United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 2005 Decided November 1, 2005

No. 04-1171

SACRAMENTO MUNICIPAL UTILITY DISTRICT,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

MODESTO IRRIGATION DISTRICT, ET AL.,

INTERVENORS

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Harvey L. Reiter argued the cause for petitioner. With him

on the briefs were Glen L. Ortman, Adrienne E. Clair, John E.

McCaffrey, and Lucy Holmes Plovnick.

Bill Lockyer, Attorney General, Attorney General’s Office

of the State of California, Mary E. Hackenbracht, Senior

Assistant Attorney General, Peter C. Kissel, and Elisa J.

Grammer were on the brief for California Department of Water

Resources.

Robert H. Solomon, Deputy Solicitor, Federal Energy

Regulatory Commission, argued the cause for respondent. With
2

1

 Pacific Gas & Electric Co., San Diego Gas & Electric Co.,

Southern California Edison Co. (collectively “California

utilities”).

2Promoting Wholesale Competition Through Open Access NonDiscriminatory Transmission Services by Public Utilities;

Recovery of Stranded Costs by Public Utilities and Transmitting

Utilities, F.E.R.C. Stats. & Regs. ¶ 31,036 (1996), 61 Fed. Reg.

21,540 (“Order No. 888”), order on reh’g, F.E.R.C. Stats. &

Regs. ¶ 31,048 (1997), 62 Fed. Reg. 12,274 (“Order No. 888-

A”), order on reh’g, 81 F.E.R.C. ¶ 61,248 (1997) (“Order No.

888-B”), order on reh’g, 82 F.E.R.C. ¶ 61,046 (1998) (“Order

No. 888-C”), aff’d, Transmission Access Policy Study Group v.

FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom. New York

him on the brief were Cynthia A. Marlette, General Counsel,

Dennis Lane, Solicitor, and Judith A. Albert, Attorney.

Michael E. Ward, Anthony J. Ivancovich, Mark D. Patrizio,

Stuart K. Gardiner, E. Gregory Barnes, Michael D. Mackness,

and Ellen A. Berman were on the brief for intervenors California

Independent System Operator, et al. in support of respondent.

Jennifer L. Key and J. Phillip Jordan entered appearances.

Before: SENTELLE, RANDOLPH, and ROGERS, Circuit

Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge: The Sacramento Municipal

Utility District (“Sacramento”) sought an order from the Federal

Energy Regulatory Commission compelling the major California

utilities1 to continue providing it with long-term firm

transmission service. Sacramento asserted a right of first refusal

under the Commission’s “Order No. 888.”2 The Commission
3

v. FERC, 535 U.S. 1 (2002).

3

 In the Commission’s parlance, “firm” service is distinguished

from “non-firm” service by its certainty. Firm service is

contractually guaranteed; non-firm service is scheduled on an

“as available” basis and is subject to interruption. Compare

Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,931

(defining “firm” service), with id. at 31,932 (defining “nonfirm” service).

rejected Sacramento’s request in two orders: Sacramento

Municipal Utility District v. Pacific Gas & Electric Co., 105

F.E.R.C. ¶ 61,358 (2003) (“Initial Order”), reh’g denied,

Sacramento Municipal Utility District v. Pacific Gas & Electric

Co., 107 F.E.R.C. ¶ 61,237 (2004) (“Rehearing Order”). This

petition for judicial review followed. 

Commercial relations between Sacramento and the

California utilities are governed by private contractual

arrangements made in accordance with public tariffs approved

by the Commission. Before 1996, vertically integrated utilities

provided bundled electricity generation, transmission, and

distribution services to both retail and wholesale customers. See

Transmission Access Policy Study Group v. FERC, 225 F.3d

667, 681 (D.C. Cir. 2000). Municipalities and other small

utilities often required more electricity to serve their customers

than they could generate. Such utilities secured additional

power through long-term contracts. In August 1967,

Sacramento entered into a power transmission agreement with

the California utilities. Like many contracts of its era, the

Sacramento agreement provided for long-term firm physical

transmission service. Sacramento could demand two hundred

megawatts of capacity along a specified transmission path at any

time throughout the duration of the contract.3

 For municipal

governments with stringent quality-of-service obligations to
4

4

 The Commission also declined to abrogate existing contracts,

such as the 1967 Sacramento agreement, but noted that any new

service taken upon expiration – including service taken under

the right of first refusal – would be considered “new” service

and be governed by the relevant open access tariff. Order No.

