F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

C A L I F O R

N I A P U B L I C U T I L I T I E S C O M M I S S I O N , P etitioner
,

C A L I F O R

N I A D E P A R

T M E N T O F W A T E R R E S O U R

C E S S T A T E W A T E R P R O J E C T ; S A C R

A M E N T O M U

N I C I P A L U T I L I T Y D I S T R

I C T ; T R A N S M I S S I O N A G E N C Y O F N O R

T H E R N C A L I F O R

N I A , Petitioners-Intervenors
,

v

.

F E D E R A L E N E R

G Y R E G U L A T O R Y C O M M I S S I O N , Respondent
,

P A C I F I C G A S & E L E C T R I C C O M P A

N Y , Respondent-Intervenor. N o. 16-70481

OPI NI ON

O n Petition for Review of an Order of the F ederal Energ

y Reg ulatory

Commission

Arg ued and Submitted October 13, 2017 San F rancisco, California

F iled J a nuary 8, 2018CPUC V

. F ERC

2

B efore: Sidney

R. Thomas, Chief J udg e, and Stephen Reinhardt and Stephen S. Trott, Circuit J udg es.
Opinion by

Chief J udg e Thomas

SUMMARY *

F ederal Energy Regulatory Com m ission

The panel g r anted the California Public Utiliti e s Commission’s (“CPUC”) p etition for review and held that the F ederal Energ y Reg ulatory Commission (“F ERC”) ar b i t rarily and capriciously determined that Pacific Gas & Electric was elig ible f or an incentive a dder f

or remaining a member of the California I ndependent Sy stem Operator Corporat i o n when
state law prevented PG& E ’ s departure without authoriz ation.

Section 2 19(c) of the F ederal Power Act required F E RC
t o provide incentives to induce utilities to join r e gi o n al transmission org aniz ations. According ly
, F ERC adopted Order 679 wh ich established upward adjustments, o r “incentive adders,” to the rate of r eturn on equity of utilities that participate in transmi s s i o n org aniz ations. I n 1998, the CPUC approved PG& E’s transfer of oper a t ional control o f
cert a in transmission assets to a newly -created California I ndependent Sy stem Operator Corporation.

The panel h e ld that F ERC did not reasonably interpret Or d e r 679 as justify ing summary g rants of adders for

* T h is su m m ary co n stitu

tes n o p art o f th e o pin io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.CPUC V

. F ERC 3

remaining in a transmission org aniz ation. The panel also h eld
t h a t F ERC’s interpretation was neither entitled to Auer v. Robbins
, 519 U.S. 452 ( 1 9 97), deference nor persuasive in its own rig ht. The pa n el f urther held that because its interpretation was unreasonable, F ERC’s g rants of adders to PG& E were an unex plained d eparture from long standing
p o l icy
, which provided that incentives should o nly b e awarded to induce future voluntary behavior. I n a ddition, the panel held that F ERC created a g eneric adder in violation of Order 679’s requirement of case-by -case review of adders.

The panel held that the CPUC’s p e t i tion was not an impermissible collateral attack on Order 679.

COUNSEL

T r a c i L

. B one (arg

u ed), H arvey Y. Morris, and Arocle s Ag uilar, San F rancisco, California, as and for Petitioner.

Harvey L

. Reit er (arg

ued), Stinson L eonard Street L L P, W ashing ton, D.C.; Michael R. Postar, Duncan W einber g Genz er & Pembroke, W ashing ton, D .C.; K atharine M. M a pes, Spieg el & McDiarmid L L P, Washing ton, D.C.; for Petitioners-I ntervenors.

Ma rk Patriz io (arg

ued), San F rancisco, California, for Respondent-I ntervenor.

Anand Viswanathan (arg

ued), Attorney ; Robert H. Solomon, Solicitor; Max Minz ner, General Co u n s e l ; W ashing ton, D.C.; as and for Respondent.CPUC V

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OP INION

THOMAS, Chief Circuit J udg e:

I n this petit ion for review, we consider w hether the F edera l Energ y Reg ulatory Commission (“F ERC” o r “Commission”) arbitrarily and capriciously determin e d that Pacific Gas & Electric Company (“PG& E”) was elig ible for

an incentive adder for remaining a member o f the California I ndependent Sy stem O perator Corporation (“Cal-I SO”) when
state law prevented PG& E ’ s departure without authoriz ation. W e conclude that it did, and we g rant the petition.

I

Section 201 of the F e deral Power Act (“F PA ”) gi v e s F ERC jurisdiction over the rates, terms, a n d conditions o f service for the transmission and sale at wholesale of electric
energ y in interstate c o mmerce. 16 U.S. C. §§ 8 24(a)-(b). Section 219 of the F PA, added in 2005, directed FE R C to promulg a te a rule providing incentive-based rates for electric transmission for the purpose of benefitting consumers throug h increased reliability and lower costs of power. 16 U.S.C. § 824s(a). As rel e v a n t h ere, section 219(c) required F ERC to provide incentives to induce utilities to join
reg ional transmission org aniz ati o ns. 16 U.S.C. § 824s(c). F ERC did so in 2006 throug h the adoption of Order 679 a nd the rehearing orders that followed. Promoting Transmission Investment Through Pricing R e form
, O rd e r N o

. 679, 116 F ERC ¶ 6 1,057 (“ O r der 679”), order on reh’g
, Order No. 679-A, 117 F E RC ¶ 61,345 (2006) (“Order 679-A”), order on reh’g
, Order No. 679-B
, 119 F ERC ¶ 61,062 (2007) (“Order 679-B ”).CPUC V

. F ERC 5

Order 679 established upward adjustments, or “incentive adders,” to the rate of return on equity of utilities that participate in transmission org aniz a tions. Order 679 set forth the terms on w hich F ERC would g rant the incentive adders. F ERC determined that it w ould “not gr ant o utrig h t any incentives,” but that it w ould g rant such incentives “when justified” in th e contex t of individual d eclaratory orders o r section 205 f

iling s. 1 Order 679 at PP 1
, 3 2 6. F ERC would evaluate adder requests o n a “ case-by

- c ase basis.” Id

. at P 326.

