Opinion ID: 187165
Heading Depth: 2
Heading Rank: 3

Heading: The Grid Management Charge and Pass-Through Tariff Are for New Services

Text: The Existing Customers argue that the Grid Management Charge and the pass-through tariff violate the Mobile-Sierra doctrine because they amount to an alteration of an existing contract. The Mobile-Sierra doctrine arises from two Supreme Court decisions, United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956), and Fed. Power Comm'n v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388 (1956). We have described the doctrine as follows: Under the well-settled and oft-invoked Mobile-Sierra doctrine, utility providers that negotiate fixed-rate contracts with their customers may, as part of that negotiation, voluntarily relinquish some of the rate-filing freedom to which they are otherwise entitled under Section 205 of the [Federal Power Act]. Under such contracts, utility providers are prohibited from filing a new rate for services currently provided (and therefore subject to) the negotiated contract rate. FERC is similarly prohibited from modifying the contract rate ... except where the modification is both required by the public interest and upon a showing that the changes are just, reasonable, and nondiscriminatory. East Kentucky, 489 F.3d at 1309 (quotation marks, brackets, footnotes, and citations omitted). However, where a new rate is intended to recover the costs of new benefits and services, [t]he Mobile-Sierra doctrine, powerful though it may be where it applies, is not implicated. Id. The question that we must address, then, is whether the Control Area Services charge and Market Operations charge are for new services provided by the ISO for the benefit of the Existing Customers among others. If they cover new services, then the Mobile-Sierra doctrine does not apply and the Commission was justified in upholding the Grid Management Charge and pass-through tariff. In Midwest ISO and East Kentucky, we addressed very similar questions relating to the Midwest ISO, and found that the ISO provided new services to customers with preexisting contracts with formerly vertically integrated utilities. Applying those cases to the California ISO, we find that the ISO similarly provides new services. Therefore, the Mobile-Sierra doctrine is inapplicable. In Midwest ISO, we reviewed a decision by the Commission concerning the allocation of the Midwest ISO's administrative costs. Midwest ISO, 373 F.3d at 1366-67. The Commission had required the ISO Cost Adder, [which] was designed to recover [Midwest ISO] administrative costs, to be applied to all loads in the system, including bundled and grandfathered load. Id. When the Midwest ISO was created, the participating transmission owners had obligations to provide bundled retail service (generation and transmission) to consumers at rates frozen by state legislation, state regulatory agencies, or legal settlements, as well as pre-existing bilateral agreements with other utilities to provide wholesale transmission service at fixed rates. Id. at 1365. The owners proposed that the Cost Adder be applied only to new wholesale and unbundled retail transmission, id. at 1365-66, but first an ALJ and then the Commission found that in order for the Cost Adder to be just and reasonable, it had to apply to bundled retail loads or grandfathered loads, because [a]ll of the Midwest ISO's Participants' transmission customers will benefit' from the new system. Id. at 1366-67. We upheld the Commission's determination finding that all transmission customersbundled, unbundled, grandfathered, whateverbenefit from the enhanced reliability and security [Midwest]ISO brings to the transmission grid. Id. at 1369-70. We also found that benefits such as an overall reduction in the costs of transmitting energy within the region and large scale regional coordination and planning of transmission would redound to all users of the transmission grid. Id. at 1371 (quotation marks omitted). Because all transmission customers draw benefits from being a part of the [Midwest] ISO regional transmission system, FERC correctly determined that they should share the cost of having an ISO. Id. In East Kentucky, we addressed a follow-up issue. The Cost Adder at issue in Midwest ISO was applied by the ISO to the participating transmission owners; the question in East Kentucky was whether the transmission owners could pass through that charge to customers with preexisting contracts. The Commission found that the owners could pass through the cost of administering the ISO, because the benefits brought by the []ISO represent new services not previously provided under ... pre-ISO grandfathered contracts. East Kentucky, 489 F.3d at 1307 (quotation marks omitted). Those benefits included: (1) independent and regional grid planning (as opposed to utility-by-utility planning), (2) enhanced reliability, (3) increased efficiency, (4) more effective management of grid congestion to accommodate greater power flows, (5) access to spot markets, and (6) price transparency to facilitate bilateral contract formation. Id. We concluded that the Commission reasonably rested its decision on this new services analysis and considered evidence that the costs to be collected under [the new charge] are separate and distinct from the costs collected under the grandfathered agreements. Id. at 1308 (quotation marks omitted). Both Midwest ISO and East Kentucky show that regional ISOs generate significant benefits for all customers of a transmission system, including customers that had preexisting contracts with formerly vertically-integrated utilities for all services. East Kentucky clearly rejected the argument that transmission contracts that provided for safe, reliable transmission by a regional operator positively exclude new services provided by an ISO. ISOs produce new benefits that the vertically-integrated utilities did not; therefore, it is not enough for the Existing Customers to point to their contracts with these utilities and argue that the new system does not provide them with any benefits that they had not contracted for in prior years. FERC made factual findings that the California ISO would generate significant new services for PG & E's existing customers. In Opinion No. 463-A, the Commission noted that the California ISO has brought about `massive' and `fundamental changes' in the manner in which electricity is sold and distributed there, so that `the complexities of operating the transmission system have increased exponentially.' 