Pacific Gas and Elec. Co. v. F.E.R.C.

• Decision Date: 15 October 2002
• Docket Number: No. 01-1190.,No. 01-1187.,01-1187.,01-1190.
• Citation: 306 F.3d 1112
• Parties: PACIFIC GAS AND ELECTRIC COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Enron Power Marketing, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

306 F.3d 1112

PACIFIC GAS AND ELECTRIC COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Enron Power Marketing, Inc., et al., Intervenors.

No. 01-1187.

No. 01-1190.

United States Court of Appeals, District of Columbia Circuit.

Argued September 9, 2002.

Decided October 15, 2002.

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Stuart K. Gardiner and Richard L. Roberts argued the causes for utility petitioners. With them on the briefs was Jennifer L. Key.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor, Federal Energy Regulatory Commission.

Channing D. Strother, Jr. was on the brief for intervenor City of Vernon, California.

Before: EDWARDS, SENTELLE and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

The principal issue in this appeal is whether the review conducted by the Federal Energy Regulatory Commission ("FERC") of the revenue requirements of a non-jurisdictional entity that is part of a jurisdictional independent system operator ("ISO") was sufficient to ensure that the ISO's rates will be just and reasonable under § 205 of the Federal Power Act ("FPA"), 16 U.S.C. § 824d. Southern California Edison Company ("Edison") and Pacific Gas and Electric Company (collectively, "PG&E"), petition for review of three Orders in which FERC approved the transmission revenue requirement of Vernon, a municipally owned utility and non-jurisdictional entity, for use in the California ISO's ("CAISO") transmission access charge. PG&E contends that FERC did not properly evaluate, consistent with its duty under § 205, Vernon's revenue requirements, and arbitrarily and capriciously approved Vernon's requirements based on findings that are unsupported by substantial evidence. We hold that, although FERC has considerable discretion in choosing how to implement its statutory duty, its approach in the Orders on review fails to ensure that the CAISO's rates will be just and reasonable under § 205. Accordingly, we grant the petition and remand the case for further proceedings.

I.

In Order No.2000, FERC encouraged the formation of regional transmission organizations. See Regional Transmission Organizations, Order No.2000, FERC Stats. & Regs. ¶ 31,089 (1999), 65 Fed. Reg. 810 (2000), on reh'g, Order No. 2000-A, FERC Stats. & Regs. ¶ 31,092, 65 Fed. Reg. 12,088 (2000) (codified at 18 C.F.R. § 35.34), aff'd, Pub. Util. Dist. No. 1 v. FERC, 272 F.3d 607 (D.C.Cir.2001). The State of California created a regional transmission organization, the CAISO, to operate transmission facilities within California. The CAISO is subject to FERC's regulatory authority, see Cal. Indep. Sys. Operator Corp., 91 F.E.R.C. ¶ 61,205, at 61,724, 2000 WL 711594 (2000), including the statutory requirement under §§ 205 and 206 of the FPA that a utility's rates must be "just and reasonable." 16 U.S.C. §§ 824d, 824e. The CAISO originally consisted of three investor-owned utilities (PG&E, Edison, and San Diego Gas & Electric Company), each of which is subject to FERC's jurisdiction. Each of the utilities is compensated by the CAISO for the use of its facilities through a transmission revenue requirement ("TRR"), which consists of the costs and rate of return to which the utilities are entitled as participating transmission owners. FERC independently examines each of these jurisdictional utilities' TRRs to ensure that they are just and reasonable. See Cal. Indep. Sys. Operator, 91 F.E.R.C. at 61,723 n.11. Initially, the CAISO's rates, or transmission access charge ("TAC"), reflected the TRRs of the participating transmission owners in each of three TAC areas. Id. at 61,720.

This case arises out of California's efforts to encourage non-jurisdictional, municipal utilities to join the CAISO. Id. at 61,720-21. As a general matter, publicly-owned utilities are not subject to FERC's §§ 205 and 206 jurisdiction, see FPA § 201(f), 16 U.S.C. § 824(f), although FERC may analyze and consider the rates of non-jurisdictional utilities to the extent that those rates affect jurisdictional transactions, see S.C. Pub. Serv. Auth., 75 F.E.R.C. ¶ 61,209, at 61,696 & n.7, 1996 WL 283302 (1996); see also Pub. Utils. Comm'n v. FERC, 660 F.2d 821, 826 (D.C.Cir.1981). The CAISO proposed to amend its tariff to allow non-jurisdictional utilities or governmental entities that joined the CAISO to recover their TRRs through the CAISO's transmission access charge. See Cal. Indep. Sys. Operator, 91 F.E.R.C. at 61,720. Once a new transmission owner ("TO") joined the CAISO, the TAC would reflect the combined TRRs of the owners in each of the three TAC areas, and then, over a ten-year period, a single ISO gridwide TAC would be phased-in. Id. However, the CAISO's original tariff proposal did not allow for any FERC review of the TRRs of governmental entities; instead, review was limited to a CAISO Revenue Review Panel. Id. at 61,721. In a May 31, 2000 Order, FERC concluded that the CAISO's proposal was inconsistent with FERC's statutory responsibility to ensure that jurisdictional utilities' rates, namely the CAISO's TAC, be just and reasonable. Id. at 61,729. In compliance with the May 31, 2000 Order, the CAISO submitted a revised tariff proposal which provided:

