Opinion ID: 810192
Heading Depth: 3
Heading Rank: 1

Heading: Categories of Customers BPA Serves

Text: BPA is a federal agency within the Department of Energy which “has marketing authority over nearly all the electric power generated by federal facilities in the Pacific Northwest.” Ass’n of Pub. Agency Customers, Inc. v. BPA (APAC), 126 F.3d 1158, 1163 (9th Cir. 1997). We have previously detailed the “complex statutory landscape” under which BPA operates at length. See Pac. Nw. Generating Coop. v. Dep’t of Energy (PNGC I), 580 F.3d 792, 799 (9th Cir. 2009). For present purposes, we focus on BPA’s statutory obligations to three different types of customers. First, “in disposing of electric energy generated” at BPA projects, BPA is required to “give preference and priority” to “public bodies3 and cooperatives” that purchase power from 2 We use the term “petitioners” to refer collectively to the Pacific Northwest Generating Cooperative (PNGC), Industrial Customers of Northwest Utilities (ICNU), Public Power Council (PPC), Northwest Requirements Utilities, and Canby Utility Board. We refer to Alcoa Inc. separately as “Alcoa” because petitioners’ and Alcoa’s claims are distinct from, and often opposed to, each other’s. 3 “Public bodies” include “[s]tates, public power districts, counties, and municipalities, including agencies of subdivisions of any thereof.” 16 U.S.C. § 832b. ALCOA, INC. v. BPA 12391 BPA for resale to their consumers. 16 U.S.C. § 832c(a). These entities are “preference” customers, and BPA is required to give priority to their applications for power when competing applications from nonpreference customers are received. See id. § 832c(b). Second, BPA is authorized to sell power to private, investor-owned utilities (IOUs), which, like the preference customers, buy power for resale to ultimate consumers. See id. § 832d(a); APAC, 126 F.3d at 1164. Third, BPA may sell to a limited group of “direct service industrial customers” (DSIs), which are large industrial companies with a high demand for electricity. 16 U.S.C. § 839c(d). Unlike BPA’s other customers, DSIs purchase power directly from BPA for their own consumption, not for resale. Id. § 839a(8); APAC, 126 F.3d at 1164. Alcoa, the power purchaser in the contract at issue here, is one of BPA’s DSI customers, and runs an aluminum smelting operation at its Intalco plant in Ferndale, Washington. B. BPA’s Rate Structure and “Sound Business Principles” BPA’s statutory framework also sets out the specific criteria by which BPA determines the rates it may charge for power to these different customers. Regardless of the type of customer, BPA must charge a rate that, at a minimum, recoups BPA’s own costs of generating or acquiring the electricity. See 16 U.S.C. § 839e(a)(1). BPA charges preference customers a cost-based rate, referred to as the priority firm or “PF rate,” that allows BPA to recover the costs of generating or obtaining the power required to meet the preference customers’ needs. Id. §§ 839c(a), 839e(b);4 see also PNGC I, 580 F.3d at 802. IOUs 4 16 U.S.C. § 839e(b)(1) provides that the PF rate “shall recover the costs of that portion of the Federal base system resources needed to supply 12392 ALCOA, INC. v. BPA can elect to sell power to BPA “at the average system cost of the utility’s resources,” id. § 839c(c)(1), and then buy power back from BPA at the PF rate. Id. §§ 839c(c); 839e(b). This subsidy “enables the [IOU] to sell power to its residential customers at the priority rate given to residential consumers receiving BPA federal power.” Central Elec. Coop., Inc. v. BPA, 835 F.2d 199, 201 (9th Cir. 1987) (quoting Pacificorp v. Fed. Energy Regulatory Comm’n, 795 F.2d 816, 818 (9th Cir. 1986)). DSI customers also pay a cost-based rate (the “IP rate”), which is prescribed by § 839e(c).5 PNGC I, 580 F.3d at 812 [preference customers’] loads until such sales exceed the Federal base system resources. Thereafter, such rate or rates shall recover the cost of additional electric power as needed to supply such loads . . . .” Federal base system resources are defined as: “(A) the Federal Columbia River Power System hydroelectric projects; (B) resources acquired by the [BPA] under long-term contracts in force on December 5, 1980; and (C) resources acquired by the [BPA] in an amount necessary to replace reductions in capability of the resources referred to in subparagraphs (A) and (B) of this paragraph.” 16 U.S.C. § 839a(10). 5 16 U.S.C. § 839e(c)(1) provides, in pertinent part: (c) Rates applicable to direct service industrial customers (1) The rate or rates applicable to direct service industrial customers shall be established . . . (B) for the period beginning July 1, 1985, at a level which the Administrator determines to be equitable in relation to the retail rates charged by the public body and cooperative customers to their industrial consumers in the region. (2) The determination under paragraph (1)(B) of this subsection shall be based upon the Administrator’s applicable wholesale rates to such public body and cooperative customers and the typical margins included by such public body and cooperative customers in their retail industrial rates but shall take into account— (A) the comparative size and character of the loads served, (B) the relative costs of electric capacity, energy, transmission, and