Opinion ID: 3048937
Heading Depth: 3
Heading Rank: 2

Heading: Adoption of Rolled-In Pricing Was Proper

Text: In this § 205 case, FERC was obliged to determine whether PG&E’s proposed method of pricing was just and reasonable. FERC’s order upholding the proposal was neither arbitrary 6914 CAL DEP’T OF WATER v. FERC nor capricious. FERC classified the facilities as “transmission” and rolled in their costs after considering the facilities’ functions and the methodology utilized in previous adjudications involving transmission tariffs.
“Transmission” Because They Performed Some Transmission Function. FERC classified all of the facilities at issue as “transmission” despite the fact that the bulk of the facilities serve generation functions in addition to transmission functions. Specifically, the loops connect plants to the grid, and many of the transformer banks step up the voltage of generated power to make the voltage compatible with grid levels. According to Opinion No. 466-B, “any degree of integration is sufficient to establish that the costs of the facilities should be treated as transmission.” 108 F.E.R.C. ¶ 61,297, at 62,511. The presiding judge called this benchmark the “exclusive use” test because it classified facilities as “generation” for costing purposes (i.e., excluded from rolled-in pricing) only if the facilities were used exclusively to generate power, step up power, or transmit power from the generator to the grid. He initially rejected this benchmark when it was proposed by PG&E because he believed that the “exclusive use” test unfairly conflated the transmission and generation functions. [1] We hold that the exclusive use test comports with FERC’s treatment of other facilities serving dual purposes. For example, in American Electric Power Service Corp., 80 F.E.R.C. ¶ 63,006 (1997), rev’d in part on other grounds, Opinion No. 440, 88 F.E.R.C. ¶ 61,141 (1999), a utility sought to include in its transmission tariff the costs associated with two 765 kV lines which supported both generation and transmission functions. Id. at 65,057. The extra-high voltage lines connected an isolated generation facility with the rest of the grid, but their configuration also provided an east-west 765 kV link across the state of Indiana, providing back-up and CAL DEP’T OF WATER v. FERC 6915 reliability functions to the grid. Id. The presiding judge found that the lines were properly included in the tariff. Id.; see Opinion No. 311, Am. Elec. Power Serv. Corp., 44 F.E.R.C. ¶ 61,206, at 61,748 (1988) (noting in earlier proceeding that the same lines serve a transmission function); Northeast Tex. Elec. Coop., Inc., 108 F.E.R.C. ¶ 61,084, at 61,426, 61,433 & n.66 (2004) Opinion No. 474) (classifying as “transmission” facilities that primarily served to connect and protect points of delivery, where the facilities also maintained reliability of service over the network transmission lines); Otter Tail Power Co., 12 F.E.R.C. ¶ 61,169, 61,419-20 (1980) (Opinion No. 93). Thus, although FERC has never explicitly referred to an exclusive use test, it appears that it does apply such a test to determine whether facilities should be classified as “transmission.”8 [2] Like the lines in American Electric Power Service Corp., PG&E’s loop facilities and dual function facilities serve a network transmission function in addition to benefitting PG&E’s generation. For example, the Diablo Canyon and Morro Bay Loops both function as parallel paths to Path 15. In addition, the Morro Bay Loop carries over 540 MW of local area load. The Moss Landing Loop carries approximately 740 MW of local area load and is one of two 500 kV lines feeding a substation that serves Silicon Valley. Further, the transformer banks within the group of “dual function facilities” both transform power at the generating station (supporting PG&E generation) and transform power that passes through the banks between various levels of voltage (a transmission function).9 Finally, the network-only facilities serve 8 This test was applied both before and after Order No. 888 was adopted in 1996. See, e.g., 80 F.E.R.C. ¶ 63,006, at 63,057; 12 F.E.R.C. ¶ 61,169, at 61,420. Although DWR emphasizes repeatedly that Order No. 888 required the unbundling of transmission and generation, it points to no specific directive in that Order or elsewhere that conflicts with FERC’s method of classifying facilities. 9 The GSUs in Kentucky Utilities Co., 85 F.E.R.C. ¶ 61,274 (1998) (Opinion No. 432), are thus distinguishable from the transformer banks in 6916 CAL DEP’T OF WATER v. FERC no generation function, only a transmission function, because the generators they previously supported have been decommissioned. [3] The facilities were all shown to perform some transmission function. Consequently, FERC’s sub silentio application of an exclusive use test in order to classify the facilities as “transmission” affords consistent treatment to regulated utilities across rate proceedings, and was not arbitrary or capricious.
