Opinion ID: 3048509
Heading Depth: 2
Heading Rank: 2

Heading: The Exercise of BPA’s Settlement Authority

Text: Although we have concluded that BPA’s settlement authority is subject to the requirements of §§ 5(c) and 7(b) and that BPA approached the REP settlement from a faulty legal premise, we must examine BPA’s actions closely to determine whether in this case BPA exercised its settlement authority in a manner that violates those requirements and is contrary to law. In other words, we must review the REP settlement to determine whether BPA’s misreading of its authority was essential to its decision; or, stated yet again: whether BPA in fact relied on its erroneous reading of the law. We conclude that BPA ignored §§ 5(c) and 7(b) and that BPA’s exercise of its settlement authority is inconsistent with the NWPA. When determining traditional REP benefits—as it did in the WP-02 rate case—BPA calculated the cost of the traditional REP benefit and made a determination of the IOUs’ eligibility. Based largely on forecasted ASCs, BPA estimated that the 20 We note that we do not in any way rule on the legality of BPA’s settlement authority when it settles out of contractual power obligations in a manner consistent with the requirements of the NWPA. We simply hold that BPA cannot bypass the requirements of §§ 5(c) and 7(b) altogether when it settles out of purchase and exchange sale obligations. 4874 PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER REP benefit would cost $240.6 million for the 2002-2006 rate period, or $48 million per year. 2000 REP Settlement Agreement ROD at 78. This figure was based on § 5(c) calculations, as capped by the § 7(b)(2) ceiling. Id. at 78-81. According to BPA’s calculations, only three IOUs were eligible for the REP benefit: Portland General Electric, Puget Sound Energy, and Pacificorp’s Utah Power & Light division. Of these three, Portland General Electric and Puget Sound Energy were entitled to some 98 percent of the benefits. See 2000 REP Settlement Agreement ROD at 34. When it proposed settling REP claims, however, BPA proceeded very differently. First, it did not rely on ASCs. Although BPA reviewed “[t]he IOUs’ most recent ASC reports” in the WP-02 proceeding, BPA decided that it did not have usable data to calculate ASCs for purposes of offering a settlement. 2000 REP Settlement Agreement ROD at 37; see also id. at 32. BPA explained that “[it] no longer receives cost and load data from utilities through ASC filings as was previously required and provided under the RPSAs. BPA therefore does not have information for precise determinations of ASCs available.” Power Subscription Strategy, Administrator’s Supplemental ROD (April 2000) at 26. More importantly, instead of developing data from which ASCs could be calculated, BPA rejected using current ASCs as the exclusive basis for preparing its REP settlement proposal. Again, as BPA explained: “[I]f BPA were to adopt [Puget Sound Energy’s] proposed methodology [of using ASCs to allocate REP settlement benefits], only a few IOUs would be allocated the large majority of the total settlement amount. This conflicts with BPA’s stated Power Subscription Strategy goal to ‘spread the benefits of the Federal Columbia River Power System as broadly as possible.’ ” 2000 REP Settlement Agreement ROD at 81. BPA estimated the cost of REP settlement at $736 million for the 2002-06 period—$496 million more than its WP-02 estimate of the cost of the REP benefit over the same rate PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER 4875 period. See id. at 49, 78. BPA explained the striking difference between BPA’s two estimates: BPA had used a different methodology to determine who would be eligible for the REP settlement. Instead of relying exclusively on ASCs, as it had done when it estimated the costs of the REP program, BPA had factored in three other variables: (1) a possible legal challenge to the 1984 methodology; (2) a possible challenge to the PF Exchange Rate; and (3) future fluctuations in the energy market. As BPA explained: [A] settlement of the REP would not be based solely on forecasted benefits using ASCs. . . . [T]here are a number of factors that must be weighed . . . , for example, possible revision of the ASC Methodology, market prices in relation to the viability of in-lieu transactions, and challenges to BPA’s PF Exchange rate. 2000 REP Settlement Agreement ROD at 67. This was a critical set of assumptions because each one served to enlarge the group of IOUs eligible for the settlement and to increase the benefits of those already qualified for the REP. For example, whereas the WP-02 proceeding concluded that effectively two IOUs were eligible for the REP benefit, after making its new assumptions, BPA concluded that seven IOUs would be eligible for the REP settlement.21 Not only did BPA dramatically revise its assumptions about ASCs to determine eligibility, it ignored the ASCs entirely to decide how to allocate its settlement. Instead of allocating the settlement through its traditional REP model, BPA proposed to allocate 1800 aMW total power to the IOUs and then asked the public utility commissions of Idaho, Montana, Oregon and Washington to negotiate 21 The seven were Avista Corp., Idaho Power Co., Montana Power Co., Portland General Electric, Puget Sound Energy and Pacificorp, which has two divisions—Pacific Power & Light, serving Oregon and Washington, and Utah Power & Light, serving southern Idaho—which we have counted here as separate entities. 