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Parties Involved:
Federal Energy Regulatory Commission
Respondent
Pacific Gas and Electric Company
Petitioner

Document Text:

Notice: This opinion is subject to formal revision before publication in the

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 12, 2004 Decided July 9, 2004

No. 03-1025

PACIFIC GAS AND ELECTRIC COMPANY,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

CALIFORNIA POWER EXCHANGE CORPORATION, ET AL.,

INTERVENORS

Consolidated with

03-1108, 03-1305

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Stan Berman argued the cause for petitioner. With him

on the briefs were Paul B. Mohler and Mark D. Patrizio.

Joseph H. Fagan entered an appearance.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

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Beth G. Pacella, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on

the brief were Cynthia A. Marlette, General Counsel, Dennis

Lane, Solicitor, and Larry D. Gasteiger, Attorney.

Robert H. Loeffler, Paul W. Fox, Andrea M. Settanni,

Margaret A. Moore, and Alan Z. Yudkowsky were on the

brief for intervenors. Bruce A. Eisen and David O. Bickart

entered appearances.

Before: EDWARDS, SENTELLE and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: Petitioner, the Pacific Gas &

Electric Company (‘‘PG&E’’), seeks this Court’s review of

final orders issued by the Federal Energy Regulatory Commission (‘‘FERC’’) that establish a procedure for funding the

wind-up costs of the now-defunct California Power Exchange

Corporation (‘‘CalPX’’). Those orders established a regime

whereby former CalPX customers, like PG&E, were assessed

a charge for CalPX’s wind-up costs that correlated to the

absolute value of any outstanding account balances the customers had with CalPX as of March 13, 2002. Because the

cost-allocation methodology is both unreasonable and violates

the filed-rate doctrine, we vacate the orders and remand the

matter to FERC for further consideration.

I. Background

In 1996, California restructured its electric power industry

to a market-based rate system. In doing so, it created

CalPX, a non-profit entity that provided various auction markets for the trading of electricity under FERC-approved

tariff and rate schedules. Under this system, CalPX determined the amounts to be paid by buyers purchasing power

and how those amounts would be distributed to the sellers.

CalPX recovered its administrative costs by assessing a

FERC-approved charge to entities using its services.

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In 2000, wholesale prices for electricity in California increased dramatically and resulted in the now-infamous California energy crisis. PG&E paid the higher prices, but owing

to price freezes on retail rates, PG&E could not pass along

the increased costs to its customers. Ultimately, PG&E

could not meet its obligations to CalPX, its credit ratings

were reduced, and it filed for Chapter 11 bankruptcy.

Shortly thereafter, FERC began an investigation into the

California energy crisis. The many matters at issue in that

investigation have been consolidated and are collectively referred to as ‘‘the Refund Proceedings.’’ Those Refund Proceedings are massive in scope, but only a narrow segment is

pertinent to this case, as detailed below.

FERC first determined that prospective relief was insufficient, and that refunds related to transactions in the electricity spot markets operated by the California Independent

System Operator (‘‘CAISO’’) and CalPX were appropriate.

Refunds of approximately three billion dollars have been

tentatively granted. San Diego Gas & Elec. v. Sellers of

Energy and Ancillary Services into Markets Operated by the

Cal. Indep. Sys. Operator and the California Power Exch.,

102 FERC ¶ 61,317, order on reh’g, 105 FERC 61,066 (2003).

These determinations are on appeal before the United States

Court of Appeals for the Ninth Circuit. Cal. Pub. Util.

Comm’n v. FERC, Nos. 01-71051, et al. (9th Cir.). In addition to the Refund Proceedings, the events surrounding the

California energy crisis have spawned a variety of litigation,

some of it criminal.

Also as a result of the California energy crisis, CalPX was

suspended from operating its markets. In re Cal. Power

Exch., 245 F.3d 1110, 1119 (9th Cir. 2001). In October 2001,

sellers in the California market, acting through the ‘‘CalPX

Creditors Committee,’’ filed a proposal with FERC requesting a distribution of CalPX funds. FERC deferred the issue,

pending resolution of the Refund Proceedings. San Diego

Gas & Elec. v. Sellers of Energy and Ancillary Services into

Markets Operated by the Cal. Indep. Sys. Operator and the

California Power Exch., 97 FERC 61,301, 62,417 (2001).

