Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-01-01190/USCOURTS-caDC-01-01190-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Southern California Edison Company
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 2002 Decided October 15, 2002

No. 01-1187

Pacific Gas and Electric Company,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Enron Power Marketing, Inc., et al.,

Intervenors

Consolidated with

No. 01-1190

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

---------

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Stuart K. Gardiner and Richard L. Roberts argued the

causes for utility petitioners. With them on the briefs was

Jennifer L. Key.

Lona T. Perry, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on

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

Dennis Lane, Solicitor, Federal Energy Regulatory Commission.

Channing D. Strother, Jr. was on the brief for intervenor

City of Vernon, California.

Before: Edwards, Sentelle and Rogers, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge: The principal issue in this appeal is

whether the review conducted by the Federal Energy Regulatory Commission ("FERC") of the revenue requirements of

a non-jurisdictional entity that is part of a jurisdictional

independent system operator ("ISO") was sufficient to ensure

that the ISO's rates will be just and reasonable under s 205

of the Federal Power Act ("FPA"), 16 U.S.C. s 824d. Southern California Edison Company ("Edison") and Pacific Gas

and Electric Company (collectively, "PG&E"), petition for

review of three Orders in which FERC approved the transmission revenue requirement of Vernon, a municipally owned

utility and non-jurisdictional entity, for use in the California

ISO's ("CAISO") transmission access charge. PG&E contends that FERC did not properly evaluate, consistent with

its duty under s 205, Vernon's revenue requirements, and

arbitrarily and capriciously approved Vernon's requirements

based on findings that are unsupported by substantial evidence. We hold that, although FERC has considerable discretion in choosing how to implement its statutory duty, its

approach in the Orders on review fails to ensure that the

CAISO's rates will be just and reasonable under s 205.

Accordingly, we grant the petition and remand the case for

further proceedings.

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I.

In Order No. 2000, FERC encouraged the formation of

regional transmission organizations. See Regional Transmission Organizations, Order No. 2000, FERC Stats. & Regs.

p 31,089 (1999), 65 Fed. Reg. 810 (2000), on reh'g, Order No.

2000-A, FERC Stats. & Regs. p 31,092, 65 Fed. Reg. 12,088

(2000) (codified at 18 C.F.R. s 35.34), aff'd, Pub. Util. Dist.

No. 1 v. FERC, 272 F.3d 607 (D.C. Cir. 2001). The State of

California created a regional transmission organization, the

CAISO, to operate transmission facilities within California.

The CAISO is subject to FERC's regulatory authority, see

Cal. Indep. Sys. Operator Corp., 91 F.E.R.C. p 61,205, at

61,724 (2000), including the statutory requirement under

ss 205 and 206 of the FPA that a utility's rates must be "just

and reasonable." 16 U.S.C. ss 824d, 824e. The CAISO

originally consisted of three investor-owned utilities (PG&E,

Edison, and San Diego Gas & Electric Company), each of

which is subject to FERC's jurisdiction. Each of the utilities

is compensated by the CAISO for the use of its facilities

through a transmission revenue requirement ("TRR"), which

consists of the costs and rate of return to which the utilities

are entitled as participating transmission owners. FERC

independently examines each of these jurisdictional utilities'

TRRs to ensure that they are just and reasonable. See Cal.

Indep. Sys. Operator, 91 F.E.R.C. at 61,723 n.11. Initially,

the CAISO's rates, or transmission access charge ("TAC"),

reflected the TRRs of the participating transmission owners

in each of three TAC areas. Id. at 61,720.

