Sacramento Mun. Util. Dist. v. Fed. Energy Regulatory Comm'n, Nos. 07-1208, 07-1216, 07-1217, 07-1513, 08-1298, 08-1311.

• Decision Date: 23 July 2010
• Docket Number: Nos. 07-1208, 07-1216, 07-1217, 07-1513, 08-1298, 08-1311.
• Parties: SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. California Independent System Operator Corporation, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

616 F.3d 520

SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner

v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.California Independent System Operator Corporation, et al., Intervenors.

Nos. 07-1208, 07-1216, 07-1217, 07-1513, 08-1298, 08-1311.

United States Court of Appeals,District of Columbia Circuit.

Argued Feb. 25, 2010.

Decided July 23, 2010.

COPYRIGHT MATERIAL OMITTED.

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

Carolyn F. Corwin and Harvey L. Reiter argued the causes for petitioners San Diego Gas & Electric Company and Sacramento Municipal Utility District on CRR Issues. With them on the briefs were James R. Dean, Jr., Don Garber, and Lucy Holmes Plovnick. William L. Massey and Glen L. Ortman entered appearances.

Lisa G. Dowden, Harvey L. Reiter, and Deborah A. Swanstrom argued the causes for petitioners City and County of San Francisco, California, Imperial Irrigation District, and Sacramento Municipal Utility District on Tariff Charge Issues. When them on the briefs were Meg Meiser, Theresa Mueller, M. Denyse Zosa, and Lodie D. White.

Sean M. Neal, Michael Postar, and Bhaveeta K. Mody were on the brief for intervenors Modesto Irrigation District and Transmission Agency of Northern California in support of petitioners. Wallace L. Duncan and Derek A. Dyson entered appearances.

Beth G. Pacella, Senior Attorney, and Samuel Soopper, Attorney, Federal Energy Regulatory Commission, argued the causes for respondent. With them on the brief was Robert H. Solomon, Solicitor.

Kenneth G. Jaffe argued the cause for intervenors in support of respondent. With him on the brief were Michael E. Ward, Nancy J. Saracino, Daniel J. Shonkwiler, Roger E. Collanton, Jennifer L. Key, E. Kathleen Moore, Christopher C. O'Hara, Arthur Lawrence Haubenstock, Charles Ragan Middlekauff, Jeffery D. Watkiss, and Stuart Caplan. Bradley R. Miliauskas entered an appearance.

Before: BROWN, GRIFFITH and KAVANAUGH, Circuit Judges.

PER CURIAM:

Following the California energy crisis of 2000-01, the California Independent System Operator (California ISO or the ISO) began the process of redesigning California's electricity market. The Federal Energy Regulatory Commission (FERC or the Commission) issued a series of orders providing guidance on California ISO's proposals. Ultimately, in four orders issued between 2006 and 2008, the Commission approved the ISO's new market design, rejecting the numerous objections lodged by at least sixty-seven intervenors. Four parties-the Sacramento Municipal Utility District (Sacramento), the Imperial Irrigation District (Imperial), the City and County of San Francisco (San Francisco), and the San Diego Gas & Electric Company (San Diego)-now petition for review of these orders. Sacramento and Imperial challenge California ISO's “locational marginal pricing” rate design, arguing in particular that it is unreasonable and unlawful to charge customers for the marginal cost of transmission losses. San Francisco challenges the “local resource adequacy requirement” imposed by California ISO, claiming it deprives San Francisco of the value of a preexisting contract. Finally, San Diego and Sacramento challenge aspects of the financial mechanism California ISO devised to allow customers to hedge against congestion costs. We find no merit to these arguments and therefore deny the petitions for review.

I. Background

A. The Parties

“In 1996, the Commission ordered the national deregulation of electricity transmission services. Order No. 888 required utilities to ‘unbundle’ their electricity generation and transmission services and to file new ‘open access' tariffs-modeled on a pro forma tariff included in the rulemaking-guaranteeing non-discriminatory access to their transmission facilities by competing generators.” Sacramento Mun. Util. Dist. v. FERC, 428 F.3d 294, 295-96 (D.C.Cir.2005) (“ Sacramento I ”) (citing Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed.Reg. 21,540 (Apr. 24, 1996) (“Order 888”)). ¹ Order 888 also encouraged public utilities “to participate in Independent System Operators (‘ISOs').” Cal. Indep. Sys. Operator Corp. v. FERC, 372 F.3d 395, 397 (D.C.Cir.2004). “An ISO conducts the transmission services and ancillary services for all users of such a system, replacing the conduct of such services by the system owners.... FERC deems it crucial that an ISO be independent of the market participants so that decisions of policy, operation, and dispute resolution be free of the discriminatory impetus inherent in the old system.” Id. (citing Order 888 at 31,731).