related delivery facilities provided and other service provisions, and ALCOA, INC. v. BPA 12393 (“[W]hen entering into contracts for the sale of firm power to a DSI, [BPA] must initially offer the IP rate.”) The IP rate must be “equitable in relation to the retail rates charged” by BPA’s preference customers to their own industrial consumers in the region, 16 U.S.C. § 839e(c)(1)(B), and is always higher than the PF rate, Golden Nw. Alum., Inc. v. BPA, 501 F.3d 1037, 1046-47 (9th Cir. 2007). In addition to charging all customers at a rate that recoups BPA’s costs of generating or acquiring electricity, 16 U.S.C. § 839e(a)(1), BPA is also responsible for setting rates in accordance with “sound business principles.” Thus, § 838g prescribes general factors BPA must balance when setting rates for the sale and transmission of federal power: Such rate schedules . . . shall be fixed and estab- lished (1) with a view to encouraging the widest possible diversified use of electric power at the lowest possible rates to consumers consistent with sound business principles, (2) having regard to the recovery (upon the basis of the application of such rate schedules to the capacity of the electric facilities of the projects) of the cost of producing and transmitting such electric power . . . and (3) at levels to produce such additional revenues as may be required, in the aggregate with all other revenues of the Administrator, to pay [all expenses associated with] bonds issued and outstanding pursuant to this chapter, and amounts required to establish and maintain reserve and other funds and accounts established in connection therewith. (C) direct and indirect overhead costs. all as related to the delivery of power to industrial customers, except that the Administrator’s rates during such period shall in no event be less than the rates in effect for the contract year ending on June 30, 1985. 12394 ALCOA, INC. v. BPA Id. § 838g (emphasis added). Section 839e similarly sets guidelines for fixing “rates for the sale and disposition of electric energy and capacity and for the transmission of nonFederal power.” Id. § 839e(a)(1). Specifically, those rates: shall . . . recover, in accordance with sound business principles, the costs associated with the acquisition, conservation, and transmission of electric power, including the amortization of the Federal investment in the Federal Columbia River Power System . . . and the other costs and expenses incurred by the [BPA] pursuant to this chapter and other provisions of law. Id. § 839e(a)(1) (emphasis added). Finally, BPA is charged with “assur[ing] the timely implementation of [16 U.S.C. §§ 839-839h] in a sound and businesslike manner.” Id. § 839f(b) (emphasis added). C. Prior Alcoa Contracts Before entering into the Alcoa Contract, BPA and Alcoa entered into two prior power sales contracts. In response to a challenge to these prior contracts by many of the same petitioners involved in this case, we struck down key provisions of these contracts. See Pac. Nw. Generating Coop. v. BPA (PNGC II), 596 F.3d 1065 (9th Cir. 2010). Because the details of those contracts are described at length in those opinions, we describe only the relevant points here. In each agreement, BPA entered a power sale contract with Alcoa, but the terms of the contract did not require BPA to provide power to Alcoa. PNGC II, 596 F.3d at 1069-70. Instead, the contract provided that BPA would make a cash payment to Alcoa that was approximately equal to the difference between the regional market price of electricity and either the PF rate (under the contract at issue in PNGC I) or the IP rate (under the contract in PNGC II), both of which are significantly below the regional market price for electricity. Id. at 1070; ALCOA, INC. v. BPA 12395 PNGC I, 580 F.3d at 800. The payments at issue were not trivial: The first contract provided that BPA would pay Alcoa up to $295 million over 5 years, PNGC I, 580 F.3d at 798, and the second provided that BPA would pay Alcoa nearly $32 million over the course of 9 months, PNGC II, 596 F.3d at 1070. In PNGC I, we held that BPA’s decision to offer power to a DSI at the PF rate (rather than the IP rate), and then monetize those rates, was invalid because inconsistent with BPA’s statutory authority. 580 F.3d at 823. After BPA modified its contract with Alcoa to offer power at the IP rate, we held that BPA’s decision to “incur a $32 million expense that will increase the rates of its preference customers, provides no direct benefit to the agency, and subsidizes the operations of its competitors” violated its statutory obligation to set rates for power sales in a manner that is “consistent with sound business principles.” PNGC II, 596 F.3d at 1085-86. We held that this “sound business principles” standard was applicable, even though BPA’s contract required it to sell Alcoa power at the IP rate. Id. at 1072-73. As we explained, BPA had no obligation to sell Alcoa power at all, but if it entered into a contract with Alcoa, it would have to offer the IP rate. Id. at 1073. We noted that if the market rate were higher than the IP rate, BPA should consider whether sound business principles weighed against entering into such a contract. Id. Although striking down BPA’s prior contracts with Alcoa on the ground that they were inconsistent with BPA’s