Transmission Agency of Northern Calif. v. F.E.R.C.

• Decision Date: 20 July 2007
• Docket Number: No. 05-1402.,No. 06-1246.,05-1402.,06-1246.
• Citation: 495 F.3d 663
• Parties: TRANSMISSION AGENCY OF NORTHERN CALIFORNIA, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Southern California Edison Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

495 F.3d 663

TRANSMISSION AGENCY OF NORTHERN CALIFORNIA, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Southern California Edison Company, et al., Intervenors.

No. 05-1402.

No. 06-1246.

United States Court of Appeals, District of Columbia Circuit.

Argued May 14, 2007.

Decided July 20, 2007.

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

Dennis M.P. Ehling argued the cause for petitioners. With him on the briefs were Roger D. Stark, Wallace L. Duncan, James D. Pembroke, Michael Postar, Peter J. Scanlon, Sean M. Neal, and Kristen Connolly McCullough.

Wallace F. Tillman, Lisa G. Dowden, Daniel I. Davidson, Robert C. McDiarmid, Susan N. Kelly, Jonathan D. Schneider, Harvey L. Reiter, and Linda M. Nagel were on the briefs for intervenor and amici curiae in support of petitioner. Eugene Tillman entered an appearance.

Samuel Soopper, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were John S. Moot, General Counsel, and Robert H. Solomon, Solicitor.

Stuart K. Gardiner argued the cause for intervenors in support of respondent. With him on the brief were Anna J. Valdberg, Jennifer L. Key, Michael E. Ward, Anthony J. Ivancovich, Daniel J. Shonkwiler, Erik N. Saltmarsh, and Jeffrey A. Diamond. Victoria S. Kolakowski entered an appearance.

Before: GINSBURG, Chief Judge, and HENDERSON and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge:

Petitioners challenge three orders¹ of the Federal Energy Regulatory Commission ("FERC") that require the City of Vernon, California ("Vernon") to issue refunds to the California Independent System Operator Corporation ("CAISO") for overcollection of its transmission revenue requirement ("TRR").² Any opinion whose opening sentence includes three acronyms, one footnote that refers to three FERC orders and another that requires a definition of an accounting procedure is likely to be about a matter of some complexity. Fortunately, the legal issue that resolves the controversy before us is not so complex as the dispute itself, and because this case is a continuation of the litigation that resulted in our decision in Pacific Gas & Electric Company v. FERC, 306 F.3d 1112 (D.C.Cir.2002) ("PG & E"), we have some prior familiarity with the events and disputes out of which it arose.

In PG & E, we were asked to review a challenge brought by some existing PTOs of CAISO to a FERC order that approved the TRR Vernon filed when it sought to become a PTO as well. We concluded that FERC had failed to demonstrate that CAISO's rates (also referred to as the "transmission access charge" or "TAC") would be just and reasonable if Vernon were to participate under the proposed TRR. On remand, FERC issued three orders directing Vernon to pay refunds to CAISO so as to restore CAISO's just and reasonable rate. Vernon now petitions for review of these orders and asks us to consider whether FERC has authority (1) to review Vernon's TRR under the just and reasonable standard and (2) to order Vernon to refund any overcollection of its TRR.

Joining Vernon are the Transmission Agency of Northern California ("TANC"), the City of Santa Clara, California, the City of Redding, California, and M-S-R Public Power Agency (collectively, the "TANC Parties").³ Together, they argue that because Vernon, as a municipality, is exempted from the Federal Power Act when it provides transmission services, see E. Ky. Power Coop., Inc. v. FERC, 489 F.3d 1299, 1306 (D.C.Cir.2007) (citing United States v. Pub. Util. Comm'n of Cal., 345 U.S. 295, 315, 73 S.Ct. 706, 97 L.Ed. 1020 (1953)), FERC has no authority to order Vernon to pay refunds. For the reasons set forth below, we hold that although FERC has sufficiently demonstrated its authority to review Vernon's TRR under the just and reasonable standard, FERC lacks jurisdiction to order Vernon to pay refunds to CAISO. Accordingly, we vacate the portions of the orders requiring refunds by Vernon and remand for further proceedings.

I.

The Federal Power Act ("FPA") grants FERC authority "to provide effective federal regulation of the expanding business of transmitting and selling electric power in interstate commerce." New York v. FERC, 535 U.S. 1, 6, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002) (citing Gulf States Util. Co. v. FPC, 411 U.S. 747, 758, 93 S.Ct. 1870, 36 L.Ed.2d 635 (1973)). Section 205 of subchapter II under the FPA permits FERC to ensure that "all rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy" subject to its jurisdiction are "just and reasonable." FPA § 205, 16 U.S.C. § 824d(a).

