Sacramento Mun. Utility Dist. v. F.E.R.C.

• Decision Date: 01 November 2005
• Docket Number: No. 04-1171.,04-1171.
• Citation: 428 F.3d 294
• Parties: SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Modesto Irrigation District, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 294

428 F.3d 294

SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Modesto Irrigation District, et al., Intervenors.

No. 04-1171.

United States Court of Appeals, District of Columbia Circuit.

Argued September 9, 2005.

Decided November 1, 2005.

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

Harvey L. Reiter argued the cause for petitioner. With him on the briefs were Glen L. Ortman, Adrienne E. Clair, John E. McCaffrey, and Lucy Holmes Plovnick.

Bill Lockyer, Attorney General, Attorney General's Office of the State of California, Mary E. Hackenbracht, Senior Assistant Attorney General, Peter C. Kissel, and Elisa J. Grammer were on the brief for California Department of Water Resources.

Robert H. Solomon, Deputy Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, Dennis Lane, Solicitor, and Judith A. Albert, Attorney.

Michael E. Ward, Anthony J. Ivancovich, Mark D. Patrizio, Stuart K. Gardiner, E. Gregory Barnes, Michael D. Mackness, and Ellen A. Berman were on the brief for intervenors California Independent System Operator, et al. in support of respondent. Jennifer L. Key and J. Phillip Jordan entered appearances.

Before: SENTELLE, RANDOLPH, and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge.

The Sacramento Municipal Utility District ("Sacramento") sought an order from the Federal Energy Regulatory Commission compelling the major California utilities¹ to continue providing it with long-term firm transmission service. Sacramento asserted a right of first refusal under the Commission's "Order No. 888."² The Commission rejected Sacramento's request in two orders: Sacramento Municipal Utility District v. Pacific Gas & Electric Co., 105 F.E.R.C. ¶ 61,358, 2003 WL 23010313 (2003) ("Initial Order"), reh'g denied, Sacramento Municipal Utility District v. Pacific Gas & Electric Co., 107 F.E.R.C. ¶ 61,237, 2004 WL 1211564 (2004) ("Rehearing Order"). This petition for judicial review followed.

Commercial relations between Sacramento and the California utilities are governed by private contractual arrangements made in accordance with public tariffs approved by the Commission. Before 1996, vertically integrated utilities provided bundled electricity generation, transmission, and distribution services to both retail and wholesale customers. See Transmission Access Policy Study Group v. FERC, 225 F.3d 667, 681 (D.C.Cir.2000). Municipalities and other small utilities often required more electricity to serve their customers than they could generate. Such utilities secured additional power through long-term contracts. In August 1967, Sacramento entered into a power transmission agreement with the California utilities. Like many contracts of its era, the Sacramento agreement provided for long-term firm physical transmission service. Sacramento could demand two hundred megawatts of capacity along a specified transmission path at any time throughout the duration of the contract.³ For municipal governments with stringent quality-of-service obligations to their retail customers, these long-term contracts provided a reliable mechanism to ensure "sufficient long-term firm transmission capacity to import all of the long-term power supplies [they had] under contract." Brief of Petitioner at 4.

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. See Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,635-36. The Commission recognized that the transition to an open access regime would have significant implications for long-term contract-holders. See id. at 31,662-63. Municipalities and other customers who required the "certainty and continuity" of long-term firm service, Transmission Access Policy Study Group, 225 F.3d at 735, could have found themselves at a disadvantage in a competitive market. To address these concerns, the Commission included in the pro forma tariff a provision granting all long-term firm transmission customers a right of first refusal to continue taking service upon expiration of their contracts.⁴ Section 2.2 of the tariff provides that "[e]xisting firm service customers ... have the right to continue to take transmission service ... when the contract expires.... If at the end of the contract term, the [transmission system] cannot accommodate all of the requests for transmission service the existing firm service customer must agree to accept a contract term at least equal to a competing request by any new [customer] and to pay the current just and reasonable rate...." Order No. 888-A, F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,511. Although the parties refer to Section 2.2 as a "right of first refusal," it is more properly understood as a reservation priority. "If there are capacity limitations and both customers (existing and potential) are willing to pay for firm transmission service of the same duration, the right of first refusal provides a tie-breaking mechanism that gives priority to existing customers so that they may continue to receive transmission service." Id. at 30,197; see also Idaho Power Co. v. FERC, 312 F.3d 454, 457 (D.C.Cir.2002). This right does not guarantee price or other terms; it is simply a "mechanism for allocating transmission capacity" to existing customers willing to match the terms of new customers. Order No. 888-A, F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,197.