Transmission Pricing. [4] FERC precedent clearly demonstrates a consistent policy favoring the rolled-in method of transmission pricing where the system operates as an integrated whole.10 Otter Tail Power Co., 12 F.E.R.C. ¶ 61,169 (1980) (Opinion No. 93), is an oft-cited example of this policy. In Otter Tail, FERC found that a utility properly attributed six high-voltage lines to a transmission function and that the utility should therefore allocate the costs of the lines on a rolled-in basis. Id. at 61,416-17. The owner of the lines, Otter Tail, was subject to an antitrust decree requiring Otter Tail to wheel11 power from any third-party supplier to any municipality within Otter Tail’s service area. Id. at 61,411. During a proceeding to the instant case. As Order No. 466-A noted, the GSUs in Kentucky Utilities were “used solely to increase the voltage of electric energy produced by generators.” 106 F.E.R.C. ¶ 61,144, at 61,481; see 85 F.E.R.C. ¶ 61,274, at 62,111 (citing Northern States Power Co., 64 F.E.R.C. ¶ 61,324, 63,379 (1993), for unbundling requirements). Applying the exclusive use test, such facilities serve no independent transmission function at all and were appropriately separated from transmission pricing. Despite DWR’s reliance on this case, we do not find any substantial support for DWR’s argument in Kentucky Utilities. 10 The parties appear to assume that PG&E’s system is integrated. 11 “Wheeling” refers to the use of transmission facilities of one system to transmit power for another system. CAL DEP’T OF WATER v. FERC 6917 determine the rate Otter Tail could charge for wheeling power, Otter Tail introduced evidence that the six highvoltage lines were used for network transmission. Id. at 61,419-20. Other parties to the proceeding contended that the lines should not be included in Otter Tail’s transmission rate because the lines were of more use to Otter Tail in its production (power generation) function than in a transmission function. One group noted that some lines were built to intertie Otter Tail’s plants with power sources. Id. at 61,417-18. It argued that on these lines, the use for transmitting non-Otter Tail-produced power was de minimis, such that the lines should be excluded from the rate base. Id. at 61,418. Another group introduced evidence that the lines performed production-related functions 26.3 percent of the time, and argued that a corresponding percentage of the lines’ costs should be excluded from the rate base. Id. at 61,418 n.54. FERC rejected these arguments, holding that any facility found to serve a transmission function was properly includable in the rate base. Id. at 61,423. As such, FERC found that the six lines’ costs formed part of the transmission rate base, to be rolled-in to all customers. FERC noted that “Commission precedent strongly favors use of the rolled-in method of transmission allocation.” Id. at 61,420 n.65 (citing Ala. Power Co., 8 F.E.R.C. ¶ 61,083 (1979) (Opinion No. 54); Public Serv. Co. of Ind., 57 F.P.C. 1173 (1977) (Opinion No. 783-A), aff’d in part, rev’d in part, Public Serv. Co. of Ind. v. FERC, 575 F.2d 1204 (7th Cir. 1978); Fla. Power & Light Co., 56 F.P.C. 3581 (1976) (Opinion No. 784); Detroit Edison Co., 54 F.P.C. 3012 (1975) (Opinion No. 748)). FERC explained: The principal reason behind adoption of this methodology is that an integrated system is designed to achieve maximum efficiency and reliability at a minimum cost on a systemwide basis. Implicit in this theory is the assumption that all customers, whether 6918 CAL DEP’T OF WATER v. FERC they be wholesale, retail or wheeling customers, receive the benefits that are inherent in such an integrated system. 12 F.E.R.C. ¶ 61,169, at 61,420 (internal citations omitted). Because Otter Tail’s system was integrated, a rolled-in allocation method was appropriate. Id. [5] Under Otter Tail’s rationale, it is irrelevant whether the loops and transformer banks directly serve the power requirements of a third-party generator such as DWR. As long as the system is integrated, and the facilities are integrated with the system, DWR is assumed to benefit from the transmission these facilities provide.12 Accord Me. Pub. Serv. Co. v. FERC, 964 F.2d 5, 8-9 (D.C. Cir. 1992); cf. Me. Public Serv. Co., 85 F.E.R.C. ¶ 61,412, at 62,566-68 (1998) (Opinion No. 434) (determining that the cost of three low-voltage lines could not be included in transmission rates where the lines were not looped and could form no parallel paths with transmission facilities). Because DWR benefits from the integrated grid, FERC reasonably required it to pay its share of the cost.