888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,665.

their retail customers, these long-term contracts provided a

reliable mechanism to ensure “sufficient long-term firm

transmission capacity to import all of the long-term power

supplies [they had] under contract.” Brief of Petitioner at 4. 

In 1996, the Commission ordered the national deregulation

of electricity transmission services. Order No. 888 required

utilities to “unbundle” their electricity generation and

transmission services and to file new “open access” tariffs –

modeled on a pro forma tariff included in the rulemaking –

guaranteeing non-discriminatory access to their transmission

facilities by competing generators. See Order No. 888, F.E.R.C.

Stats. & Regs. ¶ 31,036 at 31,635-36. The Commission

recognized that the transition to an open access regime would

have significant implications for long-term contract-holders.

See id. at 31,662-63. Municipalities and other customers who

required the “certainty and continuity” of long-term firm

service, Transmission Access Policy Study Group, 225 F.3d at

735, could have found themselves at a disadvantage in a

competitive market. To address these concerns, the Commission

included in the pro forma tariff a provision granting all longterm firm transmission customers a right of first refusal to

continue taking service upon expiration of their contracts.4

Section 2.2 of the tariff provides that “[e]xisting firm service

customers . . . have the right to continue to take transmission

service . . . when the contract expires. . . . If at the end of the

contract term, the [transmission system] cannot accommodate

all of the requests for transmission service the existing firm

service customer must agree to accept a contract term at least
5

equal to a competing request by any new [customer] and to pay

the current just and reasonable rate . . ..” Order No. 888-A,

F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,511. Although the

parties refer to Section 2.2 as a “right of first refusal,” it is more

properly understood as a reservation priority. “If there are

capacity limitations and both customers (existing and potential)

are willing to pay for firm transmission service of the same

duration, the right of first refusal provides a tie-breaking

mechanism that gives priority to existing customers so that they

may continue to receive transmission service.” Id. at 30,197;

see also Idaho Power Co. v. FERC, 312 F.3d 454, 457 (D.C. Cir.

2002). This right does not guarantee price or other terms; it is

simply a “mechanism for allocating transmission capacity” to

existing customers willing to match the terms of new customers.

Order No. 888-A, F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,197.

Although the order required utilities to file tariffs that

contained the “non-rate terms and conditions set forth in the . . .

pro forma tariff,” Order No. 888, F.E.R.C. Stats. & Regs.

¶ 31,036 at 31,768; see also 18 C.F.R. § 35.28(c)(1), the

Commission also recognized that its order was likely not the end

of the road in an industry marked by transition. Order No. 888

allows future filings in which utilities may deviate from the

terms of the pro forma tariff, so long as such deviations are

“consistent with, or superior to” the terms in the pro forma

tariff. Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at

31,770. The Commission specifically anticipated the

development of new market structures like independent service

operators (“ISOs”) – non-profit entities that administer the

transmission grids of multiple operators – and articulated a set

of principles to govern their operation. See id. at 31,730-32. 

As the Commission was implementing Order No. 888, the

California legislature and the state’s Public Utility Commission

were radically restructuring California’s energy markets. A
6

5

 The existing contracts are considered “encumbrances” on the

California ISO. CAISO II, 81 F.E.R.C. at 61,472. Because

providing service under old models is a significant

administrative burden, the tariff prohibits new or increased

service under open access tariffs. Id. 

1996 law chartered the California Independent System Operator

(“California ISO”), an independent entity that would take over

transmission operations from the California utilities and file a

new tariff with the Commission. See Cal. Indep. Sys. Operator

Corp. v. FERC, 372 F.3d 395, 397 (D.C. Cir. 2004). The

California ISO operates under a service model quite different

from that envisioned in Order No. 888. Instead of relying on

long-term contracts, the California ISO allocates transmission

capacity in “real time,” based on hour-ahead and day-ahead

scheduling requests from customers. See Paul L. Joskow,

California’s Electricity Crisis, 17 OXFORD REV. ECON. POL’Y

365, 370-72 (2001). Instead of providing long-term reservation

of transmission capacity for a set price, the California ISO

charges all customers an access fee and then adjusts its

“congestion” pricing based on supply and demand. Any

customer can, in effect, receive service at any time so long as it

is willing to pay the necessary “congestion charges” to secure

priority during peak demand periods. See Pacific Gas & Elec.

