” Id. at 978 n.5. Further still, our CPUC I
opinion concludes by noting that we did not “reach any other
issue urged by the parties.” Id. at 980.
CPUC V. FERC 17Moreover, in CPUC I, we addressed only FERC’s
refusal to consider California’s arguments that CAISO
membership is involuntary. See id. at 979 (“FERC ignored
this argument”). That is, we addressed whether FERC could
ignore the CPUC’s assertion that membership in CAISO is
not voluntary, but we did not reach the merits of that issue.
Because we were addressing only a procedural issue, it did
not matter to our decision in CPUC I whether in fact “state
law prevented PG&E’s departure [from CAISO] without
authorization.” Id. at 970. Accordingly, we conclude that in
deciding on remand that California law allows utilities to
voluntarily leave CAISO, FERC did not decide an issue that
we have already decided.
Furthermore, we do not find that FERC deviated from
our mandate. Despite California’s assertion otherwise, we
did not direct FERC to adopt the CPUC’s interpretation of
California law and deny the incentive adder. We simply
remanded the case back to FERC for further proceedings and
instructed that “[t]o satisfy Order 679’s case-by-case
analysis requirement and to avoid creating a generic adder,
FERC needed to inquire into PG&E’s specific
circumstances, i.e., whether it could unilaterally leave the
C[AISO] and thus whether an incentive adder could induce
it to remain in the C[AISO].” Id. at 979–80. This is precisely
what FERC did, and thus we find no procedural error.
B. FERC’s Remand Orders
We review the merits of FERC’s orders on remand for
arbitrariness and capriciousness. CPUC I, 879 F.3d at 973.
We must uphold FERC’s decision if it “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. (quoting
FERC v. Elec. Power Supply Ass’n, 577 U.S. 260, 292
18 CPUC V. FERC
(2016)). We do not “ask whether [the] regulatory decision is
the best one possible or even whether it is better than the
alternatives.” Id. (quoting Elec. Power Supply Ass’n, 577
U.S. at 292). “Our review is limited to the administrative
record . . . and those grounds upon which the record
discloses that [FERC’s] action was based.” Id. (cleaned up).
As previously discussed, in CPUC I, we rejected FERC’s
assertion that Order 679 allowed it to grant incentive adders
to electric utilities without analyzing whether their continued
membership in CAISO was voluntary as “merely a
convenient litigating position and a post hoc rationalization
of the orders on review.” Id. at 976. “[E]mploy[ing]
traditional tools of interpretation,” id., we held that
Order 679 reflects “FERC’s policy of only providing
incentives to induce future voluntary conduct,” id. at 978.
Thus, it was arbitrary and capricious for FERC to depart
from its own policy and award incentive adders without
determining whether they were actually incentivizing
continued CAISO membership. Id. at 977–78.
In this appeal, the parties dispute whether FERC
conducted the “case-specific inquiry into the circumstances
of PG&E’s membership” that we directed. Id. Specifically,
California argues that (1) it was error for FERC not to apply
the Erie doctrine and defer to California’s interpretation of
its own statute, and (2) FERC’s interpretation of California
law as allowing the Utilities to leave CAISO voluntarily was
erroneous. We address each argument in turn.
1. The Erie Doctrine
The Erie doctrine dictates whether state or federal law
applies. “The source of the right sued upon, not the ground
on which federal jurisdiction is invoked,” is determinative.
Int’l Ord. of Job’s Daughters v. Lindeburg & Co., 633 F.2d
CPUC V. FERC 19912, 915 (9th Cir. 1980) (citing Maternally Yours v. Your
Maternity Shop, 234 F.2d 538, 540 n.1 (2d Cir. 1956)). Thus,
“[w]here state law supplies the rule of decision,” Erie
requires “federal courts to ascertain and apply that law.” In
re Exxon Valdez, 484 F.3d 1098, 1100 (9th Cir. 2007)
(citation omitted). The Erie doctrine “is inapplicable to
claims or issues created and governed by federal law.”
Maternally Yours, 234 F.2d at 540 n.1.
Erie does not apply here. The incentive-adder and the
requirement that a utility be a voluntary member of an ISO
to qualify for the incentive adder arise from federal law. See
Order 679 at ¶ 331. Indeed, California challenges the
incentive adder as contrary to FERC’s “voluntariness”
requirement. That California law dictates whether
membership in CAISO is voluntary does not change the
“source of the right sued upon” is federal law. But even
though Erie does not strictly apply, its test for ascertaining
state law—analyzing how the state supreme court would
decide the issue absent a definitive prior ruling—is
nonetheless a helpful framework where FERC must
determine a question of state law. Thus, we hold that it was
not arbitrary or capricious nor contrary to law for FERC to
conclude that the Erie doctrine does not strictly apply here
and not to employ all the requirements of that doctrine.
