FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PACIFIC NORTHWEST GENERATING 

COOPERATIVE; BLACHY-LANE

COUNTY COOPERATIVE ELECTRIC

ASS.; CENTRAL ELECTRIC

COOPERATIVE INC.; CLEARWATER

POWER COMPANY; CONSUMERS

POWER INC.; COOS-CURRY ELECTRIC

COOP., INC.; DOUGLAS ELECTRIC

COOPERATIVE; FALL RIVER RURAL

ELECTRIC COOPERATIVE, INC.; LANE

ELECTRIC COOPERATIVE INC.; LOST

RIVER ELECTRIC COOPERATIVE INC.;

NORTHERN LIGHTS INC.; OKANOGAN

COUNTY ELECTRIC COOPERATIVE

INC.; RAFT RIVER RURAL ELECTRIC No. 09-70228

COOPERATIVE, INC.; SALMON RIVER  BPA No.

ELECTRIC COOPERATIVE INC.; 06-PB-11744

UMATILLA ELECTRIC; WEST OREGON

ELECTRIC COOPERATIVE INC.,

Petitioners,

ALCOA, INC.; AVISTA CORPORATION;

PUGET SOUND ENERGY, INC.;

PACIFICORP; IDAHO POWER

COMPANY; COLUMBIA FALLS

ALUMINUM COMPANY, LLC,

Intervenors,

v.

BONNEVILLE POWER

ADMINISTRATION; DEPT. OF ENERGY,

Respondents. 

3269
PUBLIC POWER COUNCIL, 

Petitioner,

AVISTA CORPORATION; PUGET SOUND

ENERGY, INC.; IDAHO POWER

COMPANY; ALCOA, INC.; COLUMBIA No. 09-70236 FALLS ALUMINUM COMPANY, LLC,

Intervenors,  BPA

No. 06-PB-11744

v.

BONNEVILLE POWER

ADMINISTRATION; DEPARTMENT OF

ENERGY,

Respondents. 

INDUSTRIAL CUSTOMERS OF  No. 09-70988

NORTHWEST UTILITIES, BPA

Petitioner, No. 06-PB-11744

v.  ORDER

BONNEVILLE POWER AMENDING

ADMINISTRATION, OPINION AND

Respondent. AMENDED

OPINION 

On Petition for Review of an Order of the

Bonneville Power Administration

Argued and Submitted

July 7, 2009—Seattle, Washington

Filed August 28, 2009

Amended March 2, 2010

3270 PACIFIC NORTHWEST GENERATING v. BPA
Before: Raymond C. Fisher and Marsha S. Berzon,

Circuit Judges, and Barry Ted Moskowitz, * District Judge.

Opinion by Judge Berzon

*The Honorable Barry Ted Moskowitz, District Judge for the Southern

District of California, sitting by designation. 

PACIFIC NORTHWEST GENERATING v. BPA 3271
COUNSEL

Erick Johnson, Lake Oswego, Oregon, for petitioner Pacific

Northwest Generating Cooperative.

Mark R. Thompson, Portland, Oregon, for petitioner Public

Power Council.

Melinda J. Davison, Irion Sanger, Davison Van Cleve, P.C.,

Portland, Oregon, for petitioner Industrial Customers of

Northwest Utilities.

Karin J. Immergut, United States Attorney; Stephen J. Odell,

Assistant United States Attorney; David J. Adler, J. Courtney

Olive, Special Assistant United States Attorneys; Randy A.

Roach, General Counsel; Timothy A. Johnson, Assistant General Counsel, Portland, Oregon, for respondent Bonneville

Power Administration.

Michael J. Uda, Doney Crowley Bloomquist Payne Uda P.C.,

Helena, Montana, for intervenor Columbia Falls Aluminum

Company.

3274 PACIFIC NORTHWEST GENERATING v. BPA
Michael C. Dotten, Lake Oswego, Oregon, for intervenor

Alcoa Inc. 

Jay T. Waldron, William J. Ohle, Sara Kobak, Schwabe Williamson & Wyatt P.C., Portland, Oregon, for intervenors PacifiCorp et al.

ORDER

The opinion filed on August 28, 2009, and reported at 580

F.3d 828, is amended. The amended opinion filed concurrently with this order is substituted in its place.

With the filing of the amended opinion, the panel has unanimously voted to deny the petitions for panel rehearing.

Judges Fisher and Berzon have voted to deny the petition for

rehearing en banc, and Judge Moskowitz so recommends. The

full court has been advised of the petition for rehearing en

banc, and no judge of the court has requested a vote on the

petition for rehearing en banc. Fed. R. App. P. 35(f).

The petitions for rehearing and the petition for rehearing en

banc are DENIED. No further petitions for rehearing or

rehearing en banc may be filed.

OPINION

BERZON, Circuit Judge:

In Pacific Northwest Generating Coop. v. Dep’t of Energy

(“PNGC”), 550 F.3d 846 (9th Cir. 2008), amended on denial

of reh’g, No. 05-75638, 2009 WL 2386294 (9th Cir. Aug. 5,

2009), this court held invalid a central provision of a five-year

contract between the Bonneville Power Administration

(“BPA”) and the aluminum company Alcoa, Inc. (“Alcoa”).

PACIFIC NORTHWEST GENERATING v. BPA 3275
Less than a month after we issued the PNGC opinion, BPA

announced that it and Alcoa had agreed to an amended version of the invalidated provision that would govern the ninemonth period ending September 30, 2009 (the original fiveyear contract would have expired in September 2011). Petitioners Pacific Northwest Generating Cooperative (“PNGC”),

Public Power Council (“PPC”), and Industrial Customers of

Northwest Utilities (“ICNU”) challenge BPA’s decision to

execute the amended contract.

We agree with the petitioners’ challenge and therefore

grant their petitions for review. Although under no obligation

to contract with Alcoa, BPA agreed voluntarily to make a

nearly $32 million cash “benefit” payment to the aluminum

company, so that the company could purchase power from

one of BPA’s competitors. BPA’s justifications for this

unusual transaction, under which the agency received nothing

directly in exchange for its $32 million, do not demonstrate

that the transaction was “consistent with sound business principles,” as required by BPA’s governing statutes. We therefore hold that BPA exceeded its statutory authority when it

agreed to the Alcoa contract amendment.

I. BACKGROUND

A. The PNGC Opinion

In PNGC, we invalidated a central provision of a five-year

contract (the “2007 Contract”) between the Bonneville Power

Administration and Alcoa, one of BPA’s Direct Service

Industrial (“DSI”) customers. Under the invalidated provision,

BPA had agreed to “sell” power to Alcoa at a mutually

agreed-upon rate, below both the market rate and the statutorily authorized Industrial Firm Power (IP) rate. See PNGC,

550 F.3d at 854-58. The provision at issue did not, however,

require BPA to sell physical power to Alcoa. Rather, BPA had

agreed to “monetize” the power sale by making cash “benefit”

payments to Alcoa in an amount approximately equal to the

3276 PACIFIC NORTHWEST GENERATING v. BPA
difference between the higher wholesale market rate for

power and the lower contract rate multiplied by the amount of

power consumed by Alcoa each month.1See id. at 854-55.

The idea was that Alcoa could use the monetary benefit payments to subsidize its purchase of power on the wholesale

market, such that the aluminum company’s net power costs

would be approximately equal to the agreed-upon contract

rate (assuming that various caps on the monetary benefit were

not triggered). See id.

We held this monetization provision invalid on the ground

that “[t]he decision to monetize embodied in the agreements

violated [BPA’s] statutory obligation[ ] . . . to provide ‘the

lowest possible rates to consumers consistent with sound business principles.’ § 838g.” Id. at 875. We explained:

In essence, BPA has voluntarily agreed to forgo revenues by charging the DSIs a rate below what is

authorized by statute (i.e., the IP rate) and below

what is available on the open market. These foregone revenues result in higher rates for all other customers. This outcome is in apparent and direct

conflict with BPA’s statutory mandate, see § 838g,

and renders BPA’s decision to “monetize” the DSI

contracts in an amount reflective of those underlying

rate decisions — albeit a capped amount — highly

suspect.

Id.

