Pub Utility Comision v. Fed Energy Commission

• Decision Date: 06 July 2001
• Docket Number: No. 00-1203,00-1203
• Citation: 254 F.3d 250
• Parties: (D.C. Cir. 2001) Public Utilities Commission of the State of California, Petitioner v. Federal Energy Regulatory Commission, Respondent Pacific Gas and Electric Company, et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 250

254 F.3d 250 (D.C. Cir. 2001)

Public Utilities Commission of the State of California, Petitioner v. Federal Energy Regulatory Commission, Respondent

Pacific Gas and Electric Company, et al., Intervenors

No. 00-1203

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 7, 2001

Decided July 6, 2001

On Petition for Review of Orders of the Federal Energy Regulatory Commission

Sean H. Gallagher argued the cause for petitioner. With him on the briefs was Arocles Aguilar.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Dennis Lane, Solicitor.

Edward Berlin, Kenneth G. Jaffe, Robert V. Zener, Michael E. Ward, Robert C. McDiarmid, Lida G. Dowden and Andrea G. Lonian were on the brief for intervenors Northern California Power Agency and California Independent System Operator Corporation. Daniel I. Davidson entered an appearance.

Before: Williams, Ginsburg and Rogers, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge:

The Public Utilities Commission of the State of California ("CALPUC") seeks review of orders by the Federal Energy Regulatory Commission allowing the California Independent System Operator ("ISO") to enter into "Reliability Must-Run" ("RMR") contracts with generators owned by entities not subject to the Commission's rate jurisdiction, and to pass through the costs of such contracts in the ISO's rates without filing under 205 of the Federal Power Act ("FPA"). See 16 U.S.C. 824d (1994). Because it considered the ISO's tariff to be satisfactory as a formula rate, the Commission rejected the argument that a 205 filing was required. CALPUC contends that the ISO tariff does not meet the Commission's standards for formula rates, and alternatively, that even if it is a valid formula rate, 205 requires re-filing when the formula is changed, which CALPUC maintains occurs when the ISO adds a new component by entering a new RMR contract. Additionally, CALPUC maintains that the Commission's reliance on 206 of the FPA, 16 U.S.C. 824e (1994), is misplaced because the availability of review under 206 does not abrogate the 205 filing requirement. We hold that the Commission could properly determine that although the RMR contracts are components of the formula rate or affect the ultimate rates charged pursuant to the formula, 205 filing was not required and 206 affords an adequate statutory remedy. Accordingly, we deny the petition.

I.

The State of California has restructured its electric supply operations, as implemented in large part by Commission decisions, so that the ISO now operates portions of the transmission systems of three California investor-owned utilities, referred to as Responsible Utilities: Pacific Gas & Electric Company, Southern California Edison Company ("SoCal Edison"), and San Diego Gas & Electric Company. See Pac. Gas & Elec. Co., 91 F.E.R.C. p 63,008, at 65,102 (2000) ("Southern"). In providing transmission services, the ISO is required to maintain transmission system reliability. See Pac. Gas & Elec. Co., 81 F.E.R.C. p 61,322, at 62,486 (1997). The ISO accomplishes this in part by use of RMR contracts to ensure ancillary services, voltage support, and energy to support the reliability of the ISO-controlled grid.¹ See Southern, 91 F.E.R.C. at 65,103. Under the RMR structure approved by the Commission, see Cal. Indep. Sys. Operator Corp., 87 F.E.R.C. p 61,229 (1999); Cal. Indep. Sys. Operator Corp., 87 F.E.R.C. p 61,250 (1999); see generally Pac. Gas & Elec. Co., 81 F.E.R.C. p 61,122, at 61,554-58 (1997), the cost responsibility for the RMR contracts is reflected in 5.2.8 of the ISO tariff.² Pursuant to its tariff, the ISO passes through to the Responsible Utilities the costs of RMR contracts in each utility's service area. See supra n.2; see also Southern, 91 F.E.R.C. at 65,102-03. CALPUC's concern arises because the costs are then passed along by the utilities to California retail ratepayers.

Insofar as CALPUC is concerned, the problem arose after the Commission approved Amendment 22 to the ISO tariff. The ISO requested the amendment, in September 1999, in order to enhance its ability to support reliability of the ISO- controlled grid. Relevant here is the provision allowing the ISO to enter into RMR contracts with generating units that are outside the service area of any Responsible Utility and that make no jurisdictional sales of power. See FPA 201. The Commission conditionally approved Amendment 22 on November 24, 1999. Cal. Indep. Sys. Operator Corp., 89 F.E.R.C. p 61,229, at 61,680 (1999). The Commission declined to require that the ISO make a 205 filing every time it seeks to pass through RMR contract costs involving a non- jurisdictional entity. See id. at 61,683-84. Responding to concerns expressed by CALPUC and SoCal Edison, the Commission noted, however, that the ISO's proposal did not explain how the ISO would allocate RMR costs between Responsible Utilities if more than one was contiguous with an RMR unit. Id. at 61,684. The Commission stated: "As the ISO is, in effect, proposing a formula rate, this lack of specificity is unacceptable." Id. The Commission therefore required the ISO to make a separate filing under 205 whenever it sought to allocate RMR costs where more than one Responsible Utility was contiguous to an RMR unit, and to revise its tariff accordingly. Id.

