FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CALIFORNIA PUBLIC UTILITIES

COMMISSION,

Petitioner,

CALIFORNIA DEPARTMENT OF

WATER RESOURCES STATE WATER

PROJECT; SACRAMENTO MUNICIPAL

UTILITY DISTRICT; TRANSMISSION

AGENCY OF NORTHERN CALIFORNIA,

Petitioners-Intervenors,

v.

FEDERAL ENERGY REGULATORY

COMMISSION,

Respondent,

PACIFIC GAS & ELECTRIC COMPANY,

Respondent-Intervenor.

No. 16-70481

OPINION

On Petition for Review of an Order of the

Federal Energy Regulatory Commission

Argued and Submitted October 13, 2017

San Francisco, California

Filed January 8, 2018
2 CPUC V. FERC

Before: Sidney R. Thomas, Chief Judge, and Stephen

Reinhardt and Stephen S. Trott, Circuit Judges.

Opinion by Chief Judge Thomas

SUMMARY*

Federal Energy Regulatory Commission

The panel granted the California Public Utilities

Commission’s (“CPUC”) petition for review and held that the

Federal EnergyRegulatoryCommission (“FERC”) arbitrarily

and capriciously determined that Pacific Gas & Electric was

eligible for an incentive adder for remaining a member of the

California Independent System Operator Corporation when

state law prevented PG&E’s departure without authorization.

Section 219(c) of the Federal Power Act required FERC

to provide incentives to induce utilities to join regional

transmission organizations. Accordingly, FERC adopted

Order 679 which established upward adjustments, or

“incentive adders,” to the rate of return on equity of utilities

that participate in transmission organizations. In 1998, the

CPUC approved PG&E’s transfer of operational control of

certain transmission assets to a newly-created California

Independent System Operator Corporation.

The panel held that FERC did not reasonably interpret

Order 679 as justifying summary grants of adders for

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
CPUC V. FERC 3

remaining in a transmission organization. The panel also held

that FERC’s interpretation was neither entitled to Auer v.

Robbins, 519 U.S. 452 (1997), deference nor persuasive in

its own right. The panel further held that because its

interpretation was unreasonable, FERC’s grants of adders to

PG&E were an unexplained departure from longstanding

policy, which provided that incentives should only be

awarded to induce future voluntary behavior. In addition, the

panel held that FERC created a generic adder in violation of

Order 679’s requirement of case-by-case review of adders.

The panel held that the CPUC’s petition was not an

impermissible collateral attack on Order 679.

COUNSEL

Traci L. Bone (argued), Harvey Y. Morris, and Arocles

Aguilar, San Francisco, California, as and for Petitioner.

Harvey L. Reiter (argued), Stinson Leonard Street LLP,

Washington, D.C.; Michael R. Postar, Duncan Weinberg

Genzer & Pembroke, Washington, D.C.; Katharine M.

Mapes, Spiegel & McDiarmid LLP, Washington, D.C.; for

Petitioners-Intervenors.

Mark Patrizio (argued), San Francisco, California, for

Respondent-Intervenor.

Anand Viswanathan (argued), Attorney; Robert H. Solomon,

Solicitor; Max Minzner, General Counsel;Washington, D.C.;

as and for Respondent.
4 CPUC V. FERC

OPINION

THOMAS, Chief Circuit Judge:

In this petition for review, we consider whether the

Federal Energy Regulatory Commission (“FERC” or

“Commission”) arbitrarily and capriciously determined that

Pacific Gas & Electric Company (“PG&E”) was eligible for

an incentive adder for remaining a member of the California

Independent System Operator Corporation (“Cal-ISO”) when

state law prevented PG&E’s departure without authorization. 

We conclude that it did, and we grant the petition.

I

Section 201 of the Federal Power Act (“FPA”) gives

FERC jurisdiction over the rates, terms, and conditions of

service for the transmission and sale at wholesale of electric

energy in interstate commerce. 16 U.S.C. §§ 824(a)-(b). 

Section 219 of the FPA, added in 2005, directed FERC to

promulgate a rule providing incentive-based rates for electric

transmission for the purpose of benefitting consumers

through increased reliability and lower costs of power. 

16 U.S.C. § 824s(a). As relevant here, section 219(c)

required FERC to provide incentives to induce utilities to join

regional transmission organizations. 16 U.S.C. § 824s(c). 

