Public Utility Dist. No. 1 v. F.E.R.C.

• Decision Date: 19 December 2006
• Docket Number: No. 04-70712.,No. 03-72511.,No. 03-74208.,No. 03-74757.,No. 03-74617.,03-72511.,03-74757.,04-70712.,03-74617.,03-74208.
• Citation: 471 F.3d 1053
• Parties: PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY WASHINGTON, Petitioner, Reliant Energy Services Inc., Intervenor, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Southern California Water Company, Petitioner, Enron Power Marketing Inc., Intervenor, v. Federal Energy Regulatory Commission, Respondent. Attorney General, State of Nevada, Petitioner, BP Energy Company; Mirant Americas Energy Marketing, L.P., Intervenors, v. Federal Energy Regulatory Commission, Respondent. Nevada Power Company; Sierra Pacific Power Company, Petitioners, v. Federal Energy Regulatory Commission, Respondent. Public Utility District No. 1 of Snohomish County Washington, Petitioner, Calpine Energy Services, L.P.; El Paso Merchant Energy L.P.; Morgan Stanley Capital Group, Inc.; Mirant Americas Energy Marketing, LP; BP Energy Co.; Allegheny Energy Supply Co., LLC; American Electric Power Service Corporation, Intervenors, v. Federal Energy Regulatory Commission, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

471 F.3d 1053

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY WASHINGTON, Petitioner, Reliant Energy Services Inc., Intervenor, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Southern California Water Company, Petitioner, Enron Power Marketing Inc., Intervenor, v. Federal Energy Regulatory Commission, Respondent. Attorney General, State of Nevada, Petitioner, BP Energy Company; Mirant Americas Energy Marketing, L.P., Intervenors, v. Federal Energy Regulatory Commission, Respondent.

Nevada Power Company; Sierra Pacific Power Company, Petitioners, v. Federal Energy Regulatory Commission, Respondent.

Public Utility District No. 1 of Snohomish County Washington, Petitioner, Calpine Energy Services, L.P.; El Paso Merchant Energy L.P.; Morgan Stanley Capital Group, Inc.; Mirant Americas Energy Marketing, LP; BP Energy Co.; Allegheny Energy Supply Co., LLC; American Electric Power Service Corporation, Intervenors, v. Federal Energy Regulatory Commission, Respondent.

No. 03-72511.

No. 03-74757.

No. 04-70712.

No. 03-74617.

No. 03-74208.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 8, 2004.

Filed December 19, 2006.

Stephen M. Ryan, Manatt, Phelps & Phillips LLP, Washington, DC, argued the case and was on the briefs of petitioners Nevada Power Company and Sierra Pacific Power Company. Roger A. Berliner, Manatt, Phelps & Phillips LLP, Washington, DC, and C. Stanley Hunterton, Hunterton & Associates, Las Vegas, NV, were also on the briefs as attorneys for the same parties.

Randolph Lee Elliot, Miller, Balis & O'Neil PC, Washington, DC, argued the case and was on the briefs of petitioner Southern California Water Company. Christopher M. Lyons was also on the briefs as attorney for the same party.

Eric L. Christensen, Assistant General Counsel, argued the case and was on the briefs of petitioner Public Utility District No. 1 of Snohomish County, WA. Howard M. Goodfriend, Edwards, Sieh, Smith & Goodfriend PS, Seattle, WA, and Michael J. Gianunzio, General Counsel, were also on the briefs as attorneys for the same party.

Timothy Hay, Chief Deputy Attorney General and Consumer Advocate, John E. McCaffrey, Stinson, Morrison, & Hecker LLP, Washington, DC, and Eric Witkoski, Senior Deputy Attorney General, were on the briefs of petitioner Office of the Nevada Attorney General, Bureau of Consumer Protection.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, Washington DC, argued the case and was on the briefs of the respondent. Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor, were also on the briefs as attorneys for the respondent.

Richard L. Hinckley, General Counsel, was on the brief of intervenor Public Utilities Commission of Nevada.

William J. Kayatta, Jr., Jared S. des Rosiers, Louise K. Thomas, Deborah L. Shaw, Christopher T. Roach, Pierce Atwood, Portland, ME, and Erik N. Saltmarsh, Erin KochGoodman, California Electricity Oversight Board, Sacramento, CA, were on the joint brief of the intervenors, as attorneys for California Electricity Oversight Board. Arocles Aguilar, Sean Gallagher, Jonathan Bromson, Public Utilities Commission of the State of California, San Francisco, CA, were on the joint brief of the intervenors, as attorneys for the Public Utilities Commission of the State of California.

Richard P. Bress, Michael J. Gergen, Jared W. Johnson, David G. Tewksbury, Stephanie S. Lim, Latham & Watkins LLP, Washington, DC, were on the brief of intervenor Mirant Americas Energy Marketing LP.

Paul J. Pantano, Jr. and Catherine M. Krupka, McDermott, Will & Emery LLP, Washington, DC, were on the brief of intervenor Morgan Stanley Capital Group Inc.

Kenneth W. Irvin, Morrison & Foerster LLP, Washington, DC, argued the case and was on the joint brief of the intervenors in support of the respondent, as attorney for El Paso Merchant Energy, LP. Edward J. Twomey and Bruce Barnard were also on the joint brief as attorneys for the same party.