Pricing of Transmission Facilities. [6] DWR argues that FERC’s policy regarding rolling in transmission costs “has been modified significantly” over the past decade, particularly in light of Order No. 888. In support, 12 We note that FERC has applied analogous reasoning to proposals to roll in the costs of administering an ISO. See Midwest Indep. Transmission Sys. Operator, Inc., 97 F.E.R.C. ¶ 61,033 (2001) (Opinion No. 453) (as amended), aff’d sub nom. Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004). In Opinion No. 453, FERC affirmed that the ISO benefits all users of the grid it operates by increasing the grid’s reliability. 97 F.E.R.C. ¶ 61,033, at 61,169. It rejected several utilities’ arguments that they should not have to pay part of the administrative cost because they would not benefit, and held that the costs should be rolled into the transmission tariffs. See id. CAL DEP’T OF WATER v. FERC 6919 DWR highlights various statements by FERC between 1994 and 2003 acknowledging alternative methods of transmission pricing, contained in the 1994 Transmission Pricing Policy Statement,13 Order No. 888, Order No. 2000,14 the 2002 Standard Market Design rulemaking proceedings15 (“SMD NOPR”), and Orders No. 200316 and 2003-A. The presiding judge also believed Order No. 888’s endorsement of unbun- dling forbade attribution of any generation costs to the transmission tariffs. We have reviewed the cited orders and policy statements, and we find no such change in policy. [7] As discussed above, Order No. 888, issued in 1996, required each public utility to file tariffs for open access transmission services, with the goal of remedying undue discrimination in access to the utilities’ monopoly-owned transmission wires. 61 Fed. Reg. at 21,541. FERC decisions 13 Inquiry Concerning the Commission’s Pricing Policy for Transmission Services Provided by Public Utilities Under the Federal Power Act; Policy Statement, [Regs. Preambles 1991-1996] III F.E.R.C. Stats. & Regs. ¶ 31,005, 59 Fed. Reg. 55,031 (Nov. 3, 1994) (codified at 18 C.F.R. pt. 2). 14 We reject DWR’s attempted use of Regional Transmission Organizations, [Regs. Preambles 1996-2000] F.E.R.C. Stats. & Regs. ¶ 31,089, 65 Fed. Reg. 810 (Jan. 6, 2000) (Order No. 2000), on reh’g, F.E.R.C. Stats. & Regs. ¶ 31,092, 65 Fed. Reg. 12,088 (Mar. 8, 2000) (Order No. 2000- A), aff’d sub nom. Pub. Util. Dist. No. 1 v. FERC, 272 F.3d 607 (D.C. Cir. 2001), as irrelevant. Order No. 2000 addresses regional transmission organizations, which are not at issue in this case. 15 Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design, [1998-2002 Proposed Regs.] F.E.R.C. Stats. & Regs. ¶ 32,563 (2002), 67 Fed. Reg. 55,452 (Aug. 29, 2002), 67 Fed. Reg. 58,751 (Sept. 18, 2002), 67 Fed. Reg. 63,327 (Oct. 11, 2002) (codified at 18 C.F.R. pt. 35). 16 Standardization of Generator Interconnection Agreements and Procedures, F.E.R.C. Stats. & Regs. ¶ 31,146, 68 Fed. Reg. 49,846 (Aug. 19, 2003) (Order No. 2003) (codified at 18 C.F.R. pt. 35), on reh’g, F.E.R.C. Stats. & Regs. ¶ 31,160, 69 Fed. Reg. 15,932 (Mar. 26, 2004) (Order No. 2003-A), on reh’g, F.E.R.C. Stats. & Regs. ¶ 31,171, 70 Fed. Reg. 265 (Jan. 4, 2005) (Order No. 2003-B). 6920 CAL DEP’T OF WATER v. FERC issued subsequent to Order No. 888 demonstrate that Order No. 888 did not affect FERC’s preference of rolling in transmission rates. See, e.g., W. Mass. Elec. Co., 81 F.E.R.C. ¶ 61,152, 61,693 (1997) (rolling in the cost of grid upgrades without mention of Order No. 888), aff’d sub nom. W. Mass. Elec. Co. v. FERC, 165 F.3d 922 (D.C. Cir. 1999); see also Am. Elec. Power Serv. Corp., 101 F.E.R.C. ¶ 61,211, 61,910 (2002) (affirming earlier decision to roll in costs associated with transmission facilities, without discussing Order No. 888, and noting that “historically, the rolled-in method of transmission cost allocation has been favored”).17
With Respect to PG&E’s Transmission Facilities. Finally, DWR argues that, regardless of FERC’s standard pricing policies, FERC has consistently endorsed a policy of pricing PG&E facilities based on subfunction, and changed 17 With respect to the other orders and policy statements, the selective language DWR highlights tends to show only that FERC will consider nontraditional transmission pricing proposals when appropriate. For example, the 1994 Transmission Policy Pricing Statement states that rolling in transmission rates is consistent with longstanding FERC precedent, but also notes that other methodologies are “supportable.” 