This case arises out of California's efforts to encourage

non-jurisdictional, municipal utilities to join the CAISO. Id.

at 61,720-21. As a general matter, publicly-owned utilities

are not subject to FERC's ss 205 and 206 jurisdiction, see

FPA s 201(f), 16 U.S.C. s 824(f), although FERC may analyze and consider the rates of non-jurisdictional utilities to the

extent that those rates affect jurisdictional transactions, see

S.C. Pub. Serv. Auth., 75 F.E.R.C. p 61,209, at 61,696 & n.7

(1996); see also Pub. Utils. Comm'n v. FERC, 660 F.2d 821,

826 (D.C. Cir. 1981). The CAISO proposed to amend its

tariff to allow non-jurisdictional utilities or governmental

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entities that joined the CAISO to recover their TRRs through

the CAISO's transmission access charge. See Cal. Indep.

Sys. Operator, 91 F.E.R.C. at 61,720. Once a new transmission owner ("TO") joined the CAISO, the TAC would reflect

the combined TRRs of the owners in each of the three TAC

areas, and then, over a ten-year period, a single ISO gridwide TAC would be phased-in. Id. However, the CAISO's

original tariff proposal did not allow for any FERC review of

the TRRs of governmental entities; instead, review was

limited to a CAISO Revenue Review Panel. Id. at 61,721. In

a May 31, 2000 Order, FERC concluded that the CAISO's

proposal was inconsistent with FERC's statutory responsibility to ensure that jurisdictional utilities' rates, namely the

CAISO's TAC, be just and reasonable. Id. at 61,729. In

compliance with the May 31, 2000 Order, the CAISO submitted a revised tariff proposal which provided:

If the Participating TO is not FERC jurisdictional, the

Participating TO shall at its sole option: (1) file its High

Voltage TRR and Low Voltage TRR for those facilities

and Entitlements under the Operational Control of the

ISO directly with the Commission in accordance with the

rules and requirements established by the Commission;

or (2) submit to the ISO its TRR.... The decision of

the [Revenue Review] panel shall be subject to review

and acceptance by the FERC.

Cal. Indep. Sys. Operator Corp., 93 F.E.R.C. p 61,104, at

61,287 (2000) [hereinafter "TAC Order"] (alterations in the

original). In an October 27, 2000 Order, FERC accepted this

revision. Id. at 61,288-89.

Pursuant to the CAISO's revised tariff, Vernon, a municipally-owned utility located in the same TAC area as Edison,

voluntarily submitted its TRR for FERC review. With certain revisions, FERC "accept[ed] Vernon's use of the rate

methodology utilized by [Edison] (an [investor-owned utility]

that has determined its TRR) which is a methodology familiar

to [FERC]" and approved Vernon's TRR. City of Vernon, 93

F.E.R.C. p 61,103, at 61,285 (2000) [hereinafter "Vernon Order"]. PG&E sought rehearing, which was denied in an

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order dated February 21, 2001. Cal. Indep. Sys. Operator

Corp., 94 F.E.R.C. p 61,148, at 61,565 (2000) [hereinafter

"Rehearing Order"]. PG&E now seeks review of the TAC

Order, Vernon Order, and Rehearing Order.

II.

PG&E contends that FERC's review of Vernon's TRR was

insufficient to ensure that the CAISO's rates remained just

and reasonable because it was based on an inadequate standard of review and contrary to FERC precedent. PG&E also

contends that FERC violated s 205 by relying solely on a

review of Vernon's rate methodology in order to approve

Vernon's TRR. PG&E further contends that by not requiring the CAISO to file cost support for the part of its

transmission rate resulting from use of Vernon's facilities or

requiring Vernon to meet the CAISO's s 205 obligation,

FERC chose an impermissible course and the court should

remand with directions for a s 205 inquiry of Vernon's TRR.

The court reviews FERC's Orders under the arbitrary and

capricious standard. 5 U.S.C. s 706(2)(A); Pub. Utils.

Comm'n v. FERC, 254 F.3d 250, 253-54 (D.C. Cir. 2001)

[hereinafter "CPUC"]. FERC therefore "must be able to

demonstrate that it has made a reasoned decision based upon

substantial evidence in the record." Sithe/Independence

Power Partners, L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir.