We then considered and rejected as “flawed” BPA’s three

1The monetary benefit payments in the 2007 Contract were subject to

several caps. For example, BPA agreed to pay no more than $24/MWh for

each MWh of power that Alcoa consumed. Thus, if the wholesale rate for

power exceeded the agreed-upon rate by more than $24/MWh, Alcoa was

required to pay the overage. For a more thorough discussion of the various

caps and relevant examples, see PNGC, 550 F.3d at 855 & n.11. 

PACIFIC NORTHWEST GENERATING v. BPA 3277
proffered justifications for this decision. Id. at 875-78. In so

doing, we noted that “[b]y subsidizing the DSIs’ smelter operations beyond what it is obligated to do, BPA is simply giving

away money,” id. at 877, and that such an act was “not reflective of a ‘business-oriented philosophy,’ ” id. at 878 (quoting

Ass’n of Pub. Agency Customers, Inc. v. BPA (“APAC”), 126

F.3d 1158, 1171 (9th Cir. 1997)). We also explained that

“BPA’s authority to sell power to the DSIs does not mean that

BPA may simply give money to the DSIs by calling the agreement a ‘power sale’ with ‘monetized service benefits.’ ”

PNGC, 550 F.3d at 878 (emphasis in original).

We concluded our discussion of the validity of the monetary benefit provision of the 2007 Contract with the following

summary:

In sum, BPA has not advanced a “reasonable interpretation[ ] of its governing statutes” that supports its

actions. Golden Nw. Aluminum [Inc. v. BPA, 501

F.3d 1037, 1045 (9th Cir. 2007)]. Nor has the agency

shown how offering the DSIs rates below the market

rate and below what it is statutorily authorized to

offer “further[s] BPA’s business interests consistent

with its public mission.” Ass’n of Pub. Agency Customers, 126 F.3d at 1171. We conclude that BPA’s

decision to offer the subsidized rates to the DSIs and

then monetize those rates is inconsistent with BPA’s

statutory authority under the NWPA, and therefore

hold that the monetization provisions of the aluminum contracts are invalid.

Id.

The PNGC opinion was filed on December 17, 2008. Two

weeks later, on December 31, 2008, BPA sent a letter to its

regional customers and stakeholders, including Petitioners. In

the letter, BPA informed its customers that, in light of the

3278 PACIFIC NORTHWEST GENERATING v. BPA
PNGC opinion, the agency would cease making monetary

benefit payments to Alcoa. 

The agency also announced a proposed amendment to the

2007 Contract “so that service thereunder will conform to the

[PNGC] Opinion.” The critical change that BPA proposed

was that the parties would begin using the IP rate as the basis

for the monetary benefit calculation, rather than the previous

contract rate (which, as noted, was below the IP rate). BPA

also informed its customers that the amendment would only

govern “sales” to Alcoa from January 1, 2009 through September 30, 2009.

BPA concluded its letter by providing a web address where

interested parties could view the proposed amended contract.

The agency also stated that it would accept public comments

about the amendment until January 6, 2009, less than a week

later. Although it recognized that it was providing only “a

limited time to comment on the proposed amendment,” the

agency stated that it “believe[d] that it is important to implement this amendment in a timely manner to avoid, if possible,

any unnecessary interruption of smelter operations, especially

given the difficult economic times and potential loss of additional jobs in the region.”

B. The Amended Contract

On January 9, 2009, BPA signed the amended contract.

Like the 2007 Contract, the amended contract did not require

BPA to deliver physical power to Alcoa. Instead, BPA once

again agreed to provide a “monetary benefit” to Alcoa, which

Alcoa could then use to offset the cost of purchasing physical

power on the open market.

Unlike under the previous contract, however, the monetary

benefit in the amended contract is calculated using the IP rate

as the base rate, rather than an agreed-upon rate lower than

the IP rate. More specifically, BPA agreed in the amended

PACIFIC NORTHWEST GENERATING v. BPA 3279
contract to pay Alcoa the difference between a forecasted

market rate for power of $48.05/MWh and the IP rate of

$32.70/MWh — that is, $15.35/MWh — for every megawatt

hour of power purchased by Alcoa on the open market

between January 1, 2009 and September 30, 2009, up to a

total of $31.9 million.2

BPA announced the execution of the amended contract in

a letter to its customers dated January 13, 2009. In the letter,

BPA explained the reasons for its decision to enter into the

amended agreement:

BPA decided it was necessary to move quickly to

implement the amendment and avoid, if possible,

any unnecessary interruption of smelter operations,

especially given the difficult economic times and

potential loss of additional jobs. Alcoa’s announcement of substantial worldwide layoffs and [Columbia Falls Aluminum Company’s] announcement of a

likely plant closure reinforced our view that it was

important to act quickly. As a consequence, a limited

amount of time was available for public comment.

While we would have preferred to afford customers

more time to comment on the proposed amendment,

BPA believed it had to move quickly due to the circumstances. 

. . . 

This amendment is an interim action that applies to

payments through FY 2009 only. We now have time

to address the FY 2010-11 period under the 2007

Block Contract, and will use that time to more thoroughly engage with the public on the terms for any

2The IP rate quoted in PNGC was $45.08/MWh. See PNGC, 550 F.3d

at 857. That rate was for FY2007. The adjusted FY2009 rate is

$32.70//MWh. Petitioners do not dispute the validity of the 2009 IP rate.

3280 PACIFIC NORTHWEST GENERATING v. BPA
amendment or replacement agreement for the FY

2010-11 period.

BPA understands that it must address the look-back

issue associated with payments made under the 2007

Block Contract during the FY 2007-2008 period, and

intends to engage the region once we have an opportunity to consider all these arrangements more thoroughly.

Two months later, on March 3, 2009, BPA announced that

it had executed a nearly identical amendment to its contract

with a second aluminum DSI, Columbia Falls Aluminum

Company (CFAC). The validity of the amended CFAC contract is not part of this appeal. The announcement of the

CFAC deal is relevant, however, because in that announcement, BPA provided more detailed explanations of its reasons

for entering into the Alcoa contract amendment. Those reasons included the fact that “DSI loads have historically benefitted BPA by taking power in relatively flat blocks that

require little or no shaping; they have taken power from BPA

at light load hours, when power has historically been difficult

to market; and they have provided the Administrator with

additional power reserves.” The agency also averred that

“changing technologies in the aluminum and power industries

may permit DSI smelters to provide value to BPA in ways

that have not yet been imagined.” Thus, the agency concluded, it would be “unwise and imprudent . . . to refuse to

provide service to customers that may provide future value to

BPA as they have done in the past.” BPA also expressed concern about the short-term impact of a refusal to execute the

amended agreement, stating that the “DSIs currently have no

viable alternative for its power needs and a decision not to sell

power to DSIs would almost surely have the immediate consequence of the plants shutting down and perhaps never

resuming production.” 

Finally, the agency acknowledged that the monetary benefits offered to Alcoa and CFAC would result in an increase in

PACIFIC NORTHWEST GENERATING v. BPA 3281
rates for its other customers. It nonetheless concluded that the

contracts were reasonable because the agency did “not believe

that the proposed amendment, which covers only a nine

month period at a relatively modest cost, causes unreasonable

upward pressure on rates.”

C. The Current Petitions

Petitioners PNGC, PPC, and ICNU filed petitions challenging the validity of the amended contracts on January 22, 2009,

January 23, 2009, and April 6, 2009, respectively. The petitions were consolidated on April 21, 2009, and are the basis

of the current appeal.

II. Standard of Review

We affirm BPA’s actions unless they are “arbitrary, capricious, an abuse of discretion, or in excess of statutory authority.” PNGC, 550 F.3d at 860 (quoting Aluminum Co. of

America v. BPA, 903 F.2d 585, 590 (9th Cir. 1989)). “In

determining whether BPA has acted in accordance with law,

we defer to BPA’s reasonable interpretations of its governing

statutes. Golden Nw. Alum. v. BPA, 501 F.3d 1037, 1045 (9th

Cir. 2007); see also PNGC, 550 F.3d at 861.

III. Analysis

Petitioners maintain that by entering into the amended

Alcoa contract, BPA acted in contravention of its statutory

obligation to provide “the lowest possible rates to consumers

consistent with sound business principles.” In essence, the

Petitioners argue that BPA’s decision to enter into a moneylosing contract that required it to pay up to $31.8 million to

a customer the agency was not obligated to serve “is not a

transaction that a rational business would enter.” The Petitioners further assert that BPA’s proffered justifications for the

decision once again fail to establish that the decision was reasonable. 

