Central Elec. Co-op., Inc. v. Bonneville Power Admin.

Decision Date23 December 1987
Docket NumberNo. 85-7242,85-7242
Citation835 F.2d 199
PartiesCENTRAL ELECTRIC COOPERATIVE, INC., Petitioner, v. BONNEVILLE POWER ADMINISTRATION, U.S. Department of Energy, Respondent, and Direct Service Industrial Customers, Intervenors.
CourtU.S. Court of Appeals — Ninth Circuit

Ronald L. Marceau, Marceau, Karnopp, Petersen, Noteboom & Hubel, Bend, Or., for petitioner.

Thomas D. Miller, Asst. U.S. Atty., Civil Div., Portland, Or., for respondent.

Paul M. Murphy, Heller, Ehrman, White & McAuliffe, Portland, Or., for intervenors.

Petition to Review the Decision of the Bonneville Power Administration.

Before HUG, FARRIS and CANBY, Circuit Judges.

HUG, Circuit Judge:

This case is brought as a direct proceeding under the Pacific Northwest Electric Power Planning and Conservation Act, 16 U.S.C. Sec. 839f(e)(5) (1982) ("Regional Act"). Central Electric Cooperative ("CEC"), a utility, claims that Bonneville Power Administration ("BPA") breached their Residential Purchase and Sale Agreement by refusing to acknowledge a rate increase which would have led to an enhancement of the subsidy BPA is obliged to give under the contract. At issue is whether BPA's action should be reviewed in the context of contract law or administrative law; the latter would entitle BPA's action to due deference. We find that principles of administrative law govern.


BPA is the marketing agent for all electric power generated by federal generating plants in the Pacific Northwest. During the power shortages of the mid-1970's, investor-owned utility ("IOU") customers of BPA lost their access to federal power and built their own generating stations. A disparity developed between rates paid by residential IOU customers and the lower rates paid by residential customers of publicly-owned utilities, which received power from BPA at a lower cost. In 1980, Congress enacted the Regional Act, in which it attempted to rectify the effects of federal power shortages on IOU's by establishing the "residential exchange program." See Pacificorp v. Fed. Energy Regulatory Comm'n, 795 F.2d 816, 818 (9th Cir.1986). This program subsidizes the residential rates of IOU's and other utilities participating in the program. 1 Section 839c(c)(1) disguises this subsidy as a fictional exchange of power between BPA and the utility. The section authorizes BPA to purchase power from the utility at "the average system cost" ["ASC"] of that utility's resources. 16 U.S.C. Sec. 839c(c)(1). In exchange, BPA sells to the utility an equivalent amount of power at the same rate it charges its preference customers. When this rate is lower than the utility's ASC, the exchange, in essence, amounts to a subsidy. In actuality, no power is exchanged; BPA simply pays the utility the difference between its preference rate and the utility's To implement this program, each utility's ASC must be determined. "Average system cost" is not defined anywhere in the Act. Instead, the Act directs BPA to develop a "methodology" for making this determination and provides for review of the methodology by the Federal Energy Regulatory Commission. 16 U.S.C. Sec. 839c(c)(7). BPA devised a formula in which the ASC equals "Contract System Costs" divided by "Contract System Load." The "Contract System Costs" consist of certain eligible costs (namely power production and transmission costs) allowed by the rate-setting body to determine the revenue requirement for the utility during a fixed period. The "Contract System Load" represents the total retail sales for the same fixed period. 3 A utility arrives at its ASC by plugging these components into the formula. If this ASC is higher than BPA's preferential rate, a utility is entitled to an exchange benefit as provided by section 839c(c)(1).

                ASC. 2   This, in turn, "enables the utility to sell power to its residential customers at the priority rate given to residential consumers receiving BPA federal power."    Pacificorp, 795 F.2d at 818

The Regional Act directs BPA to offer a contract to the utility embodying the "exchange of power." 16 U.S.C. Sec. 839c(g)(1)(C). The generic contract offered utilities is called a Residential Purchase and Sale Agreement ("RPSA"). This dispute arises out of an RPSA entered into between BPA and CEC.