2. FERC’s voluntariness requirement
Turning to FERC’s conclusion that California law allows
electric utilities to voluntarily withdraw from CAISO, we are
again faced with a two-part question: (1) what standard of
review applies to FERC’s interpretation of California law;
and (2) did FERC’s interpretation of California law render
its orders arbitrary and capricious?
20 CPUC V. FERC
a. Standard of review
As previously stated, we review FERC’s overall decision
to determine whether it was “arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law.”
CPUC I, 879 F.3d at 973 (quoting 5 U.S.C. § 706). The
question here is what standard of review we apply when
determining whether FERC properly interpreted state law.
FERC is entitled to deference in interpreting federal laws
within its expertise. See Chevron U.S.A., Inc. v. Nat. Res.
Def. Council, Inc., 467 U.S. 837, 842–43 (1984); Ctr. for
Biological Diversity v. Zinke, 900 F.3d 1053, 1067 (9th Cir.
2018) (“Agency decisions deserve the highest deference
when the agency is making predictions, within its area of
special expertise.” (cleaned up)). But FERC does not have
expertise in interpreting California state law. As such,
FERC’s interpretation of California law is not entitled to
deference.
This conclusion is consistent with decisions from other
circuits. For example, in Cellwave Telephone Services LP v.
FCC, the D.C. Circuit acknowledged the arbitrary and
capricious standard in reviewing an FCC decision
determining a corporate entity’s status under state law. But
the D.C. Circuit reviewed de novo the FCC’s interpretation
of state law without giving the FCC deference. 30 F.3d 1533,
1535–38 (D.C. Cir. 1994).
Likewise, in Levy v. Office of Personnel Management,
the Federal Circuit considered whether the Merit Systems
Protection Board properly concluded that a former spouse
was entitled to federal retirement benefits under a California
divorce judgment. 902 F.2d 1550, 1552 (Fed. Cir. 1990).
While it reviewed the Board’s ultimate decision under the
arbitrary and capricious standard, the Federal Circuit
reviewed the Board’s interpretation of California law de
CPUC V. FERC 21novo without giving any deference. See id. at 1552–55. The
Federal Circuit rejected the agency’s argument that its
interpretation of state law was “reasonable,” noting that
“[n]o amount of deference can sustain a federal agency’s
interpretation of state law when, as here, the agency’s
interpretation is in direct conflict with decisions of the state’s
highest court.” Id. at 1554 n.8. After concluding that the
Board’s interpretation was “contrary to controlling
California law,” the Federal Circuit set aside the Board’s
decision as contrary to law. See id. at 1554 & n.8.
And in Walker Operating Corp. v. FERC, 874 F.2d 1320,
1332 (10th Cir. 1989), the Tenth Circuit indicated that
neither the court nor FERC need defer to a state agency’s
interpretation of state law as it implicates a federal issue. But
the Tenth Circuit upheld FERC’s interpretation of Texas law
noting that FERC’s interpretation was “well represented in
Texas law,” Texas statutes and regulations were “consistent
and harmonious with FERC’s position,” and thus there was
“overwhelming support for the reasonableness of FERC’s
definitional position.” Id. at 1333–34. FERC’s interpretation
of state law in Walker was therefore consistent with APA
review.
Even though existing caselaw is not definitive, general
principles of administrative law and the decisions just
discussed counsel us to conclude that deference to FERC’s
interpretation of California law is unwarranted. “Deference
is appropriate when the agency has expertise in a particular
area or the Congress has entrusted the agency to administer
a particular statute.” Cellwave, 30 F.3d at 1537 (citing
Chevron, 467 U.S. at 842). Giving deference in these
situations captures the “benefit of specialized experience”
that an agency possesses, which may be valuable when
facing “highly detailed” regulatory schemes. United States
22 CPUC V. FERC
v. Mead Corp., 533 U.S. 218, 235 (2001). The Supreme
Court also has given deference to an agency’s interpretation
of its own regulations in recognition of the agency’s role as
regulatory drafter. See Auer v. Robbins, 519 U.S. 452, 461
(1997).
The validity, scope, and meaning of these deference
principles is subject to much debate. See, e.g., Kisor v.
Wilkie, 139 S. Ct. 2400, 2426 (2019) (Gorsuch, J.,
concurring) (criticizing Auer deference as it “requires judges
to accept an executive agency’s interpretation of its own
regulations even when that interpretation doesn’t represent
the best and fairest reading.”); Pereira v. Sessions, 138 S. Ct.
