You are viewing a free summary from Descrybe.ai. For citation and good law / bad law checking, legal issue analysis, and other advanced tools, explore our Legal Research Toolkit — not free, but close.

Cpuc v. Ferc

Citation: Not availableDocket: 16-70481

Court: Court of Appeals for the Ninth Circuit; January 7, 2018; Federal Appellate Court

Original Court Document: View Document

EnglishEspañolSimplified EnglishEspañol Fácil
The Ninth Circuit Court granted the California Public Utilities Commission's (CPUC) petition for review, finding that the Federal Energy Regulatory Commission (FERC) acted arbitrarily in declaring Pacific Gas and Electric Company (PG&E) eligible for an incentive adder for remaining with the California Independent System Operator Corporation (Cal-ISO). This determination was deemed inconsistent with state law, which required authorization for PG&E to leave. The court emphasized that Section 219(c) of the Federal Power Act mandates FERC to incentivize utilities to join regional transmission organizations, leading to the establishment of Order 679, which allows for upward adjustments (incentive adders) to the rate of return on equity for utilities that participate.

The court criticized FERC for incorrectly interpreting Order 679, stating that it failed to justify blanket grants of adders without meeting the requirement for a case-by-case review. The panel also determined that FERC's interpretation lacked deference under Auer v. Robbins and constituted an unexplained deviation from established policy that incentives should encourage future voluntary actions. Furthermore, FERC's generalized application of adders was found to violate the specific stipulations of Order 679. The CPUC's petition was ruled not to be a collateral attack on Order 679.

Section 219(c) mandates that FERC incentivize utilities to join regional transmission organizations, which FERC addressed in 2006 through Order 679 and subsequent rehearing orders. Order 679 introduced 'incentive adders' to the rate of return on equity for utilities participating in transmission organizations, stipulating that such incentives would be granted only when justified in specific cases rather than generically. The order established that utilities would be presumed eligible for these adders if they demonstrated ongoing membership in a transmission organization, acknowledging the voluntary nature of such membership. FERC rejected suggestions to automatically grant incentives, opting instead for a case-by-case evaluation process.

Separately, in 1995, the California Public Utilities Commission (CPUC) directed California's major investor-owned utilities, including PG&E, to propose an independent system operator (ISO) and to transfer operational control of facilities to it, retaining authority under state law for any control transfers. This directive was affirmed in state law. In 1997, PG&E sought and received CPUC approval to transfer control of its transmission assets to the newly established Cal-ISO, with future transfers requiring CPUC authorization.

Since joining Cal-ISO in 1997, PG&E has filed annual 'transmission owner' tariff filings with FERC, establishing its transmission revenue requirement, including the rate of return. Since 2007, PG&E has consistently requested 50 basis-point incentive adders under Order 679 in its filings, which FERC has routinely approved.

CPUC protested PG&E's requests for incentive adders in its sixteenth and seventeenth transmission owner tariff filings (TO 16 and TO 17) in 2014 and 2015, asserting that PG&E should not receive rewards for mandatory participation in Cal-ISO. Despite CPUC’s objections, FERC granted PG&E the requested 50 basis-point incentive adders in both cases, stating that there was no new evidence to reconsider the appropriateness of the adders. FERC’s TO 16 Initial Order recognized PG&E’s ongoing membership in Cal-ISO and confirmed eligibility for the incentive under Order No. 679, rejecting CPUC's argument that the adders were unjustified since PG&E’s participation was not voluntary. 

CPUC sought rehearing, claiming FERC mistakenly granted an adder for an involuntary membership and failed to address their arguments adequately. FERC denied these rehearing requests, clarifying that Order No. 679 allows incentives for utilities maintaining membership in transmission organizations, irrespective of whether membership is voluntary. FERC reiterated that PG&E's ongoing membership justified the incentive adders, which support Cal-ISO’s operational duties.

FERC characterized CPUC's objection as a 'collateral attack' on Orders 679 and 679-A, which it deemed unnecessary to address. CPUC filed a timely petition for review. FERC has jurisdiction over the transmission owner rate filings (TO 16 and TO 17) under section 205 of the Federal Power Act (FPA) and under section 313(b) for reviewing its orders. All parties agree that FERC definitively resolved the incentive adder issue in the orders under review. The review standard is whether FERC's actions were arbitrary, capricious, an abuse of discretion, or not in accordance with law, emphasizing that courts should not evaluate the quality of FERC's decision-making but rather whether it provided a rational explanation based on the facts. The review is constrained to the administrative record and the grounds specified therein.

FERC's conclusion that PG&E is entitled to incentive adders for remaining in the Cal-ISO was found to be arbitrary and capricious, as it misinterpreted Order 679 by granting adder requests without justifiable grounds, representing a deviation from established policy. FERC's interpretation that ongoing membership alone qualifies a utility for an incentive adder is viewed as plainly erroneous and inconsistent with the regulation. Order 679 allows for rebuttal of the presumption of eligibility for adders, contradicting FERC's application that ongoing membership is the sole criterion for such incentives.

FERC is required to conduct a case-by-case review of incentive adders for utilities, even those with ongoing membership in transmission organizations. Order 679 indicates that incentives for public utilities joining or remaining in these organizations will only be approved when justified, emphasizing that if automatic qualification existed, the "when justified" clause would be redundant. FERC explicitly rejected proposals for a generic membership adder, asserting the need for specific incentive evaluations on a case-by-case basis.

The justification for incentive adders stems from the benefits of membership in transmission organizations and the voluntary nature of that membership. If membership is not voluntary, the incentive would not be warranted, and challenges regarding eligibility based on this presumption could be raised during tariff filings. Order 679-A identifies these adders as inducements for utilities to join and remain in such organizations, highlighting that an incentive cannot promote behavior that is legally required.