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FERC has also denied several other requests from individual

sellers to release CalPX collateral and funds, again stating

that the proper allocation cannot be made until the Refund

Proceedings are resolved. FERC’s denials of these requests

are on appeal to this Circuit. Constellation Power Source,

Inc. v. FERC, No. 02-1367 (consolidated with Powerex Corp.

v. FERC, No. 03-1285).

With CalPX out of the energy business, its sole remaining

function is ‘‘winding up’’ its business affairs. This includes

several responsibilities, such as: (1) acting as custodian of

certain financial rights owed by and to participants in its

defunct markets; (2) acting as records custodian for transactions in California’s markets; and (3) participating in ongoing

Commission and judicial proceedings. In other words, CalPX

is complying with the Refund Proceedings. Because it is no

longer in the energy business, CalPX has no current funding

source during the wind-up period. According to CalPX,

without some source of revenue, it would have exhausted its

reserve of operating funds by August of 2002. FERC’s

attempt to remedy this problem is the subject of this petition.

In order to recover its operating cost during the wind-up

period, CalPX filed a new rate schedule under the Federal

Power Act § 205, 16 U.S.C. § 824d, to ‘‘apportion the costs of

CalPX’s wind-up and ongoing operations equitably among the

participants for whose benefit CalPX is continuing those

operations.’’ FERC agreed, and ultimately adopted a regime

whereby CalPX’s costs would be allocated among its participants in proportion to their relative exposure, as measured by

the absolute value of their current payables and receivables,

with CalPX. FERC stated that ‘‘[t]his is consistent with the

fact that CalPX’s ongoing activities are essentially centered

around the appropriate and orderly disposition of these payables and receivables.’’ Cal. Power Exch., 100 FERC 61,178,

61,637 (2002). Thus, any party that has a balance (positive or

negative) outstanding with CalPX is required to pay a percentage of CalPX’s wind-up costs equal to its percentage of

the total outstanding account balances. Additionally, FERC

found that CalPX was required to use ‘‘the most current

account information,’’ which was reflected in the March 13,

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2002 Account summaries (the ‘‘Account Balances’’). Id. Furthermore, recognizing that the outstanding balances would

change pursuant to the ongoing Refund Proceedings, FERC

required CalPX to modify the allocation in subsequent sixmonth rate filings to track any changes. Id. From that time

until oral argument in this case, the March 13, 2002 Account

Balances have been used for each six-month period. Finally,

FERC also excluded CAISO’s account balance, which is the

largest outstanding balance amount in CalPX’s account, from

the cost allocation.

PG&E, among others, sought a rehearing of FERC’s August 8, 2002 Order that adopted CalPX’s wind-up charges.

PG&E argued that FERC’s Order violated the filed-rate

doctrine by imposing new charges for past services. FERC

disagreed, claiming that PG&E was confusing two distinct

issues: rates previously charged for transactions in the

CalPX market; and the responsibility for newly incurred

wind-up costs. PG&E also challenged CalPX’s reliance on

March 13 Account Balances as the basis for allocating cost

among participants. FERC denied rehearing on this claim as

well, because it ‘‘believe[d] that the primary focus of CalPX’s

on-going activities is to support this Commission’s efforts to

calculate just and reasonable rates and associated refunds’’

for participants in CalPX’s markets, including PG&E. Cal.

Power Exch., 101 FERC 61,330, 62,370 (2002). According to

FERC, ‘‘each participant’s Account Balance was the best

approximation of what the participant would ultimately owe

to, or be owed by, the CalPX,’’ once all the refund proceedings and related matters were resolved. Id.

PG&E further argued that CAISO’s account balance should

have been included in the cost allocation. FERC defended

the exclusion of CAISO’s balance from the cost allocation on

the ground that ‘‘any real-time energy charges assessed to

CalPX by CAISO would have been assessed to it as a

scheduling coordinator for its customers; i.e. PG&E.’’ Cal.

