Sacramento Municipal Utility v. F.E.R.C.

• Decision Date: 05 January 2007
• Docket Number: No. 05-1231.,05-1231.
• Citation: 474 F.3d 797
• Parties: SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent California Independent System Operator Corp., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

474 F.3d 797

SACRAMENTO MUNICIPAL UTILITY DISTRICT, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent California Independent System Operator Corp., et al., Intervenors.

No. 05-1231.

United States Court of Appeals, District of Columbia Circuit.

Argued October 27, 2006.

Decided January 5, 2007.

Harvey L. Reiter argued the cause for petitioner. With him on the briefs were Glen L. Ortman, Dennis Lane, Lucy Holmes Plovnick, and Linda M. Nagel.

Carol J. Banta, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were John S. Moot, General Counsel, and Robert H. Solomon, Solicitor. Judith A. Albert, Attorney, entered an appearance.

Michael E. Ward, Anthony J. Ivancovich, Daniel J. Shonkwiler, Mark D. Patrizio, and Stuart K. Gardiner were on the brief for intervenors California Independent System Operator Corporation, et al. in support of respondent.

Before: GINSBURG, Chief Judge, and SENTELLE and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

For the second time in as many years, petitioner, a local utility, seeks review of a Federal Energy Regulatory Commission order denying it the opportunity to continue purchasing transmission services through a contract that expired at the end of 2004. Finding petitioner's claims meritless, we deny the petition.

I.

Under a contract signed in 1967, Pacific Gas & Electric (PG & E) and several other California utilities provided petitioner, the Sacramento Municipal Utility District (SMUD), long-term firm transmission service. For those uninitiated in the intricacies of energy regulation, "[f]irm service permits customers to demand transmission at any time, while non-firm service permits the utility to cut service when there is not enough excess capacity." Transmission Access Policy Study Group v. FERC, 225 F.3d 667, 730 (D.C.Cir.2000) (per curiam). The contract permitted SMUD to demand 200 megawatts of transmission service—at any time for a fixed rate—over a series of high-voltage transmission facilities known as the Pacific Intertie. Consisting of two 500 kilovolt lines running from the Pacific Northwest through California, the Intertie allows California utilities to purchase power from sources in Oregon and Washington. Critical to the issue before us, PG & E had a similar contract with the Western Area Power Administration (Western). The SMUD and Western contracts (like other PG & E firm service contracts relating to the Intertie) expired on December 31, 2004.

As we explained in Sacramento Municipal Utility District v. FERC, 428 F.3d 294 (D.C.Cir.2005) (hereinafter Sacramento I), while Western and SMUD were receiving service under these contracts, the state of California and FERC "radically restructur[ed]" California's energy market. Id. at 296. As part of the restructuring, FERC "required utilities to `unbundle' their electricity generation and transmission services and to file new `open access' tariffs . . . guaranteeing non-discriminatory access to their transmission facilities by competing generators." Id. at 295-96; see also Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, F.E.R.C. Stats & Regs. ¶ 31,036 at 31,634-38 (1996) (summarizing FERC's new regulation). At the same time, California created the California Independent System Operator Corporation (CAISO), a non-profit organization that took over operation (but not ownership) of many transmission facilities, including the portions of the Pacific Intertie owned by PG & E. A year later (in a proceeding in which SMUD intervened) FERC approved a new tariff proposed by CAISO, under which CAISO no longer offers long-term firm transmission service, but instead requires utility customers to request transmission capacity in "real time," i.e., on either an hour-ahead or day-ahead basis. See Sacramento I, 428 F.3d at 297 (explaining CAISO tariff); Pac. Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122 at 61,435, 1997 WL 805937 (1997) (hereinafter CAISO II) (approving CAISO tariff). Utilities are then charged an access fee, as well as a "congestion price" that fluctuates with demand. The CAISO tariff provides transmission service to any utilities willing to pay the congestion charge. Sacramento I, 428 F.3d at 297.

Recognizing that CAISO's new service model represented a significant change for the utilities, "the Commission . . . declined to abrogate existing contracts and ordered customers to take service under the [CAISO] tariff upon contract expiration." Id.; see also CAISO II, 81 F.E.R.C. at 61,470-71. For this reason, SMUD and Western continued receiving transmission service under the 1967 contracts until they expired at the end of 2004. In addition to delaying implementation of the open-access tariff for these utilities, FERC required CAISO to find ways to allow utilities to hedge the risk of price fluctuations, Pac. Gas & Elec. Co., 80 F.E.R.C. ¶ 61,128 at 61,427, 1997 WL 568000 (1997) (hereinafter CAISO I), and later adopted a CAISO proposal that mitigated risk through the use of short-term tradeable financial instruments, see Cal. Ind. Sys. Operator Corp., 87 F.E.R.C. ¶ 61,143, at 61,569-82, 1999 WL 259874 (1999). At oral argument in this case, FERC's counsel indicated the Commission is now investigating longer-term risk mitigation strategies through a comprehensive market redesign proceeding. Oral Arg. at 24:30.