1999) (quotations omitted). Because of the highly technical

and policy-based nature of rate design, the court's review of

whether a particular rate design is just and reasonable is

highly deferential. CPUC, 254 F.3d at 254. Absent procedural or methodological flaws, the court may only set aside a

rate that is outside a zone of reasonableness, bounded on one

end by investor interest and the other by the public interest

against excessive rates. Jersey Cent. Power & Light Co. v.

FERC, 810 F.2d 1168, 1176-77 (D.C. Cir. 1987) (describing

the standard in FPC v. Hope Natural Gas Co., 320 U.S. 591

(1944)). Pertinent here, the Supreme Court explained:

The court's responsibility is not to supplant the Commission's balance of these interests [investor and public

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interest] with one more nearly to its liking, but instead to

assure itself that the Commission has given reasoned

consideration to each of the pertinent factors. Judicial

review of the Commission's orders will therefore function

accurately and efficaciously only if the Commission indicates fully and carefully the methods by which, and the

purposes for which, it has chosen to act, as well as its

assessment of the consequences of its orders for the

character and future development of the industry.

In re Permian Basin Area Rate Cases, 390 U.S. 747, 792

(1968). FERC's findings of facts are conclusive if supported

by substantial evidence. FPA s 313(b), 16 U.S.C. s 825l(b).

The CAISO's TAC methodology is a formula rate through

which the TRR of each participating transmission owner is

collected. See generally CPUC, 254 F.3d at 254. As such,

the TRR of each participating transmission owner can be

conceptualized not as its own rate but rather as a cost of the

CAISO. Understood this way, Vernon's TRR need not be

independently subjected to the just and reasonable standard

of s 205, as PG&E contends. While FERC does subject the

TRRs of jurisdictional participating transmission owners to

an independent s 205 just and reasonable review, FERC may

take a different approach as to Vernon, over which FERC

lacks independent jurisdiction, so long as FERC can ensure

by examining Vernon's TRR that the CAISO's rates will

ultimately be just and reasonable.

FERC's approach is to allow a non-jurisdictional entity to

file its costs directly with the FERC, in effect reducing

paperwork and speeding the regulatory process. See Public

Utils. Comm'n, 660 F.2d at 824. FERC then uses its review

of Vernon's filed costs--i.e., its TRR--to evaluate whether

the CAISO's jurisdictional rates are permissible, a form of

indirect regulation. An analogous approach was upheld as to

small natural gas producers in FPC v. Texaco, Inc., 417 U.S.

380 (1974). In Texaco, FERC allowed small gas producers to

sell gas at market prices even if those prices were above the

maximum area rates set by FERC, id. at 384, inasmuch as it

could indirectly regulate the rates of the small producers by

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regulating them as costs of the large producers, id. at 384,

386-87. The Supreme Court held that "the Commission is

free to engage in indirect regulation of small producers by

reviewing pipeline costs of purchased gas, providing that it

insures that the rates paid by pipelines, and ultimately borne

by the consumer, are just and reasonable." Id. at 401.

In principle, then, there is no objection to the general

approach taken by FERC. Neither FERC nor Vernon suggest that FPA s 201, exempting "a State or any political

subdivision of a State ... from the review provisions of

s 205," 16 U.S.C. s 824(f), bars FERC's review of Vernon's

TRR to the extent necessary to ensure that the CAISO's

rates are just and reasonable. However, the only place

where FERC described this approach--the approach it now

relies upon in its brief--was in its Rehearing Order. Its

explanation there of the standard it applied in implementing

that approach is limited to the statement: "[W]e evaluated

Vernon's proposed TRR as a means of ensuring that the costs

ultimately charged by the ISO are just and reasonable."