3282 PACIFIC NORTHWEST GENERATING v. BPA
BPA defends the validity of the amended contract on three

grounds. First, the agency contends that it “has no independent obligation under PNGC to demonstrate that a sale of

power (or monetization of a sale of power) to the DSIs at the

IP rate must also satisfy the sound business principles standard.” (Emphasis in original.) In BPA’s view, so long as it

offers Alcoa power (or its monetary equivalent) at the IP rate,

it has acted within its statutory authority and complied with

this court’s holding in PNGC. Second, BPA maintains that the

“sound business principles” standard is “so suffused with discretion that it cannot supply a basis for a justiciable federal

claim because it provides ‘no law to apply.’ ” In other words,

according to BPA, even if the agency has an independent statutory obligation to act in accordance with sound business

principles, any decision it makes pursuant to that obligation

is not reviewable. Finally, BPA asserts that, assuming its decision to enter into the amended contract is reviewable under

the sound business principles standard, the decision comports

with such principles. We address each of these arguments in

turn.

A. BPA has an independent obligation to act in a 

manner consistent with sound business principles.

BPA’s argument that it need not independently demonstrate

that its decision to sell power to Alcoa at the IP rate was “consistent with sound business principles” hinges on this panel’s

repeated references in PNGC to the agency’s improper decision to monetize the sale of power to the DSIs at a “rate

below what is authorized by statute (i.e., the IP rate) and

below what is available on the open market.” See PNGC, 550

F.3d at 875. BPA cites the following sentence as particularly

clear evidence of this court’s “narrow and straightforward”

holding: 

Because, by its own admission, BPA is not obligated

to sell power to the DSIs, its decision to sell power

voluntarily at a rate below what it is statutorily

PACIFIC NORTHWEST GENERATING v. BPA 3283
required to offer (i.e., the IP rate) and below what it

could receive on the open market violates its statutory mandate to act in accordance with “sound business principles.” See § 838g.

Id. at 873-74. According to BPA, this statement indicates that,

had it used a rate that was equal to the IP rate or the market

rate in the 2007 Contract, it would, by definition, not have

violated its statutory mandate to act in accordance with

“sound business principles.” In short, BPA views its decision

to premise its “benefits” to Alcoa on the IP rate as a kind of

safe harbor that insulates it from a challenge that its decision

to enter into the amended contract was not consistent with

“sound business principles.” 

[1] BPA’s interpretation of PNGC ignores critical aspects

of that opinion and is therefore incorrect. First, the panel in

PNGC agreed with BPA that it has no statutory obligation to

sell power to Alcoa. See id. at 866. Second, the court in

PNGC concluded, and BPA in that case acknowledged, that

the agency is subject to a statutory obligation to act in accordance “with sound business principles.” See id. at 875. Other

panels have similarly recognized that BPA is required by statute “to operate with a business-oriented philosophy” and have

reviewed BPA’s compliance with this standard. See, e.g.,

Public Power Council, Inc. v. BPA, 442 F.3d 1204 (9th Cir.

2006); APAC, 126 F.3d at 1171; Dep’t of Water & Power of

the City of Los Angeles v. BPA, 759 F.2d 684, 693 (9th Cir.

1985); see also Portland Gen. Elec. Co. v. BPA, 501 F.3d

1009, 1029 (9th Cir. 2007) (noting that BPA is “charg[ed] to

function as a business.”).3

[2] Given that BPA is not obligated to sell to the DSIs and

3We explain in Part III.B infra, why the “consistent with sound business

principles” standard provides adequate law for a reviewing court to apply,

and also conclude, contrary to BPA’s submission, that no prior case has

held otherwise. 

3284 PACIFIC NORTHWEST GENERATING v. BPA
that its actions are generally reviewable under the “sound

business principles” standard, it follows that a decision by

BPA to enter into a contract with a DSI, like other nonobligatory contractual decisions made by the agency, see

APAC, 126 F.3d at 1171, must also conform to the “sound

business principles” standard. BPA would surely have to consider the fact that it must offer DSIs the IP rate when deciding

whether to execute a contract with the DSIs. See PNGC, 550

F.3d at 861 (holding that “if the agency chooses to offer firm

power to the DSIs, . . . it must first offer them the IP rate.”).

But the fact that the agency entered into a contract at the IP

rate does not insulate from review its voluntary decision to

enter into the contract in the first place.

[3] To put it slightly differently, BPA is certainly authorized to sell power to the DSIs at the IP rate. See PNGC, 550

F.3d at 867-73. But that authority, like its authority to enter

into contracts generally, is cabined by its obligation to “operate with a business-oriented philosophy.” APAC, 126 F.3d at

1169-71 (reviewing BPA’s decision to enter into “Long-Term

Extension Agreements” with the DSIs for the sale of unbundled transmission services); see also PNGC, 550 F.3d at 878

(“BPA’s authority to sell power to the DSIs does not mean

that BPA may simply give money to the DSIs by calling the

agreement a ‘power sale’ with ‘monetized service benefits.’ ”

(emphasis omitted)). 

Intervenor CFAC, another aluminum DSI, argues that this

interpretation of BPA’s governing statutes would render the

IP rate a nullity, because it would never make business sense

for BPA to sell to the DSIs at the IP rate when market rates

exceed the IP rate, and DSIs would never accept the IP rate

when market rates fall below the IP rate. We disagree. 

We can envision several situations in which BPA might

reasonably conclude that a below-market rate sale to the DSIs

is a sound business decision. First, as the court alluded to in

PNGC, BPA’s governing statutes likely require it to offer

PACIFIC NORTHWEST GENERATING v. BPA 3285
power within the Pacific Northwest at established rates before

the agency may sell power outside the region. See PNGC, 550

F.3d at 876 n.35.4 If so, BPA might reasonably enter into a

contract with the DSIs at the IP rate so as to “free up power

to sell outside the Pacific Northwest.” Id.

Second, BPA has asserted that the physical sale of power

to the DSIs has indirect benefits that might offset a belowmarket rate sale. For example, BPA noted in its letter explaining its justifications for the amended contract with CFAC that

“DSI loads have historically benefitted BPA by taking power

in relatively flat blocks that require little or no shaping; they

have taken power from BPA at light load hours, when power

has historically been difficult to market; and they have provided the Administrator with additional power reserves.”

These and other non-financial benefits to BPA could very

well justify a less-than-market rate sale, but they have no

direct application when, as here, BPA is not in fact physically

selling power to the DSIs. 

Third, a soundly run business might reasonably offer a

large customer a short-term discount with the expectation that

the customer’s future business at higher prices will more than

make up for the short-term loss of revenue. Similarly, a reasonable business might offer a short-term discount to a customer in order to diversify its customer base or to offload

unused capacity. 

As these examples illustrate — and they are only examples,

not meant to be exhaustive — a decision by BPA to enter into

a power sale contract with the DSIs at the IP rate, even if the

IP rate is below market rates, could under various circumstances be consistent with sound business principles.5

 As

4Because the issue is again not before us, we adopt no holding concerning whether BPA’s governing statutes do, in fact, require it to offer power

inside the region at established rates before it may sell power outside the

region. 

5

If BPA can demonstrate that the decision to sell power to the DSIs at

the IP rate is a sound business one, even where such a sale would require

3286 PACIFIC NORTHWEST GENERATING v. BPA
explained below, however, although we review such a decision by BPA with great deference, see APAC, 126 F.3d at

1171, the decision must still be reasonable and have some

support in the record before the agency at the time the decision is made. 

[4] In sum, we hold that BPA’s voluntary decision to contract with the DSIs, like its other non-obligatory contractual

choices, must conform to the congressionally imposed

requirement that the agency act in a manner “consistent with

sound business principles.” See 16 U.S.C. §§ 838g;

839e(a)(1); 825s. The mere fact that BPA has chosen to contract with a DSI at the statutorily authorized IP rate does not

insulate the decision to contract from review under the “sound

business principles” standard.6

B. The “sound business principles” standard provides

adequate law to apply.