FERC did so in 2006 through the adoption of Order 679 and

the rehearing orders that followed. Promoting Transmission

Investment Through Pricing Reform, Order No. 679, 116

FERC ¶ 61,057 (“Order 679”), order on reh’g, Order No.

679-A, 117 FERC ¶ 61,345 (2006) (“Order 679-A”), order on

reh’g, Order No. 679-B, 119 FERC ¶ 61,062 (2007) (“Order

679-B”).
CPUC V. FERC 5

Order 679 established upward adjustments, or “incentive

adders,” to the rate of return on equity of utilities that

participate in transmission organizations. Order 679 set forth

the terms on which FERC would grant the incentive adders. 

FERC determined that it would “not grant outright any

incentives,” but that it would grant such incentives “when

justified” in the context of individual declaratory orders or

section 205 filings.1 Order 679 at PP 1, 326. FERC would

evaluate adder requests on a “case-by-case basis.” Id. at P

326.

Order 679 provided that adders would be available for

utilities that “have already joined, and that remain members

of,” transmission organizations in “recognition of the benefits

that flow from membership” and the fact that “continuing

membership is generally voluntary.” Order 679 at P 331. 

The order stated that a utility “will be presumed to be eligible

for the incentive” if it can demonstrate that it has joined a

transmission organization and that its membership is ongoing. 

Id. at P 327.

FERC declined to create a “generic adder” for

membership in a transmission organization. Order 679 at P

326. Commenters had urged FERC to make a “generic

finding” that any entity that joins a transmission organization

“automatically qualif[ies]” for an incentive adder, with at

least one commenter specifically proposing a 50 basis-point

incentive adder. Id. at P 318. FERC declined to adopt this

1

“Section 205” refers to FPA § 205, codified at 16 U.S.C. § 824d. 

Investor-owned utilities like PG&E make transmission owner rate case

filings with FERC pursuant to section 205 in order to recover their costs

of transmission service.
6 CPUC V. FERC

proposal, electing to consider “on a case-by-case basis” what

incentive (if any) is appropriate for a utility. Id. at P 326.

In 1995, as part of its restructuring of California’s electric

power industry, the California Public Utilities Commission

(“CPUC”) ordered the state’s three largest investor-owned

utilities, including PG&E, to submit to FERC a proposal to

establish an independent system operator (“ISO”) and to

transfer operational control of their facilities to that ISO.2

Order Instituting Rulemaking on Commission’s Proposed

Policies Governing Restructuring California’s Electric

Service Industry and Reforming Regulation, 64 CPUC 2d 1,

p. 95, 1995 WL 792086 at *99 (Dec. 20, 1995) (“CPUC

Decision 95-12-063”). In the same decision, CPUC retained

authority under California state law to review any transfer of

control of transmission facilities to the ISO. CPUC Decision

95-12-063, p. 31, 1995 WL 792086 at *15 (citing Cal. Pub.

Util. Code § 851). CPUC’s determinations were largely

affirmed in state law. See Cal. Pub. Util. Code §§ 330, 365.

In 1997, California’s three largest investor-owned

utilities, including PG&E, sought CPUC authorization to turn

over operational control of certain transmission assets to the

newly-created Cal-ISO. CPUC approved this transfer of

control. In its decision approving the transfer, CPUC stated

that any further transfers of control, such as transfers of

control from the Cal-ISO back to the utilities, would also

require CPUC authorization under state law. Joint

Application of Pac. Gas & Elec. Co., San Diego Gas & Elec.

Co., and S. Cal. Edison Co., 78 CPUC 2d 307, p. 313, 1998

2 An ISO is a form of regional transmission organization, and an

ISO’s members are eligible for incentive adders under section 219(c) and

Order 679.
CPUC V. FERC 7

WL 242747 at *7 (Jan. 21, 1998) (citing Cal. Pub. Util. Code

§ 851).

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

an annual “transmission owner” tariff filing to FERC

pursuant to section 205 of the FPA. See Pac. Gas. & Elec.

Co., 148 FERC ¶ 61,245 at P 1 n.2 (2014). Each filing

establishes PG&E’s transmission revenue requirement,which

includes the rate of return to which it is entitled as a

participating transmission owner. Id. Since 2007, PG&E has

regularly invoked Order 679 in its tariff filings to request

50 basis-point incentive adders for its ongoing participation

in the Cal-ISO, and FERC has summarily granted those

requests.3 Various parties, including CPUC, protested

PG&E’s earlier requests, but those cases settled without final

resolution of the objections raised.

