Cal. Pub. Utilities Comm'n v. Fed. Energy Regulatory Comm'n
| Decision Date | 17 March 2022 |
| Docket Number | No. 19-72897, No. 20-71335,19-72897 |
| Citation | 29 F.4th 454 |
| Parties | CALIFORNIA PUBLIC UTILITIES 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. California Public Utilities Commission; California Department of Water Resources; Northern California Power Agency; Sacramento Municipal Utility District; Transmission Agency of Northern California, Petitioners, v. Federal Energy Regulatory Commission, Respondent, Pacific Gas and Electric Company, Intervenor. |
| Court | U.S. Court of Appeals — Ninth Circuit |
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.
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.
Before: Ryan D. Nelson and Danielle J. Forrest, Circuit Judges, and Janis Graham Jack,* District 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 FERC1 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 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.
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, 122 S.Ct. 1012, 152 L.Ed.2d 47 (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, 128 S.Ct. 2733, 171 L.Ed.2d 607 (2008).
Nevertheless, monopolistic tendencies persist within the transmission segment of the industry. New York , 535 U.S. at 7–8, 122 S.Ct. 1012. 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 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, 128 S.Ct. 2733.
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 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":
879 F.3d at 970–71 (internal citations and footnote omitted).
After 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.
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....
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