BPA next argues that even if its decision to contract with

BPA to incur a short-term loss (either in the form of higher costs or foregone revenues), then the decision to monetize that contract may well be

a sound business decision for the reasons discussed in PNGC. See 550

F.3d at 874-75 (noting, among other things, that “monetization reduces

[BPA’s] financial costs because it circumvents the risk that a customer

will default on payment after power is physically delivered”). There are,

of course, situations in which the decision to monetize would undermine

the validity of BPA’s decision to contract with the DSIs. For example, if,

as here, BPA justifies the underlying sale by citing to benefits that would

accrue to the agency only from the physical sale of power, then the decision to monetize rather than sell power would likely undercut that justification. 

6

In neither PNGC nor this case did BPA attempt to sell power to the

DSIs at a market rate above the IP rate. We do not decide, nor have we

decided, whether BPA could offer power to the DSIs at a rate above the

IP rate if the agency could demonstrate that offering power to the DSIs at

the IP rate was not consistent with sound business principles. See PNGC,

550 F.3d at 861. 

PACIFIC NORTHWEST GENERATING v. BPA 3287
Alcoa is subject to the “sound business principles” standard,

that standard is “so suffused with discretion” that it provides

“no law to apply” and cannot form the basis of our review.7

In forwarding this position, BPA relies on City of Santa Clara

v. Andrus, 572 F.2d 660 (9th Cir. 1978), and Aluminum Co.

of America v. BPA (“Alcoa”), 903 F.2d 585 (9th Cir. 1989),

cases that BPA claims definitively ruled that judicial review

cannot be premised on the “sound business principles” standard.

Although we fully acknowledge that actions taken by BPA

in furtherance of its business interests are entitled to particular

deference, see PNGC, 550 F.3d at 860-61, we reject BPA’s

argument that such decisions are unreviewable, for several

reasons.

[5] First, BPA’s contention that its business decisions are

entirely unreviewable is directly at odds with this court’s precedent, as well as with a Supreme Court case, United States

v. City of Fulton, 475 U.S. 657 (1986). As already noted, we

have, on multiple occasions, held that actions taken by BPA

in furtherance of its business interests, while owed significant

deference, are nonetheless reviewable. See PNGC, 550 F.3d

at 861, 877-78; APAC, 126 F.3d at 1171; Public Power Council, 442 F.3d at 1204; Bell v. BPA, 340 F.3d 945, 948-49 (9th

Cir. 2003); Dep’t of Water & Power, 759 F.2d at 693. 

In APAC, for example, BPA asserted that its decision to

begin “wheeling” non-federal power was a valid exercise of

its “broad [statutory] authority to contract in [its] best busi7The Administrative Procedure Act, which governs our review of

BPA’s actions, see 16 U.S.C. § 839f(e)(2), prohibits judicial review of

“agency action[s that are] committed to agency discretion by law.” 5

U.S.C. § 701(a)(2). An agency action is “committed to [its] discretion by

law” where a “statute is drawn so that a court would have no meaningful

standard against which to judge the agency’s exercise of discretion” —

i.e., where it is “drawn in such broad terms that in a given case there is

no law to apply.” Heckler v. Chaney, 470 U.S. 821, 830 (1985). 

3288 PACIFIC NORTHWEST GENERATING v. BPA
ness interests.” APAC, 126 F.3d at 1169. In evaluating this

argument, the court noted that “[t]he statutes governing

BPA’s operations are permeated with references to the ‘sound

business principles’ Congress desired the Administrator to use

in discharging his duties.” Id. at 1171. In the court’s view,

these references provided BPA with “an unusually expansive

mandate to operate with a business-oriented philosophy.” Id.

This “unusually expansive mandate” did not, however, preclude the court from reviewing the agency’s decision for reasonableness. See id. After performing this review, the court

concluded that the BPA’s decision to begin wheeling nonfederal power, a decision that was intended to increase BPA’s

competitiveness in a recently deregulated market, “appear[ed]

reasonable” and was therefore entitled to deference. See id. at

1171. 

In PNGC, BPA likewise argued that its decision to provide

cash payments to the DSIs furthered its statutory mandate to

operate in accordance with “sound business principles.” See

PNGC, 550 F.3d at 877-78. As in APAC, we noted that this

court is “particularly deferential” to BPA when the agency

acts in furtherance of its business interests. Id. at 861. We

nonetheless held that BPA’s conclusion that a specific action

was consistent with “sound business principles” was reviewable for reasonableness. See id.

BPA’s assertion that the “sound business principles” standard is too vague to support review is also undermined by our

decision in Public Power Council. In that case, we expressly

relied on the “sound business principles” standard to review

a decision by BPA to revise upward its previously approved

wholesale power rates. Public Power Council, 442 F.3d at

1209-11. Ultimately, we concluded that “[i]n light of [the]

eximious reasons for BPA’s [acting] in the way it did, we are

not able to say that BPA failed to proceed in accordance with

‘sound business principles.’ ” Id. at 1210. Although we

affirmed BPA’s actions in Public Power Council, our holding

clearly indicates that we did not find the “sound business prinPACIFIC NORTHWEST GENERATING v. BPA 3289
ciples” standard too indeterminate to support any review,

however deferential.

Finally, in Bell, we reviewed BPA’s decision to buy out its

contractual obligations to supply suddenly high-cost power to

DSIs at uneconomically low prices during a recent energy crisis. See Bell, 340 F.3d at 948-49. The court concluded that

“BPA’s decision to amend its contract obligations was eminently businesslike, given the probably devastating result of

performing the original contract . . . .” Id. at 949. The court

therefore refused to “second-guess the wisdom of BPA’s winning business decision[ ], especially when it was responding

to unprecedented market changes.” Id. Implicit in this holding, however, is an assumption that the court would “secondguess” an action by BPA that was not “eminently businesslike.” See also Dep’t of Water, 759 F.2d at 693 (citing 16

U.S.C. § 839e(a)(1)’s requirement that rates “be designed

consistent with sound business principles” and holding that,

as a result of this and other legislative requirements, a decision by BPA to implement a policy designed to mitigate revenue shortfalls was “not only statutorily authorized but

statutorily mandated”).

[6] As these cases demonstrate, the law of this circuit is

clear: when Congress imposed a duty on BPA to operate in

accordance with “sound business principles,” see APAC, 126

F.3d at 1171, it imposed a requirement that was capable of

supporting review.

Our approach in all these cases, like our holding in this

case, is consistent with the Supreme Court’s approach in City

of Fulton to review under a different statute containing

“sound business principles” language. In City of Fulton, the

Supreme Court held that Section 5 of the Flood Control Act

imposed a statutory obligation on the Secretary of Energy to

“protect consumers by ensuring that power is sold ‘at the lowest possible rates . . . consistent with sound business principles.’ ” 475 U.S. at 667-68 (quoting United States v. Tex-La

3290 PACIFIC NORTHWEST GENERATING v. BPA
Elec. Cooperative, Inc., 693 F.2d 392, 399-400 (5th Cir.

1982)). The Court then reviewed an action by the Secretary

for consistency with that standard, ultimately affirming the

Secretary’s action on the ground that the action was “reasonable” and “well suited” to meeting this obligation. See id. at

668. So, the Supreme Court, too, has recognized that “consistent with sound business principles” language provides a

reviewable standard.

[7] Second, precedent aside, there is no basis for concluding that this is one of the “rare instances” where a statute is

“drawn in such broad terms that in a given case there is no

law to apply.” Heckler v. Chaney, 470 U.S. 821, 830 (1985)

(quoting Citizens to Preserve Overton Park v. Volpe, Inc., 401

U.S. 402, 410 (1971)). The statutory requirement that BPA

operate in a manner “consistent with sound business principles” is at least as specific as other statutory mandates held

sufficient to permit judicial review.

For example, Keating v. FAA, 610 F.2d 611 (9th Cir. 1979),

held that an FAA Administrator’s decision was reviewable

where the relevant statute required that the decision be made

“in the public[‘s] interest.” See id. at 612. Similarly, City of

Los Angeles v. U.S. Dep’t. of Commerce, 307 F.3d 859 (9th

Cir. 2002), determined that a statute requiring the Secretary of

Commerce to use statistical sampling “if he considers it feasible” provided a meaningful standard for the court to review

the Secretary’s decision not to use sampling. See id. at 869

n.6; see also Barber v. Widnall, 78 F.3d 1419, 1423 (9th Cir.