In 2014 and 2015, PG&E filed its sixteenth and

seventeenth transmission owner tariff filings, respectively

(“TO 16” and “TO 17”). In each of those filings, PG&E

requested a 50 basis-point incentive adder. CPUC filed

timely protests to both of the filings. CPUC’s protests

claimed that because PG&E’s continued participation in the

Cal-ISO is mandated by CPUC order, granting it incentive

adders would reward PG&E for doing something it was

already required to do.

3

See Pac. Gas & Elec. Co., 120 FERC ¶ 61,296 at P 15 (2007); Pac.

Gas & Elec. Co., 124 FERC ¶ 61,305 at P 20 (2008); Pac. Gas & Elec.

Co. 128 FERC ¶ 61,288 at P 19 (2009); Pac. Gas & Elec. Co., 132 FERC

¶ 61,272 at P 23 (2010); Pac. Gas & Elec. Co., 141 FERC ¶ 61,168 at P

25 (2012); Pac. Gas &Elec. Co., 144 FERC ¶ 61,227 at P 20 (2013); Pac.

Gas & Elec. Co., 148 FERC ¶ 61,245 at P 30 (2014); Pac. Gas & Elec.

Co., 152 FERC ¶ 61,252 at P 23 (2015).
8 CPUC V. FERC

FERC issued orders in both proceedings summarily

granting PG&E’s requested adders. Pac. Gas & Elec. Co.,

148 FERC ¶ 61,245 at P 30 (2014) (“TO 16 Initial Order”);

Pac. Gas & Elec. Co., 152 FERC ¶ 61,252 at P 23 (2015)

(“TO 17 Initial Order”). The TO 16 Initial Order responded

to CPUC’s arguments by stating:

“[C]onsistent with previous Commissions

[sic] orders, we summarily accept PG&E’s

request for a 50 basis point incentive ROE

adder for its continued participation in [CalISO] . . . Parties opposing PG&E’s request

. . . have presented no new evidence or

circumstances to warrant reexamining

whether the adder is appropriate in this

proceeding.”

TO 16 Initial Order at P 30 (footnotes omitted). The TO 17

Initial Order held similarly:

“[C]onsistent with previous Commission

orders, we accept PG&E’s request for a 50

basis point incentive ROE adder for its

continued participation in [Cal-ISO] . . .

PG&E is a member of [Cal-ISO] . . . and its

membership is ongoing; therefore, PG&E is

presumed to be eligible for this incentive

adder in accordance with Order No. 679.”

TO 17 Initial Order at P 23 (footnotes omitted). FERC

rejected CPUC’s argument that the incentive adder was not

justified because it did not “induce” PG&E’s continuing

membership in the Cal-ISO: “Notwithstanding CPUC’s

argument asserting that PG&E’s participation is not voluntary
CPUC V. FERC 9

because it is mandated by state law, it is within the

Commission’s authority to grant incentive adders as

described in Order No. 679.” Id. at P 24. FERC also rejected

CPUC’s argument that it had created a generic adder, stating

that PG&E had demonstrated that it was a Cal-ISO member

and “thus satisfied the criteria set forth in Order No. 679.” Id.

at P 25.

CPUC sought rehearing of both FERC orders. CPUC

explained that FERC erred by granting PG&E an incentive

adder even though it was not free to leave the Cal-ISO;

failing to respond to CPUC’s arguments about PG&E’s

involuntary membership in the Cal-ISO; and granting a

generic adder inconsistent with Order 679. FERC denied

CPUC’s rehearing requests. Pac. Gas & Elec. Co.,

154 FERC ¶ 61,119 at P 10 (2016) (“TO 16 Reh’g Order”);

Pac. Gas &Elec. Co., 154 FERC ¶ 61,118 at P 9 (2016) (“TO

17 Reh’g Order”). In response to CPUC’s claims that PG&E

was not free to leave the Cal-ISO, FERC stated that Order

679 “is clear that the Commission may grant incentive adders

for public utilities that join and/or continue to remain in”

transmission organizations and that the order does not

“require that the Commission discontinue such adders in the

face of arguments like those that CPUC has made here.” TO

16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9.

