Public Utilities Com'n. of Cal. v. F.E.R.C.

• Decision Date: 19 December 2006
• Docket Number: No. 03-74207.,No. 03-74246.,03-74207.,03-74246.
• Citation: 474 F.3d 587
• Parties: PUBLIC UTILITIES COMMISSION OF the STATE OF CALIFORNIA; California Electric Oversight Board, Petitioners, Pacific Gas and Electric Company; Nevada Power Company; Southern California Edison Co. ("Edison"); Department of Water and Power of the City of Los Angeles, Public Service Department of the City of Burbank, Public Service Department of the City of Glendale, and Water and Power Department of the City of Pasadena (Collectively "LADWP, et al."); Sempra Energy; Mirant Americas Energy Marketing, L.P.; Coral Power; PPM Energy; Public Utility District No. 1 of Snohomish County, Washington; Dynegy Power Marketing Inc., Intervenors, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. California Electric Oversight Board; California Public Utilities Commission, Petitioners, Nevada Power Company; Southern California Edison Co. ("Edison"); Department of Water and Power of the City of Los Angeles, Public Service Department of the City of Burbank, Public Service Department of the City of Glendale, and Water and Power Department of the City of Pasadena (Collectively "LADWP, et al."); Sempra Energy; Mirant Americas Energy Marketing, L.P.; PPM Energy; Public Utility District No. 1 of Snohomish County, Washington; Dynegy Power Marketing Inc., Intervenors, v. Federal Energy Regulatory Commission, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

474 F.3d 587

PUBLIC UTILITIES COMMISSION OF the STATE OF CALIFORNIA; California Electric Oversight Board, Petitioners Pacific Gas and Electric Company; Nevada Power Company; Southern California Edison Co. ("Edison"); Department of Water and Power of the City of Los Angeles, Public Service Department of the City of Burbank, Public Service Department of the City of Glendale, and Water and Power Department of the City of Pasadena (Collectively "LADWP, et al."); Sempra Energy; Mirant Americas Energy Marketing, L.P.; Coral Power; PPM Energy; Public Utility District No. 1 of Snohomish County, Washington; Dynegy Power Marketing Inc., Intervenors, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent California Electric Oversight Board; California Public Utilities Commission, Petitioners Nevada Power Company; Southern California Edison Co. ("Edison"); Department of Water and Power of the City of Los Angeles, Public Service Department of the City of Burbank, Public Service Department of the City of Glendale, and Water and Power

Department of the City of Pasadena (Collectively "LADWP, et al."); Sempra Energy; Mirant Americas Energy Marketing, L.P.; PPM Energy; Public Utility District No. 1 of Snohomish County, Washington; Dynegy Power Marketing Inc., Intervenors, v. Federal Energy Regulatory Commission, Respondent.

No. 03-74207.

No. 03-74246.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 8, 2004.

Filed December 19, 2006.

William J. Kayatta, Jr. (argued), Arocles Aguilar, Sean Gallagher, Jonathan Bromson, Public Utilities Commission of the State of California, San Francisco, CA; William J. Kayatta, Jr., Jared S. des Rosiers, Louise K. Thomas, Deborah L. Shaw, Christopher T. Roach, Pierce Atwood, Portland, ME; Erik N. Saltmarsh, Erin Koch-Goodman, California Electric Oversight Board, Sacramento, CA (on the brief), for the petitioners.

Dennis Lane (argued), Cynthia A. Marlette, Dennis Lane, Lona T. Perry, Federal Energy Regulatory Commission, Washington, D.C. (on the brief), for the respondent.

Richard P. Bress (argued), John N. Estes III, W. Mason Emnett, Skadden, Arps, Slate, Meagher & Flom, LLP, New York, N.Y.; Jeffrey D. Watkiss, Bracewell & Patterson, Washington, D.C.; Richard P. Bress, Michael J. Gergen, David G. Tewksbury, Latham & Watkins, LLP, Washington, D.C. (on the brief), for the intervenors-respondents.

Roger A. Berliner, Stephen M. Ryan, Manatt, Phelps & Phillips, Washington, D.C.; C. Stanley Hunterton, Hunterton & Associates, Las Vegas, NV, on the joint brief, for intervenors Public Utility District No. 1 of Snohomish County, Washington, Nevada Power Company, Sierra Pacific Power Company, and Southern California Water Company.

Julie Simon, Electric Power Supply Association, Washington, D.C.; Andrew B. Brown, Ellison, Schneider & Harris, LLP, Sacramento, CA, on the amici curiae brief, for the Independent Energy Producers Association, Electric Power Supply Association, and Western Power Trading Forum.

Marcus Wood, Jennifer E. Horan, Stoel Rives, LLP Portland, OR, on the brief of intervenor PPM Energy, Inc.

On Petition for Review of an Order of the Federal Energy Regulatory Commission. FERC Nos. EL02-60, EL02-62, EL 02-60-000.

Before BROWNING, PREGERSON, and BERZON, Circuit Judges.

BERZON, Circuit Judge.

As in Public Utility District No. 1 v. FERC ("PUD"), Nos. 03-72511, et al. (9th Cir. Dec. ___, 2006), a related case also decided today, the petitioners—here, the California Public Utilities Commission ("PUC") and the California Electric Oversight Board ("CEOB") (collectively, "Public Utilities Commission")—challenge the statutory validity of electric power rates in certain wholesale power contracts. Again as in PUD, that challenge hinges on whether the Federal Energy Regulatory Commission ("FERC") was correct to apply the Mobile-Sierra¹ "public interest" doctrine or whether in doing so it failed to meet its statutory obligation to provide "just and reasonable" review. See 16 U.S.C. § 824e(a).