1996) (holding a decision of the Secretary of the Air Force

not to correct a military record reviewable where the governing statute allowed the Secretary to make a correction “when

the Secretary considers it necessary to correct an error or

remove an injustice”). And, of course, it is well-established

that courts may review FERC’s determination that a given

electricity rate is “just and reasonable.” See Morgan Stanley

Capital Group Inc. v. Pub. Util. Dist. No. 1 of Snohomish

County, 128 S. Ct. 2733, 2738 (2008); see also E.& J. Gallo

PACIFIC NORTHWEST GENERATING v. BPA 3291
Winery v. Encana Corp., 503 F.3d 1027, 1039 (9th Cir. 2007).

If we may review whether a decision was “in the public’s

interest” or whether a particular act was “feasible” or “just

and reasonable,” we can certainly review whether an action is

“consistent with sound business principles.”

Moreover, courts routinely review the rationality of business decisions in other contexts. For example, under the common law “business judgment rule,” courts are required to

defer to business decisions made by a corporation’s board of

directors, unless “the directors[, among other things,] act in a

manner that cannot be attributed to a rational business purpose.” Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del. 2000);

see also Navellier v. Sletten, 262 F.3d 923, 946 (9th Cir.

2001) (affirming district court’s formulation of the business

judgment rule as requiring a director to “[r]ationally believe

that the [director’s] business judgment is in the best interest

of the corporation”). 

Even more relevantly, the Sixth Circuit, in interpreting a

statutory directive very similar to the statutory requirements

at issue here, concluded that there was sufficient law to apply.

See McCarthy v. Middle Tenn. Elec. Membership Corp., 466

F.3d 399 (6th Cir. 2006). In McCarthy, the Sixth Circuit held

that an electric cooperative’s decision to incur “non-necessary

expenses,” if proven true, would “clear[ly]” violate the cooperative’s statutory duty under Tennessee law to provide its

“members with electricity ‘at the lowest cost consistent with

sound business principles.’ ” Id. at 410 (citing Tenn. Code

Ann. § 65-25-203). 

The statute at issue in Rank v. Nimmo, 677 F.2d 692 (9th

Cir. 1982), which was found not to provide law to apply, provides a useful contrast to the statutes held to permit review in

the cases just surveyed. In Rank, the relevant statute provided

that “the Administrator [of the Veterans Administration] may,

at the Administrator’s option,” accept assignment of a veteran’s loan. See id. at 699-700. According to the court, Con3292 PACIFIC NORTHWEST GENERATING v. BPA
gress’s use of “the precatory ‘may’ ” and of the phrase “at the

Administrator’s option” made “clear that Congress intended

to vest the widest discretion possible in the Administrator.”

Id. The Administrator’s decision to accept or reject assignment of a loan was therefore unreviewable. See id.

[8] No such precatory language existed in the statutes in the

cases we have reviewed, and none exists in the statutes governing BPA’s conduct in this case. Section 838g, for instance,

states that BPA “shall” fix and establish rates in a manner

consistent with “sound business principles.” 16 U.S.C.

§ 838g; see also 16 U.S.C. § 839e(a)(1) (stating that “rates

shall be established . . . in accordance with sound business

principles”) (emphasis added). Moreover, unlike in Rank,

BPA’s governing statutes do not evince an intention on Congress’s part to vest BPA “with the widest discretion possible,”

by referring to BPA’s “option” or “choice” or similar language. To the contrary, by requiring BPA to act in a prescribed manner — i.e., in a manner that “accord[s] with sound

business principles” — Congress clearly intended to limit

BPA’s discretion to a degree.

Finally, BPA is incorrect in maintaining that City of Santa

Clara and Alcoa held that the “sound business principles”

standard is so vague that it provides no law to apply. Those

cases held instead that a congressional directive to sell power

“in such a way as ‘to encourage the most widespread use

thereof’ ” was “too vague and general” to provide applicable

law. See City of Santa Clara, 572 F.2d at 668; Alcoa, 903

F.2d at 599. Neither case directly precluded reviewability

under the “sound business principles” standard at issue here,

and neither can be fairly taken to have done so by implication

— particularly in light of the already surveyed precedents to

the contrary.

In City of Santa Clara, the petitioners argued that certain

decisions made by the Secretary of the Interior violated Section 5 of the Flood Control Act of 1944. See City of Santa

PACIFIC NORTHWEST GENERATING v. BPA 3293
Clara, 572 F.2d at 667. Section 5 requires the Secretary to

“transmit and dispose of [surplus energy from reservoir projects] in such manner as to encourage the most widespread use

thereof at the lowest possible rates to consumers consistent

with sound business principles.” 16 U.S.C. § 825s. We

refused to review the decision, holding that the statute’s

“widespread use” requirement was too vague to support judicial review. See City of Santa Clara, 572 F.2d at 668. As we

explained,

The Flood Control Act’s directive to market power

in such a way as to “encourage the most widespread

use thereof” could be interpreted in many different

ways, such as to require that power be sold to as

many different preference entities as possible,

thereby fostering the most widespread geographic

use of the power, or to mandate sale of the power to

those preference entities whose customers present

the most diversified mix of agricultural, industrial or

residential users, or to require sale of federal power

to those preference entities which serve the largest

number of ultimate consumers.

Clearly, the “most widespread use” standard is

susceptible of widely divergent interpretations. As

we said of another law in Strickland v. Morton,

supra, “(t)he provisions of this statute breathe discretion at every pore.” 519 F.2d at 469. The statute permits the exercise of the widest administrative

discretion by the Secretary. It does not supply “law

to apply.” 

Id. at 668. 

As the above quoted passage reveals, the court in City of

Santa Clara considered only whether the “widespread use”

clause provided law to apply; it did not address the “sound

business principles” clause. In this case, we are concerned

3294 PACIFIC NORTHWEST GENERATING v. BPA
solely with the “sound business principles” standard, a standard that “permeate[s]” BPA’s governing statutes. See APAC,

126 F.3d at 1171 (citing 16 U.S.C. §§ 825s, 838g,

839e(a)(1)); see also 16 U.S.C. § 839f(b) (“[T]he Administrator shall take such steps as are necessary to assure the timely

implementation of this chapter in a sound and businesslike

manner.”). City of Santa Clara’s holding is therefore not

applicable here.8

For similar reasons, this court’s holding in Alcoa is inapplicable. In Alcoa, the petitioners asserted that BPA had violated

section 7(k) of the Regional Act when it established certain

8Even if City of Santa Clara’s holding was on point, that holding may

no longer be good law. City of Santa Clara predates both Heckler v.

Chaney, 470 U.S. 821 (1985), and Webster v. Doe, 486 U.S. 592 (1988).

In those cases, the Supreme Court clarified “what it means for an action

to be ‘committed to agency discretion by law.’ ” Webster, 486 U.S. at 599.

In doing so, the Supreme Court emphasized that the “committed to agency

discretion” exception to judicial review is a “very narrow exception.” See

Heckler, 470 U.S. at 830. 

Consistent with the emphasis in Heckler and Webster on the extreme

narrowness of the “committed to agency discretion” exception, the

Supreme Court in City of Fulton substantively reviewed the actions of the

Secretary of Energy under the part of Section 5 of the Flood Control Act

at issue in City of Santa Clara. 475 U.S. at 667-68. Although the Court

did not specifically reference the “widespread use” phrase of Section 5, it

did cite the “lowest possible rates” phrase that immediately follows, and

is logically linked to, the “widespread use” language. See id. (holding that

Section 5 requires the Secretary “to protect consumers by ensuring that

power is sold ‘at the lowest possible rates . . . consistent with sound business principles.’ ”); 16 U.S.C. § 825s (“[T]he Secretary of Energy [shall

dispose of surplus energy from reservoir projects] in such manner as to

encourage the most widespread use thereof at the lowest possible rates to

consumers consistent with sound business principles.”). Unlike the court

in Santa Clara, the Supreme Court did not conclude that Section 5’s “most

widespread use” and “lowest possible rates” directives rendered the entire

statutory section “so imprecise that its interpretation requires a profound

exercise of discretion.” See City of Santa Clara, 572 F.2d at 668 (quotation marks and citations omitted). To the contrary, it reviewed the Secretary’s decision for compliance with Section 5’s statutory mandates

generally. 