Order 679 provided that a dders would be avai l a ble for utilities that “h a v e a l r eady joined, and that remain members of,” transmission org aniz ations in “recog nition of the benefits that flow f

rom membership” a n d the fact that “continuing membership is g enerally v olunt a r y

. ” Order 679 at P 331. The order stated that a utility “will be presumed to be elig ible f or the incentive” if it can demonstrate that it h as joined a t r a n smission o rg aniz ation and that its membership is o n g o i n g

. Id . at P 327.

F ERC declined to c r eate a “g ener i c a d d er” for membership in a transmission org ani z ation. Order 6 79 at P 326. Commen t e rs had urg ed F ERC to make a “ g eneric finding ” that any entity that joins a transmission org aniz ation “automatically qualif[ ies] ” for an incentive adder, with at least one c ommente r specifically proposing a 50 basis-point in c e n t i v e adder. Id

. a t P 318. F ERC declined to adopt this

1 “ Sectio n 2 0 5 ” ref

ers to FP A § 2 0 5
, co d ifie d a t 1 6 U .S.C. § 8 2 4 d

. In v esto r- o w

n ed u tilities l ik e P G& E m ak e t ran sm issio n o w

n er rate c ase f ilin g s w ith

FERC p u rsu an t to sectio n 2 05 i n o rd er to reco v er th eir co s ts

o f tran sm issio n

serv ice.CPUC V

. F ERC

6

proposal, electing to consider “ on a c ase-by -case basis” what incentive (if any

) is appropriate for a utility

. Id . at P 326.

I n 1995, as part of its restructuring of California’s electric
power industry
, the California Public Utilities Commi s sion (“CPUC”) ordered the stat e’s three larg est investor-owned utilities, including PG& E, to submit to F ERC a proposal to establish an independent sy stem operator ( “ I S O”) and to transfer operational control of their facilities to that I SO. 2 Order Instituting Rulemaki n g o n Commission’s P roposed Policies G overning Restructuring California’s E lectric Service Industry and Reforming Regulation , 64 CPUC 2d 1,
p

. 9 5
, 1995 W L 792086 at *99 (Dec. 20, 1995) (“ C P U C Decision 95-12-063”). I n the same d ecision, CPUC retained authority under California state law to review any transfer o f control of transmission facilities to the I SO. CPUC Decision 95-12-063, p. 3 1, 1995 W L 792086 at * 1 5 ( c i ting Cal. Pub. Util. Code § 851). CPUC’s determination s w ere larg ely affirmed in state law. See Cal. Pub. Util. Code §§ 330, 365.

I n 1997, Californ i a ’ s three larg est investor-owned utilities, including PG& E
, soug ht CPUC authoriz ation to turn over operational control o f c ertain transmission assets to the newly -created Cal-I SO. CPUC a pproved this transfer o f control. I n its decision approving the transfer, CPUC stated that a ny further tran s f

e r s of control, such as transfers o f control from the Cal-I SO back t o the utilities, would also require CPUC authoriz a t i on under state law. Joint Application o

f Pac. Gas & Elec. Co., San Diego Gas & Elec. Co., and S. Cal. Edison Co.
, 78 CPUC 2d 307, p. 313, 1998

2 A n ISO is a f

o rm o f reg i o n a l t r an sm issio n o rg an izatio n , an d an ISO’ s m em

bers are elig ib le f

o r in cen tiv e ad d ers u n d er sectio n 2 1 9 (c) an d Ord er 6 7 9

.CPUC V

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W L 242747 at *7 (J an. 21, 1998) ( citing Cal. Pub. U til. Code § 851).

Since it joined the Cal-I SO in 1997, PG& E has submitted

an annual “ tr a n s m i ssion owner” tariff filing to F E RC pursuant to section 205 o f the F PA. See Pac. Gas. & E l ec. Co.
, 148 F ERC ¶ 61,245 at P 1 n.2 (2014). E ach filing

e s t a b l i s h e s PG& E’s transmission revenue requiremen t , w h i c h includes t h e r a t e of return to which it is entitled as a participating transmission o wner. Id

. Since 2007, PG& E has
reg ularly invoked Order 679 i n its tariff filing s to request 50 basis-point incentive adders for its on go i ng participation i n t he Cal-I SO, and F ERC h as summarily g ranted th o s e requests. 3 Various pa r t ies, including CPUC, protested PG& E’s earlier requests, but those cases settled without final resolution of the objections raised.

I n 2 014 and 2015, PG& E filed its six teenth a n d seventeenth transmission owner tariff fili ng s, respectively ( “TO 16” and “TO 1 7”). I n each of those filing s, PG& E requested a 50 basis-point incentive adder. CPUC fi l ed timely protests to both of the filing s. CPUC’s protests claimed that because PG& E’s continued participation in the C al-I SO is mandated by CPUC order, g ranting it incenti v e

a dders would reward PG& E for doing something it wa s already required to do.