In response to CPUC’s claims that FERC had adopted a

generic adder, FERC stated that utilities with ongoing

membership in transmission organizations are “presumed

eligible” for the adder and that CPUC “concedes” that PG&E

had an ongoing membership in the Cal-ISO. TO 16 Reh’g

Order at P 11; TO 17 Reh’g Order at P 11. FERC added that

because PG&E’s membership in the Cal-ISO helps the CalISO to “fulfill its duties,” FERC found the incentive adders
10 CPUC V. FERC

“to be justified.” TO 16 Reh’g Order at P 12; TO 17 Reh’g

Order at P 10.

Finally, FERC asserted that CPUC’s objection amounted

to a “collateral attack” on Order 679 and Order 679-A that it

did not need to address. TO 16 Reh’g Order at P 13; TO 17

Reh’g Order at P 12. CPUC timely petitioned for review.

II

FERC has jurisdiction over the two transmission owner

rate filings (TO 16 and TO 17) that initiated the instant

proceedings pursuant to section 205 of the FPA. See

16 U.S.C. § 824d. We have jurisdiction to review “order[s]

issued by the Commission” under section 313(b) of the FPA. 

See 16 U.S.C. § 825l(b). All parties to this petition for review

agree that the incentive adder issue was definitively resolved

by FERC in the orders under review.

We review a decision by FERC to determine whether its

action was “arbitrary, capricious, an abuse of discretion, or

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 court is not to ask whether a

regulatory decision is the best one possible or even whether

it is better than the alternatives.” FERC v. Elec. Power

Supply Ass’n, 136 S. Ct. 760, 782 (2016). Rather, the court

must uphold a decision if the agency has “examined the

relevant considerations and articulated a satisfactory

explanation for its action, including a rational connection

between the facts found and the choice made.” Id. (quoting

Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) (alterations

normalized). Our review “is limited to . . . the administrative
CPUC V. FERC 11

record,” Envtl. Coal. of Ojai v. Brown, 72 F.3d 1411, 1414

(9th Cir. 1995), and to those “grounds upon which . . . the

record discloses that [the agency’s] action was based.” SEC

v. Chenery Corp., 318 U.S. 80, 87 (1943).

III

FERC’s determination that PG&E was entitled to

incentive adders for remaining in the Cal-ISO was arbitrary

and capricious. FERC did not reasonably interpret Order 679

as justifying summary grants of adders for remaining in a

transmission organization. Because its interpretation was

unreasonable, FERC’s grants of adders to PG&E were an

unexplained departure from longstanding policy. Moreover,

FERC created a generic adder in violation of the order.

A

FERC’s interpretation of Order 679 as justifying

summary grants of incentive adders to utilities that remain in

transmission organizations was not reasonable.

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

an agency’s interpretation of its own ambiguous regulation

unless that interpretation is “plainly erroneous or inconsistent

with the regulation, or there is reason to suspect that the

interpretation does not reflect the agency’s fair and

considered judgment on the matter in question.” W. Radio

Servs. Co. v. Qwest Corp., 678 F.3d 970, 984–85 (9th Cir.

2012) (internal citation omitted).

FERC interprets Order 679 as conferring on it “the

authority. . . to continue to grant incentive adders for electric

utilities . . . that remain members of regional transmission
12 CPUC V. FERC

organizations” without further inquiry into the voluntariness

of their membership. Brief of Respondent at 20. FERC notes

that Order 679 makes an entity presumptively eligible to

receive an adder if it demonstrates continuing membership in

a transmission organization. See Order 679 at P 327. FERC

appears to interpret the “presumed to be eligible” language as

absolving it of an obligation to consider whether the

presumption should apply to utilities that are prohibited from

withdrawing from transmission organizations without the

consent of a higher authority. Under this interpretation,

ongoing membership itself is the sole criterion for receipt of

an incentive adder.

1

FERC’s interpretation of Order 679 is plainly erroneous

and inconsistent with the regulation. Order 679 provides that

a utility demonstrating that it has remained in a transmission

organization is “presumed to be eligible” for an incentive

adder. Order 679 at P 327. However, language throughout

Orders 679 and 679-A suggests that the presumption of

eligibility may be rebutted by the arguments CPUC has made

and that ongoing membership is not sufficient for an

incentive adder.

The orders commit FERC to case-by-case review of

incentive adders even for utilities that have demonstrated

ongoing membership in transmission organizations. Order

679 states that FERC “will approve, when justified, requests

for ROE-based incentives for public utilities that join and/or

continue to be a member of” transmission organizations. 