Rehearing Order, 94 F.E.R.C. at 61,564. Nowhere does

FERC elaborate on the application of this standard to Vernon's TRR or to the CAISO's rates; in other words, it is

unclear under what standard FERC reviewed Vernon's TRR

to ensure that a pass through of its costs by the CAISO

would be just and reasonable. Typically, "[u]nder the Commission's cost-of-service ratemaking, before a utility's costs of

providing jurisdictional service will be disallowed, those costs

must be examined and found to be excessive or improper."

Ind. & Mich. Mun. Distribs. Ass'n, 62 F.E.R.C. p 61,189, at

62,237 (1993), aff'd sub nom. Ind. Mun. Power Agency v.

FERC, 56 F.3d 247 (D.C. Cir. 1995). In its brief, FERC

recognizes that it generally judges pass-through costs using

this prudence test. But this prudence standard is nowhere to

be found in the Orders at issue.

In contrast, elsewhere in the administrative proceedings,

the most prominently stated description of the approach that

FERC undertook was as follows:

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[T]he purpose of our review is to determine whether

Vernon's rate methodology, in the context of Vernon's

participation in a Commission jurisdictional public utility

ISO, will result in a just and reasonable component of the

ISO's rates.

Vernon Order, 93 F.E.R.C. at 61,285; accord Rehearing

Order, 94 F.E.R.C. at 61,563; TAC Order, 93 F.E.R.C. at

61,389. On its face, this statement suggests that FERC did

not consider Vernon's TRR only as a cost component of the

CAISO's formula rate, but rather reviewed Vernon's rate

methodology independently to determine if Vernon's TRR

was itself just and reasonable, albeit under an arguably less

strict standard of just and reasonable. This is confirmed by

other statements in the Orders that FERC concluded that

Vernon's TRR was itself just and reasonable and not merely

that, when passed through into the CAISO's formula rate, the

CAISO's rate remained just reasonable:

[T]he Commission finds that Vernon's proposed rate

methodology and resulting high voltage TRR, as modified, are just and reasonable.

Vernon Order, 93 F.E.R.C. at 61,283.

In the [Vernon Order], the Commission found that the

proposed rate methodology and resulting TRR filed by

the City of Vernon, in accordance with the ISO's alternative filing procedure, were just and reasonable as modified.

Rehearing Order, 94 F.E.R.C. at 61,562.

The filed protests by PG&E and Edison argued that all

aspects of Vernon's TRR had to be found just and reasonable

under the s 205 or comparable standard, Vernon Order, 93

F.E.R.C. at 61,284-85, and took issue with various claimed

costs of services, including the proper rate of return. Id.

The CAISO sought guidance on three aspects of Vernon's

calculation of its TRR, regarding cost deferrals and use of

Edison's rate of return and depreciation factor. Id. at 61,285.

FERC did address some of these concerns. It directed

Vernon to modify its TRR by (1) using Edison's capital

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structure as well as its return on common equity as a proxy

and (2) deleting unused transmission capacity expense. Id. at

61,286. In concluding that Vernon's "resulting high voltage

TRR" was just and reasonable, see Vernon Order, 93

F.E.R.C. at 61,282, and in addressing the evidence supporting

its costs provided by Vernon, see Rehearing Order, 94

F.E.R.C. at 61,564, FERC also considered the costs that

underlay Vernon's TRR. We therefore reject PG&E's contention that FERC improperly relied solely on cost methodology. But FERC never clarified and developed either the

approach or the standard that it applied in this case.

In justifying its approach, FERC stated: "We believe that

the approach we took properly balances our duty to ensure

the justness and reasonableness of the ISO's rates with the

fact that Vernon itself is not jurisdictional for purposes of

FPA Section 205." Rehearing Order, 94 F.E.R.C. at 61,564.

In none of the Orders on review did FERC expand on this

justification for its "approach" aside from noting that it may

approve other approaches in the future, id. at 61,563.