3 S ee Pa c. Ga s & Elec. Co

. , 1 2 0 F ERC ¶ 61 ,2 9 6 at P 1 5 (2 00 7 ); Pa c. Ga s & Elec. Co

. , 1 2 4 FERC ¶ 61 ,3 0 5 at P 2 0 (2 0 0 8 ) ; P a c

. G a s & Elec. Co

. 1 2 8 FERC ¶ 6 1 ,2 8 8 at P 1 9 (2 0 0 9); Pa c. Ga s & Elec. Co

. , 1 32 FERC ¶ 6 1 ,2 7 2 at P 2 3 (2 01 0 ); Pa c. Ga s & Elec. Co

. , 1 4 1 FERC ¶ 6 1 ,1 6 8 at P 2 5 (2 0 1 2 ); Pa c. Ga s & Elec. Co

. , 14 4 FERC ¶ 6 1 ,2 2 7 at P 2 0 (2 0 1 3 ); Pa c. Ga s & Elec. Co

. , 1 4 8 FERC ¶ 6 1
, 2 4 5 a t P 3 0 (2 0 1 4 ); Pa c. Ga s & Elec. Co

. , 1 5 2 FERC ¶

6 1 ,2 5 2 at P 2 3 (2 0 1 5 ).CPUC V

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8

F ERC issued order s in both proceeding s summarily
g ranting PG& E’s requested adders. Pac. Gas & Elec. Co.
, 148 F ERC ¶ 61,245 a t P 3 0 (2014) (“TO 16 I nitial Order”); P a c. Gas & E lec. Co.
, 152 F E RC ¶ 61,252 at P 23 ( 2 0 1 5 ) (“TO 17 I nitial Order”). The TO 16 I nitial Order responded to CPUC’s arg uments by

stating :

“[ C] onsistent with previous Commi s sions [ sic] o rders, we summarily accept PG&E ’s request for a 50 basis point incentive ROE

a d d er for its c ontinued participation in [ Cal

I SO]

. . . Parties opposing P G&E ’s request

. . . have p r e sented no new evidence o r

c i r c u m s t an c e s t o w ar r an t r e e x a m i n i n g whether the adder is appropriate in this proceeding .”

TO 16 I nitial Order at P 30 (footnotes omitte d). The TO 17 I nitial Order held similarly :

“[ C] onsistent with pr e vious Commission orders, we accept PG& E’s request for a 5 0 basis point incentive ROE adder for its
cont inued p articipation in [ Cal-I SO]

. . . PG& E is a member of [ Cal-I SO]

. . . a nd its membe r s hip is ong oing ; therefore, PG& E is presumed to b e elig ible for this incentive adder in accordance with Order No. 679.”

TO 17 I nitial Or der at P 23 (footnotes omitted). F E RC rejected CPUC’s arg u ment that the incentive adder w as not j ustified because it did not “induce” PG& E’s continu i n g membership in the Cal-I SO: “Notwithstanding CPU C ’s
arg ument a s s erting that PG& E’s participation is not voluntaryCPUC V

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b e cause it is mandated by state law, it is within t h e Commis s i o n’s authority to g rant incentive a dders a s described in Order No. 679.” Id

. at P 24. F ERC a lso rejected CPUC’s arg ument that it had created a g eneric adder, stating that PG& E had demonstrated t h at it w as a Cal-I SO member and “thus satisfied the criteria set forth in Order No. 679.” Id

. at P 25.

CPUC soug ht rehearing of b o t h F ERC orders. CPUC

e x plained that F ERC e rred b y g ranting PG& E a n incent i v e ad d er even thoug h it was not free to leave the Cal-I SO; failing to respond to CPUC’s arg um ents about PG& E’s i n v o l untary membership in the Cal-I SO; and g ranting a g eneric adder inc o n s istent w ith Order 679. F ERC denied CPUC’s rehearing requests. Pac. G a s & Elec. Co.
, 154 F ERC ¶ 6 1,119 at P 10 ( 2 0 1 6 ) ( “ TO 16 Reh’g Order”); Pac. Gas & E lec. Co.
, 154 F ERC ¶ 61,118 at P 9 (2016) (“TO 17 Reh’g Order”). I n response to CPUC’s claims that PG& E

was n ot free to leave the Cal-I SO, F E R C stated that Order 679 “is c lear that the Commission may g rant incentive adders for public utilities that join and/or continue to remain in” transmission o r ga n i z ations and that the order d oes not “require that the Commission discontinue such a dders in the face of a rg uments like those that CPUC h as made here.” TO 16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9.

I n response to CPUC’s claims that F ERC had a dopted a g e n e r ic adder, F ERC stated that utilities with ong oing membershi p in transmission org aniz ations are “presumed elig ible” for the adder and that CPUC “concedes” that PG& E had an ong oing membership in the Cal-I SO. TO 16 Reh’g Order at P 11; TO 1 7 Reh’g Order at P 11. F ERC added that be c a use PG& E’s membership in the Cal-I SO helps the CalI SO to “fulfill its duties,” F E R C f o und the incentive addersCPUC V

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10

“ t o b e j u stified.” TO 1 6 Reh’g Order at P 12; TO 1 7 Reh’ g Order at P 10.

