Opinion ID: 3048512
Heading Depth: 2
Heading Rank: 3

Heading: Recovering the Cost of Supplying Power to

Text: Direct-Service Industrial Users The Public Generating Pool and Pacific Northwest Generating Cooperative petitioners contend that BPA violated the Northwest Power Act by supplying low-cost power to its DSI customers at the expense of its preference customers. The NWPA, which was enacted in 1981, required BPA to enter “initial long term contract[s]” to sell power to its DSI customers. See 16 U.S.C. § 839c(d)(1)(B). The idea was to ensure that DSIs had continued access to low-cost federal power at a time when BPA’s obligation to serve its preference customers threatened to preclude BPA from supplying other customers. BPA was “deemed to have sufficient resources for the purpose of entering into the initial contracts.” Id. § 839c(g)(7). BPA was then authorized to acquire additional resources necessary “to meet [its] contractual obligations.” Id. § 839d(a)(2). BPA’s initial 20-year contracts its DSI customers expired on September 30, 2001. Anticipating the expiration of these contracts, BPA began in the late 1990s to develop a plan for allocating federal power among preference and non-preference customers. During this process, which culminated in the Subscription ROD, BPA concluded that it had authority under the NWPA to enter successor contracts with its DSI customers but that it was under no obligation to do so. See id. § 839c(d). Based on that understanding of the law, BPA agreed in principal to continue to supply power to its DSI customers. However, BPA decided to wait until the WP-02 rate proceeding to determine how much power it would sell to the DSIs and at what price. It set September 30, 2000, as the deadline for executing new DSI contracts. In the Initial ROD, BPA proposed to sell to the DSIs 1440 aMW of firm power. Of that amount, 990 aMW was to be priced, pursuant to 16 U.S.C. § 839e(c), at a “cost-based” rate representing the rate charged to BPA’s preference customers 4902 GOLDEN NORTHWEST ALUMINUM v. BPA plus a margin. The remaining 450 aMW was to be priced, pursuant to 16 U.S.C. § 839e(f), at the market rate, which was higher. The two prices were then combined to establish a single average rate for the DSI customers. BPA explained in the Initial ROD that it adopted this approach in order “to enhance DSI smelter survivability, but without raising other customers’ rates.” BPA also determined that its existing power generation capabilities would be inadequate to supply both its DSI and other customers. BPA estimated in the Initial ROD that it would need to acquire approximately 1562 aMW of additional power to meet the needs of these customers. It explained that it would classify most of this additional power as “Federal base system” (FBS) replacements. Under the NWPA, FBS resources include three components: (1) “the Federal Columbia River Power System hydroelectric projects”; (2) “resources acquired by the Administrator under long-term contracts in force on December 5, 1980”; and (3) “resources acquired by the Administrator in an amount necessary to replace reductions in capability of” the first two sources. Id. § 839a(10). BPA estimated that declines in the capability of its primary FBS resources allowed it to purchase up to 2669 aMW of replacement FBS resources—“far more than the amount of power” it actually planned to acquire. Shortly after issuing the Initial ROD, BPA recognized that, due to changing market conditions, it had significantly underestimated the amount of additional power it would need to purchase in the market. See Supplemental ROD (calculating that BPA would need to make “system augmentation purchases” of 3305 aMW). BPA briefly suspended execution of new power sale contracts in August 2000, but lifted that suspension and continued to sign contracts during the fall of 2000. BPA then initiated a supplemental rate proceeding in order to establish new cost recovery mechanisms. During that supplemental proceeding, petitioners argued that BPA no longer had sufficient FBS resources to serve its GOLDEN NORTHWEST ALUMINUM v. BPA 4903 DSI customers. According to petitioners, “Entering contracts to sell power to the DSIs when BPA has none to sell them is unlawful. . . . The only way the post-2001 contracts with the DSIs can be lawfully performed is to require the DSIs to pay the full costs of service.” In other words, petitioners asserted that BPA could not allocate to its preference customers any of the costs of purchasing power at market prices to serve the DSIs. BPA rejected petitioners’ arguments in the Supplemental ROD. It explained that the Northwest Power Act expressly grants BPA the authority to “purchase power to replace reductions in the capability of the FBS and [to] acquire power to meet its forecasted contractual obligations to all its customers.” Supplemental ROD. BPA further concluded that “the FBS is a single resource pool, not a segmented resource to be divided into separately priced portions that serve any particular customer class.” [3] To the extent petitioners here seek to challenge BPA’s authority to enter into successor contracts with DSIs, their claim is barred by res judicata. We previously held in an unpublished disposition that petitioners’ attempt to contest the validity of BPA’s power sales to its DSI customers was untimely. Blachly-Lane Elec. Coop. Ass’n v. U.S. Dep’t of Energy, 79 Fed. Appx. 975, 977 (9th Cir. 2003). Because “[p]ower sale contracts are final agency actions,” the 90-day statute of limitations begins to run from the date such contracts are executed. Id.; see also 16 U.S.C. § 839f(e)(1)(B) (providing that power sales are final agency actions subject to judicial review). The petitions in this case were filed some three years after BPA entered into its new DSI contracts— long after the prescribed statutory window for judicial review had expired. [4] In Blachly-Lane we also held, however, that petitioners would be entitled to raise “ratemaking issues” in subsequent litigation. Blachly-Lane, 79 Fed. Appx. at 977. Specifically, 4904 GOLDEN NORTHWEST ALUMINUM v. BPA we may consider in this litigation whether it was unlawful for BPA to charge its preference customers a rate that reflects the costs of acquiring additional power to serve DSIs. Our analysis takes the existence of BPA’s contractual obligations to its DSI customers as given; we express no independent view as to whether, or