Early in 2004, PG & E filed for permission to terminate transmission service to SMUD and Western upon the expiration of their contracts at the end of that year. Shortly thereafter, PG & E and CAISO began negotiations with Western—but not with SMUD—to continue transmission service outside the CAISO tariff. Unlike SMUD, Western owns and operates a segment of one of the two transmission lines that make up the Pacific Intertie. PG & E owns and CAISO operates the remainder of this line. Absent an agreement similar to Western's 1967 contract with PG & E, utility customers receiving power transmitted along the Intertie would be charged twice, once by CAISO and again by Western (a phenomenon FERC calls "pancaked rates"). Pac. Gas & Elec. Co., 109 F.E.R.C. ¶ 61,255 at 62,213, 2004 WL 2758030 (2004) (hereinafter Initial Order). Western, CAISO, and PG & E, however, negotiated a "Transmission Exchange Agreement," whereby the parties agreed to exchange transmission without charging each other transmission rates, including congestion charges. This Agreement effectively shielded Western from the risks of congestion pricing under the CAISO tariff in exchange for providing CAISO and its customers rate-free capacity on Western's portion of the Pacific Intertie. Calling the Transmission Exchange Agreement a "unique agreement which is beneficial to all the parties," FERC approved it, along with PG & E's termination of service to Western under the 1967 contract. Id. at 62,212-13.

Although SMUD lodged no objection to the Transmission Exchange Agreement, it opposed PG & E's filing to terminate its own service, alleging that termination would harm the public interest by subjecting SMUD to the financial risks of congestion pricing under the CAISO tariff. SMUD also asserted that PG & E's refusal to negotiate a successor agreement similar to the new Western agreement was discriminatory. Based on these arguments, SMUD urged FERC to reject PG & E's filing, or in the alternative, to suspend termination until the Commission could conduct an evidentiary hearing to resolve the issues.

FERC rejected SMUD's arguments, denied its request for an evidentiary hearing, and accepted PG & E's notice of termination. Id. at 62,215. SMUD sought rehearing, reiterating its arguments and asserting that FERC should have reviewed PG & E's termination request under a "public interest" rather than a "just and reasonable" standard. FERC denied rehearing, Pac. Gas & Elec. Co., 111 F.E.R.C. ¶ 61,175 at 61,849, 2005 WL 1060912 (2005) (hereinafter Rehearing Order), and SMUD now petitions for review, see 16 U.S.C. § 825l(b) (granting judicial review of FERC orders made under the Federal Power Act).

II.

Because termination of transmission service constitutes a rate change requiring FERC approval under section 205(d) of the Federal Power Act (FPA), 16 U.S.C. § 824d(d), a transmission service provider must file with FERC before terminating service, even if service is provided under a contract ending on its own terms. See also 18 C.F.R. § 35.15(a). SMUD first argues that FERC may accept a filing requesting termination of service only if the termination serves the "public interest." SMUD roots this contention in dictum from Pennsylvania Water & Power Co. v. Federal Power Commission, 343 U.S. 414, 72 S.Ct. 843, 96 L.Ed. 1042 (1952), in which the Supreme Court held that FERC's predecessor agency, the Federal Power Commission (FPC), had statutory authority to order Penn Water to continue its practice of integrating its power output with that of another public utility. Id. at 422-23, 72 S.Ct. 843. The Court explained that Penn Water could nonetheless seek Commission approval to discontinue service under FPA section 205(d), "provided Penn Water can prove that its wishes are consistent with the public interest." Id. (emphasis added). SMUD also points to two previous FERC orders, in which the Commission stated that "proposed termination[s] must be shown to be consistent with the public interest." Fla. Power & Light Co., 3 F.E.R.C. ¶ 61,081 at 61,231 (1978); see also Pub. Serv. Co. of Ind., 10 F.E.R.C. ¶ 61,277 at 61,537 (1980). According to SMUD, by refusing to make a public interest determination, FERC departed from these precedents without explanation.

We see no merit in SMUD's argument. The words "public interest" appear nowhere in section 205(d). Instead, the statute requires FERC to determine whether a proposed change in...