Order 679 at P 326 (emphasis added). If all utilities that

continued to be members of transmission organizations

automatically qualified for incentive adders, the “when
CPUC V. FERC 13

justified” language would be surplusage. In the same

paragraph, FERC declines proposals to “create a generic

adder for such membership” and states that it will “consider

specific incentives on a case-by-case basis.” Id. If FERC’s

interpretation were correct, case-by-case review would be

meaningless.

The justification for incentive adders as articulated in

Order 679 also belies FERC interpretation of the order. The

order states that the “basis for the incentive is a recognition

of the benefits that flow from membership in [transmission]

organizations and the fact that continuing membership is

generally voluntary.” Order 679 at P 331 (emphasis added). 

When membership is not voluntary, the incentive is

presumably not justified. Challenges to the presumption of

eligibility for the incentive on such grounds would not be

precluded by the order and would need to be addressed by

FERC if raised in tariff filing proceedings.

Order 679-A, citing section 219’s purpose of ensuring

reliability and reducing the cost of power, describes incentive

adders as “an inducement for utilities to join, and remain in,

Transmission Organizations.” Order 679-A at P 86

(emphasis added). An incentive cannot “induce” behavior

that is already legally mandated. Thus, the voluntariness of

a utility’s membership in a transmission organization is

logically relevant to whether it is eligible for an adder. The

same paragraph acknowledges that granting incentives only

for joining transmission organizations “offers no inducement

to stay in these organizations for members with the option to

withdraw.” Id. (emphasis added). Order 679-A thus

distinguishes between utilities that have the option to

withdraw from transmission organizations and those without
14 CPUC V. FERC

the option, and it necessarily implies that incentives are

justified only for the former.

Finally, Order 679-A states that with respect to incentives

under section 219, “[a] prior contractual commitment or

statute may have a bearing on our nexus evaluation of

individual applications.” Order 679-A at P 122. This also

necessarily implies that ongoing membership in a

transmission organization is not dispositive as to incentive

adder eligibility.

FERC argues that Orders 679 and 679-A considered and

rejected the argument that the voluntariness of a utility’s

membership in a transmission organization should bear on its

eligibility for an incentive adder. Order 679 did decline to

adopt proposals making utilities ineligible for incentives if

they were ordered to join transmission organizations by

statute. Order 679 at P 316; Order 679-A at P 83. However,

this does not support FERC’s interpretation, which holds that

utilities that remain in transmission organizations qualify for

adders even when their continued participation is compelled

by statute. No party to the Order 679 proceedings raised the

issue of whether a utility could qualify for an incentive for its

involuntary continued participation in a transmission

organization.

The text of Orders 679 and 679-A makes it clear that

FERC’s interpretation of those orders is plainlyerroneous and

inconsistent with the regulations. The orders did not make

ongoing membership in a transmission organization the sole

criterion for an incentive adder, and the orders did not

preclude challenges based on the voluntariness of a utility’s

membership in a transmission organization. We decline to

defer to FERC’s interpretation of the orders.
CPUC V. FERC 15

2

Even if not plainly erroneous, an agency’s interpretation

is not owed deference if “there is reason to suspect that the

interpretation does not reflect the agency’s fair and

considered judgment on the matter in question.” W. Radio

Servs. Co., 678 F.3d at 985. “Indicia of inadequate

consideration include . . . signs that the agency’s

interpretation amounts to no more than a convenient litigating

position; or an appearance that the agency’s interpretation is

no more than a post hoc rationalization advanced by an

agency seeking to defend past agency action against attack.” 

Price v. Stevedoring Servs. of Am., Inc., 697 F.3d 820,

829–30 n.4 (9th Cir. 2012) (en banc) (internal quotation

marks and citations omitted).

FERC’s interpretation of Order 679 is a post hoc

rationalization of its actions. FERC never before explicitly

articulated the interpretation it relies on, even though, as the

author of Order 679, it could have easily incorporated the

interpretation into the order. Order 679 provides that utilities

that demonstrate ongoing membership in transmission

organizations will be “presumed to be eligible” for incentive

adders, but it is silent as to whether that presumption can be

rebutted for utilities that cannot voluntarily leave their

organizations. Order 679 at P 327. Nowhere does Order 679

state that the voluntariness of a utility’s membership is

irrelevant to its eligibility for an incentive adder, even though

this would have been a reasonably foreseeable challenge to

future adders. By observing that transmission organization

membership was “generally voluntary,” FERC indicated that

it knew that some utilities could not voluntarily leave. Order

679 at P 331 (emphasis added). FERC could have foreseen

a challenge like CPUC’s challenge here.
16 CPUC V. FERC

Nor did FERC clearly articulate its interpretation in the

two orders currently on review. In denying CPUC’s

rehearing requests for the TO 16 and TO 17 orders, FERC

merely stated that “it is within the Commission’s authority to

grant incentive adders as described in Order No. 679,” that

Order 679 “is clear that the Commission may grant incentive

adders for public utilities that join and/or continue to remain

in” transmission organizations, and that Order 679 does not

“require that the Commission discontinue such adders in the

face of arguments like those that the CPUC has made here.” 