FERC's efforts to defend its approach on appeal are to no

avail. First, FERC seeks to defend its vague standard under

the "end result" test identified in Hope Natural Gas, 320 U.S.

at 602. However, it is long settled that "[e]xperience has

taught that a determination of whether the result reached is

just and reasonable requires an examination of the method

employed in reaching that result." City of Charlottesville v.

FERC, 661 F.2d 945, 950 (D.C. Cir. 1981) (citing Permian

Basin Area Cases, 390 U.S. at 791-92). Second, FERC

maintains, relying on CPUC, 254 F.3d 250, that as long as the

formula rate filed by the CAISO has been approved, it need

not conduct any separate review under s 205 of the CAISO's

pass through of Vernon's TRR costs via that formula rate.

But, FERC itself acknowledged in requiring FERC review of

non-jurisdictional TRRs that it "must be able to determine

that the pass through of costs by the [CAISO] to its customers are just and reasonable." Cal. Indep. Sys. Operator

Corp., 91 F.E.R.C. at 61,724. Moreover, in CPUC, the court

held that separate s 205 review was unnecessary for "contracts that merely affect jurisdictional rates" because the

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CAISO used a bid-based process to ensure that it paid as

little as possible for those contracts. 254 F.3d at 255. The

Vernon TRR at issue, on the other hand, is filed directly with

FERC, and the CAISO has no authority to approve or

disapprove it, see TAC Order, 93 F.E.R.C. at 61,287, giving

Vernon "unfettered discretion to set the level of" its TRR, see

CPUC, 254 F.3d at 256 n.5. FERC also appears to have

relied on its review of Vernon's TRR to deny future "collateral" attacks on the justness and reasonableness of the

CAISO's pass through of Vernon's costs. See Cal. Indep.

Sys. Operator Corp., 94 F.E.R.C. p 61,147, at 61,558 (2001).

Finally, FERC's reliance for the first time on appeal on FPA

s 206, which allows FERC or consumers to retroactively

challenge rates as not just and reasonable, as affording

consumers sufficient protections, is a post-hoc rationalization

of counsel, Burlington Truck Lines, Inc. v. United States, 371

U.S. 156, 168-69 (1962), that cannot cure the deficiency of the

initial review.

The only remaining question is what standard of review

should apply, and on this point it is clear that s 205 imposes a

"just and reasonable" standard. FERC acknowledges that it

is required under s 205 to determine that the rate ultimately

charged by an ISO is "just and reasonable." See Respondent's Br. at 22-23. Yet the Orders on review reveal, as

noted, no method for ensuring this, neither specifying what

approach nor defining the standard FERC applied in determining that the CAISO's rates were "just and reasonable"

after the inclusion of Vernon's TRR. On appeal FERC does

not claim that its somewhat amorphous standards ensure that

Vernon's TRR itself will be just and reasonable. While

FERC's approach might be acceptable if FERC tested the

final ISO composite rate (which included Vernon's requirements) to determine whether it was just and reasonable,

FERC acknowledged at oral argument that the CAISO's rate

is filed without such review. See generally CPUC, 254 F.3d

at 254. Thus, "[a]t the very least, the [approach] is so

ambiguous that it falls short of that standard of clarity that

administrative orders must exhibit," see Texaco, 417 U.S. at

395-96, and a remand is required so that FERC can articulate with clarity what approach and standard are governing

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its review and how both ensure the CAISO's rates are just

and reasonable under s 205.

III.

In light of the remand, we briefly address PG&E's contention that FERC's method of review of Vernon's TRR was

arbitrary and capricious on several procedural and substantive grounds.