PACIFIC NORTHWEST GENERATING v. BPA 3295
rates for non-firm power. See Alcoa, 903 F.2d at 599. Section

7(k) requires BPA to establish nonfirm energy rates in accordance with a number of statutory provisions, including

§ 838g. See 16 U.S.C. § 839e(k). Reviewing the various statutory provisions, the court in Alcoa concluded that section 7(k)

“require[s] that BPA rates for nonfirm energy be drawn:

1. having regard to the recovery of the cost of generation and transmission of such electric energy;

2. so as to encourage the most widespread use of

Bonneville power;

3. to provide the lowest possible rates to consumers

consistent with sound business principles; and

4. in a manner that protects the interests of the

United States in amortizing its investments in the

projects within a reasonable period.”

Alcoa, 903 F.2d at 590-91. 

The court then addressed the question “whether there is law

to apply here to the four standards section 7(k) incorporates.”

Id. at 599. Citing City of Santa Clara, the court noted that

“the ‘widespread use’ requirement provides BPA with . . . so

much discretion that there is no law to apply.” Id. The court

nonetheless held that there was law to apply overall because

the first and fourth standards “limit[ed] BPA’s discretion” to

set nonfirm energy rates. Id. It was careful to note that “[t]his

conclusion does not conflict with City of Santa Clara, because

these two standards were not present in that case.” Id.

Although the court in Alcoa did not apply the “consistent with

sound business principles” standard, it did not state that the

standard provided no law to apply. Nor was there any need for

3296 PACIFIC NORTHWEST GENERATING v. BPA
the case to address that standard, as the court held that other

standards set forth in section 7(k) provided adequate law.9

[9] In sum, neither City of Santa Clara nor Alcoa addressed

the reviewability of the standard at issue here. As a result, neither decision controls the outcome of this case.

[10] For all the reasons noted above, we hold that the

“sound business principles” standard incorporated in BPA’s

governing statutes is sufficiently specific to support judicial

review and does not indicate that Congress “committed to

agency discretion” decisions concerning compliance with that

statutory requirement.

C. BPA’s decision to enter into the amended contract

does not conform with “sound business principles.”

Having determined that the “consistent with sound business

principles” standard provides adequate law to apply, we next

turn to the question whether, as the agency maintains, its decision to enter into the amended contract conforms with that

statutory mandate. In resolving this issue, we are “particularly

deferential” to “the agency’s assessment of whether its actions

‘further BPA’s business interests consistent with its public

mission.’ ” PNGC, 550 F.3d at 861 (quoting APAC, 126 F.3d

at 1171). We may only set aside such an assessment if it is

unreasonable, meaning that it is “contrary to clear congressional intent or that [it] frustrate[s] the policy Congress sought

9Noting that Alcoa stated in passing that “this ‘widespread use’ standard

[ ] incorporates two of the four standards BPA must use,” Alcoa, 903 F.2d

at 599, BPA posits that we must have been including the “sound business

principles” standard as one of the two standards, and so must also have

meant to include that provision in the earlier statement that “the ‘widespread use’ requirement provides BPA with . . . so much discretion that

there is no law to apply.” Id. This chain of inferences is simply too thin

to constitute a holding, particularly about an issue, the impact of the

“sound business principles” standard, that was not necessary to the court’s

conclusion that the relevant agency action was reviewable. 

PACIFIC NORTHWEST GENERATING v. BPA 3297
to implement.” See Biodiversity Legal Found. v. Badgley, 309

F.3d 1166, 1175 (9th Cir. 2002); see also Kaiser Aluminum

& Chem. Corp. v. BPA, 261 F.3d 843, 848-49 (9th Cir. 2001)

(noting that this court does not defer to BPA’s construction of

its governing statutes where BPA’s interpretation is “inconsistent with statutory mandates, or [contravenes] the statutory

policy Congress intended to implement.”). 

Although we do not reject BPA’s views of its statutory

authority lightly, we are compelled to do so here. Congress

intended BPA to conduct its affairs in a “sound and businesslike manner.” See 16 U.S.C. § 839f(b). That mandate requires

BPA to operate in “a manner consistent with sound business

principles.” See supra Section III.A; see also 16 U.S.C.

§ 838g; PNGC, 550 F.3d at 875. For the reasons discussed

below, the agency’s decision to pay Alcoa up to $32 million

cannot be squared with this clear congressional directive. As

a result, we hold that the agency’s conclusion that it had the

statutory authority to enter into the Alcoa amendment was not

reasonable. See Biodiversity Legal Found., 390 F.3d at 1175

(holding that an agency’s interpretation of its governing statutes is unreasonable if it is “contrary to clear congressional

intent or . . . frustrate[s] the policy Congress sought to implement”).

[11] Like its decision to enter into the initial contract,

BPA’s agreement to the Alcoa contract amendment is, on its

face, a “highly suspect” one. See PNGC, 550 F.3d at 875. The

amended contract requires BPA to pay Alcoa up to almost

$32 million over a nine month period. BPA is to receive nothing in return. In essence, then, BPA has agreed to provide a

non-obligatory gift of up to $32 million. The agency concedes, as it did in PNGC, that its decision to provide this voluntary gift will lead to higher rates for its other customers. See

id. Given that BPA was under no obligation to contract with

Alcoa, let alone to pay it over $30 million in cash, and that

the amended contract will inevitably lead to higher prices for

all other customers, BPA’s decision raises serious questions

3298 PACIFIC NORTHWEST GENERATING v. BPA
concerning compliance with its statutory obligation to maintain “the lowest possible rates to consumers consistent with

sound business principles.” 16 U.S.C. § 838g; see PNGC, 550

F.3d at 875; see also McCarthy, 466 F.3d at 410 (“If the

Cooperatives failed to maintain records and spent their money

on non-necessary expenses, it is clear that they were not acting in accordance with their statutory purpose of providing

their members with electricity ‘at the lowest cost consistent

with sound business principles.’ ”).10

[12] Moreover, the amended contract requires Alcoa to use

the $32 million to purchase power from BPA’s competitors

(because BPA itself is not selling physical power to Alcoa).

In other words, BPA has effectively agreed to subsidize the

operations of its competitors, competitors who, in the past,

have not hesitated to take business away from BPA. In Kaiser

Aluminum, for instance, the court noted that, as the wholesale

price for power in the Northwest began to drop in the mid1990s, competition for the DSIs’ business increased substantially, and “[m]any DSIs were considering offers from alternative power suppliers at prices below BPA’s rates.” 261 F.3d

at 846. In response, BPA was forced to amend its long-term

contracts with the DSIs by adjusting rates downward. See id.

10We agree with BPA that if the agency’s decision to incur the $32 million expense at issue here was valid, it could lawfully include that cost in

the rates it charges its preference customers. See Golden Nw. Aluminum,

Inc. v. BPA, 501 F.3d 1037, 1045 (9th Cir. 2007) (holding that “nothing

in [the relevant section of the Northwest Power Act] precluded BPA from

considering the costs of [resources needed to service valid contracts with

the DSIs] when calculating its preference rate, even though BPA would

not have incurred such costs absent its DSI contracts”). In Golden Northwest, however, unlike in this case, petitioners had not filed a timely challenge to the validity of the DSI contracts that generated the costs at issue.

See id. at 1044-45. As a result, the court was required “to take[ ] the existence of BPA’s contractual obligations to its DSI customers as given.” Id.

at 1045. 

In this case, petitioners have filed a timely challenge to the underlying

contract. Thus, we are required to address the preliminary issue that the

court in Golden Northwest took as given. 

PACIFIC NORTHWEST GENERATING v. BPA 3299
[13] At the present time, wholesale market rates are substantially higher than both the PF rate and the IP rate. BPA’s

competitors are therefore at a price disadvantage and cannot

put direct pressure on BPA to lower its prices. BPA’s decision, during a time of relative competitive advantage, to transfer $32 million to these competitors would not appear to make

sound business sense.11

BPA nonetheless argues that the decision to execute the

amendment “advances [its] business interest in numerous

respects.” First, the agency maintains that the amendment was

necessary to avoid “any unnecessary interruption of smelter

operations, especially given the difficult economic times and

potential loss of additional jobs.” This justification is essentially identical to one we rejected as invalid, while sympathizing with its humanitarian goals, in PNGC. 550 F.3d at 877-78.