106 F.E.R.C. at 61,111 (quoting witness). The Commission recited some of the benefits of the ISO: [B]y combining the pre-ISO control areas and eliminating pancaked rates, the ISO operations allow greater access to generation alternatives so that the ISO can provide ancillary services to the existing transmission contracts in the most cost-effective and efficient manner possible on a broad regional basis. Regional planning and operation of the combined ISO grid maximizes efficiencies when compared to the pre-existing utility operations. Consolidating scheduling maximizes transmission usage, reduces ancillary service requirements and provides greater reliability by allowing the operation of more facilities to respond to contingencies. Id. at 61,112. The Commission also noted the creation of new market opportunities, which in the long term will result in an increased supply of competing generation to load-serving entities . .. leading to lower overall costs. Id. These same new market opportunities were credited by this court in Midwest ISO and East Kentucky as lending support to the justification for a new charge. The Commission further noted evidence provided by PG & E that the costs of the [Grid Management Charge] passthrough were for the ISO's service, and not the service which PG & E has provided and continues to provide under existing contracts. Id. The Commission credited the testimony of PG & E witness Mr. Bray: Mr. Bray specifically explained that the ISO performs certain activities in its role of control area operator which were not performed in the pre-ISO era. He further stated that the ISO's new tasks had a direct impact on PG & E, which performs on behalf of each and every [Control Area Agreement] customer as its ISO-certified Scheduling Coordinator a new and unique function that it did not provide to the [Control Area Agreement] customers prior to the ISO. He also distinguished the costs charged by PG & E for services performed under the [Control Area Agreements] from the costs that PG & E was passing through to its [Control Area Agreement] customers by means of the [pass-through tariff]. Id. (footnotes, brackets, and ellipses omitted). The Commission additionally credited the testimony of PG & E witness Mr. King, who explained in detail the manner in which he analyzed the company's accounts to demonstrate that `no ISO costs billed to PG & E for [the] ISO [Grid Management Charge] are included in PG & E's transmission operation and maintenance expense accounts or the [Control Area Agreements].' Id. (quoting witness) (bracket omitted). The petitioners fail in their attempts to rebut FERC's analysis. Petitioners argue that new market opportunities are not a new benefit, but this contention is directly contrary to this court's findings in Midwest ISO and East Kentucky. Petitioners also fail to address new efficiencies that are created by the existence of a regional transmission grid. The best argument presented by the petitioners is that, under the new regime, PG & E has fewer responsibilities for managing the Control Area and therefore fees that it collected for that role in the past should be returned to customers. Br. for Western Area Power Admin. at 45-46. The Commission addresses this argument in two ways. First, the Commission credited PG & E's testimony that the new ISO arrangement creates additional burdens on PG & E in its role as Scheduling Coordinator. More importantly, the Commission has refuted the petitioners' zero-sum argument by noting that the new arrangementwhile it may generate long-term benefitsresults in exponential[] increases in the complexity of the system. Thus, it is not the case that there is a one-for-one relationship such that each service that is now done by the ISO means one less service provided by PG & E. The point is that, together, PG & E and the ISO perform new and better services for customers. The pass-through tariff is dollar-for-dollar based on the Grid Management Charge, which itself is the cost of starting up and operating the ISO. The customers get the benefit of the new system and pay exactly the cost of the new system. In its first Initial Decision, the ALJ found that PG & E has failed to carry its burden of proof to show that the Market Operations charges were for new services when those services are being self-provided and not procured through the ISO Markets. 99 F.E.R.C. at 65,173. The Commission overruled that finding, holding that the ISO is only assessing charges to the responsible [Scheduling Coordinator] for accessing the ISO-controlled grid to support transmission service. Opinion No. 463, 103 F.E.R.C. at 61,362. The Commission further clarified its position in Opinion No. 463-A, stating that the [Market Operations] charge is only assessed on a Scheduling Coordinator when it procures such services through the ISO markets. The tariff further provides that a Scheduling Coordinator's responsibility for these costs is reduced by other, self-provided ancillary services. 106 F.E.R.C. at 61,114 (footnote omitted). Thus, the Commission argues, the parties' claim of being charged twice for the same service cannot be sustained. Id. The Commission's finding on the Market Operations charge is based on substantial evidence and it is not arbitrary or capricious. The Existing Customers' complaint is premised on their view that, when they self-provide ancillary services, they should not be charged a Market Operations charge because they are not availing themselves of any Market Operations services. But, as the Commission has noted, this is a misplaced concern. The billing determinant for the Market Operations charge is the proportion of a given [Scheduling Coordinator's] total purchase and sales of Ancillary Services, Supplemental Energy, and Imbalance Energy ... to the total purchases and sales of all [Scheduling Coordinators]. PG & Ein its role as a Scheduling Coordinatorthen passes on that charge to its customers, based on total purchases and sales of Ancillary Services, Supplemental Energy, and Imbalance Energy to its customers. FERC, both in the administrative record and in oral arguments to this court, has indicated that all self-provision of ancillary services will be accounted for, and that the Market Operations charge for all existing customers will be reduced accordingly. The Existing Customers have shown nothing to the contrary. The Commission's findings therefore survive scrutiny under the deferential arbitrary and capricious standard of review. Finally, we do not address the arguments raised by the Existing Customers that provisions of their contracts with PG & E either expressly forbid PG & E from charging for new services or provide for specific consultive procedures before any such charges may be implemented. The contract provisions cited by petitioners do not facially support the assertions they now advance. Furthermore, petitioners have failed to show that they properly raised these precise contract claims with FERC so as to preserve them for judicial review. Because the ISO provides new services, the Grid Management Charge and PG & E's pass-through of that charge to the Existing Customers do not violate the Mobile-Sierra doctrine. The Commissions factual findings on this matter relied on substantial evidence, and its decision to approve the charge and pass-through was not arbitrary or capricious.