TO 16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9. 

These statements do not reflect a fair and considered

judgment on the meaning of Order 679.

It is apparent that FERC’s interpretation of Order 679 is

merely a convenient litigating position and a post hoc

rationalization of the orders on review. We decline to defer

to the interpretation.

3

“[W]hen Auer deference is not warranted, an agency’s

interpretation of an ambiguousregulation should be evaluated

under the principle articulated in Skidmore v. Swift & Co.,

323 U.S. 134 (1944).” Indep. Training & Apprenticeship

Program v. Cal. Dep’t of Indus. Relations, 730 F.3d 1024,

1035 (9th Cir. 2013). Under this standard, this court gives an

agency’s interpretation “a measure of deference proportional

to the thoroughness evident in its consideration, the validity

of its reasoning, its consistency with earlier and later

pronouncements, and all those factors which give it the power

to persuade.” Id. at 1036 (quoting Christopher v. SmithKline

Beecham Corp., 567 U.S. 142, 159 (2012))(internal quotation

marks omitted).
CPUC V. FERC 17

FERC’s interpretation does not reflect thorough

consideration, nor is it persuasive in its own right. FERC

does not develop or justify its interpretation in either the

orders on review or in its briefing before this court; the

interpretation is found only in FERC’s post-hoc reasoning.

4

We 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 explained above, FERC’s

interpretation is inconsistent with the text of Order 679 and

Order 679-A and the evident purposes of those regulations.

In light of our conclusion that FERC’s interpretation is

neither entitled to Auer deference nor persuasive in its own

right, we employ traditional tools of interpretation to

determine whether Order 679 permits challenges to the

presumption of eligibility of the sort CPUC has lodged here. 

Christopher v. SmithKline Beecham Corp., 567 U.S. at 161. 

The order’s plain language and purpose show that it does. A

utility that joins a regional transmission organization is

“presumed to be eligible” for incentive adders under Order

679, but this presumption is rebuttable. Order 679 at P 327. 

Given the order’s evident purpose of inducing utilities to

voluntarily remain in transmission organizations, and given

its language specifying that incentives will be awarded “when

justified” and on a “case-by-case basis,” it permits challenges

to incentives on the grounds that they will not induce

continuing participation in transmission organizations. Id. at

4

In a proceeding subsequent to the orders on review here, FERC

offered for the first time an explicit interpretation of the “presumption”

provision in Order 679, in line with the implicit interpretation at issue

here. See Pac. Gas & Elec. Co., 160 FERC ¶ 61,090 at P 13 (Sept. 20,

2017). Because this interpretation was not advanced in the two orders on

review here, it could not sustain those orders even if we were to consider

it.
18 CPUC V. FERC

P 326. Challenges such as that mounted by CPUC are not

precluded and must be answered by FERC.

B

Given that its interpretation of Order 679 is not

controlling, FERC failed to provide a reasoned explanation

for its actions in the orders under review. An agency must

“articulate a satisfactory explanation for its action.” Motor

Vehicle Mfrs. Ass’n, 463 U.S. at 43. When an agency

changes policy, the requirement that it provide a reasoned

explanation for its action demands, at a minimum, that the

agency “display awareness that it is changing position.” FCC

v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). 

“An agency may not, for example, depart from a prior policy

sub silentio or simply disregard rules that are still on the

books.” Id.

FERC had a longstanding policy that incentives should

only be awarded to induce future behavior. FERC departed

from this policy without acknowledgment or explanation. 

This departure was arbitrary and capricious.

1

FERC has a longstanding policy that rate incentives must

be prospective and that there must be a connection between

the incentive and the conduct meant to be induced. This

policy is incorporated in Order 679. The policy prohibits

FERC from rewarding utilities for past conduct or for conduct

which they are otherwise obligated to undertake.