59 Fed. Reg. at 55,032-33. This statement cannot be stretched to indicate a rejection of rolled-in pricing. DWR also cites to portions of the 2002 SMD NOPR and Order No. 2003, but both address the cost allocation of new facilities. See SMD NOPR, 67 Fed. Reg. at 55,479; Order No. 2003, 104 F.E.R.C. ¶ 61,103, at 1-2, 675-80. Both suggest that, under some circumstances, a more flexible approach to assigning the costs of constructing interconnection facilities may incentivize states to participate in construction of more isolated generators. See, e.g., SMD NOPR, 67 Fed. Reg. at 55,479 (noting that assigning the cost of interconnection facilities to participant generators could encourage siting and building of such generation facilities). By contrast, the facilities in this case were not newly-constructed and such incentives are therefore not implicated. Neither the 2002 SMD NOPR nor Order No. 2003 dictates a cost assignment process or forecloses rolled-in pricing under the circumstances presented in this case. CAL DEP’T OF WATER v. FERC 6921 course without presenting any reasons for doing so or establishing that the new pricing method was just and reasonable. [8] Despite DWR’s contrary representations in its briefs and during oral argument, FERC has never stated that it favors PG&E’s subfunctional method. As respondent highlights, on one occasion FERC adjudicated a rate dispute involving subfunctionalized pricing, but explicitly declined to pass on the merits of the methodology. See Pac. Gas & Elec. Co., 53 F.E.R.C. ¶ 61,146, 61,521 n.66, 61,524 (1990) (Opinion No. 356) (noting that none of the parties had challenged the subfunctional methodology). Opinion No. 356 noted that the method itself had never been litigated, and stated that “PG&E is free to continue the use of its subfunctional methodology or to propose a rolled-in rate in future proceedings. . . . [W]e will continue to evaluate the appropriateness of this or any other pricing methodology on a case-by-case basis.” Id. at 61,521 n.90. It appears PG&E sought to change from subfunctionalized rates to rolled-in transmission rates beginning in 1993. See Turlock Irrigation Dist. v. Pac. Gas & Elec. Co., 64 F.E.R.C. ¶ 61,183, at 62,542 (1993); Pac. Gas & Elec. Co., 63 F.E.R.C. ¶ 61,136, at  (1993), proceeding dismissed, 86 F.E.R.C. ¶ 61,105 (1999). PG&E’s requests were challenged before FERC in two cases, but both were resolved without an adjudication of the subfunctionalized method. See 64 F.E.R.C. ¶ 61,183, at 62,542-44 (noting that the parties had reached agreement on the rate level and declining to issue a requested declaratory order forbidding the use of a rolled-in rate in the future); 63 F.E.R.C. ¶ 61,136, at  (finding that the contract language prohibited change to rolled-in rate). An administrative law judge did reject a third attempt by PG&E to utilize rolled-in pricing in a transmission rate schedule. Pac. Gas & Elec. Co., 63 F.E.R.C. ¶ 63,018 (1993), aff’d in part, vacated in part, 67 F.E.R.C. ¶ 61,239 (1994). Noting that the proposed rate under the new agreement was a steep 6922 CAL DEP’T OF WATER v. FERC increase over the subfunctionalized rate being charged under the parties’ current interconnection agreements, the judge found the proposal to be an unjust and unreasonable attempt to charge more for the same service. Id. at 65,098. FERC affirmed the judge’s rejection of the agreement, noting that no party had excepted to that ruling. Pac. Gas & Elec. Co., 67 F.E.R.C. ¶ 61,239, 61,753 n.5 (1994) (Opinion No. 389), on reh’g, 85 F.E.R.C. ¶ 61,230 (1998) (Opinion No. 389-A). However, FERC later clarified that Opinion No. 389 did not make any findings regarding the merits of a rolled-in rate. Pac. Gas & Elec. Co., 71 F.E.R.C. ¶ 61,394, at 62,547 (1995), reh’g granted, 72 F.E.R.C. ¶ 61,217 (1995). In a proceeding conditionally accepting PG&E’s proposed rate filing, FERC considered a request by the intervenors to prohibit PG&E from utilizing its proposed rolled-in rate. Id. at 62,546. FERC set a hearing for the intervenors to pursue their concerns about the rate, but declined requests to direct PG&E to continue to use the subfunctionalized rate. Id. FERC stated that “grandfathering” in a particular rate simply because it was used in the past would stifle innovation and pricing flexibility. Id. at 62,547. The parties later settled their dispute. See Pac. Gas & Elec. Co., 94 F.E.R.C. ¶ 61,093, 61,392 (2001). [9] In sum, when FERC has considered the subfunctionalized method, it has not expressed the sort of favorable opinions that would render its decision to permit rolled-in pricing in this case arbitrary and capricious. DWR’s claim that FERC’s decision is a “dramatic reversal” of earlier policy is simply erroneous.18 18 Finally, we decline to entertain DWR’s argument that FERC is playing favorites with PG&E. DWR failed to raise this argument before FERC on DWR’s Request for Rehearing, as is jurisdictionally required, and offered no reason for failing to do so. See 16 U.S.C. § 825l(b); High Country Res. v. FERC, 255 F.3d 741, 744-47 (9th Cir. 2001). CAL DEP’T OF WATER v. FERC 6923