statutory requirements, we did not expressly establish any criteria that BPA would have to meet to ensure its contracts were consistent with sound business principles. BPA, however, interpreted PNGC II as holding that in order for BPA “to offer a sale of power to a DSI, BPA must conclude based on evidence in the record that the proposed transaction will result in benefits that equal or exceed the costs to BPA of the transaction.” BPA has dubbed its interpretation the “Equivalent Benefits standard” or the “Equivalent Benefits Test.” 12396 ALCOA, INC. v. BPA D. The Current Alcoa Contract BPA restructured its agreement with Alcoa in light of this Equivalent Benefits standard. On December 21, 2009, it entered into the Alcoa Contract, which defined four different time periods: (1) an “Initial Period,” (2) an “Extended Initial Period,” (3) a “Transition Period”; and (4) a “Second Period.” The Alcoa Contract defined the Initial Period as “the period December 22, 2009, through the earlier of (i) May 26, 2011; or (ii) the start of the Second Period.”6 During the Initial Period, BPA agreed to sell, and Alcoa to buy, up to 320 average megawatts (aMW) of electricity. As required by statute, all such power sales “will be made to Alcoa at the then applicable Industrial Firm power (IP) rate.” See also Administrator’s Record of Decision (“The sale [in the Alcoa Contract commencing December 22, 2009] is priced at the Industrial Firm power (‘IP’) rate, . . . which is the applicable rate for sales of non-surplus firm power to BPA’s direct service industrial (‘DSI’) customers.”). Although BPA complied with the statutory requirement to sell power to Alcoa at the IP rate, because BPA could have declined to sell power to Alcoa at all, BPA was also required to consider whether its power sale to Alcoa was consistent with “sound business principles.” PNGC II, 596 F.3d at 1073. BPA did so. As explained in its Record of Decision, BPA determined that its sale of power during the Initial Period was consistent with the Equivalent Benefits standard that it had derived from PNGC I and II. Using market forecasts, projected water-flow patterns, and other data, BPA concluded it could earn a profit on a sale of electricity to Alcoa from December 22, 2009 through May 26, 2011. It calculated this total net benefit to be approximately $10,000. 6 Because the Second Period had not begun by May 26, 2011, the Initial Period terminated as scheduled on that date. ALCOA, INC. v. BPA 12397 The Alcoa Contract also provided that at the end of the Initial Period, Alcoa could request a three- to twelve-month extension (the “Extended Initial Period”). BPA was required to agree to this extension if it determined that it would obtain Equivalent Benefits, as defined, from its sales to Alcoa during that period. As noted, the Alcoa Contract defined “Equivalent Benefits” as benefits accruing to BPA as a result of providing power to Alcoa that equal or exceed BPA’s costs of providing the power. At oral argument, the parties informed us that Alcoa and BPA had executed an agreement to enter into the Extended Initial Period for one year; that period expired on May 26, 2012. According to BPA, this separate action could have formed the basis for a separate petition for review and, therefore, the validity of the Extended Initial Period was not before us. After the Initial Period and any Extended Initial Period, the Alcoa Contract provided for a Transition Period and a Second Period. The one-year Transition Period would occur only if “the Ninth Circuit issues an opinion or other ruling holding, or that BPA determines can reasonably be interpreted to mean, that the Equivalent Benefits standard does not apply to sales under [the Alcoa Contract].” (emphasis added). Upon the occurrence of this contingency, BPA would have up to one year to determine whether: (i) service to Alcoa during the Second Period would be “consistent with any alternative standard established by any such opinions” and other applicable rulings; and (ii) the cost to serve Alcoa will not exceed specified cost caps. If these criteria were met, the Second Period would commence and last for five years. During the Second Period, BPA would sell, and Alcoa would buy, 320 aMW of electric power at the IP rate during each year the contract is in effect. After the Extended Initial Period passed, the parties entered into discussions regarding extending the contract beyond May 26, 2012. To accommodate these negotiations, the parties 12398 ALCOA, INC. v. BPA entered into three successive short term amendments, which extended the Initial Period from: (1) May 27, 2012 to June 30, 2012; (2) July 1, 2012 to July 31, 2012; and (3) August 1, 2012 to August 31, 2012. In addition, the May-June 2012 amendment provided that “all references in the Agreement to ‘Second Period’ are hereby removed and all contract clauses implementing the Second Period shall have no effect.” E. The Record of Decision for the Alcoa Contract BPA released a draft of the Alcoa Contract for public comment in October 2009, and issued the final version of the contract and Record of Decision (ROD) on December 21, 2009. In the ROD, BPA explained its determination that it did not have to prepare an Environmental Impact Statement (EIS) for the Alcoa Contract because it fell within a categorical exclusion from review under the National Environmental Policy Act (NEPA), 42 U.S.C. §§ 4321-4347. See 10 C.F.R. pt. 1021, subpart D, App. B4.1.7 The ROD stated that BPA would be able to “supply power to Alcoa’s Intalco Plant from existing generation sources, [which] would be expected to continue to operate within their normal operating limits.” The power “would be supplied to the Intalco Plant over existing transmission lines,” meaning that “no physical changes to this system would occur.” BPA therefore concluded that the above categorical exclusion applied and exempted the Alcoa Contract from NEPA’s requirements. 