The claimed procedural error concerns FERC's denial of a

hearing. PG&E maintains FERC precedent establishes that

all material, factual disputes warrant a hearing and discovery,

which were both denied to PG&E. Inasmuch as FERC may

have to consider this question anew on remand, we need only

point out that FERC may properly deny an evidentiary

hearing if the issues, even disputed issues, may be adequately

resolved on the written record, at least where there is no

issue of motive, intent, or credibility. Texaco, Inc. v. FERC,

148 F.3d 1091, 1100 (D.C. Cir. 1998). PG&E does not contend that the disputed issues could not be resolved on the

written record and offers no evidence that would have required such a hearing. Its contentions pose legal and policy

disputes as to the appropriateness of the evidence provided

by Vernon, see Carnegie Natural Gas Co., 47 F.E.R.C.

p 63,025, at 65,063 (1989), and as such do not warrant a

hearing, Union Pac. Fuels, Inc. v. FERC, 129 F.3d 157, 164

(D.C. Cir. 1997). Under the circumstances, the court defers

to FERC's determination that a hearing was not required.

See Ala. Power Co. v. FERC, 993 F.2d 1557, 1565 (D.C. Cir.

1993). That said, it does not follow that legal and policy

disputes about the sufficiency of the evidence might not

require further elaboration on remand.

The substantive errors, PG&E maintains, arise because

FERC (1) failed to look for cost justification of Vernon's TRR

and improperly declined to examine certain costs because

they were de minimis, and (2) did not justify Vernon's reliance on Edison's rates of return and depreciation. FERC's

threshold response, that these contentions fail because PG&E

does not claim that the CAISO's rates are not just and

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reasonable, misses the mark. When PG&E contends that

FERC lacked adequate support to conclude that Vernon's

TRR was just and reasonable, PG&E is necessarily contending that the CAISO's TAC, to the extent it has as a component Vernon's TRR, is not just and reasonable. Indeed, any

failure by PG&E to challenge explicitly the CAISO's resulting

TAC may well be a result of FERC's amorphous analysis

purporting to determine, under an unspecified standard of

review, that Vernon's TRR was a just and reasonable component of the CAISO's rate. In the end, FERC's responsibility

appears the same: whatever standard it might apply, it must

be able to show that there was substantial evidence to support the conclusion that the CAISO's rates after the inclusion

of Vernon's TRR are just and reasonable and that this

conclusion was not arbitrarily and capriciously reached.

Regarding costs, "it has come to be well established that

electrical rates should be based on the costs of providing

service to the utility's customers, plus a just and fair return

on equity." Ala. Elec. Coop., Inc. v. FERC, 684 F.2d 20, 27

(D.C. Cir. 1982). FERC generally requires that rates be cost

supported. Id. PG&E maintains that FERC improperly

relied solely on sworn cost support and testimony and that

there is a lack of specific evidence to support FERC's conclusions; according to PG&E, this prevented FERC from investigating why Vernon's costs were proportionately so much

higher than Edison's. With respect to the administrative and

general costs, PG&E contends that FERC departed from

pre-existing precedent not to disregard de minimis costs,

citing People's Elec. Coop., 84 F.E.R.C. p 61,229 (1998); N.

Ind. Pub. Serv. Co., 66 F.E.R.C. p 61,213 (1994), when it

justified its review of those costs by pointing out that Vernon's administrative and general expense was approximately

0.04 percent of the CAISO's rate. Rehearing Order, 94

F.E.R.C. at 61,564 n.7.

FERC persuasively responds that it did review the costs

underlying Vernon's proposed rate methodology and that in

large part they were "objectively verifiable." Although the

supporting data for Vernon's TRR costs do not meet the

requirements of 18 C.F.R. s 35.13, which apply to the rate

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filings of jurisdictional utilities, PG&E never specifically raises this as a challenge to the Orders and, more importantly,

for reasons discussed in Part II, FERC need not apply to

non-jurisdictional utilities the requirements of its regulations

applicable to jurisdictional utilities. In the Rehearing Order,

FERC discussed each element of Vernon's costs, noting that

most of its costs were specified in work papers from various

"transmission projects" in which Vernon had ownership interests and came from expenses paid to other utility corporations for transmission of Vernon's electricity, expenses that

were "a pass through of verifiable transmission expenses"

paid to those utilities. Rehearing Order, 94 F.E.R.C. at

61,564. With respect to Vernon's administrative and general

costs, FERC reviewed this cost, indicating that it was approximating 0.04 percent of the CAISO's rate, a sufficient analysis

to defeat PG&E's contention that FERC departed from preexisting precedent not to disregard de minimis costs. Given

our deferential standard of review, FERC's review of Vernon's costs was not arbitrary and capricious. Rather, the

more fundamental problem is the amorphous standard by

which FERC has reviewed the impact of Vernon's TRR on

the CAISO's rates.