F inally
, F ERC asserted that CPUC’s objection amounted
to a “ collateral attack” o n Order 679 and Order 679-A that it did n ot need to address. TO 16 Reh’g Order at P 13; TO 17 Reh’g Order at P 12. CPUC timely petitioned for review.

I I

F ERC has jurisdiction over the two t r a nsmission owner rate filing s (TO 16 and T O 17) t h at initiated the instant proceeding s pursuant to section 2 05 of the F PA. See 16 U.S.C. § 824d. W e h a v e jurisdiction to review “order[ s ] issued by the Commission” under section 313(b) o f the F PA. See 16 U.S.C. § 825 l (b). All p arties to this petition for r eview
ag ree that the incentive a dder issue was definitively resolved by F ERC in the orders under review.

W e review a decision by F ERC to determine whether its action was “arbitrary
, c apricious, an ab u s e of discretion, o r otherwise not in accordance with law

. ” 5 U.S.C. § 706(2)

, see also Fall River Rural Elec. Coop., Inc. v. FERC
, 543 F .3d 519, 525 (9th Cir. 2008). “ A c o u r t is not to ask whether a reg ulatory decisi o n is the best one possible o r even whether it is better than the alternatives.” FERC v. E l e c. P ower Supply A s s ’n
, 1 3 6 S. Ct. 760, 782 (2016). Rather, the court

mu s t u phold a decision if the ag ency has “ex amined the relevant considerations and articulated a satisfactory

ex p lanati o n for its action, including a rational connection betwee n t h e f

acts f ound and the choice made.” Id. (quoting Motor V ehicle Mfrs. A ss’n of United States, Inc. v. State Farm Mut. Auto. Ins. Co.
, 463 U.S. 29, 43 (1983)) (alterations normaliz ed). Our review “is limited to

. . . the administrativeCPUC V

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r e c o r d
, ” Envtl. Coal. of Ojai v. Brown
, 72 F .3d 1411, 141 4 (9th Cir. 1995), and to those “g r o u n d s upon w hich

. . . the record discloses that [ the ag e ncy ’s] action was based.” SEC v. Chenery Corp. , 318 U.S. 80, 87 (1943).

I I I

FE RC’s determination that PG& E was entitled t o incentive add e r s for remaining in the Cal-I SO was arbitrary and capricious. F ERC did not r easonably interpret Order 679

as justify ing summary g rants o f ad d e rs for remaining in a transmission org aniz ation. B ecause its interp r e t ation was

u n r e a sonable, F ERC’s g rants of adders to PG& E were an

unex p lained departure from long standing policy

. Moreover, F ERC created a g eneric adder in violation of the order.

A

F ERC’s interpretation of Order 679 as justify ing
summary g rants of incentive adders to utilities that remain in transmission org aniz ations was not reasonable.

Under Auer v. R obbins
, 519 U.S. 452 (1997), we defer to

an ag ency ’s interpretation of its o wn ambig uous reg ulation unless that interpretation is “plainly erroneous or inconsistent with the reg ulation, o r t h e r e is r e a son to suspect that the interpretation does n o t reflect the ag ency ’ s f air a nd considered judg ment on the matter in question.” W

. Radio Servs. Co. v

. Qwest Corp.
, 678 F .3d 970, 984–85 ( 9 th Cir. 2012) (internal citation omitted).

F ERC interprets Order 6 7 9 as con f e r r i ng on it “the authority

. . . to continue to g rant incentive adders for electric utilities

. . . that remain memb e rs of reg ional transmissionCPUC V

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12

org aniz ations” without further inquiry into the voluntariness of their membership. B rief of Respondent at 20. F ERC notes that Order 679 makes a n entity presumptively el i g i ble to receive an a dder if it demonstrates continuing membership in

a transmission org a

niz ation. See O rder 679 at P 327. F E RC
appears to interpret the “presumed to b e e lig ible” lang uag e a s

a b solving it of a

n oblig ation to consider w hether th e presumption should a

pply to utilities that are prohibited from withdrawing from transmission org aniz ations without the
consent of a h ig her authority

. Under this inter p r e t a tion,
ong oing membership itself is the sole criterion for receipt o f an incentive adder.

1

F ERC’s interpretation of Or der 679 is plainly erroneous and inconsistent with the reg ulation. Order 6 7 9 provides that

a utility demonstrating that it has r e mained in a transmission
org aniz ation is “presumed to be elig ibl e ” f o r an incentive adder. Order 679 at P 327. However, l a n g uag e throug hout Orders 679 a

nd 6 79- A s ug g e sts that the presumption o f elig ibility may be r ebutted by the arg u ments CPUC h as made and that o n g oing membership is n ot sufficient for an incentive adder.

The orders c o m mit F ERC to case-by

- case review o f incentive a dders even for utili t i es that have demonstrated
ong oing me m b ership in transmission org aniz ations. Order 679 states that F E RC “will approve, when justified
, requests for ROE-based incentives f or public utilities that join and/or continue to be a member of” transmission org ani z ations. Ord e r 6 7 9 at P 326 (emphasis added). I f all utilities that continued to be membe r s o f transmission org aniz ations
automat ically qualified f or incentive adders, the “whenCPUC V

. F ERC 13

j ustified” lang uag e would be surplusag e. I n the sa m e parag raph, FERC d eclines proposals to “create a g eneric adder for such membership” and states that it will “consider specific incentives on a case-by -case b a sis.” Id

. I f F ERC’s interpretation were corr e ct, case-by -case review would be meaning less.