Co., 80 F.E.R.C. ¶ 61,128, at 61,428-29 (1997) (“CAISO I”). 

The Commission found the California ISO tariff consistent

with the broad non-discrimination goals of Order No. 888. See

Pacific Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122, at 61,435,

61,446 (1997) (“CAISO II”). To manage the transition to a new

regulatory regime and a completely new service model, the

Commission again declined to abrogate existing contracts and

ordered customers to take service under the California ISO tariff

upon contract expiration.5

 Id. at 61,463-65. The California ISO

tariff does not contain a right of first refusal provision. The

Commission explicitly approved the absence of such a
7

provision, noting that “[t]he ISO’s proposal to schedule

transmission on a day-ahead and hour-ahead basis is not

compatible with the long-term reservation of discrete physical

transmission rights.” Id. at 61,472. To achieve consistency with

the California utilities’ Order No. 888 tariffs, which governed

service until the ISO commenced operations, the Commission

struck the Section 2.2 right of first refusal provision from the

California utilities’ tariffs, replacing it with a clause honoring

existing contracts only for the term of the contract. Id. at 61,472

n.196. 

The Commission nevertheless found that the California ISO

tariff would not provide service “as good as or superior to” that

provided under Order No. 888 without some instrument for

hedging the risk of congestion charges. CAISO I, 80 F.E.R.C.

at 61,427. This was especially so for incumbent customers with

previously guaranteed service. Id. (“We are also concerned

about potential discrimination between new market participants

and participants with existing long-term transmission

contracts.”). The California ISO proposed a system of “firm

transmission rights” – tradeable financial instruments that

protect against significant fluctuations in congestion pricing.

See Cal. Indep. Sys. Operator Corp., 87 F.E.R.C. ¶ 61,143, at

61,570 (1999) (“CAISO III”). The Commission conditionally

approved the proposal, finding these financial instruments to be

a sufficient substitute for firm physical transmission rights. Id.

at 61,572; see also Cal. Indep. Sys. Operator Corp., 88 F.E.R.C.

¶ 61,156, at 61,525 (1999) (“CAISO IV”) (“We have determined

that [firm transmission rights] need not provide customers with

firm physical transmission rights in order for them to secure

transmission service that is as good as or superior to the service

under the Order No. 888 pro forma tariff.”). Although the

Commission had previously noted that a right of first refusal

mechanism might be appropriate in the context of a transmission

rights proposal, CAISO II, 81 F.E.R.C. at 61,473, the proposal
8

approved in CAISO III did not contain such a provision. The

Commission did, however, order the California ISO to develop

and report on plans for longer-term financial rights, finding the

one-year term to be inadequate. CAISO III, 87 F.E.R.C. at

61,572; see also CAISO IV, 88 F.E.R.C. at 61,525. The

Commission took no further action on the transmission rights

proposal, choosing instead to fold it into a comprehensive

market redesign proceeding initiated in the aftermath of the

California energy crisis. 

Shortly before its contract with the California utilities was

set to expire, Sacramento informed the companies that it wished

to extend the terms of the contract or invoke its right of first

refusal under Order No. 888. When the California utilities

demurred, Sacramento filed a complaint with the Commission.

The Commission declined to order the relief sought, noting that

“[Sacramento] would have to take service under the CAISO

tariff, the only relevant tariff since the California utilities have

turned over operational control of their transmission facilities to

the CAISO.” Initial Order, 105 F.E.R.C. at 62,615; see also

Rehearing Order, 107 F.E.R.C. at 62,010 (“[T]he Commissionapproved CAISO tariff is the relevant tariff here for

transmission service and that tariff supersedes the Order No. 888

pro forma tariff.”).

 In light of the developments described above, the

Commission’s actions can hardly be said to be “arbitrary” and

“capricious.” 5 U.S.C. § 706(2)(A); see Midwest ISO

Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir.