In PNGC, BPA had attempted to justify the monetization provision of the 2007 Contract, in part, on the ground that the

“monetary benefits” were necessary to ensure the continued

operation of the aluminum smelters and to protect “DSI jobs.”

Id. We held that this goal, while “laudable,” was “simply not

reflective of a ‘business-oriented philosophy.’ ” Id. at 878.

We also noted that BPA’s counsel had conceded at oral argument that “[i]t’s not Bonneville’s responsibility to ensure that

[the DSIs] exist.” Id. at 877 n.36 (alterations in original); see

also Envtl. Def. Ctr., Inc. v. EPA, 344 F.3d 832, 858 n.36 (9th

Cir. 2003) (noting that an agency action should be set aside

where, among other things, the agency “has relied on factors

which Congress has not intended it to consider”) (citing

Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut.

11Petitioners also maintain that BPA’s decision to enter into the

amended contract was not consistent with sound business principles

because the agency did not first seek a refund of funds it improperly paid

to Alcoa pursuant to the 2007 Contract. As BPA notes, however, there is

a significant possibility that the DSIs do not owe BPA a refund. See infra

Part IV. Given this possibility, the agency’s failure to seek a refund before

entering into the amended contract does not, standing alone, render the

decision unreasonable. 

3300 PACIFIC NORTHWEST GENERATING v. BPA
Auto. Ins. Co., 463 U.S. 29, 43 (1983)). For these same reasons, BPA’s first justification does not demonstrate that the

agency’s decision to enter into the amended contract was a

reasonable business decision.

Second, BPA asserts that the monetary benefit payments

were necessary to assure the continued existence of the DSI

load, and that that was important because “[t]he DSI load has

provided enormous value to BPA in the past and it is reasonable to believe that it will do so again.” As evidence of the

past value that DSIs have provided, BPA cites the fact that the

DSIs purchased “relatively flat blocks” of power, accepted

power at “light load hours,” and provided BPA with additional power reserves. 

There are several problems with this rationale. First, it

comes fairly close to another justification that the panel

rejected in PNGC: BPA’s “historic relationship with the DSIs

[and] the important role the DSIs played in the development

of the [federal power systems].” PNGC, 550 F.3d at 877 (second alteration in original). 

Second, the primary examples of the DSIs’ value to the

agency that BPA cites result from the sale of physical power

to the DSIs. Because BPA will not provide Alcoa with physical power under the amended contract, BPA will not receive

those benefits from Alcoa, at least in the short term. See Envtl.

Def. Ctr., Inc., 344 F.3d at 858 n.36 (stating that an agency’s

determination is not entitled to deference where the agency’s

explanation for its conclusion is “implausible”).

BPA asserts that its decision to monetize the contract

amendment was a sound business one because “monetization

[has] certain obvious risk management benefits.” These risk

management benefits include eliminating both “the risks [to

BPA] associated with making the relatively large wholesale

market power purchases [at fluctuating prices] BPA would be

required to undertake . . . to serve Alcoa’s current operating

PACIFIC NORTHWEST GENERATING v. BPA 3301
load” and the risk that Alcoa would be unable to pay for physical power that BPA delivered.

[14] Although we do not doubt that monetization provides

these benefits, BPA’s decision to monetize cannot, on its own,

justify the Alcoa contract amendment, for three reasons. First,

monetizing a contract only makes sound business sense if the

underlying contract is a sound one. For the reasons we discuss

above, BPA could not reasonably have concluded that its

decision to sell power to Alcoa, and thereby incur a $32 million loss, was “consistent with sound business principles.” If

anything, the agency’s decision to monetize highlights the

fact that the contract amendment amounts to no more than a

$32 million gift to Alcoa.

Second, BPA attempted to justify the contract amendment

by citing to benefits that had previously accrued to the agency

when it sold physical power to Alcoa and the other DSIs. By

monetizing the contract, BPA undermined this justification.

Third, the very reasons BPA provided for its decision to

monetize the contract — reducing the significant risk of nonpayment by Alcoa and eliminating the market risks that BPA

would face if it sold physical power to Alcoa — underscore

the unreasonableness of BPA’s belief that Alcoa will provide

future benefits to the agency that will offset the current $32

million cash payment. The agency does not explain why,

given that the risks of selling power to Alcoa are currently so

significant that the agency would rather give the company

money to purchase power from a competitor than deliver

power to the aluminum company itself, it reasonably believes

that the risks will be less significant in the future or that

Alcoa’s financial situation will improve. 

[15] The fourth, and perhaps most important, problem with

BPA’s contention that Alcoa will provide future benefits to

the agency that will offset the $32 million that BPA voluntarily agreed to pay the aluminum company is that the agency’s

3302 PACIFIC NORTHWEST GENERATING v. BPA
assertion is without any analytic or evidentiary support. For

example, BPA has not quantified the monetary value of the

past benefits that the DSIs provided. Nor has the agency analyzed how likely it is that Alcoa (either directly or indirectly

through its employees) will be able to provide benefits in the

future, when the aluminum company will provide these proposed benefits, and how much those benefits will be worth.

Perhaps voluntarily paying $32 million to help ensure Alcoa’s

viability at the expense of other customers will lead to higher

revenues or lower costs for BPA in the future. BPA, however,

has not demonstrated that it has any basis for believing that

it will. In short, neither the record in this case nor the record

in PNGC contains any financial or other business analysis or

evidence to support the agency’s assertion that future benefits

to the agency are (a) likely or (b) sufficiently large to make

the decision to give $32 million away a sound business decision. See Envtl. Def. Ctr., Inc., 344 F.3d at 858 n.36 (no deference is due an agency’s conclusion where the agency

“entirely failed to consider an important aspect of the problem”). 

Moreover, the information that the administrative record

does contain would lead a rational observer to conclude that

Alcoa is not particularly likely to provide significant future

benefits to the agency. All of the parties agree that the total

DSI load has been steadily declining for many years and now

accounts for a relatively small percentage of BPA’s power

sales. Admin. Record at 76 (“[T]he aggregate DSI load has

decreased substantially over the past decade due to adverse

global aluminum market forces . . . .”). According to figures

available on BPA’s website, DSI load accounted for 630

aMW, or less than 3%, of BPA’s firm power load in 2008,

down from 3150 aMW in the early 1990s. See also APAC,

126 F.3d at 1164.12 BPA also asserted, in its letter to constitu12See Bonneville Power Administration, 2007 Pacific Northwest Loads

& Resource Study 37 (2007), available at: http://www.bpa.gov/

power/pgp/whitebook/2007/Summary_Document_2007_White_Book.pdf 

PACIFIC NORTHWEST GENERATING v. BPA 3303
ents, that Alcoa’s aluminum smelter might close down for

good if the agency failed to make even a single monthly monetary benefit payment. But the agency further noted, in the

preamble to the contract amendment itself, that there was “uncertainty that Alcoa will continue operating at existing levels”

during the nine-month amendment period even with the benefit of the agency’s monetary payment. Given that the only

information in the record shows that DSI load has been steadily declining for years and that the current health of the aluminum smelting industry is precarious at best, BPA could not

reasonably have concluded that Alcoa will be healthy enough

in the future to provide sufficient benefits to BPA to compensate for the tens of millions of dollars that the agency is now

giving away. See Envtl. Def. Ctr., Inc., 344 F.3d at 858 n.36

(noting that an agency’s decision is not entitled to deference

where the agency “offer[s] an explanation for its decision that

runs counter to the evidence before the agency”). It may be

that DSI demand has fluctuated significantly in the past and

that the recovery of the aluminum industry can be reasonably

anticipated. But nothing in the record of this case or the earlier one, aside from BPA’s conclusory assertions, suggests as

much. 

In sum, had BPA at any point performed a reasonable business analysis of its decision to offer one of its customers a $32

million cash payment which the customer was required to

spend on services provided by one of BPA’s competitors, we

may well have deferred to its business judgment. But the

agency has not done so, and so has failed to demonstrate that

it had any basis for concluding that its decision to incur a nonobligatory expense of almost $32 million was a sound business judgment.