The ju s t i fi cation for incentive adders as articulated in Order 679 also belies F ERC interpretation of the order. The order states that the “basis for the incentive i s a recog nition of the b enefits that flow from membership in [ transmission]
org aniz ations and the fact that continuing membership is generally voluntary .” Order 679 at P 3 31 (emphasis added). W h en members hip is not voluntary
, the incentive is
p resumably not justified. Challeng es to the presumpti o n o f elig ibility for the incentive on such g rou nds would not be precluded by the order and would n e e d to be addressed b y F ERC if raised in tariff filing proceeding s.

Order 679- A
, c iting section 219’s purpose of ensuring reliability and reducing the cost o f p ower, describes incentive adders as “an inducement f or utilities to join, and remain in, Transmission Org aniz ati o n s

. ” Order 679-A at P 86 ( e mphasis a dded). An incentive cannot “induce” behavi o r that is alre a d y l eg a lly mandated. Thus, the voluntariness o f

a u t i lity ’s membership in a transmission org aniz ation is log ically r elevant to w hether it is e lig ible for a n adder. The

same parag raph acknowledg es that g r anting incen t i v e s only for joining transmission org aniz ations “offers no inducement
to stay in these org aniz ations for m embers with the option to withdraw

. ” I

d. (emphasis added). Order 679-A thus disting uishes between utilities that have the option t o withdraw from transmission org aniz ations and those withoutCPUC V

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t he option, and it necessarily implies that incentives ar e justified only

for the former.

F inally
, Order 679-A states that with respect to incentives under section 219, “ [ a] pri o r contractual commitment o r statute may have a bearing on our n ex us e va l u a t i on o f individual applicat i o ns.” Order 679-A at P 1 2 2. T his also

necess a r ily implies that ong oing membership in a transmission org aniz ation is not disp ositive a s to incentive adder elig ibility

.

F ERC arg u es that O rders 6 79 a nd 679-A considered and

r e jected the arg ument that the voluntariness of a utility ’s membership in a transmission o rg aniz ation should bear on its elig ibility for a

n in c e n t i ve adder. Order 679 did d ecline to adopt proposal s m aking utilities inelig ible for incentives if they were ordered to join transm i ssion org aniz a tions b y statute. Order 679 a t P 316; O rder 679-A at P 83. However, this does not support F ERC’s interpretation, which holds that utilities that r emain in transmission org aniz ations qualify for adders even when their continued participation is compelled by statute. No party to the Order 679 proceeding s raised the issue of whether a utility c o uld qualify for an incentive for its involuntary continued participation in a transmission
org aniz ation.

T h e tex t of Orders 6 79 and 6 79-A makes it clear t h at F ERC’s interpretation of those orders is pla i nly erroneous a nd inconsistent w i t h t he reg ulations. The orders d id not make
ong oing membership in a transmission o rg aniz a tion the sole criterion for an in centive adder, a n d the orders d id not preclude challeng es base d on the voluntariness of a utility ’s membership in a transmission org aniz ation. W e decli ne to defer to F ERC’s interpretation of the orders.CPUC V

. F ERC 15

2

Even if not plainly

erroneous, an ag ency ’s interpretation is not owed deference if “there is re a s o n t o suspect that the interpretation does not reflect th e a g ency ’ s f air a nd considered judg ment on th e m atter in question.” W

. Radio Servs. Co.
, 678 F .3d at 985. “ I n di c i a of inadequate consideration include

. . . sig ns that the ag e ncy ’s interpretation amounts to no more than a convenient litig ating position; or an appearance that the ag ency ’s interpretation is

no more than a p ost hoc r ationaliz ation advanced by an ag ency seeking to defend past ag ency action ag ainst attack.” Price v. Ste v e d

oring Servs. of Am., Inc.
, 697 F .3d 820, 829–30 n

. 4 (9th Cir. 201 2 ) ( en banc) (internal quotation marks and citations omitted).

F ERC’s interpretation of Order 67 9 i s a p ost h oc

r a tionaliz ation of its actions. F ERC never before ex plicitly articulated the interpretation it relies on, even thoug h, as the author o f Order 679, it could have easily incorporated the interpretation into the order. Order 679 provides that utilities that demons t r ate ong oing membership in transmission
org aniz ations will be “presumed to be elig ible” for incentive adders, but it is silent as to whether that presumption can be rebutted for utilities that c anno t v o luntarily leave their
org aniz ations. Order 679 at P 327. Nowhere does Order 679
state that the voluntariness of a u tility ’s me m b e r s h ip is irrelevant to its elig ibility for an incentive adder, even thoug h this would have been a reason a b l y f oreseeable challeng e to future ad d er s

. B y observing that transmission org aniz ation membership was “

generally voluntary ,” F ERC indicated that it knew that some utilities could n ot voluntarily leave. Order 679 at P 331 (emphasis ad d ed ). F ERC could have foreseen a challeng e like CPUC’s challeng e here.CPUC V

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Nor did F ERC clearly a r t iculate its interpretation in the
two orders currently on review. I n deny ing CPUC’s rehearing r equest s f

o r the TO 16 and TO 17 orders, F E RC merely stated that “it is within the Commission’s authority to g rant incentive adders as described in O rder No. 679,” that Order 679 “is c lear that the Commission may g rant incentive adders for public utilities that join and/or continue to remain in” transmission o r ga niz ations, a nd that Order 679 does not “require that the Commission discontinue such a dders in the face of arg uments like those that the CPUC has made here.” TO 16 Reh’g Order at P 10; T O 1 7 Reh’g Order at P 9. These statements do not reflect a fair and c o n s idered judg ment on the meaning of Order 679.