CALPUC (and others) sought rehearing regarding, as relevant here, the necessity of 205 filings for RMR contracts with non-jurisdictional entities. CALPUC asserted that "[i]n the absence of such a requirement California ratepayers will be subject to paying RMR contract costs which have been negotiated by the ISO without any public, consumer, or ratepayer input, and with no regulatory review." CALPUC argued that the charging of RMR costs to a Responsible Utility by the ISO was a jurisdictional sale under 205 and, therefore, the Commission was obligated to ensure that such charges were just and reasonable. The Commission denied rehearing, responding:

The recovery of RMR costs under the ISO's tariff is through a formula rate. The ISO purchases RMR services under the contracts and passes through the costs to Responsible Utilities under the formula rate. The filed rate in this circumstance is the formula. SoCal Edison, [CALPUC], and others may challenge the costs recovered under this formula by filing a complaint under FPA Section 206, and such challenges to costs recovered under a formula rate are not limited to prospective relief. Accordingly, we see no purpose to also requiring the filing under FPA Section 205 of each contract the ISO enters into with a non-jurisdictional entity.

Cal. Indep. Sys. Operator Corp., 90 F.E.R.C. p 61,315, at 62,042 (2000) (footnote omitted).

II.

On appeal, CALPUC contends that the Commission has violated both the FPA and its obligation to engage in reasoned decision making. Essentially, CALPUC maintains that 205 filing of the non-jurisdictional RMR contracts is required because RMR contract costs significantly affect the ISO's 5.2.8 RMR rate, and thus must be filed under FPA 205(c) and (d). The court reviews the Commission's orders under the Administrative Procedure Act's arbitrary and capricious standard. See Sithe/Independence Power Partners, L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999); 5 U.S.C. 706(2)(A) (1994). "Because '[i]ssues of rate design are fairly technical and, insofar as they are not technical, involve policy judgments that lie at the core of the regulatory mission,' our review of whether a particular rate design is 'just and reasonable' is highly deferential." Id. (quoting Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C. Cir. 1992)). Thus, for CALPUC to prevail, the court must be able to conclude that the Commission was required to review the RMR contracts with non-jurisdictional entities pursuant to 205 before allowing the pass through of RMR costs and could not rely on possible investigation, review, and refund proceedings under 206. Cf. La. Pub. Serv. Comm'n v. FERC, 174 F.3d 218, 231 (D.C. Cir. 1999).

It can hardly be doubted at this late date that the Commission "need not confine rates to specific, absolute numbers but may approve a tariff containing a rate 'formula' or a rate 'rule'...." Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 578 (D.C. Cir. 1990). The Commission has been accepting formula rates since the early 1970s. See Me. Yankee Atomic Power Co., 42 F.E.R.C. p 61,307, at 61,923 (1988). As defined by the Commission, a formula rate specifies the cost components that form the basis of the rates a utility charges its customers. Hampshire Gas Co., 6 F.E.R.C. p 61,249, at 61,607 (1979). The Commission's acceptance of formula rates is premised on the rate design's "fixed, predictable nature," Ocean State Power II, 69 F.E.R.C. p 61,146, at 61,552 (1994), which both allows a utility to recover costs that may fluctuate over time and prevents a utility from utilizing excessive discretion in determining the ultimate amounts charged to customers. See id. Thus, " '[w]hen the Commission accepts a formula rate as a filed rate, it grants waiver of the filing and notice requirements of [§ 205] [, and] [t]he utility's rates, then, can change repeatedly, without notice to the Commission, provided those changes are consistent with the formula.' " Ala. Power Co. v. FERC, 993 F.2d 1557, 1567-68 (D.C. Cir. 1993) (quoting San Diego Gas & Elec. Co., 46 F.E.R.C. p 61,363, at 62,129-30 (1989)). As further explained, because "the formula itself is the rate, not the particular components of the formula, ... periodic adjustments made in accordance with the Commission-approved formula do not constitute changes in the rate itself and accordingly do not require [s] 205 filings." Ocean State Power II, 69 F.E.R.C. at 61,544-45 (footnote omitted).³

The Commission has required 205 filings, as CALPUC points out, for matters...