If the Participating TO is not FERC jurisdictional, the Participating TO shall at its sole option: (1) file its High Voltage TRR and Low Voltage TRR for those facilities and Entitlements under the Operational Control of the ISO directly with the Commission in accordance with the rules and requirements established by the Commission; or (2) submit to the ISO its TRR.... The decision of the [Revenue Review] panel shall be subject to review and acceptance by the FERC.

Cal. Indep. Sys. Operator Corp., 93 F.E.R.C. ¶ 61,104, at 61,287, 2000 WL 1610582(2000) [hereinafter "TAC Order"] (alterations in the original). In an October 27, 2000 Order, FERC accepted this revision. Id. at 61,288-89.

Pursuant to the CAISO's revised tariff, Vernon, a municipally-owned utility located in the same TAC area as Edison, voluntarily submitted its TRR for FERC review. With certain revisions, FERC "accept[ed] Vernon's use of the rate methodology utilized by [Edison] (an [investor-owned utility] that has determined its TRR) which is a methodology familiar to [FERC]" and approved Vernon's TRR. City of Vernon, 93 F.E.R.C. ¶ 61,103, at 61,285, 2000 WL 1824305 (2000) [hereinafter "Vernon Order"]. PG&E sought rehearing, which was denied in an order dated February 21, 2001. Cal. Indep. Sys. Operator Corp., 94 F.E.R.C. ¶ 61,148, at 61,565, 2001 WL 275502 (2000) [hereinafter "Rehearing Order"]. PG&E now seeks review of the TAC Order, Vernon Order, and Rehearing Order.

II.

PG&E contends that FERC's review of Vernon's TRR was insufficient to ensure that the CAISO's rates remained just and reasonable because it was based on an inadequate standard of review and contrary to FERC precedent. PG&E also contends that FERC violated § 205 by relying solely on a review of Vernon's rate methodology in order to approve Vernon's TRR. PG&E further contends that by not requiring the CAISO to file cost support for the part of its transmission rate resulting from use of Vernon's facilities or requiring Vernon to meet the CAISO's § 205 obligation, FERC chose an impermissible course and the court shouldremand with directions for a § 205 inquiry of Vernon's TRR.

The court reviews FERC's Orders under the arbitrary and capricious standard. 5 U.S.C. § 706(2)(A); Pub. Utils. Comm'n v. FERC, 254 F.3d 250, 253-54 (D.C.Cir.2001) [hereinafter "CPUC"]. FERC therefore "must be able to demonstrate that it has made a reasoned decision based upon substantial evidence in the record." Sithe/Independence Power Partners, L.P. v. FERC, 165 F.3d 944, 948 (D.C.Cir.1999) (quotations omitted). Because of the highly technical and policy-based nature of rate design, the court's review of whether a particular rate design is just and reasonable is highly deferential. CPUC, 254 F.3d at 254. Absent procedural or methodological flaws, the court may only set aside a rate that is outside a zone of reasonableness, bounded on one end by investor interest and the other by the public interest against excessive rates. Jersey Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1176-77 (D.C.Cir.1987) (describing the standard in FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944)). Pertinent here, the Supreme Court explained:

The court's responsibility is not to supplant the Commission's balance of these interests [investor and public interest] with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors. Judicial review of the Commission's orders will therefore function accurately and efficaciously only if the Commission indicates fully and carefully the methods by which, and the purposes for which, it has chosen to act, as well as its assessment of the consequences of its orders for the character and future development of the industry.

In re Permian Basin Area Rate Cases, 390 U.S. 747, 792, 88 S.Ct. 1344, 1373, 20 L.Ed.2d 312 (1968). FERC's findings of facts are conclusive if supported by substantial evidence. FPA § 313(b), 16 U.S.C. § 825l(b).

The CAISO's TAC methodology is a formula rate through which the TRR of each participating transmission owner is collected. See generally CPUC, 254 F.3d at 254. As such, the TRR of each participating transmission owner can be conceptualized not as its own rate but rather as a cost of the CAISO. Understood this way, Vernon's TRR need not be independently subjected to the just and reasonable standard of § 205, as PG&E contends. While FERC does subject the TRRs of jurisdictional participating transmission owners to an...