Power Exch., 102 FERC 61,208, 61,606 (2003). Therefore,

those amounts were already reflected in the Account Balances

and used to determine the cost allocation. Any counting of

CAISO’s balances would therefore result in double-counting,

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because FERC considers CAISO a flow-through entity.

FERC offered the further justification that CAISO, as a nonprofit entity, had no stake in the outcome of the Refund

Proceedings. Id.

Having not received the relief it requested below, PG&E

now petitions this Court for review of FERC’s orders. Under the current scheme, PG&E pays 76 percent of CalPX’s

wind-up costs.

II. Analysis

A reviewing court sets aside final action of FERC if that

action is arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law. 5 U.S.C. § 706(2)(A);

Sithe/Independence Power Partners v. FERC, 165 F.3d 944,

948 (D.C. Cir. 1999). FERC ‘‘must be able to demonstrate

that it has made a reasoned decision based upon substantial

evidence in the record.’’ Northern States Power Co. v.

FERC, 30 F.3d 177, 180 (D.C. Cir. 1994). We also must

ensure that FERC ‘‘articulate[s] a satisfactory explanation for

its action including a rational connection between the facts

found and the choice made.’’ Motor Vehicle Mfrs. Ass’n of

the United States, Inc. v. State Farm Mut. Ins. Co., 463 U.S.

29, 43 (1983) (quotations omitted). For reasons more fully set

forth below, we hold that FERC’s decision does not survive

that standard of review.

A. The Filed-Rate Doctrine and Rule Against Retroactive

Ratemaking

Citing the filed-rate doctrine, PG&E contends that FERC

erred in allocating CalPX’s administrative wind-up costs

based on balances PG&E incurred for previous transactions.

The filed-rate doctrine ‘‘bars a regulated seller TTT from

collecting a rate other than the one filed with the Commission

and prevents the Commission itself from imposing a rate

increase for [power] already sold.’’ Arkansas Louisiana Gas

Co. v. Hall, 453 U.S. 571, 578 (1981). According to PG&E’s

theory of the case, FERC violated the filed-rate doctrine and

the rule against retroactive ratemaking by effectively changing the rate of those previous purchases. It did so by using

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outstanding balances resulting from those prior transactions

to determine PG&E’s share of CalPX’s current operating, or

wind-up, costs. PG&E points out that at the time it took

service from CalPX, it paid CalPX a FERC-accepted tariff

designed to cover CalPX’s administrative costs. Now, however, FERC is using those same prior transactions to determine

how much PG&E should pay in new charges to cover CalPX’s

new administrative costs.

According to PG&E, ‘‘the wind-up charges are additional

charges for further administrative activities related to service

that has already been provided.’’ Furthermore, ‘‘winding-up

its operations is merely a euphemism for continued billing

adjustments for service taken in the 2000 and 2001 period.’’

In other words, these new charges reflect an additional

charge, not related to any new FERC-jurisdictional business.

Even FERC admits that ‘‘costs are being incurred to resolve

matters related to the market as it operated during [the

customer’s] participation.’’ Cal. Power Exch., 101 FERC

61,330.

PG&E argues the imposition of this fee violates the filedrate doctrine. This Court has held that ‘‘even costs TTT

incurred in order to provide current or future service cannot

be retroactively billed to customers based on their past

purchasing decisions.’’ Panhandle Eastern Pipeline Co. v.

FERC, 95 F.3d 62, 68 (D.C. Cir. 1996). PG&E argues it is

now paying a surcharge on the previous service with no notice

of the potential increased charge at the time of the prior

transactions. We have repeatedly held that customers must

have adequate notice before the approved rate is changed.

See Pub. Utils. Comm’n of Cal. v. FERC, 988 F.2d 154, 164

(D.C. Cir. 1993); Transwestern Pipeline Co. v. FERC, 897

F.2d 570, 579-80 (D.C. Cir. 1990); Columbia Gas Transmission v. FERC, 831 F.2d 1135, 1140-42 (D.C. Cir. 1987).