Merrill L. Kramer, Robert Shapiro, and Robin D. Ball, Chadbourne & Park LLP, Washington, DC, were on the joint brief of the intervenors in support of the respondent, as attorneys for Allegheny Energy Supply Company, LLC.

Clark Evans Downs, Martin V. Kirkwood, Kenneth B. Driver, Jonathan F. Christian, Jones Day, Washington, DC, were on the joint brief of the intervenors in support of the respondent, as attorneys for American Electric Power Service Corp.

Mark R. Haskell, Morgan, Lewis & Bockius LLP, Washington, DC, was on the joint brief of the intervenors in support of the respondent, as attorney for BP Energy Company.

Sarah G. Novosel, Calpine Corporation, Washington, DC, was on the joint brief of the intervenors in support of the respondent, as attorney for Calpine Energy Services, LP.

Charles A. Moore, Leboeuf, Lamb, Greene & MacRae, LLP, Houston, TX, was on the joint brief of the intervenors in support of the respondent, as attorney for Enron Power Marketing, Inc.

Randoplph Q. McManus and Melissa E. Maxwell, Baker Botts LLP, Washington, DC, were on the joint brief of the intervenors in support of the respondent, as attorney for Reliant Energy Services, Inc.

On Petition for Review of an Order of the Federal Energy Regulatory Commission. FERC Nos. EL02-26 et al., EL-02-28, EL02-28-004, EL02-26-000.

Before: BROWNING, PREGERSON, and BERZON, Circuit Judges.

BERZON, Circuit Judge:

The energy crisis in 2000-2001 resulted in extreme power shortages and price volatility in California and other western states. This consolidated appeal raises several interrelated issues concerning a series of wholesale energy contracts for future energy supplies — known as "forward" contracts — entered into by power companies in California, Nevada, and Washington during the energy crisis. Petitioners, including retail power companies and state agencies,¹ contended before the Federal Energy Regulatory Commission (FERC) that the contracts should be modified, but FERC concluded that they should not be.

Petitioners (the "local utilities") now allege that FERC, in so deciding, did not appropriately apply the just and reasonable standard set by section 206(a) of the Federal Power Act (FPA).² They allege that FERC erred in applying the Mobile-Sierra "public interest" mode of review³ to contracts that were (1) not subject to meaningful initial review or approval, and (2) formed during one of the most erratic and bizarre periods of activity for the western energy market.

We hold that FERC erred both in its procedural reliance on Mobile-Sierra⁴ and in the substantive standard it used in determining that the contracts at issue did not affect the public interest. FERC's reliance on Mobile-Sierra was misplaced because its grant of market-based rate authority lacked a mechanism to provide effective, timely relief from unjust and unreasonable rates due to market dysfunction, thereby creating a gap in the FPA's protection against excessive energy prices. Although we would remand to FERC solely because its application of Mobile-Sierra was therefore procedurally improper, we further hold that the agency's finding that the challenged contracts do not affect the public interest was based on a substantively erroneous mode of analysis. A remand is therefore necessary to allow FERC the opportunity to review these complaints in the first instance in light of these holdings and determine whether the challenged rates meet the statutory standard.

I. The Federal Power Act and Mobile-Sierra

The FPA governs the actions of public utilities, defined as "any person who owns or operates facilities subject to the jurisdiction of the [Federal Energy Regulatory] Commission." 16 U.S.C. § 824(e). The Commission's jurisdiction covers the "transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce." Id. § 824(a). This definition encompasses activities carried out by all of the Intervenor-Respondent companies.

The FPA requires FERC to regulate public utilities for the benefit of consumers. See Pa. Water & Power Co. v. Fed. Power Comm'n, 343 U.S. 414, 418, 72 S.Ct. 843, 96 L.Ed. 1042 (1952) ("A major purpose of the whole [Federal Power] Act is to protect power consumers against excessive prices."); California ex rel. Lockyer v. FERC (Lockyer), 383 F.3d 1006, 1017 (9th Cir.2004) (describing "protecting consumers" as the FPA's "primary purpose"); see also Atl. Ref. Co. v. Pub. Serv. Comm'n, 360 U.S. 378, 388, 79 S.Ct. 1246, 3 L.Ed.2d 1312 (1959) ("The [Natural Gas] Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.").

Two FPA provisions, sections 205 and 206, 16 U.S.C. §§ 824d, 824e, govern FERC's authority and establish its obligation to regulate rates for the interstate sale and transmission of electricity. Through these provisions, the FPA empowers FERC to regulate wholesale electricity rates but not the rates charged directly to consumers by local utilities. See 16 U.S.C. § 824(a), (b)(1). The protection the FPA accords consumers is therefore indirect: By assuring that wholesale purveyors of electric power charge fair rates to retailers, the FPA protects against the need to pass excessive rates on to consumers. At the same time, by assuring that wholesale purveyors of electric power receive a fair rate of return, the FPA assures that such sellers have the incentive to continue to produce and supply power.

The First Circuit has aptly described the interaction of sections 205 and 206:

In regulating electricity rates, the Federal Power Act follows (with variations) a well-developed model: the utility sets the rates in the first instance, 16 U.S.C. § 824d(a), subject to a basic statutory obligation that rates be just and reasonable and not unduly discriminatory or preferential, id. §§ 824d(a)-(b). FERC, which inherited the powers of its predecessor (the Federal Power Commission), can investigate a newly filed rate (...