4876 PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER a proposal for dividing the power among the IOUs. The PUCs did, recommending to BPA that it increase the power allocated to 1900 aMW, which BPA agreed to do. Id. at 12. The most significant of the assumptions BPA made was its decision to consider the effect of a possible legal challenge to its 1984 methodology. BPA hypothesized that the IOUs might challenge BPA’s current ASC methodology and demand that BPA revert to its 1981 methodology.22 By giving full effect to this hypothesis, BPA estimated much higher ASCs for the IOUs, which made more IOUs eligible for the REP benefit23 and increased the cost of the REP benefits payable to IOUs already qualified for the program.24 The consequences of this 22 Similarly, BPA assumed it would lose any challenge to the way it currently calculates its PF Exchange Rate. BPA’s assumption entirely disregarded the likelihood that if BPA reduced the PF Exchange rate—thereby increasing the REP benefits to qualified IOUs and making additional IOUs eligible for the REP benefit—it would almost surely have increased BPA’s liability for a REP benefit, thereby making it more likely that §§ 7(b)(2) and (3)’s Rate Ceiling Test would trigger, and “when the 7(b)(2) rate test triggers, the IOUs receive lesser benefits.” 2000 REP Settlement Agreement ROD at 80. See Residential Purchase and Sale Agreements ROD at 21 (“Congress was well aware that section 7(b)(2) could result in the reduction or complete elimination of Residential Exchange benefits for utilities participating in the REP.”); id. at 19 (“Congress contemplated that section 7(b)(2) could completely eliminate exchange benefits for utilities with ASCs less than BPA’s PF Exchange rate.”). 23 For example, when BPA forecasted the ASCs of Pacific Power and Idaho Power, it calculated they would not be eligible for the traditional REP because their ASCs were less than BPA’s PF Exchange Program rate. But, when BPA took into account the potential revision to the 1984 methodology, BPA forecasted a 26 percent increase in Pacific Power’s and IPC’s ASCs, thereby qualifying them for the REP benefit. See 2000 REP Settlement Agreement ROD at 35-36. In other words, had Pacific Power and IPC applied for the traditional REP benefit, even taking into account anticipated changes in the energy market, they would not have qualified. Yet, BPA found that they were eligible for the REP settlement. 24 This is so because eligibility and benefits are based on evidence that an IOU’s ASC is greater than BPA’s PF Exchange Rate. As ASC increases, more IOUs will become eligible and IOUs who have already qualified for the REP benefit will get a higher payments: PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER 4877 assumption were enormous. BPA demonstrated this by recalculating the REP benefits under the 1981 methodology: If, as suggested by the IOUs, BPA were to revert to the 1981 ASC Methodology, REP benefits for the upcoming rate and contract periods would be dra- matically increased. Using a twenty-six percent escalation of ASCs to represent the 1981 ASC Methodology (the amount of average decrease in ASCs after adoption of the 1984 ASC Methodology) the average annual benefits for the five-year rate period would be approximately $323 million. Total REP benefits for the rate period would be $1.615 billion. Even assuming in-lieu transactions for fifty percent of the exchangeable loads, average annual benefits would be $161.5 million and total REP benefits for the five-year period would be $807.5 million. These figures still exceed the amounts of the proposed settlements. 2000 REP Settlement Agreement ROD at 50; see also id. at 36 (“If the methodology is revised and exchanging utilities are allowed to exchange greater costs, this would increase their ASCs and exchange benefits.”); id. (“When BPA moved from the 1981 ASC Methodology to the 1984 Methodology, the ASCs for exchanging utilities were reduced by an average of 26 percent. Assuming that moving back to the 1981 ASC Methodology were to increase ASCs by an average of 26 percent, the would substantially increase exchange benefits.”). REP benefits are determined by the difference between a utility’s ASC and the PF Exchange Program rate. Thus, if a utility’s ASC goes up, its REP benefits go up. If the PF Exchange Program rate goes down, the utility’s REP benefits also go up. While a utility might not be eligible for REP benefits because its ASC is lower than the PF Exchange Program rate, a reduction in the PF Exchange rate could make the utility eligible. 2000 REP Settlement Agreement ROD at 36. 4878 PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER [14] What is unusual about BPA’s assumption is that there was no existing legal challenge nor had BPA proposed changing its methodology.25 BPA had done nothing more than suggest that it would “begin regional discussions of whether the ASC Methodology should be revised.” 2000 REP Settlement Agreement ROD at 50. BPA’s decision to revert to its prior methodology is especially puzzling because its 1984 methodology was approved by FERC and this court some twenty years ago. The 1984 methodology has been in place continuously since then. See 16 U.S.C. § 839c(c)(7); Order No. 400, Final Rule, 49 Fed. Reg. 39,293 (1984); Order No. 400-A, 50 Fed. Reg. 4,970 (1985). We reviewed FERC’s decision in Pacificorp v. FERC, 795 F.2d 816 (9th Cir. 1986), and we denied the IOUs’ petitions for review.26 BPA has not identified any problem in the 1984 methodology that it fears may be exploited by those seeking to challenge it. Until BPA adopts new regulations, FERC or this court disapprove the existing regulations, or Congress changes the law, BPA is bound by its regulations. See, e.g., Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 110-111 (1995) (holding that HHS is 25 At the time, BPA was not considering changes to its ASC methodology. In fact, in its Power Subscription Strategy ROD, BPA expressly stated that the current methodology would be used for any Residential Exchange forecasts. Furthermore, BPA noted that the current Subscription Strategy did not include a proposal for a new ASC methodology; such changes, BPA noted, “require a separate public process involving consultation with regional parties. Such a process would occur separately from the Subscription process. The Subscription Strategy does not propose and will not direct any changes to the ASC Methodology at this time.” Power Subscription Strategy Administrator’s ROD at 27-28. 