2105, 2121 (2018) (Kennedy, J., concurring) (“[I]t seems
necessary and appropriate to reconsider, in an appropriate
case, the premises that underlie Chevron and how courts
have implemented that decision.”); Michigan v. EPA, 576
U.S. 743, 760 (2015) (Thomas, J., concurring) (questioning
the “constitutionality of our broader practice of deferring to
agency interpretations of federal statutes.”); Perez v. Mortg.
Bankers Ass’n, 575 U.S. 92, 133 (2015) (Thomas, J.,
concurring) (“[T]he entire line of precedent [behind Auer
deference] raises serious constitutional questions and should
be reconsidered in an appropriate case.”). But applying these
principles, as we must, none of the justifications that support
giving deference to federal agencies apply here where FERC
is interpreting California law, not its own regulations.
While FERC has expertise in electricity regulation, it
does not have specific expertise in California public policy
or interpreting California law, nor has Congress assigned it
the task of interpreting state statutes. FERC’s energy-
regulation expertise is unnecessary to answering whether
California law allows PG&E to voluntarily leave CAISO, as
evidenced by FERC’s decision. FERC did not reference its
CPUC V. FERC 23agency-specific knowledge or experience in answering this
question; it applied commonly used statutory interpretation
tools to determine how the California Supreme Court would
construe the California statute, such as the noscitur a sociis 4
interpretive cannon and the reasoning in a D.C. Circuit case
interpreting an analogous federal statute. Federal courts are
at least as able as FERC to use these same interpretive tools
to determine state law as that is a task squarely in the federal
judiciary’s wheelhouse. See West v. Am. Tel. & Tel. Co., 311
U.S. 223, 237 (1940) (“State law is to be applied in the
federal as well as the state courts and it is the duty of the
former in every case to ascertain from all the available data
what the state law is and apply it . . . .”); see Judd v.
Weinstein, 967 F.3d 952, 955 (9th Cir. 2020) (district court’s
application of state law is reviewed de novo).
For these reasons, we find no justification for deferring
to FERC’s interpretation of California law, and we apply de
novo review.
b. California law
FERC concluded that membership in CAISO is
voluntary under California law. The California Supreme
Court has not decided this question. Therefore, we determine
California law by predicting how the California Supreme
Court “would decide the issue using intermediate appellate
court decisions, decisions from other jurisdictions, statutes,
treatises, and restatements as guidance.” Vestar Dev. II, LLC
v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001)
(citation omitted). Even though our review is de novo, we
previously interpreted Order 679 as creating a rebuttable
presumption that membership is voluntary. CPUC I, 879
4
It is known by its associates.
24 CPUC V. FERC
F.3d at 977 (citing Order 679 at ¶ 327). Therefore, California
bears the burden of showing that state law makes
membership involuntary. Id.As FERC noted, California “point[s] to no provision in
the California Code that mandates [CAISO] membership.”
The statutory provisions that California relies on merely
directed the CPUC to facilitate the creation of CAISO and
encourage utilities to join. See Cal. Pub. Util. Code § 330(m)
(“[E]lectric utilities should commit control of their
transmission facilities to the [ISO]”) (emphasis added); id.§ 365(a) (“[CPUC] shall . . . encourage all publicly owned
utilities in California to become full participants [in the
ISO]”) (emphasis added). There is also no California case
law—at any level—that decides or discusses whether
utilities who become CAISO members must remain such.
Instead, the parties focus their arguments on how much
deference a California court would give the CPUC’s 1998
Decision.
The 1998 Decision stated that future transfers of
operational control of the transmission facilities will be
subject to review under California Public Utility Code § 851,
thus making ongoing membership involuntary. 5 California
5
California also references a 1995 decision. We focus on the 1998
Decision because it specifically discussed future transfers of operational
control from CAISO, whereas the 1995 decision was concerned with
transfers to CAISO in the first instance. Compare Order Instituting
Rulemaking on Commission’s Proposed Policies Governing
Restructuring California’s Electric Service Industry and Reforming
Regulation, Decision 95-12-063, 1995 WL 792086, at *15 (Dec. 20,
1995) (“Under state law we must approve transfer of control over the
investor-owned utilities’ transmission systems and dispatch facilities to
the [CAISO].”) (emphasis added), with Joint App. of Pac. Gas & Elec.