I t is apparent that F ERC’s interpr e t a t ion of Order 679 is merely a convenient litig a t i n g position a nd a post h oc rationa l i z ation of the orders on review. W e decline to defer to the interpretation.

3

“[ W ] hen Auer deference is not warranted, an a ge n cy ’s interpretation of an ambig u o u s r eg u lation should be evaluated under the principle articul a t ed in Skidmore v. Swift & Co.
, 323 U .S. 134 (194 4).” Indep. Training & Apprenticeship Program v. Cal. Dep’t of I ndus. R elations
, 73 0 F .3d 1024, 1035 (9th Cir. 2013). Under this standard, this court g ives an ag ency ’s interpretation “a measure of deference p r o portional
to the thoroug hness evident in its c o n s ideration, the validity of its reasoning, its consistency with earlier a nd later pronouncements, and all those factors w hich g ive it the power to persuade.” I

d

. at 1036 (quoting Christopher v. S mithKline Beecham Corp.
, 567 U.S. 142, 159 (201 2 ) ) ( i n t e rnal quotation marks omitted).CPUC V

. F ERC 17

F ERC’s interpretation d oes not r eflect thoroug h consideration, nor is it p ersuasiv e in its own rig ht. F E RC does no t d ev e l op o r justify its interpretation in either the

o rders on review or in its briefing before this court; t h e interpretation is found only i n FE RC’s post-hoc reasoning

. 4 W e do not owe deference to such a “nominal” interpretation. Barboza v. Cal. Ass’n of Prof’l Firefighters , 799 F .3d 1257, 1267 ( 9th Cir. 2015). Moreover, as ex plained above, F ERC’s in t e r p retation is inconsistent with the tex t of Order 6 79 a nd Order 679-A and the evident purposes of those reg ulations.

I n lig ht of our c o n c l u sion that F ERC’s interpretation is neither entitled t o A uer deference nor persuasive in its o wn rig ht, we employ traditional tools of interpretation to determine whether O rder 6 79 permits challeng es to the presumption of elig ibility of the sort CPUC h as lodg ed h ere. Christopher v. SmithKline Beecham Corp.
, 567 U.S. at 161. The order’s plain lang u ag e and p urpose show that it does. A utility that joins a reg ional transmiss i o n org aniz ation is “presumed to be elig ible” for incentiv e a dders under Order 679, but this presumption is rebuttable. Order 679 at P 327. Given the o rder’s evident purpose of i nducing u tilities to voluntarily remain in transmis sion o rg aniz ations, and g iven its lang uag e specify

ing that incentives will be awarded “when justified” and on a “case-by -case basis,” it permits c halleng e s to incentives on the g r ounds that they wil l not induce continuing p articipation in transmission org aniz ations. Id

. at

4 In a p ro ceed in g su

bseq u en t to th e o r d e r s o n rev iew h ere, FERC

o f f ered f or th e first tim e an ex p licit in terp retatio n of th e “ p resu m p tio n ”
p ro v isio n in Ord er 6 7 9
, in li ne w i t h t h e im p licit in terp retatio n at issu e h ere. S ee Pa c. G a s & Elec. Co

. , 1 6 0 F ERC ¶ 6 1 ,0 9 0 at P 1 3 (Sep t

. 2 0
, 2 0 1 7 ). B ecau se th is in terp retatio n w as n o t ad v an ced in th e tw o o rd ers on

rev iew h ere, it co u ld n o t su stain th o se ord ers ev en if w e w ere to co n s id er it.CPUC V

. F ERC

18

P 326. Challeng es such as that mounted by CPUC are not precluded and must be answered by F ERC.

B

Given that its interpretatio n of Order 679 is not controlling
, F ERC failed to provide a reasoned ex pl anation for its actions i n t h e o r ders under review. An ag ency must “articulate a satisfactory ex p l a nation for its action.” Motor Vehicle Mfrs. As s ’ n , 463 U .S. at 43. W hen an ag ency chang es policy
, the requirement that it provide a r e a soned

ex p lanation for its action demands, at a minim u m , t h at the
ag ency “display awareness that it is chang ing position.” F CC

v

. F o x Television Stations, Inc.
, 556 U .S. 5 0 2, 515 (2009 ). “An a g ency may not, for ex ample, depart from a prior p olicy

su b s i lentio or simply d isreg ard rules that are still on the books.” Id.

FE R C had a long standing policy that incentives should only be awarded to induce future behavi o r. F ERC departed from this policy without acknowledg ment or ex p lanation. This departure was arbitrary and capricious.

1

F ERC h a s a long standing policy that rate incentives must be prospective and that there m u s t b e a connection b etween the incent i v e and the c o nduct meant to be induced. This policy is incorporated in O rd e r 6 7 9

. The policy prohibits F ERC from r ewarding utilities for p ast conduct or f or conduct which they

are otherwise oblig ated to undertake.