As a final justification for the amendment, BPA asserts that

“[t]he Alcoa Amendment is nothing more than a temporary

solution while BPA and the region engage in a further administrative process to more fully respond to PNGC.” According

to the agency, the short-term nature of the amendment, com3304 PACIFIC NORTHWEST GENERATING v. BPA
bined with the agency’s need to act quickly, renders its decision to enter into the amendment a sound business judgment.

This rationale is the most plausible of those BPA offers.

But even assuming that exigent circumstances could render

reasonable BPA’s decision to spend millions of dollars it was

not obligated to spend, BPA has not established in the record

— even barely — that such exigent circumstances exist. BPA

explained in its January 13th letter announcing the execution

of the amended contract that “it was necessary to move

quickly to implement the amendment and avoid, if possible,

any unnecessary interruption of smelter operations.” But nothing in the administrative record demonstrates that smelter

operations would have been threatened absent immediate

action on BPA’s part. In fact, the available information again

suggests otherwise. In its January 13th letter, BPA noted that

CFAC had announced a likely plant closure and that this

announcement “reinforced [the agency’s] view that it was

important to act quickly.” Yet, the agency did not execute an

amended contract with CFAC until March, two months after

it agreed to the amended contract with Alcoa and almost three

months after we issued our opinion in PNGC. This two-tothree month delay indicates that BPA had time to consider

more thoroughly than it did whether its decision to spend tens

of millions of dollars was in its business interests. 

Moreover, BPA failed to demonstrate why the payment of

almost $32 million over nine months, as opposed to the payment of a lesser amount, was necessary to avoid the interruption of Alcoa’s smelter operations. A prudent business would

presumably want to minimize its discretionary expenses, even

in an emergency. Yet, the administrative record contains no

evidence that BPA considered precisely how large (or small)

a payment was necessary to buy the company the time it

needed so that the agency could fully consider further action.

Because the record contains no information from which

BPA could have concluded that it needed to act as quickly as

PACIFIC NORTHWEST GENERATING v. BPA 3305
it did or that it needed to pay Alcoa as much as $32 million

to avert an emergency, we hold that BPA cannot reasonably

justify its decision to enter into the amended contract on the

ground that exigent circumstances required immediate action.

[16] For all of the above reasons, we hold that BPA has

failed to demonstrate that it reasonably believed its decision

to execute the Alcoa contract amendment was consistent with

“sound business principles.” To be clear, we do not hold that

BPA’s governing statutes prohibit the agency from selling

power to the DSIs at the IP rate or that the agency may not

“monetize” such a sale under any circumstances. If the agency

provides a rational business justification for a sale (monetized

or otherwise) that is supported by the record before the

agency, we would be obliged to defer to the agency’s expertise. In this case, however, the agency has entered into a transaction that, on its face, is not “eminently businesslike.” See

Bell, 340 F.3d at 949. Moreover, the agency’s justifications

for its agreement to the transaction fall far short of establishing that its decision to award substantial, non-necessary “benefits” not involving the sale of power was a sound business

one. We therefore conclude that the agency has acted in a

manner that is not in accordance with its statutory obligations.

Although we cannot defer to BPA’s voluntary decision to

provide Alcoa with up to $32 million in cash payments, we

note that the decision to sell physical power to Alcoa might

produce a different result, for several reasons. First, the sale

of physical power to the DSIs is expressly authorized by statute, see § 839c(d)(1)(A), while the payment of cash is not.

Given that Congress intended the agency to sell physical

power to the DSIs, BPA’s conclusion that such a sale is in its

business interests is more likely to be reasonable. Second, as

noted above, many of the justifications that BPA gave for its

decision to execute the costly amended contract, though inapplicable to a “monetized” sale, would apply to a physical

power sale. See supra p. 3301. Third, a physical power sale

implicates a number of issues that fall within BPA’s particular

3306 PACIFIC NORTHWEST GENERATING v. BPA
expertise. Such issues include BPA’s current and future generating capacity, its transmission capabilities, its relationship

with suppliers, its current and projected commitments of

physical power to other customers, its ability to acquire additional power if needed, and so forth. Simply giving away $32

million in cash to a customer does not, by contrast, involve

issues that the agency is uniquely positioned to address. In

short, although we do not defer to BPA’s determination that

paying Alcoa $32 million was “consistent with sound business principles,” the agency’s conclusion that a physical sale

of power to Alcoa, even at loss, furthered its business interests

might very well warrant our deference.

IV. Conclusion

We hold that BPA has once again failed to advance “a ‘reasonable interpretation[ ] of its governing statutes’ that supports its actions.” PNGC, 550 F.3d at 878 (alteration in

original). More specifically, the agency has failed to show

that its decision voluntarily to incur a $32 million expense

that will increase the rates of its preference customers, provides no direct benefit to the agency, and subsidizes the operations of its competitors was a reasonable interpretation of its

statutory obligation “to operate with a business-oriented philosophy.” APAC, 126 F.3d at 1171. Consequently — and with

due regard to our obligation to defer to BPA’s conclusion

regarding whether its action comports with the “sound business principles” standard if it is at all reasonable to do so —

we hold that the amended Alcoa contract provision is invalid.13

In addition to seeking a declaration that the Alcoa contract

amendment is unlawful and invalid, Petitioners ask us to issue

13Because we conclude that the monetary benefit provision is invalid for

the reasons raised by the petitioners, we do not decide whether Alcoa’s

alternative argument that the monetary benefit payments were impermissibly low was properly before us, or, if it was, whether that argument is

meritorious. 

PACIFIC NORTHWEST GENERATING v. BPA 3307
an order “compel[ling] BPA to seek a recovery from Alcoa of

unlawful payments so that they can be refunded or credited to

the customers of BPA who bore those costs in their rates.” We

decline to do so. Instead, we remand this case to BPA to

determine whether and how it will seek a refund from Alcoa.

See Pub. Util. Dist. No. 1 of Snohomish County v. BPA, 506

F.3d 1145, 1147-48, 1154 (9th Cir. 2007) (remanding case to

BIA for the agency to determine in the first instance how to

respond to the court’s invalidation of multiple settlement

agreements that the agency had entered into improperly).

Among other reasons why a remand is appropriate, BPA

has yet to consider the validity and applicability of a damages

waiver provision that appears in the 2007 Contract and was

incorporated by reference into the amended contract. See

PNGC, 550 F.3d at 881-82 (holding monetization provision of

the 2007 Contract invalid, but remanding case “to BPA to

determine in the first instance the applicability and construction of . . . the damage waiver” provision of the contract). The

agency will also need to consider Alcoa’s argument that no

refund is due because the aluminum company, at the agency’s

demand, purchased wholesale power at rates well above what

it could afford. 

Moreover, the agency has informed the court that it has

already begun a public process to consider the damage waiver

and refund issue with respect to the 2007 Contract. Once that

process is complete and BPA has both reached a final conclusion on the refund issue and generated an appropriate administrative record, the issue will be ripe for this court’s review.

See id.

One final note: We have approached this case with careful

regard for the limited judicial role in overseeing BPA’s execution of its obligations and authority. The agency’s role is an

essential one in providing power to the Northwest, and it is

subjected to competing demands from various constituencies

in the region. Reviewing the underlying agency proceedings

3308 PACIFIC NORTHWEST GENERATING v. BPA
in this case and in PNGC, it becomes apparent that BPA’s

peculiarly dual role, as both a federal agency and a power

business, can create situations in which it can fulfill neither

role very well and so has reasons to test the limits of its statutory authority. Whether the statutory scheme bears revisiting

so as to make BPA’s job easier — for example, by providing

it with the obligation or authority to provide power to the historic DSIs even when it is not a sound business decision to do

so — is not, however, a question judges can answer. Instead,

we must determine whether BPA’s actions, however well

motivated, are so clearly outside its statutory authority that

even taking into account the very large measure of deference

due its decisions, we have no choice but to disapprove its

action. That is the case here.

[17] In sum, we GRANT Pacific Northwest Generating

Cooperative’s, Public Power Council’s, and Industrial Customers of Northwest Utilities’ petitions as to their challenge

to the validity of the Alcoa contract amendment and

REMAND to the agency for determination of the applicability

of the agreement’s damage waiver provision.

PETITIONS GRANTED IN PART, DENIED IN PART,

AND DISMISSED IN PART.

PACIFIC NORTHWEST GENERATING v. BPA 3309