In the past, the monopoly control of vertically-integrated utilities presented a major structural problem in the electricity industry because consumers were forced to pay a single price for "bundled" generation, transmission, and distribution services. See, e.g., Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1363 (D.C.Cir.2004) ("Midwest ISO"); Pub. Util. Dist. No. 1 of Snohomish Co. v. FERC, 272 F.3d 607, 610 (D.C.Cir.2001) ("Snohomish"). In an attempt to correct this problem, FERC implemented several policies to minimize anticompetitive behavior among transmission-owning public utilities. FERC began by requiring "utilities that owned transmission facilities to guarantee all market participants non-discriminatory access to those facilities," Midwest ISO, 373 F.3d at 1363 (citing Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, 61 Fed.Reg. 21,540, 21,550-52 (1996) ("Order No. 888")). Next, FERC encouraged, but did not require, the development of umbrella entities called independent system operators ("ISOs") and regional transmission organizations ("RTOs"). See id. at 1364. FERC encouraged public utilities to participate in these organizations, which would manage the transmission facilities of each of its members and return to them the revenues set forth in the TRRs. By assuming operational control but not ownership of the transmission facilities, ISOs (which manage RTOs) would separate "operation of the transmission grid and access to it from economic interests in generation[,]" Order No. 888, 61 Fed.Reg. at 21,551, and promote efficiency by taking advantage of economies of scale in segmentation and control of facilities, see Midwest ISO, 373 F.3d at 1364. Finally, FERC encouraged "all transmission-owning entities in the Nation, including non-public entities [e.g., governmental entities],"⁴ Regional Transmission Organizations, Order No. 2000, 65 Fed.Reg. 810, 811 (1996) (emphasis added); see also Order No. 888, 61 Fed.Reg. at 31,780-81, to voluntarily place their transmission facilities under the control of RTOs, see Order No. 2000, 54 Fed.Reg. at 811, some of which would be managed in turn by ISOs, id.; see also Order No. 888, 61 Fed.Reg. at 21,595-96.

This last step created a complication from which this case arises. Because governmental entities are exempt from the FPA, see FPA § 201(f), 16 U.S.C. § 824(f), FERC cannot regulate them even when they join regulated ISOs. See PG & E, 306 F.3d at 1114. It is settled, however, that "FERC may analyze and consider the rates of non-jurisdictional utilities to the extent that those rates affect jurisdictional transactions." Id. (citations omitted). In other words, FERC may consider the rates of a municipal utility PTO to the extent that they affect the rates of the ISO, which is subject to the FPA.

Established in 1997 by the State of California, CAISO is an ISO subject to the FPA. Initially, it had three PTOs, each subject to FERC's jurisdiction—Pacific Gas & Electric Company, Southern California Edison Company, and San Diego Gas & Electric Company. Under § 205, FERC had authority to examine these PTOs' TRRs to ensure that they were just and reasonable. On March 31, 2000, CAISO proposed to amend its tariff to allow non-jurisdictional utilities, including governmental entities, to become PTOs. See Cal. Indep. Sys. Operator Corp., 91 FERC ¶ 61,205, 61,720 (2000). Although the aim of the proposal was consistent with FERC's effort to encourage non-jurisdictional entities to become PTOs, FERC nonetheless determined that this particular proposal was at odds with FERC's regulatory responsibility because it barred any FERC review of the TRRs of non-jurisdictional entities. See id. at 61,724. Careful to disavow any intention "to broaden the applicability of Section 205 to non-public utilities," id. (internal quotation and citation omitted), FERC accepted a revised CAISO proposal only when it required non-jurisdictional PTOs to submit their TRRs to either an ISO panel subject to FERC review or directly to FERC. See Cal. Indep. Sys. Operator Corp., 93 FERC ¶ 61,104, 61,287-89 (2000).

On August 30, 2000, Vernon, seeking to become a PTO of CAISO, filed its TRR. See City of Vernon, Cal., 93 FERC ¶ 61,103, 61,283 (2000). FERC accepted Vernon's proposal subject to certain modifications (of no significance here), see Cal. Indep. Sys. Operator, 94 FERC ¶ 61,148 (2001), which Vernon made. See City of Vernon, Cal., 94 FERC ¶ 61,344 (2001). Two of CAISO's PTOs appealed FERC's decision to accept Vernon's proposal on the ground that Vernon's TRR did not meet § 205's "just and reasonable" standard and that FERC had failed to adequately consider how Vernon's participation and its TRR would affect CAISO's overall rates. See PG & E, 306 F.3d at 1114.

It should not be surprising that these PTOs were troubled by FERC's approval of Vernon's TRR. Because CAISO's rates are based on the TRRs of each of the PTOs, a Vernon TRR that is not just and reasonable could frustrate FERC's effort to ensure that CAISO's rates are. Observing this, in PG & E we held that "FERC never clarified or developed either the approach or the standard that it applied" to...