Th i s l o n gstanding policy is evinced in a series of F E RC decisions and statements. I n 2001, F ERC denied a committeeCPUC V

. F ERC 19

of utilities an incentive for a mainten a n c e/construction pilot project. F ERC reason e d that awarding the incentive would “unjustly reward ” t he committee “for doing what it is supposed to do, i.e., to adequately maintain its facilities in a prudent, cost-effective manner.” New England Power Pool
, 97 F ERC ¶ 61,093 at 6 1,477 ( 2001), order o n r e h ’ g , 98 F ERC ¶ 61,249 ( 2002). I n a 2001 c ase, F ERC found that retroactive incentives are ineffective
, since the u tilities that would r eceive the incentives “would have already made their decisions.” ISO New England
, 9 6 F ERC ¶ 61,359 at 62,355 (2001), aff’d Sithe New England Holdings, LLC v. FERC
, 308 F

. 3d 71, 78 (1st Cir. 2002). A 19 9 2 FE R C p olicy
statement makes its position clear: “Consider ation of past performan c e would violate the standard that incentive ratemaking must be prospective.

. . . I n centive reg ulation can produce superior results over traditional reg ulation only if it is prospective.” Incentive Ratemaking for Interstate Nat. Gas Pipelines, Oil Pipelines, & Elec. Utilities
, 61 F ERC ¶ 61,168
at 61,599 (1992). I n 2006, prior to the adoption of Order 679, F ERC denied Southern California Edision Company ( “SCE”)

an incentive for joining the Cal- I SO because SCE was already a member. F ERC stated that SCE “nee d [ e d ] no inducement” to join the Cal-I SO, because i t was a lready a member. S

. Cal. Edison Co.
, 114 F ERC ¶ 61,018 at P 15 (2006).

F ERC arg ues that this long s tanding policy predates, a nd is i m p licitly superseded by
, Order 679. Order 679 did

ex p licitly reverse the holdin g in S. Cal. Edison
, in which F ERC had d enied SCE an incentive for joining the Cal-I SO because SCE w as already a Cal-I SO member. I n Order 679- A, F ERC stated that its d e c i s ion in S. Cal. Edison “failed to

r e c o gniz e that incentives are e q u ally important in inducing utilities to join and remain in Transmission Org aniz a tions.”CPUC V

. F ERC

20

Order 679-A at P 86 n.142. However, this statement did not overrule F ER C ’ s policy of awarding incentives to induce future voluntary conduct. F ERC overruled its policy barring incentives to u tilities fo r remaining in transmission
org aniz ations, but it still treated such incentives a s prospective: they were premised on the f act that membership in transmission org aniz ations w as “g enerally voluntary
, ” a nd thus that utilities may need incentives to choose to remain in such org aniz ations. Order 6 7 9 at P 331. F ERC’s p o l i c y o f only providing incentives to induce future voluntary conduct was still in place as of the TO 16 and TO 17 orders.

2

Awarding PG& E incentiv e adders was a departure from F ERC’s long standing p olicy that inc entives should only be awarded to induce voluntary conduct. This unacknowledg ed and u nex plained d eparture from policy w as arbitrary a nd capricious.

I n the initial orders and on rehearing
, F ERC did not acknowledg e its long standing policy
, n o r did it provide an

ex p lanation for its departure from that policy

. I t merely asserted that it ha d the authority to g rant incentive adders to PG& E a nd t h a t CPUC’s voluntariness arg uments were irrelevant to adder elig ibility

. F ERC’s statements would only

ex p lain its action s i f its interpretation of Order 679 were correct. B ecause that interpretation is erroneous, the orders

on review were a departure from O rder 679’s terms a nd the long standing policy it incorporates. Without anyCPUC V

. F ERC 21

acknowledg ment or ex planation of that departure, the orders were arbitrary

and capricious. 5

C

FE R C also acted arbitrarily and capriciously b y creating
a g eneric adder in contravention of Order 679’s requirement of case-by-case review of adders.

Order 67 9 provides that F ERC w ill approve incentive adder requests “when justified” and will eval u a t e such requests “on a cas e -b y

- case b asis.” Order 679 a t P 326. Order 679 ex plicitly r ejected a proposal to adopt a g eneric 50- basis-po int incentive a dder for ong oing transmission
org aniz ation membership. Id

.

I n its challeng es to PG& E’s tari f f filing s, CPUC a

rg u ed that incentive adders could not induce PG& E to remain in the Cal-I SO since its membe r ship was involuntary

. F E RC ig nored this arg ument and “summarily accept[ ed] ” PG& E’s

5 FERC an d P G& E each arg u e th at PG& E’ s p articip atio n i n th e CalISO i s, in f act, v o lu n tary . FERC arg u es th at ev en if P G& E is n o t f

ree to leav e th e Cal- ISO w ith ou t C P UC’ s co n sen t, “ th at still d o es n o t d em on strate th at [P G & E ] is f o rb id d en f

ro m seekin g to leav e th e [CalISO],” an d th at P G& E “ co u ld t ak e step s, w i th Calif orn ia’ s ap p ro v al, to

v o lu n t arily leav e th e [Cal- ISO].” B rief o f Resp o n d en t at 2 3

– 2 4

. P G& E
g o es a s tep f

u rth er an d arg u es th at its w ith d raw al f ro m m em bersh ip i n th e Cal- ISO i s n o t s u

b j ect to CP U C ap p ro v al. B rief of P G& E as Resp o n d en tIn terv en o r at 2 2– 2 5

