Aluminum Co. of America v. Bonneville Power Admin.

Decision Date11 December 1989
Docket NumberNos. 87-7303,87-7308 and 87-7313,s. 87-7303
Citation891 F.2d 748
PartiesALUMINUM COMPANY OF AMERICA; Arco Metals Company; Columbia Falls Aluminum Company, Petitioners, Association of Public Agency Customers, Petitioner-Intervenor, v. BONNEVILLE POWER ADMINISTRATION; Federal Energy Regulatory Commission, Respondents, Portland General Electric Company; Puget Sound Power & Light Company; Public Generating Pool (PGP), Respondents-Intervenors. CALIFORNIA ENERGY COMMISSION, Petitioner, v. BONNEVILLE POWER ADMINISTRATION; Federal Energy Regulatory Commission, Respondents. PUBLIC UTILITIES COMMISSION OF the STATE OF CALIFORNIA; Southern California Edison Company; Pacific Gas and Electric Company; San Diego Gas & Electric Company; Department of Water and Power of the City of Los Angeles, et al., Petitioners, v. BONNEVILLE POWER ADMINISTRATION; Federal Energy Regulatory Commission, Respondents.
CourtU.S. Court of Appeals — Ninth Circuit

Matthew Cohen, Heller, Ehrman, White & McAuliffe, Seattle, Wash., Peter G. Fairchild, San Francisco, Cal., John D. McGrane, Reid & Priest, Washington, D.C., Stephen E. Pickett, Rosemead, Cal., Glenn West, Jr., San Francisco, Cal., Thomas C. Hokinson, Sr. Asst. City Atty., Los Angeles, Cal., for petitioners.

Jonathan Blees, Deputy General Counsel, Sacramento, Cal., for California Energy Com'n.

Max M. Miller, Tonkon, Torp, Galen, Marmaduke & Booth, Portland, Or., Judith Bearzi, Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, Seattle, Wash., for petitioner-intervenor.

Kurt R. Casad, Portland, Or., Joanne Leveque, Washington, D.C., for respondent.

Pamela G. Rapp and J. Jeffrey Dudley, Portland, Or., Frederic A. Morris, Perkins Coie, Seattle, Wash., Jay T. Waldron, Schwabe, Williamson, Wyatt, Moore & Roberts, Portland, Or., for respondent-intervenor.

Petition to Review a Decision of the Federal Energy Regulatory commission.

Before CANBY, THOMPSON and LEAVY, Circuit Judges.

LEAVY, Circuit Judge:

OVERVIEW

These consolidated cases challenge the first nonfirm energy rates that the Bonneville Power Administration (BPA) established, and the Federal Energy Regulatory Commission (FERC) approved, under section 7(k) of the Pacific Northwest Electric Power Planning and Conservation Act (the Regional Act), 16 U.S.C. § 839e(k) (1982). 1 Nonfirm energy is that energy that is surplus to the needs of the Pacific Northwest. The challenged rates, schedules NF-1 and NF-2, were effective from July 1, 1981, through September 30, 1982, and from October 1, 1982, through October 31, 1983, respectively. The NF-1 and NF-2 rates applied to sales of nonfirm energy both in and outside the Pacific Northwest.

In case No. 87-7303, BPA's direct service industrial customers, joined by intervenors the Public Generating Pool, Public Power Council, Association of Public Agency Customers, and Portland General Electric (the Northwest parties), allege that BPA's rates for electricity under NF-1 and NF-2 were too low. The Northwest parties claim the rates: (1) failed to recover the costs of nonfirm energy, (2) failed to include the costs of the residential exchange program, and (3) that FERC failed to review the rates based on the administrative record of BPA.

In cases Nos. 87-7308 and 87-7313, the California Energy Commission, the Public Utilities Commission of the State of California, and the California Utilities (Southern California Edison Company, Pacific Gas & Electric Company, San Diego Gas & Electric Company, and the Cities of Los Angeles, Burbank, Glendale, and Pasadena) allege that BPA's nonfirm energy rates under NF-1 and NF-2 were too high. These California parties claim that the rates should not have included an unweighted, proportionate share of the costs of BPA's generating capacity, the costs of the mothballed nuclear plants of the Washington Public Power Supply System (WPPSS), or the costs of conservation of fish, wildlife, and energy in the Pacific Northwest.

We hold that the evidentiary hearing that FERC held upon review of the rates violated section 7(k); nonetheless, we affirm FERC's decision to approve the rates BPA established for nonfirm energy under schedules NF-1 and NF-2 from 1981 to 1983.