The crucial part of the agreement is Exhibit C, which sets forth the ASC methodology developed by BPA pursuant to the Regional Act. 4 The methodology requires CEC to maintain records in support of its ASC. The relevant data is compiled on forms contained in Appendix 1 to Exhibit C and submitted to BPA as an "Appendix 1 filing." This filing presents what the utility asserts is its ASC. As provided in the methodology, BPA will "determine" the utility's ASC. However, in doing so, BPA does not exercise a great degree of latitude. Rather, since the ASC is the result of a fairly straightforward calculation, BPA's role is akin to that of an auditor, verifying the accuracy and legitimacy of the data contained in the Appendix 1 filing. 5

The ASC as set forth in the Appendix 1 filing is a fixed number from which the subsidy is calculated. In actuality, however, a utility's ASC may be subject to fluctuation. As indicated earlier, when the ASC increases, the span between the ASC and BPA's preference rate widens; this, in turn, creates the potential for a higher subsidy. A utility might thus have the incentive to submit a new Appendix 1 filing reflecting any increases in ASC. The methodology, however, limits the occasions on which a utility may submit a new filing. Each filing must be based on an identifiable "exchange period." The exchange period begins when new retail rate schedules are in effect. 6 Thus, a change in rate schedules triggers a new exchange period, at which time the utility may submit a new Appendix 1 filing. 7

The dispute in this case concerns CEC's third ASC filing. On March 4, 1984, the Board of Directors of CEC adopted a retroactive rate increase effective September 20, 1983 to March 1, 1984. On March 5, 1984, CEC submitted its third filing: an after-the-fact filing based on the period covered by the retroactive rate increase. The ASC for this third period was higher than that for the second filing period; it thus would have entitled CEC to a greater subsidy. BPA paid an exchange benefit for the third filing. Subsequent to that payment, however, BPA reviewed the third filing and rejected it by an administrator's decision dated February 1, 1985. BPA found that "for purposes of ASC, ... there has not been a real 'rate increase'. There is no 'Exchange Period' because the alleged retroactive rate change is not in effect.... Absent a rate change, there is no basis for an ASC filing. Central's filing is hereby rejected." CEC was permitted to restate its arguments during a rehearing, but BPA affirmed its earlier decision. After rejecting the third filing, BPA claimed that the ASC from the second filing period remained in effect during the third filing period; CEC acquired a new ASC only when its fourth filing was accepted March 1, 1984. Because the ASC for the second filing was lower than the ASC for the third filing, BPA determined that CEC was not entitled to the full amount of the subsidy it claimed for the third filing. It thus withheld $662,494 from CEC's exchange benefits. 8

The underlying dispute in this case revolves around BPA's determination that CEC's retroactive rate increase was invalid. BPA gave two primary reasons supporting its decision. 9 First, it found that a retroactive rate increase is per se an inappropriate basis for an ASC filing. 10

Second, BPA found that there had been no "real" rate increase because the residential customers had never been charged. 11 According to BPA, CEC refrained from instituting a rate increase in the fall of 1983 even though its anticipated costs were rising. Instead of covering the costs by raising rates, CEC absorbed the costs out of cash on hand. In March, 1984, CEC experienced cash flow problems resulting from their decision not to raise rates in September, 1983. BPA alleges [I]t is clear that the primary reason Central claims to have enacted a rate increase was to solve a cash flow problem in a way that did not result in a real "rate increase" to its customers. The ASC methodology was not designed by Congress to make BPA the "deep pocket" to which participating utilities turn.

                that CEC solved this problem in a way that abused the subsidy program.  CEC adopted a retroactive rate increase applicable only to residential and irrigation customers, who are the beneficiaries of the subsidy program.  As stated in BPA's report, "Central [then] set the amount of the retroactive rate increase at exactly the amount Central expected to receive from the residential exchange."    Because the subsidy offset the rate increase, the customers were relieved from ever having to pay the increased rate.  BPA surmised that "the retroactive rate increase was structured so that the proceeds from the ASC benefits would flow directly to Central."    In rejecting the Appendix 1 filing, BPA stated,


Though CEC contests BPA's rejection of its third filing, it has not asked us to resolve the dispute. Rather, CEC asks us to determine whether it is entitled to bring a breach of contract claim against BPA on the basis that BPA violated the RPSA. CEC's position is that BPA breached the RPSA by rejecting the third filing; it contends that since the RPSA contains no language allowing BPA to reject a filing on the basis it did, BPA's action amounted to a breach. 12 While CEC urges us to declare that contract law governs this suit, BPA argues that principles of administrative law prevail. BPA views its action as a regulatory decision rather than a breach of contract.

The choice of law is important in this dispute for two reasons. First, the application of administrative law would compel a court to treat BPA's action with the same deference normally...

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