. T h ese arg u m en ts, ev en i f co rrect, co u ld n o t su stain th e o rd ers o n rev iew
, as th ey d o n o t ap pear an y w h ere in th o se o rd ers. W e

can o n l y u

ph o ld ag en cy actio n o n g ro u n d s articu lated b y th e ag en cy in its

o rd ers; w e “ m ay

n o t accep t ap p ellate co u n sel’ s p o st h o c ratio n alizatio n s f o r ag en cy actio n .” O r. Na t. Desert Ass’n v. Bu rea u o f La n d Mg mt. , 5 3 1 F.3 d 1 1 14
, 11 4 1 (9 th Cir. 2 00 8 ) (q u o tin g M o to r Veh icle Mfrs. Ass’n
, 4 6 3 U.S. at 5 0 ).CPUC V

. F ERC

22

adder request “consistent with previous Commission orders.” TO 16 I n itial Order a t P 30; TO 1 7 I nitial Order at P 2 3

. I t reitera t e d t his position on r ehearing

. TO 16 Reh’g Order at P 11; TO 17 Reh’g Order at P 11. F ERC also asserted that an adder is not “g eneric” simply because other utilities h a v e received the same adder. TO 16 Reh’g O rder at P 13 & n.26 (citing Midcontinent Indep. Sys. Operator, Inc.
, 161 F ERC ¶ 62,269 at P 14 (2015)); TO 1 7 R e h’g Order, at P 11 & n.22 (same).

W h en Order 679 is rea d i n a ccordance with its plain lang uag e and evident purpose, it is clear that F ERC has

c reated a g eneric adder in violation of its provisions. T o satisfy Order 679’s case-by -case analy sis requirement and to avoid creating a g eneric adder, F ERC needed to inquire into PG& E’s specific circumstanc es, i.e., whether it could unilaterally leave the Cal-I SO and thus whether an incentive adder could induce it to remain in the Cal-I SO. The f act that the o ther utilities have r eceived the same adder does not make it g eneric; it is the fact that the adders were gr an t ed summarily without any case-specific inquiry into the circumstances of PG& E ’ s membership that made them
g eneric. F ERC’s summary g rants are an unacknowledg ed

a n d u nex plained departure f r om O rder 679. The orders o n review are arbitrary

and capricious. Fox , 556 U.S. at 515.

I V

CPUC’s petition is not an impermissible collateral attack

on Order 679. Under the FP A
, this court’s “jurisdiction

. . . is lim i t ed t o r eview of new orders,” a nd the court does not have jurisdiction over a petition for review “that collaterally attacks a prior F ERC order.” Pac. Gas & Elec. Co. v. FERC
, 464 F .3d 861, 868 (9th Cir. 2006). A petition for re viewCPUC V

. F ERC 23

under the F PA is a collateral attack o n a prior F ERC o rder if the o rder upon which the petition is b ased is a “ clarification,”

as oppo sed to a “modification,” of the prior order. Id. T o differentiate b etween a clarification a n d a modification, the
court asks “whether a reasonable party in the petitio n e r’s position would have p erceived a very substantial risk that the orig inal order meant what the Commission now say s it meant.” Id. at 868–69 (citation and alterations omitted).

F or the same reasons that F ERC’s interpretation of Order 679 is inconsistent with the reg ulation, a reasonable party in CPUC’s position would not h ave perceived a very substantial risk that F ERC w ould interpret Order 679 a s p r e c l u ding its challeng es. To the ex tent that FE R C n o w interprets Order 679 as precluding s u c h challeng es, this interpretation constitutes a modification, and CPUC’s cha l l e ng e is not an impermissible collateral attack on the orig inal order.

F ERC makes two a dditional arg uments in support of its collateral a ttack claim. F irst, F ERC arg u e s t h a t CPUC’s petition is a collateral attack on Order 679 because CPUC is advancing the same arg ument that F ERC consid e r e d a nd rejected in 2006: that utilities leg ally m a n d a t ed to join transmission org aniz ations should not be elig ible to receive incentive adders. However, this i s not the challeng e CPUC is making

. CPUC challeng es incentive a dders for remaining in a tr a n s m i s s i on org aniz ation when a utility is not free to leave. No party to the Order 679 proceeding raised the issue of whether a utility could qualify for an incentive adder for continued participation in a transmission org aniz ation when such participation was not v o l u n tary

. CPUC was not p r e cluded from making such a challeng e to the orders o n review.CPUC V

. F ERC

24

Second, F ERC arg u es that CPUC had sufficient notice that PG& E was elig ible for an incentive adder because it has been a party

to each of the annual proceeding s since 2007 in which F ERC approved PG& E ’s requests for incentive adders. This arg ument is also unpersuasive

. CPUC settled the proceeding s g ranting PG& E’s first incentive a dder in 2 007,

as well as every other proceeding that followed. Each one o f those orders stated that F ERC’s approval of the settlement did
not c onstitute precedent regarding a ny issue or principle raised in the proceeding

. FE R C c annot now cite these settlement approvals as p utting CPUC on notice t h at i t was precluded from challeng ing future incentive adders.

Neither Order 679 nor the settlement approval orders that followed g ave CPUC suf f icient notice that O r der 679 precluded challeng es to incentive a d der el i gi b i lity on the
g round that a utility ’s membership in a t r a nsmission
org aniz ation is involuntary

. CPUC’s petition is thu s not an impermissible collateral attack on Order 679.

V

W e g rant CPUC’s p etitio n f o r review and r emand to F ERC for further proceeding s consi s t e nt with this opinion. W e need n ot, and d o not, r e ach any other issue urg ed by the parties.

P ETITION G RANTED.