Regarding Vernon's use of Edison as a proxy for the rate

of return on common equity and the depreciation rate, the

Orders on review provide only an inadequate conclusory

statement that FERC thought use of Edison as a proxy was

appropriate because Edison and Vernon were in the same

TAC area. Vernon Order, 93 F.E.R.C. at 61,286. Not only

does the record reflect that Vernon itself sought to distinguish itself from Edison, at least for the purposes of being

allowed to include unused transmission expense in its TRR,

the filed protests presented unanswered challenges to allowing Vernon to use Edison's rates. Vernon Order, 93 F.E.R.C.

at 61,284; see also Rehearing Order, 94 F.E.R.C. at 61,563.

While use of a surrogate capital structure or return on equity

may be appropriate for a governmental entity, FERC did not

explain why such a proxy was necessary nor justify the

selection of Edison as a surrogate by considering and examining, for example, whether Vernon and Edison share common

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risks. Cf. S. Cal. Edison Co., 92 FERC p 61,070, at 61,264-67

(2000). Vernon's use of Edison's rate-making methodology

bears no obvious correlation to an appropriate return on

equity for Vernon, and mere geographical proximity hardly

appears, absent further explanation, a sufficient warrant for

the same return on equity or the same capital structure. A

similar problem exists with regard to FERC's explanation of

its approval of Vernon's reliance on Edison's 3.2% rate of

depreciation. FERC's conclusion that its choice is "reasonable," Rehearing Order, 94 F.E.R.C. at 61,565, is thus insufficient to survive arbitrary and capricious review.

Perhaps on remand FERC may be able to provide an

adequate explanation for allowing Vernon to use Edison as a

proxy. FERC did adequately explain in the Rehearing Order

that the "alternative proposal to use a cost of capital equivalent to the debt costs of other California municipals does not

represent a superior proxy for Vernon[, because] Vernon's

facilities were not financed with tax-exempt debt or bonds of

any kind." Rehearing Order, 94 F.E.R.C. at 61,565. However, the rejection of a single alternative does not alone warrant

adoption of Edison as a proxy. On appeal, FERC maintains

that it was necessary for Vernon to rely on Edison's capital

structure and overall return as a proxy because Vernon's

return could only be measured indirectly, and Vernon and

Edison had the same risks because they provide services in

the same TAC area. The Orders on review do not provide

that explanation and the court cannot rely on FERC's post

hoc justifications for its action. Burlington Truck Lines, 371

U.S. at 168-69.

Accordingly, because the Orders on review provided no

explanation as to how or why FERC's review of Vernon's

TRR produced the necessary result, namely, just and reasonable rates for the CAISO, we grant the petition and remand

the case for further proceedings. In doing so we are not

unmindful of the complexities underlying Order No. 2000 and

FERC's regional approach, and that FERC may wish to

retain flexibility regarding the nature of its review of the

TRRs of individual non-jurisdictional entities. Vernon Order,

93 F.E.R.C. at 61,285. Nevertheless, while FERC has discreUSCA Case #01-1190 Document #707590 Filed: 10/15/2002 Page 14 of 15
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tion in formulating its approach with respect to a nonjurisdictional utility, the choice it makes must ensure that the

CAISO's rates meet the just and reasonable standard of

s 205.

USCA Case #01-1190 Document #707590 Filed: 10/15/2002 Page 15 of 15