FACTS

BPA is a self-financing power marketing agency within the United States Department of Energy. The rates BPA receives for electricity and its transmission are BPA's only sources of revenue. Central Lincoln Peoples' Util. Dist. v. Johnson, 735 F.2d 1101, 1116 (9th Cir.1984). Various federal acts require the BPA administrator periodically to revise rates to recover the capital costs and expenses associated with the Columbia River power system. 16 U.S.C. §§ 832f, 838g, 839e(a)(1) (1982). BPA is required to meet all interest and amortization payments owed to the United States Treasury for federal investments in BPA power and transmission systems. 16 U.S.C. §§ 839(4), 839e(a)(1).

BPA's combined generation and transmission facilities are known as the Federal Columbia River Power System. See 16 U.S.C. § 839a(10)(A). BPA also purchases energy from other utilities and accumulates it through conservation measures. Currently, BPA markets power generated at thirty federal hydroelectric projects and two nuclear plants, WPPSS Plant No. 2 and Trojan. The primary marketing area is the Pacific Northwest, comprised of the states of Washington, Oregon, and Idaho; Montana west of the Continental Divide; and the parts of Utah, Wyoming, and Nevada that are within the Columbia River drainage. 16 U.S.C. § 839a(14). BPA also markets BPA's energy system is planned around a hypothetical "critical water" supply, in which BPA measures its ability to meet the demand for power in the Pacific Northwest by assuming streamflows will be the worst on record and thermal generation and power purchases occur as planned. Nonfirm energy may result from streamflows in excess of critical, so long as reservoirs appear to be refilling on schedule. See, e.g., Central Lincoln, 735 F.2d at 1112. This planning method results in large amounts of nonfirm energy in most years. Consequently, BPA counts on nonfirm energy and makes decisions based on its availability.

                power outside the Pacific Northwest, but only if it has the surplus energy to do so.  16 U.S.C. § 837a (1982).   This energy is referred to as "nonfirm" energy, to distinguish it from the "firm" energy that BPA is required to provide to its Pacific Northwest customers first, pursuant to the Pacific Northwest Consumer Power Preference Act of 1964 (the Regional Preference Act), 16 U.S.C. §§ 837-837h (1982).  Department of Water and Power of Los Angeles v. Bonneville Power Admin., 759 F.2d 684, 687 (9th Cir.1985)
                

BPA integrates hydroelectric energy production with other energy-producing resources. For example, when thermal resources are used to generate energy in the fall and early winter, the water that otherwise would have been used is stored behind the dams for later energy production. Therefore, BPA describes the reservoir as an "inventory" of energy, in which the quantity of water depends not only on streamflows, but on the use of thermal resources, power purchases, and conservation. Thus, electricity produced by dams may result from water whose energy content is attributable to the use of thermal or other resources, as well as to streamflow. According to BPA, it is impossible to attribute a unit of nonfirm energy to the resource that produced it, because the water supply is dependent on the use of several different resources. BPA operates the system not only to meet firm energy demands of the Pacific Northwest, but to maximize the amount of nonfirm energy produced.

While the NF-1 and 2 rates that BPA established were capped at cost, below-cost sales occurred to avoid wasting this surplus energy. According to BPA, California utilities saved $1.5 billion by buying electricity from BPA from July 1981 through October 1983, while at the same time BPA realized only $270 million in cumulative NF-1 and 2 revenues. BPA incurred revenue shortfalls in the years these rates were in effect, which resulted in missed interest and principal payments owed to the United States Treasury.

Prior Proceedings

After lengthy formal evidentiary hearings, BPA proposed the NF-1 and 2 electric rates. In April of 1983, FERC consolidated its review of the NF-1 and 2 rates and set them for an evidentiary hearing before an administrative law judge (ALJ). United States Dept. of Energy--Bonneville Power Admin., 23 F.E.R.C. p 61,161, 61,354 (1983). All parties to the consolidated case before this court were represented at the FERC hearing.

The ALJ disapproved the NF-1 and 2 rates as not conforming to section 7(k) of the Regional Act. He stated:

The loser under the NF-1 and NF-2 rates has been BPA. The nonfirm customers were grossly undercharged for energy and this violated the fairness principle of cost allocations encompassed, in this case, within the "lowest possible rates to consumers consistent with sound business principles" requirement found in the statutory standards.... BPA came up short in revenue and could not pay on its federal debt and had its deferred interest payments increase.

29 F.E.R.C. p 63,039, 65,122 (1984). The parties filed exceptions to this ruling; therefore, the full Commission reviewed the NF-1 and 2 rates. See generally 18 C.F.R. §§ 385.708(d), 385.711 (1984) (sets forth procedures for review of an initial decision by the Commission).

In Opinion No. 250, the full Commission modified and reversed the decision of the ALJ in part, and approved and confirmed Except as modified or reversed, the Commission affirmed and adopted the ALJ's decision. The modifications of significance to this appeal are: (1) FERC eliminated a cap on the amount of thermal capacity costs included in the rates, 36 F.E.R.C. p 61,335, at 61,808; (2) FERC did not approve the inclusion of costs of the residential exchange program in the rates, id. at 61,800,...

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