7 This regulation exempts the following actions from the EIS requirement: Establishment and implementation of contracts, marketing plans, policies, allocation plans, or acquisition of excess electric power that does not involve: (1) the integration of a new generation resource, (2) physical changes in the transmission system beyond the previously developed facility area, unless the changes are themselves categorically excluded, or (3) changes in the normal operating limits of generation resources. 10 C.F.R. pt. 1021, subpart D, App. B4.1. ALCOA, INC. v. BPA 12399 F. Effect of Amendment to PNGC II In March 2010, after the parties executed the Alcoa Contract, we added a clarifying amendment to PNGC II in response to BPA’s petition for review. The amended opinion distinguished “BPA’s voluntary decision to provide Alcoa with up to $32 million in cash payments” from “the decision to sell physical power to Alcoa” (at the IP rate) noting that the latter was different because “the sale of physical power to the DSIs is expressly authorized by statute, see § 839c(d)(1)(A),” and therefore “BPA’s conclusion that such a sale is in its business interests is more likely to be reasonable.” 596 F.3d at 1085. Further, we observed that “many of the justifications that BPA gave for its decision to execute the costly amended contract, though inapplicable to a ‘monetized’ sale, would apply to a physical power sale.” Id. Finally, we noted that “a physical power sale implicates a number of issues that fall within BPA’s particular expertise,” such as “BPA’s current and future generating capacity, its transmission capabilities, its relationship with suppliers, its current and projected commitments of physical power to other customers, its ability to acquire additional power if needed, and so forth.” Id. Accordingly, we stated that “the agency’s conclusion that a physical sale of power to Alcoa, even at loss, furthered its business interests might very well warrant our deference.” Id. In its briefs on appeal here, BPA argued that this amendment to PNGC II, which acknowledged that a physical sale of power at the IP rate, “even at a loss” (compared to selling the power at the market rate), might further BPA’s business interest, could “reasonably be interpreted to mean that the Equivalent Benefits Test does not apply to sales under the Alcoa Contract,” and therefore might meet the first contingency for the Second Period. But both at oral argument and in a subsequent letter brief, BPA clarified that no prior opinion of this court, including PNGC II as amended, had rejected the Equiv12400 ALCOA, INC. v. BPA alent Benefits Test and that the first requirement for triggering the Second Period had not been met.8 After BPA issued the ROD and executed the Alcoa Contract, many of BPA’s preference customers, as well as other entities and organizations in the Pacific Northwest, filed this petition for review, requesting that we hold that the contract is unlawful and invalid because it is inconsistent with the agency’s statutory mandate to act in accordance with sound business principles. They claim that BPA should not have entered into a contract with Alcoa at the IP rate when BPA could have instead sold that same power at a higher market rate. Because BPA must set its rates to cover all its system costs, petitioners argue, if BPA had maximized profits by selling power in the market, it could have charged its preference customers a lower rate. According to petitioners, this failure to maximize profits violates BPA’s duty to provide power “at the lowest possible rates to consumers consistent with sound business principles.” Alcoa also petitions for review, asking us to hold that BPA erred in adopting the Equivalent Benefits standard, because such a ruling is a condition precedent for commencement of a Second Period under the Alcoa Contract. Finally, PPC argues that BPA violated NEPA by failing to prepare an EIS. According to PPC, the Alcoa Contract did not fall within a categorical exclusion to NEPA, because the status quo is Alcoa’s inevitable closure of its smelter, and the Alcoa Contract changes the status quo by allowing the smelter to keep operating. All these arguments are wrong. 8 This clarification was crucial to BPA’s arguments at the time, because under the original contract, the Second Period had to begin “no later than 12 months after” issuance of the Ninth Circuit decision that, in BPA’s opinion, met the first contingency (i.e., a determination that the Equivalent Benefits standard does not apply to sales under the Alcoa Contract). If the amendment to PNGC II had triggered this 12 month period, the time period during which the Second Period had to begin would have lapsed on March 2, 2011. ALCOA, INC. v. BPA 12401