The distinction between utilities that can withdraw from transmission organizations and those that cannot implies that incentives should only apply to the former. Additionally, ongoing contractual commitments or statutory obligations may influence the evaluation of individual applications, indicating that mere membership does not guarantee eligibility for adders. Although FERC argues that its orders dismissed the relevance of voluntary membership for incentive eligibility, the orders did not support the interpretation that mandatory participation should qualify utilities for adders. The absence of raised issues regarding involuntary participation further underscores the inconsistency of FERC's interpretation with the orders, which do not establish ongoing membership as the sole criterion for incentive eligibility and do not bar challenges based on the voluntariness of such membership. Therefore, deference to FERC’s interpretation of its own orders is declined.

An agency's interpretation of its regulations is not entitled to deference if there are indications that it lacks fair and considered judgment. Signs of inadequate consideration include treating the interpretation as a convenient litigating position or as a post hoc rationalization to defend prior actions. In this case, FERC's interpretation of Order 679 is viewed as a post hoc justification, as it had not previously articulated its stance and could have included it in the order itself. Order 679 states that utilities demonstrating ongoing membership in transmission organizations are 'presumed to be eligible' for incentive adders, but it does not address the rebuttal of this presumption for those unable to leave such organizations voluntarily. FERC acknowledged that membership is 'generally voluntary,' indicating awareness of non-voluntary memberships yet failed to address this foreseeable challenge adequately. In its responses to rehearing requests for TO 16 and TO 17 orders, FERC did not clearly articulate its interpretation, merely asserting its authority to grant incentive adders without substantial justification. Consequently, FERC’s interpretation is seen as a convenient litigating position lacking thorough consideration, thus not deserving deference. When Auer deference is not applicable, an agency's interpretation should be evaluated under the Skidmore standard, which considers the thoroughness of the agency's reasoning and its persuasive power. FERC's interpretation does not meet these criteria, as it lacks sufficient development or justification in the reviewed orders and is inconsistent with the text and purposes of Order 679.

FERC's interpretation of Order 679 does not receive Auer deference and is not persuasive, prompting a traditional interpretative approach to assess whether the Order allows challenges to the presumption of eligibility raised by CPUC. The language and intent of Order 679 indicate that utilities joining a regional transmission organization are "presumed to be eligible" for incentive adders, but this presumption is rebuttable, allowing for challenges based on the argument that such incentives do not promote continued participation. FERC's interpretation lacks a controlling authority and fails to provide a reasoned explanation for its decisions, which is a requirement for agency actions. Historically, FERC maintained that incentives should be prospective, linking them to future behavior and not rewarding past conduct. This policy is reflected in several FERC rulings, including denials of incentives for actions that utilities were already obligated to undertake. FERC previously denied incentives based on past membership in transmission organizations, indicating that utilities did not require inducement for actions they were already taking. Although FERC's recent order claims to revise its outlook on incentives, it does not effectively overrule the longstanding policy against retroactive rewards, thereby rendering FERC's departure from its established policy arbitrary and capricious.

FERC reversed its policy against providing incentives to utilities for remaining in transmission organizations, yet maintained that such incentives should be prospective, as membership in these organizations is generally voluntary. This policy, which limited incentives to future voluntary actions, persisted in the TO 16 and TO 17 orders. Granting PG&E incentive adders contradicted FERC’s established policy, as this was an unacknowledged and unexplained departure, rendering the decision arbitrary and capricious. FERC neither recognized its prior policy nor justified its deviation, claiming authority to grant the adders while dismissing CPUC's arguments regarding voluntariness as irrelevant.

FERC also acted arbitrarily by implementing a generic adder, contrary to Order 679’s requirement for a case-by-case assessment. Order 679 explicitly rejected the idea of a blanket 50-basis-point incentive adder for ongoing membership. In CPUC's challenges to PG&E's filings, it argued that the adder could not incentivize PG&E’s involuntary membership in Cal-ISO, but FERC ignored this point and approved the adder based on previous orders. FERC's argument that an adder is not considered generic merely because it is similarly granted to other utilities is flawed; it is the summary nature of the grant without specific inquiry into PG&E’s circumstances that renders it generic. 

Finally, CPUC's petition does not constitute a collateral attack on Order 679, as jurisdiction under the Federal Power Act (FPA) is limited to reviewing new orders. A petition is only a collateral attack if it is based on a clarification rather than a modification of a prior order. The court assesses whether a reasonable party would perceive a substantial risk that the original order was interpreted differently than FERC now asserts.

FERC's interpretation of Order 679 does not reasonably suggest that challenges from CPUC are precluded, meaning CPUC's challenge is not an impermissible collateral attack. FERC claims CPUC's petition is a collateral attack because it raises an argument previously rejected in 2006 regarding the eligibility of utilities for incentive adders. However, CPUC's actual challenge concerns the eligibility of utilities for incentive adders when participation in a transmission organization is involuntary, a point not addressed in the original Order 679 proceedings. Additionally, FERC argues that CPUC had notice regarding PG&E's eligibility for incentive adders due to its involvement in annual proceedings since 2007. This argument is countered by the fact that CPUC settled those proceedings, with each order explicitly stating that the settlements did not establish precedent on any issues. Consequently, neither Order 679 nor subsequent orders sufficiently informed CPUC that it could not challenge incentive adder eligibility based on involuntary membership in a transmission organization. As a result, CPUC's petition is granted, and the case is remanded to FERC for further proceedings, without addressing other issues raised by the parties.