Co., Decision 98-01-053, 1998 WL 242747, at *7 (Jan. 21, 1998)
CPUC V. FERC 25argues this statement is binding on California state courts,
but California law does not bear out this assertion. While the
CPUC purported to interpret California’s statute, that
interpretation was not the focus of the CPUC’s decision. See
Joint App. of Pac. Gas & Elec. Co., Decision 98-01-053,
1998 WL 242747 (Jan. 21, 1998). Furthermore, the statute
at issue defines the scope of the CPUC’s authority, a subject
on which agencies are not afforded deference. See New
Cingular Wireless PCS, LLC v. Pub. Utils. Comm’n, 201
Cal. Rptr. 3d 652, 671 (2016) (“Where the statute subject to
interpretation is one that defines the very scope of the
CPUC’s jurisdiction, [a highly deferential standard] is not
appropriate.”); see also Yamaha Corp. of Am. v. State Bd. of
Equalization, 960 P.2d 1031, 1036 (Cal. 1998) (explaining
an agency’s interpretation of a statute “does not implicate the
exercise of a delegated lawmaking power; instead, it
represents the agency’s view of the statute’s legal meaning
and effect, questions lying within the constitutional domain
of the courts”). Moreover, whether the CPUC must approve
a utility’s withdrawal from CAISO was not actually litigated
when the CPUC issued its 1998 Decision, and thus it is
unclear what, if any, preclusive effect the 1998 Decision
could have on the question before us. See Samara v. Matar,
419 P.3d 924, 926 (Cal. 2018).
But most significant, we conclude that California courts
would not defer to the CPUC’s 1998 Decision because it is
inconsistent with the relevant California statute. See
Yamaha, 960 P.2d at 1036. Section 851 of the California
Public Utility Code provides: “A public utility . . . shall not
sell, lease, assign, mortgage, or otherwise dispose of . . . any
part of its [property] . . . without [CPUC approval].” Cal.
(“[A]ny future transfer of operational control . . . from the [CAISO] will,
itself, be subject to review under [Public Utilities] Code Section 851.”).
26 CPUC V. FERC
Pub. Util. Code § 851. Section 851 does not reference
transfers of operational control; thus, the question is whether
“otherwise dispose of” encompasses these transfers. The
reasoning in Atlantic City Electric Co. v. FERC, which
FERC referenced in its decision on remand, is instructive on
this point. 295 F.3d 1 (D.C. Cir. 2002). There, the D.C.
Circuit applied the noscitur a sociis canon of statutory
interpretation (which instructs that words grouped in a list
should be given a similar meaning) to a similar federal
statute and concluded that the phrase “otherwise dispose of”
“contemplate[ed] a transfer of ownership or proprietary
interests” because it was listed with terms such as “sell” and
“lease.” Id. at 12. Because a change in operational control
involves only a transfer of certain operational
responsibilities, the court held that “[a] utility does not ‘sell,
lease, or otherwise dispose’ of its facilities when it agrees to
the changes in operational control necessary to initially join
or to withdraw from an ISO.” Id. at 11.
We agree. California courts apply the noscitur a sociis
canon of interpretation. See, e.g., Sierra Club v. Superior Ct.,
302 P.3d 1026, 1034 (Cal. 2013). And like the federal statute
interpreted in Atlantic City Electric Co., California’s statute
also focuses on ownership and proprietary interests by using
words such as “sell” and “lease.” While a transfer of
operational control may result from a transfer of ownership,
the former does not require the latter—a fact contemplated
by the federal regulations themselves. See 18 C.F.R. § 35.34(“The [transfer of operation control] requirement . . . may be
satisfied by proposing to transfer to the Regional
Transmission Organization ownership of the facilities in
addition to operational control.”). Therefore, we have no
reason to believe that a California court would conclude that
transfers of operational control fall within Section 851’s
“otherwise dispose of” language because such transfers are
CPUC V. FERC 27unlike any of the other actions listed in Section 851. For
these reasons, we find no error in FERC’s conclusion that
membership in CAISO is voluntary under California law
despite the suggestion to the contrary in the CPUC’s 1998
Decision. As such, FERC’s decision was not arbitrary,
capricious, or contrary to law under the APA. See 5 U.S.C.
§ 706.
III. CONCLUSION
We conclude that the CPUC’s 1998 Decision is not
binding on California courts and, therefore, it is not binding
on FERC. And where neither the text of California’s Public
Utility Code nor any California caselaw mandates that
utilities maintain ongoing membership in CAISO or get the
CPUC’s approval before leaving CAISO, we hold that
FERC did not err in concluding that the Utilities’
membership in CAISO is voluntary. Therefore, FERC’s
voluntariness requirement for awarding incentive adders
was satisfied and its award of such adders to induce the
Utilities to remain in CAISO was not arbitrary or capricious.
California’s petitions for review are DENIED.