This longstanding policy is evinced in a series of FERC

decisions and statements. In 2001, FERC denied a committee
CPUC V. FERC 19

of utilities an incentive for a maintenance/construction pilot

project. FERC reasoned that awarding the incentive would

“unjustly reward” the 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 FERC ¶ 61,093 at 61,477 (2001), order on reh’g,

98 FERC ¶ 61,249 (2002). In a 2001 case, FERC found that

retroactive incentives are ineffective, since the utilities that

would receive the incentives “would have already made their

decisions.” ISO New England, 96 FERC ¶ 61,359 at 62,355

(2001), aff’d Sithe New England Holdings, LLC v. FERC,

308 F.3d 71, 78 (1st Cir. 2002). A 1992 FERC policy

statement makes its position clear: “Consideration of past

performance would violate the standard that incentive

ratemaking must be prospective. . . . Incentive regulation can

produce superior results over traditional regulation only if it

is prospective.” Incentive Ratemaking for Interstate Nat. Gas

Pipelines, Oil Pipelines, & Elec. Utilities, 61 FERC ¶ 61,168

at 61,599 (1992). In 2006, prior to the adoption of Order 679,

FERC denied Southern California Edision Company(“SCE”)

an incentive for joining the Cal-ISO because SCE was

already a member. FERC stated that SCE “need[ed] no

inducement” to join the Cal-ISO, because it was already a

member. S. Cal. Edison Co., 114 FERC ¶ 61,018 at P 15

(2006).

FERC argues that this longstanding policy predates, and

is implicitly superseded by, Order 679. Order 679 did

explicitly reverse the holding in S. Cal. Edison, in which

FERC had denied SCE an incentive for joining the Cal-ISO

because SCE was already a Cal-ISO member. In Order 679-

A, FERC stated that its decision in S. Cal. Edison “failed to

recognize that incentives are equally important in inducing

utilities to join and remain in Transmission Organizations.” 
20 CPUC V. FERC

Order 679-A at P 86 n.142. However, this statement did not

overrule FERC’s policy of awarding incentives to induce

future voluntary conduct. FERC overruled its policy barring

incentives to utilities for remaining in transmission

organizations, but it still treated such incentives as

prospective: they were premised on the fact that membership

in transmission organizations was “generally voluntary,” and

thus that utilities may need incentives to choose to remain in

such organizations. Order 679 at P 331. FERC’s policy of

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 incentive adders was a departure from

FERC’s longstanding policy that incentives should only be

awarded to induce voluntary conduct. This unacknowledged

and unexplained departure from policy was arbitrary and

capricious.

In the initial orders and on rehearing, FERC did not

acknowledge its longstanding policy, nor did it provide an

explanation for its departure from that policy. It merely

asserted that it had the authority to grant incentive adders to

PG&E and that CPUC’s voluntariness arguments were

irrelevant to adder eligibility. FERC’s statements would only

explain its actions if its interpretation of Order 679 were

correct. Because that interpretation is erroneous, the orders

on review were a departure from Order 679’s terms and the

longstanding policy it incorporates. Without any
CPUC V. FERC 21

acknowledgment or explanation of that departure, the orders

were arbitrary and capricious.5

C

FERC also acted arbitrarily and capriciously by creating

a generic adder in contravention of Order 679’s requirement

of case-by-case review of adders.

Order 679 provides that FERC will approve incentive

adder requests “when justified” and will evaluate such

requests “on a case-by-case basis.” Order 679 at P 326. 

Order 679 explicitly rejected a proposal to adopt a generic 50-

basis-point incentive adder for ongoing transmission

organization membership. Id.

In its challenges to PG&E’s tariff filings, CPUC argued

that incentive adders could not induce PG&E to remain in the

Cal-ISO since its membership was involuntary. FERC

ignored this argument and “summarily accept[ed]” PG&E’s

5 FERC and PG&E each argue that PG&E’s participation in the CalISO is, in fact, voluntary. FERC argues that even if PG&E is not free to

leave the Cal-ISO without CPUC’s consent, “that still does not

demonstrate that [PG&E] is forbidden from seeking to leave the [CalISO],” and that PG&E “could take steps, with California’s approval, to

voluntarily leave the [Cal-ISO].” Brief of Respondent at 23–24. PG&E

goes a step further and argues that its withdrawal from membership in the

Cal-ISO is not subject to CPUC approval. Brief of PG&E as RespondentIntervenor at 22–25. These arguments, even if correct, could not sustain

the orders on review, as they do not appear anywhere in those orders. We

can only uphold agency action on grounds articulated by the agency in its

orders; we “may not accept appellate counsel’s post hoc rationalizations

for agency action.” Or. Nat. Desert Ass’n v. Bureau of Land Mgmt.,

531 F.3d 1114, 1141 (9th Cir. 2008) (quoting Motor Vehicle Mfrs. Ass’n,

463 U.S. at 50).
22 CPUC V. FERC

adder request “consistent with previous Commission orders.” 