2004). The Commission engaged in a straightforward

application of the relevant tariffs and orders. Even before the

ISO commenced operations, the California utilities’ open access

tariffs had been stripped of their right of first refusal provisions.

CAISO II, 81 F.E.R.C. at 61,472 n.196. Now that the California

utilities have ceded their transmission operations to the
9

California ISO, they no longer offer service under the open

access tariffs; requests for service upon expiration of existing

contracts are governed by the California ISO tariff. Id. at

61,472. As described above, that tariff does not contain a right

of first refusal provision. “Such concepts,” the Commission

said, “no longer have meaning in the context of the CAISO’s

day-ahead and hour-ahead transmission scheduling system.”

Initial Order, 105 F.E.R.C. at 62,615. Sacramento cannot assert

a right it no longer has and it cannot take service under a

business model that no longer exists.

There is nothing to Sacramento’s argument that the

Commission’s orders amount to a new rule promulgated without

notice and comment and improperly applied retroactively. For

reasons already mentioned, the Commission engaged only in the

application of an existing rule; it did not alter any aspect of

Order No. 888 or the California ISO orders. 

Sacramento ultimately challenges the validity of the

California ISO tariff itself, arguing that its system of congestion

pricing and firm transmission rights – and the absence of an

Order No.888-style right of first refusal – fails to provide a

service that is as good as or superior to that under the Order No.

888 pro forma tariff. See, e.g., Brief of Petitioner at 28-30;

Reply Brief at 11-12. But the California ISO tariff is not before

us. Section 313(b) of the Federal Power Act, 16 U.S.C.

§ 825l(b), grants this court jurisdiction only over petitions for

review within sixty days following the Commission’s denial of

rehearing. The Commission proceedings approving the

California ISO tariff and the firm transmission rights proposal

took place in 1997 and 1999, respectively. Because the time for

seeking judicial review has long passed, Sacramento’s argument

amounts to an impermissible collateral attack on the previously

approved California ISO tariff. See, e.g., City of Nephi v. FERC,

147 F.3d 929, 934-35 (D.C. Cir. 1998); Ga. Indus. Group v.
10

FERC, 137 F.3d 1358, 1363-64 (D.C. Cir. 1998); Transwestern

Pipeline Co. v. FERC, 988 F.2d 169, 174 (D.C. Cir. 1993).

While agency rules can at times be challenged on substantive

grounds when they are applied, even though the statutory period

for judicial review has expired, none of the typical conditions

for allowing this are present. Sacramento does not object to the

Commission’s constitutional or statutory authority, e.g., Indep.

Cmty. Bankers of Am. v. Bd. of Governors of the Fed. Reserve

Sys., 195 F.3d 28, 34-35 (D.C. Cir. 1999); the Commission,

through its orders in this case, has not effectively reopened the

California ISO orders, e.g., Pub. Citizen v. Nuclear Regulatory

Comm’n, 901 F.2d 147, 150-52 (D.C. Cir. 1990); and the orders

did not fail to place the parties on notice of what would be

required. E.g., S. Co. Servs., Inc. v. FERC, 416 F.3d 39, 44-45

(D.C. Cir. 2005) (citing Dominion Res., Inc. v. FERC, 286 F.3d

586, 590 (D.C. Cir. 2002)). As to the last consideration, the

order approving the California ISO tariff explicitly addressed

(and dismissed) concerns – raised by one of the intervenors in

this case, see CAISO II, 81 F.E.R.C. at 61,467 (California

Department of Water Resources) – about the absence of a right

of first refusal. Id. at 61,472-73. The Commission also

approved the firm transmission rights proposal in the face of an

objection that the proposal was inconsistent with Order No. 888.

CAISO III, 87 F.E.R.C. at 61,572. Sacramento participated in all

of those proceedings. See CAISO II, 81 F.E.R.C. at 61,591

(listing Sacramento as intervenor); CAISO III, 87 F.E.R.C. at

61,583 (same). A reasonable firm in Sacramento’s position

would have understood the Commission’s approvals to “mean[]

what the Commission now says [they] mean[].” Dominion Res.,

286 F.3d at 589-90 (internal quotation marks omitted).

We therefore deny Sacramento’s petition for review in part

and we dismiss it to the extent that it collaterally attacks the

Commission’s California ISO orders. 

So ordered.