For its part, FERC contends that because the charges are

new charges for the costs of CalPX to wind-up its operations,

it is not engaged in retroactive rulemaking, nor does its action

violate the filed-rate doctrine. FERC argues that ‘‘PG&E

TTT confuses two distinct issues: rates previously charged for

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transactions in the CalPX markets TTT and responsibility for

the CalPX’s newly incurred wind-up administrative costs.’’

Cal. Power Exch., 101 FERC 61,330 at 62,370. According to

FERC, these new administrative costs are occurring precisely

for the benefit of parties like PG&E, so that there can be an

appropriate and orderly disposition of payables and receivables. FERC admits that the allocation of the wind-up costs

are based on previous purchases, but argues that nothing in

the filed-rate doctrine or rule against retroactive ratemaking

prohibits such action. FERC also claims that PG&E was on

notice, as FERC publicly issued orders that CalPX would

have to perform wind-up activities. Id.

We agree with PG&E. FERC’s imposition of additional

charges on CalPX’s customers allocated on the basis of their

prior purchases without reflection of any new jurisdictional

services directly violates the filed-rate doctrine or the rule

against retroactive ratemaking. Otherwise put, the assessment of the wind-up charges is directly tied to past jurisdictional services – specifically, the outstanding balances resulting from CalPX’s operation of a wholesale electricity market.

CalPX’s former customers, including PG&E, have already

paid the filed rate for this service. Therefore, any imposition

of new costs based on these previous transactions is prohibited.

Moreover, the former CalPX participants, like PG&E, had

no notice at the time they paid the filed rate that they would

be assessed an additional charge at a later date because they

used those services. In an effort to show that market

participants were on notice that CalPX would have to perform

wind-up activities, FERC points to an Order issued on December 20, 2002 where it stated as much. This Order, issued

well after CalPX ceased operations, obviously could not have

given notice to market participants at the time of their

purchasing decisions.

B. Cost-Causation Principles

PG&E also challenges the use of the March 13 Account

Balances as violating cost-causation principles. ‘‘It has been

traditionally required that all approved rates reflect to some

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degree the costs actually caused by the customer who must

pay them.’’ K N Energy v. FERC, 968 F.2d 1295, 1300 (D.C.

Cir. 1991). According to PG&E, the account balances of

individual CalPX participants have no causal relationship to

the wind-up costs. Specifically, PG&E is paying 76 percent

of the wind-up costs because it was in bankruptcy and not

able to pay off its account balances prior to March 13, 2002.

PG&E then identifies California Edison, which also had large

account balances, but came into sufficient cash to pay off its

account two weeks prior to March 13. Now, California

Edison owes 0.72 percent of CalPX’s wind-up costs, while

PG&E owes 76 percent. According to PG&E, the system

simply punishes those with outstanding balances, although it

is not based on any causation or potential reward. CalPX

would be doing the exact same work if PG&E had paid off its

balances, but PG&E would not be required to pay the same

amount. In sum, PG&E argues that there is no record

evidence, or logical link, between the outstanding account

balances and the CalPX’s wind-up cost.

FERC claims that the order applied the ‘‘well-established

ratemaking principle that ‘costs should be allocated, where

possible, to customers based on customer benefits and cost

incurrence.’ ’’ Cal. Power Exch., 101 FERC 61,330 at 62,370.

FERC argues that it has used this procedure before, and

cites instances where this Court affirmed a roll-in to all

transmission customers of system-upgrade costs because

those improvements benefitted the entire system. See Mass.

Elec. Co. v. FERC, 165 F.3d 922, 927–28 (D.C. Cir. 1999).

From that starting proposition, FERC argues that it found

‘‘the magnitude of each Account Balance correlates with the

importance to each participant of the Commission’s efforts to

calculate just and reasonable rates and associate refunds, if

any, because the larger the Account Balance, the greater the

impact of the refund proceeding on the participant.’’ Cal.

Power Exch., 101 FERC 61,330 at 62,370. In other words,

FERC argues that the size of a customer’s account balance

approximates their ‘‘stake’’ in CalPX’s wind-up activities.