In PUD, we explained that Mobile-Sierra represents a presumption "that private parties to a wholesale electric power contract have negotiated a `just and reasonable' contract over a designated period of time, lawful under the FPA throughout that period." PUD, Slip Op. at 19554. That presumption, however, "can be rebutted by establishing that the contract adversely affects the public interest." Id., Slip Op. at 19554. We concluded that, to establish the Mobile-Sierra presumption, "three prerequisites are necessary: (1) the contract by its own terms must not preclude the limited Mobile-Sierra review; (2) the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for effective, timely review of the contracted rates; and (3) where, as here, FERC is relying on a market-based rate-setting system to produce just and reasonable rates, this review must permit consideration of all factors relevant to the propriety of the contract's formation." Id., Slip Op. at 19555-56. In PUD we found two of these prerequisites lacking and remanded to FERC for it to consider the propriety of applying the Mobile-Sierra mode of review to the contracts at issue. We held, in the alternative, that even if Mobile-Sierra properly applied, FERC's "finding that the challenged contracts do not affect the public interest was based on a substantively erroneous mode of analysis." Id., Slip Op. at 19549.

Applying PUD to the challenged contracts in this case, we grant the petition to review and remand to the agency to apply the modes of review outlined in PUD.

I.

Much of the relevant background to this case is described in PUD. See id., Slip Op. at 19567-83. We therefore will summarize only those facts relevant to the present case.

A. California Energy Crisis

California responded to the energy crisis outlined in PUD in several ways, although not until after "rolling blackout" became a household phrase and several of California's largest utilities bordered on insolvency. Governor Gray Davis declared a state of emergency on January 17, 2001, and ordered the California Department of Water Resources ("CDWR") to purchase forward power "as expeditiously as possible." On February 1, 2001, the California Legislature passed Assembly Bill 1 of the 2001-2002 First Extraordinary Session ("AB1X"), which authorized CDWR to purchase power through the end of December 31, 2002.

Between February 6 and August 23, 2001, CDWR executed 57 forward contracts with 28 suppliers. Some of these contracts explicitly called for applying the relatively stringent Mobile-Sierra "public interest" test, rather than the relatively relaxed "just and reasonable" test to judge the rates included in the contracts. Other contracts were silent regarding the test to apply. The 57 contracts include 32 agreements with the intervenor-respondents in this case:²

• Coral Power, for prices from $169 to $249/MWh, for delivery in 2001 and 2002;

• Dynegy Power Marketing, Inc., for $119.50/MWh, for delivery from January 1, 2002 through December 31, 2004;

• Mirant Americas Energy Marketing, for $148.65/MWh, for delivery between June 1, 2001 and December 31, 2002;

• PacifiCorp ("PPM"), for $70/MWh, for delivery between July 29, 2001 and June 30, 2002; and

• Sempra Energy Resources, for $189/MWh, for delivery between June 1, 2001 and September 30, 2001.

Under AB1X, the people of California must pay the cost of these contracts through their electricity rates. See CAL. WATER CODE § 80104 (West) ("Upon the delivery of power to them, the retail end use customers shall be deemed to have purchased that power from the department. Payment for any sale shall be a direct obligation of the retail end use customer to the department."). Raymond Hart, who testified for the Public Utilities Commission, described this statutory provision as ensuring that costs of CDWR contracts would "be passed on to the retail end-users of the IOUs [investor-owned utilities] through their retail electricity rates." In other words, CDWR passed the costs of the power it purchased to local utilities—such as Pacific Gas and Electric—which, in turn, passed it on to California consumers. FERC questions whether the challenged contracts call for rates above long-run competitive prices, Pub. Utils. Comm'n v. Sellers of Long Term Contracts, 103 F.E.R.C. ¶ 61,354, at ¶ 62,415 (2003), but does not contest that the cost of those contracts is passed on to California consumers.

On June 19, 2001, FERC issued a price mitigation order for spot markets regarding several western states, which went into effect the following day. Subsequently, prices generally returned to pre-crisis levels in both spot and forward markets, completing a downward cycle that had begun about a month prior to the June 19 Order.

B. Procedural Background

On February 25, 2002, PUC filed complaints under section 206(a) of the Federal Power Act,³ 16 U.S.C. § 824e(a), seeking modification of all power contracts signed by CDWR in 2001.⁴ The only contracts at issue on this appeal are those listed above, which PUC alleges overcharge CDWR and California consumers by a total of $1.4 billion. In the process of adjudicating and ultimately denying these complaints, FERC issued a series of orders:

On April 25, 2002, FERC ordered a hearing to determine "whether the dysfunctional California spot markets adversely affected the long-term bilateral markets, and, if so, whether modification of any individual contract at issue[was] warranted." Pub. Utils. Comm'n v. Sellers of Long Term Contracts, 99 F.E.R.C. ¶ 61,087, at ¶ 61,384 (2002) (footnote omitted). FERC announced that it would review all contracts explicitly calling for "public interest" review under Mobile-Sierra,⁵ while setting for hearing the question of whether it would also apply that standard to contracts that were silent on the issue.⁶ Id. ¶ 61,383. FERC dismissed the complaints with regard to all contracts executed on or after June 20, 2001, the...