Thus, in 1996, the California legislature chartered California ISO, “a non-profit organization that took over operation (but not ownership) of many transmission facilities” in the state. Sacramento Mun. Utility Dist. v. FERC, 474 F.3d 797, 798 (D.C.Cir.2007). California ISO maintains a tariff, subject to approval by the Commission, setting forth the terms, conditions, and rates under which it provides electricity service to customers. Sacramento, Imperial, San Francisco, and San Diego are all “load-serving entities,” meaning they acquire electricity from California ISO for delivery to end-use consumers. The wholesale rates they pay are dictated by the ISO's tariff.

However, these four petitioners are not all alike. San Diego is a privately-owned utility that became a “participating transmission owner” in California ISO by turning over operational control of its transmission facilities to the ISO. See W. Area Power Admin. v. FERC, 525 F.3d 40, 44 (D.C.Cir.2008). Thus, California ISO assumed the obligation to honor San Diego's preexisting transmission contracts. By contrast, Sacramento, Imperial, and San Francisco are publicly-owned “non-jurisdictional” utilities that opted not to become participating transmission owners of California ISO. (They are called “non-jurisdictional” because, as governmental entities, they are not subject to FERC's jurisdiction under §§ 205 and 206 of the Federal Power Act, see 16 U.S.C. § 824(f).) Accordingly, they own or co-own certain transmission facilities that are within California ISO's “balancing authority area” ² but are not part of the ISO's grid. These entities retain “transmission ownership rights”-contractual entitlements to use such facilities.

B. The Market Redesign and Technology Upgrade Proposal

“In 2000, wholesale prices for electricity in California increased dramatically and resulted in the now-infamous California energy crisis.” Pac. Gas & Elec. Co. v. FERC, 373 F.3d 1315, 1317 (D.C.Cir.2004). This prompted California ISO, at the behest of the Commission, to begin redesigning California's electricity market to avoid any repetition of the 2000-01 crisis. California ISO's “market redesign and technology upgrade” proposal followed. Over the course of six years, the Commission issued more than thirty orders providing guidance to California ISO and its market participants on the various contours of the proposed changes. The Commission ultimately approved California ISO's revised tariff in four orders issued between 2006 and 2008. ³ Three features of this tariff are challenged here: its incorporation of marginal loss charges into locational marginal prices, its local resource adequacy requirement, and its congestion revenue rights mechanism.

1. Locational Marginal Pricing

California ISO proposed to use “locational marginal pricing” (LMP) to set wholesale electricity prices. With an LMP-based rate structure, prices are designed to reflect the least-cost of meeting an incremental megawatt-hour of demand at each location on the grid, and thus prices vary based on location and time. Each LMP consists of three components: (i) the cost of generation; (ii) the cost of congestion; and (iii) the cost of transmission losses. See First Market Redesign Order ¶ 50. The first component refers basically to the baseline cost of serving load ⁴ anywhere on the system in the absence of congestion and transmission losses. Id. With respect to the second component, we have explained:

LMP ... incorporates the cost of congestion into the price of energy. Under the LMP system, [an ISO] takes into

account the limits on available transmission capacity when determining the price of energy at each node in its transmission grid. This results in higher energy prices at nodes that require the use of congested transmission lines and lower prices in less congested areas.... LMP [therefore] ... giv[es] market participants incentives to avoid congestion-causing transactions [and] is also more economically efficient: scarce transmission capacity is allocated to those who value it most instead of being physically rationed.

Wis. Pub. Power, Inc. v. FERC, 493 F.3d 239, 250-51 (D.C.Cir.2007). The third component, transmission losses,

refer[s] to the amount of electric energy lost when electricity flows across a transmission system: it is a function of the square of the amount of the current flowing on the wire and of the resistance it encounters. In general, the current on a given transmission line remains a constant, and the loss associated with a single transmission of electricity is primarily a function of the distance the electricity is transmitted. [An ISO] must deliver to the electricity customer the entire amount contracted for, regardless of the inevitable loss, so a transmission customer [ i.e., a load-serving entity] ... generally compensates [the ISO] for lost energy either by providing more energy at the injection point than the electricity customer receives at the withdrawal point, or by providing energy in-kind to the transmitting utility.

Sithe/Independence Power Partners, L.P. v. FERC, 285 F.3d 1, 2 (D.C.Cir.2002) (citation omitted). In other words, unless the load-serving entity self-supplies sufficient electricity to...