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FERC’s argument fails. There is nothing in the record to

support any correlation between the size of an account balance and the magnitude of the relevant former CalPX customer’s likely benefit from, or stake in, CalPX’s wind-up

activities. An example shows the fallacy of FERC’s argument:

had PG&E completely paid off its account at the same time as

California Edison, it would have the same stake in the

outcome and, more importantly, CalPX’s wind-up costs would

be the same, but PG&E would not be paying 76 percent of

the cost. FERC basically gives this argument away in its

brief while defending a separate point. It concedes that

‘‘even if [PG&E] paid off its account balance, it would not

impact the [CalPX’s] continuing obligations.’’

Finally, FERC’s reliance on Massachusetts Electric is misplaced. That case involved FERC’s decision to pass along

costs associated with improving a system to all of the system’s users. 165 F.3d at 927-28. It simply stands for the

proposition that ‘‘when a system is integrated, any system

enhancements are presumed to benefit the entire system.’’

Id. at 927. That general proposition is not at issue in this

case.

In sum, other than the fact that outstanding account balances are a mathematically simple way to allocate cost, we

can find no reason why they serve as an appropriate or

reasonable basis for doing so. FERC’s method of allocating

cost is unreasonable, and cannot meet the basic requirements

imposed by the cost-causation principle.

C. Exclusion of CAISO’s Account Balance

PG&E also argues that even if every other aspect of the

allocation is legitimate, the exclusion of sales to CalPX

through CAISO markets improperly increases the burden on

PG&E. CAISO has the largest outstanding balance of any

customer, but FERC decided to exempt that balance from the

equation because CAISO was a scheduling coordinator for

other entities, like PG&E. According to FERC, because the

costs would be passed on to CAISO’s customers, like PG&E,

including CAISO’s balance would be ‘‘double counting.’’

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PG&E claims that this explanation does not square with

FERC’s allocation methodology. Because FERC considers

absolute outstanding account balances in allocating costs, a

buyer and a seller could be assessed a charge on an account

for the same megawatt sold. Thus, double-counting exists

under the regime, but not if the seller was CAISO.

FERC responds that while sellers’ and buyers’ outstanding

balances are equally assessed, the same balance is not double

counted. Because any amount assessed to CAISO would also

be assessed to its customers, the result would be double

counting the same account, not counting two different accounts from the same transaction. Finally, FERC cites the

fact that CAISO is a not-for-profit entity with no stake in the

Refund Proceedings – any refunds will flow through CAISO

directly to its customers. In sum, FERC contends that

because CAISO is a flow-through entity, the cost allocation is

properly assessed on its customers, not on it.

Again, FERC’s arguments are unconvincing. FERC’s double-counting argument makes no sense in light of its justification for its cost-allocation scheme. If, as FERC argues, the

absolute value of a party’s balance correlates with the magnitude of its stake in CalPX’s wind-up activities, then CAISO’s

stake should be proportional to its balance. The fact that the

money owed by CalPX to CAISO is the ‘‘same’’ money owed

to CalPX by participants, such as PG&E, has no bearing on

CAISO’s stake as a CalPX creditor in the calculation of

refunds. As to FERC’s assertion that CAISO has no stake in

CalPX’s wind-up activities because any money refunded to

CAISO would simply pass through to CAISO’s customers,

CAISO’s outstanding account balance would be just as reflective of its customers’ stake in the outcome as PG&E’s outstanding balance is reflective of its stake. Knowing that, and

taking FERC’s position that CAISO is a flow-through entity,

FERC has not explained why CAISO should not be induced

to pass along the costs of CalPX’s wind-up activities to its

customers. To the extent that using outstanding account

balances would be appropriate, FERC has erred in excluding

CAISO’s balance.

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As to CAISO’s non-profit status, we can find no reason why

that status limits what it has at ‘‘stake’’ in the proceeding.

Any number of entities operating in energy markets may be

classified as non-profit, and FERC has offered no convincing

reason why they should be treated differently in this case.

III. Conclusion

Because FERC’s cost-allocation methodology is both unreasonable and violates the filed-rate doctrine, the petitions are

granted, and the orders are vacated and remanded to FERC

for further consideration.

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