26 Specifically, we upheld “BPA’s ASC determinations in this case” but declined to “sanction any permanent implementation” of BPA’s decision to exclude certain costs. Pacificorp, 795 F.2d at 823. As we explained, the statute “neither commands nor proscribes these adjustments in ASC methodology.” Id. Accordingly, we did not approve BPA’s ASC methodology for all time as a construction of the Act, but as a “question of policy.” Id. at 821. We simply concluded that BPA retained discretion to exercise its expertise to determine what should or should not be included in the ASC, subject to FERC’s approval and our review. PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER 4879 bound by the rules it promulgates and cannot circumvent the amendment process by substantive changes recorded in an informal policy); Esch v. Yeutter, 876 F.2d 976, 991 (D.C. Cir. 1989) (“It is well settled that an agency is legally bound to respect its own regulations, and commits procedural error if it fails to abide them.”); Am. Fed’n of Gov. Employees, AFL-CIO v. Fed. Labor Relations Auth., 777 F.2d 751, 759 (D.C. Cir. 1985) (holding that an agency “seeking to repeal or modify a legislative rule promulgated by means of notice and comment rulemaking is obligated to undertake similar procedures to accomplish such modification or repeal . . . . [U]ntil it amends or repeals a valid legislative rule or regulation, an agency is bound by such a rule or regulation.”); Dyniewicz v. United States, 742 F.2d 484, 485 (9th Cir. 1984) (as amended) (holding that agencies are bound by both procedural and substantive rules they promulgate); Panhandle E. Pipeline Co. v. FERC, 613 F.2d 1120, 1135 (D.C. Cir. 1979) (holding that FERC is bound by its regulations and does not have authority to “play fast and loose with its own regulations.”). [15] In effect, then, BPA settled the REP program as if it had changed its regulations, which it had not. While spreading the benefits of cheap federal power as broadly as possible may have been one of BPA’s goals in the Power Subscription Strategy ROD, Congress did not confer on BPA the discretion to create new regulatory schemes in pursuit of that goal. Congress made clear that its primary purpose remained to protect BPA’s preference customers and that any steps BPA took to exchange power with non-preference customers could not result in an increase in the preference customers’ rates. The REP settlement does not reflect the current REP program, as defined by BPA’s own regulations. [16] Finally, consistent with its view that its authority to enter into the REP settlement rested on § 2(f) rather than § 5(c), BPA classified the costs of the REP as a “settlement cost.” This permitted BPA to assess the cost of the REP settlement as ordinary expenses to be incorporated into BPA’s gen- 4880 PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER eral power rates. The net effect is that BPA’s preference customers are paying for the REP settlement the same as BPA’s other customers. This is in plain violation of the Rates Adjustment Test, which guarantees preference customers rates as if “no purchases or sales . . . were made [under the REP program].” 16 U.S.C. § 839e(b)(2)(C). Section 7(b)(3) specifically provides that such REP costs “shall be recovered through supplemental rate charges for all other power sold by the Administrator to all customers.” 16 U.S.C. § 839e(b)(3) (emphasis added). BPA ignored its obligations under these pressures. V. CONCLUSION We conclude that BPA ignored the exchange program that Congress created in the NWPA and that BPA has implemented through its regulations. BPA proceeded from a flawed legal premise about its settlement authority, and its defense of the settlement as consistent with the NWPA appears to be post-hoc rationalization for BPA insisting on greater flexibility in designing a REP program than Congress was willing to give it. Congress ordained one system; BPA appears to prefer another. In saying this, we do not impugn BPA’s motives or its business judgment. BPA itself has written that as “a result of the implementation of the directives of the Northwest Power Act,” “different customer classes may receive greater or lesser benefits. . . . While it is unfortunate that some customer classes may receive greater benefits than other customer classes, BPA cannot unilaterally change the law.” 2000 REP Settlement Agreement ROD at 80. Yet, it appears to us that, in an effort to spread its relatively cheap power across the Pacific Northwest, BPA has done precisely that. We have recognized within this opinion that BPA has broad authority to settle claims under the NWPA. We repeat: flexibility inheres in compromises under that authority. Nevertheless, BPA’s settlement does not resemble the REP program created in §§ 5(c) and 7(b) that it purports to be settling. PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER 4881 Rather, BPA created a new residential exchange benefit system under § 2(f) that better suited BPA’s goals. BPA’s actions conflict with its governing statutes and regulations and are, accordingly, “not in accordance with law.” 5 U.S.C. § 706(2)(A). For the foregoing reasons, we conclude that the settlement agreements entered into between BPA and the IOUs are inconsistent with the NWPA, and we grant the petitions. All remaining motions are dismissed as moot. PETITIONS GRANTED.