TO 16 Initial Order at P 30; TO 17 Initial Order at P 23. It

reiterated this position on rehearing. TO 16 Reh’g Order at

P 11; TO 17 Reh’g Order at P 11. FERC also asserted that an

adder is not “generic” simply because other utilities have

received the same adder. TO 16 Reh’g Order at P 13 & n.26

(citing Midcontinent Indep. Sys. Operator, Inc., 161 FERC ¶

62,269 at P 14 (2015)); TO 17 Reh’g Order, at P 11 & n.22

(same).

When Order 679 is read in accordance with its plain

language and evident purpose, it is clear that FERC has

created a generic adder in violation of its provisions. To

satisfy Order 679’s case-by-case analysis requirement and to

avoid creating a generic adder, FERC needed to inquire into

PG&E’s specific circumstances, i.e., whether it could

unilaterally leave the Cal-ISO and thus whether an incentive

adder could induce it to remain in the Cal-ISO. The fact that

the other utilities have received the same adder does not make

it generic; it is the fact that the adders were granted

summarily without any case-specific inquiry into the

circumstances of PG&E’s membership that made them

generic. FERC’s summary grants are an unacknowledged

and unexplained departure from Order 679. The orders on

review are arbitrary and capricious. Fox, 556 U.S. at 515.

IV

CPUC’s petition is not an impermissible collateral attack

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

is limited to review of new orders,” and the court does not

have jurisdiction over a petition for review “that collaterally

attacks a prior FERC order.” Pac. Gas & Elec. Co. v. FERC,

464 F.3d 861, 868 (9th Cir. 2006). A petition for review
CPUC V. FERC 23

under the FPA is a collateral attack on a prior FERC order if

the order upon which the petition is based is a “clarification,”

as opposed to a “modification,” of the prior order. Id. To

differentiate between a clarification and a modification, the

court asks “whether a reasonable party in the petitioner’s

position would have perceived a very substantial risk that the

original order meant what the Commission now says it

meant.” Id. at 868–69 (citation and alterations omitted).

For the same reasons that FERC’s interpretation of Order

679 is inconsistent with the regulation, a reasonable party in

CPUC’s position would not have perceived a very substantial

risk that FERC would interpret Order 679 as precluding its

challenges. To the extent that FERC now interprets Order

679 as precluding such challenges, this interpretation

constitutes a modification, and CPUC’s challenge is not an

impermissible collateral attack on the original order.

FERC makes two additional arguments in support of its

collateral attack claim. First, FERC argues that CPUC’s

petition is a collateral attack on Order 679 because CPUC is

advancing the same argument that FERC considered and

rejected in 2006: that utilities legally mandated to join

transmission organizations should not be eligible to receive

incentive adders. However, this is not the challenge CPUC

is making. CPUC challenges incentive adders for remaining

in a transmission organization 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 organization when

such participation was not voluntary. CPUC was not

precluded from making such a challenge to the orders on

review.
24 CPUC V. FERC

Second, FERC argues that CPUC had sufficient notice

that PG&E was eligible for an incentive adder because it has

been a party to each of the annual proceedings since 2007 in

which FERC approved PG&E’s requests for incentive adders. 

This argument is also unpersuasive. CPUC settled the

proceedings granting PG&E’s first incentive adder in 2007,

as well as every other proceeding that followed. Each one of

those orders stated that FERC’s approval of the settlement did

not constitute precedent regarding any issue or principle

raised in the proceeding. FERC cannot now cite these

settlement approvals as putting CPUC on notice that it was

precluded from challenging future incentive adders.

Neither Order 679 nor the settlement approval orders that

followed gave CPUC sufficient notice that Order 679

precluded challenges to incentive adder eligibility on the

ground that a utility’s membership in a transmission

organization is involuntary. CPUC’s petition is thus not an

impermissible collateral attack on Order 679.

V

We grant CPUC’s petition for review and remand to

FERC for further proceedings consistent with this opinion. 

We need not, and do not, reach any other issue urged by the

parties.

PETITION GRANTED.