Although the order required utilities to file tariffs that contained the "non-rate terms and conditions set forth in the ... pro forma tariff," Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,768; see also 18 C.F.R. § 35.28(c)(1), the Commission also recognized that its order was likely not the end of the road in an industry marked by transition. Order No. 888 allows future filings in which utilities may deviate from the terms of the pro forma tariff, so long as such deviations are "consistent with, or superior to" the terms in the pro forma tariff. Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,770. The Commission specifically anticipated the development of new market structures like independent service operators ("ISOs") — non-profit entities that administer the transmission grids of multiple operators — and articulated a set of principles to govern their operation. See id. at 31,730-32.

As the Commission was implementing Order No. 888, the California legislature and the state's Public Utility Commission were radically restructuring California's energy markets. A 1996 law chartered the California Independent System Operator ("California ISO"), an independent entity that would take over transmission operations from the California utilities and file a new tariff with the Commission. See Cal. Indep. Sys. Operator Corp. v. FERC, 372 F.3d 395, 397 (D.C.Cir.2004). The California ISO operates under a service model quite different from that envisioned in Order No. 888. Instead of relying on long-term contracts, the California ISO allocates transmission capacity in "real time," based on hour-ahead and day-ahead scheduling requests from customers. See Paul L. Joskow, California's Electricity Crisis, 17 OXFORD REV. ECON. POL'Y 365, 370-72 (2001). Instead of providing long-term reservation of transmission capacity for a set price, the California ISO charges all customers an access fee and then adjusts its "congestion" pricing based on supply and demand. Any customer can, in effect, receive service at any time so long as it is willing to pay the necessary "congestion charges" to secure priority during peak demand periods. See Pacific Gas & Elec. Co., 80 F.E.R.C. ¶ 61,128, at 61,428-29 (1997) ("CAISO I").

The Commission found the California ISO tariff consistent with the broad non-discrimination goals of Order No. 888. See Pacific Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122, at 61,435, 61,446, 1997 WL 805937 (1997) ("CAISO II"). To manage the transition to a new regulatory regime and a completely new service model, the Commission again declined to abrogate existing contracts and ordered customers to take service under the California ISO tariff upon contract expiration.⁵ Id. at 61,463-65. The California ISO tariff does not contain a right of first refusal provision. The Commission explicitly approved the absence of such a provision, noting that "[t]he ISO's proposal to schedule transmission on a day-ahead and hour-ahead basis is not compatible with the long-term reservation of discrete physical transmission rights." Id. at 61,472. To achieve consistency with the California utilities' Order No. 888 tariffs, which governed service until the ISO commenced operations, the Commission struck the Section 2.2 right of first refusal provision from the California utilities' tariffs, replacing it with a clause honoring existing contracts only for the term of the contract. Id. at 61,472 n. 196.

The Commission nevertheless found that the California ISO tariff would not provide service "as good as or superior to" that provided under Order No. 888 without some instrument for hedging the risk of congestion charges. CAISO I, 80 F.E.R.C. at 61,427. This was especially so for incumbent customers with previously guaranteed service. Id. ("We are also concerned about potential discrimination between new market participants and participants with existing long-term transmission contracts."). The California ISO proposed a system of "firm transmission rights" — tradeable financial instruments that protect against significant fluctuations in congestion pricing. See Cal....