under what circumstances, section 5(d) of the NWPA, 16 U.S.C. § 839c(d), permits BPA to contract with its DSI customers once their initial contracts have expired. Our review of BPA’s actions is governed by the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701-06. See 16 U.S.C. § 839f(e)(2). “Under the APA, we must uphold BPA’s actions unless they are ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ ” Pub. Power Council, 442 F.3d at 1209 (quoting 5 U.S.C. § 706(2)(A)). In determining whether BPA has acted in accordance with law, we defer to BPA’s reasonable interpretations of its governing statutes. See, e.g., Nw. Envtl. Def. Ctr. v. BPA, 117 F.3d 1520, 1530 (9th Cir. 1997). Deference is especially appropriate “when the agency is responding to unprecedented changes in the market resulting from deregulation.” Ass’n of Pub. Energy Customers, 126 F.3d at 1171. However, “[r]egardless of how serious the problem an administrative agency seeks to address, . . . it may not exercise its authority ‘in a manner that is inconsistent with the administrative structure that Congress enacted into law.’ ” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 125 (2000) (quoting ETSI Pipeline Project v. Missouri, 484 U.S. 495, 517 (1988)). “ ‘If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.’ ” M-S R Public Power Agency, 297 F.3d at 841 (quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984)). [5] Our task is to decide whether applicable law clearly precludes BPA from allocating to its preference customers certain costs of supplying power to its DSI customers. Under GOLDEN NORTHWEST ALUMINUM v. BPA 4905 section 7(b)(1) of the NWPA, rates “for electric power sold to meet the general requirements of [preference customers] . . . shall recover the costs of that portion of the Federal base system resources needed to supply such loads until such sales exceed the Federal base system resources.” 16 U.S.C. § 839e(b)(1). Petitioners construe FBS resources as referring only to BPA’s “unaugmented” power generation capabilities. According to petitioners, as long as preference customer loads do not exceed BPA’s unaugmented FBS resources, section 7(b)(1) requires BPA to charge its preference customers rates that recover no more than the cost of those resources. BPA, joined by intervenor Alcoa, counters that it is entitled to charge preference customers a rate that reflects the total cost of all FBS resources, including resources acquired to replace losses in the generation capabilities of BPA’s primary resources. [6] We conclude that BPA’s approach does not contravene the Northwest Power Act and related provisions. Contrary to petitioners’ claim, FBS resources are not limited to “unaugmented” FBS resources. Rather, the statutory definition of FBS resources expressly includes “resources acquired by [BPA] in an amount necessary to replace reductions in capability of [BPA’s primary resources].” Id. § 839a(10). Section 6 of the NWPA confirms BPA’s authority to acquire “sufficient power . . . to meet [its] contractual obligations.” Id. § 839d(a)(2); see also Alcoa, 467 U.S. at 384 (noting that “[o]nce a contract between BPA and a customer is signed, . . . the Project Act makes clear that the contract is ‘binding in accordance with the terms thereof’ ” (quoting 16 U.S.C. § 832d(a))). BPA took this language to mean that, once it had satisfied the needs of its preference customers, it could use any remaining FBS resources—including FBS replacement resources—to supply its DSI customers. [7] Once FBS replacement resources were acquired, nothing in section 7(b)(1) precluded BPA from considering the costs of those replacement resources when calculating its 4906 GOLDEN NORTHWEST ALUMINUM v. BPA preference rate, even though BPA would not have incurred such costs absent its DSI contracts. If FBS resources include both primary and replacement resources, and if BPA must recover “the costs of that portion” of FBS resources needed supply preference customer loads, then it follows that BPA may impose rates based on the average cost of FBS resources as a whole. This result is consistent with Central Lincoln Peoples’ Utility District v. Johnson, 735 F.2d 1101 (9th Cir. 1984), which rejected the premise that preference customers were entitled “to purchase not just available power, but the cheapest available power.” Id. at 1125. BPA’s approach is not contrary to the general statutory preference provisions on which petitioners rely. Section 4 of the Bonneville Project Act, for example, requires that BPA “shall at all times, in disposing of energy at said project, give preference and priority to public bodies and cooperatives.” 16 U.S.C. § 832c(a). Similarly, section 5(a) of the NWPA provides that “[a]ll power sales under this chapter shall be subject at all times to the preference and priority provisions of the Bonneville Project Act.” Id. § 839c(a); see also id. § 839g(c). We have explained that these provisions “protect[ ] the preference customers’ access to power supply”; they do not speak directly to price. See Cent. Lincoln, 735 F.2d at 1125; see also Alcoa, 467 U.S. at 393 (noting that “the preference system merely determines the priority of different customers when the Administrator receives ‘conflicting or competing’ applications for power”). There is no allegation here that BPA failed to provide the power necessary “to meet the firm power load” of its preference customers. 16 U.S.C. § 839c(b)(1). BPA is, of course, required to honor its preference customers’ “right to purchase power at a reasonable price.” Cent. Lincoln, 735 F.2d at 1125. Petitioners cite to legislative history for the proposition that the NWPA “protects preference as to both supply and price” and that preference rates “will be no higher than they would have been” absent sales to nonpreference customers. H.R. Rep. No. 96-976, pt. 1, at 34, 68 GOLDEN NORTHWEST ALUMINUM v. BPA 4907 (1980). We agree that section 7(b) provides price benefits to preference customers in the form of a “rate ceiling.” Id. at 34. We also agree that the legislative history contains some indications that Congress did not intend for preference customers to bear the costs of acquiring FBS replacement resources. See, e.g., id. (explaining that “preference customers’ cost of power from BPA will not exceed the costs they would have paid for power if . . . [they] were served from available Federal base system resources” (emphasis added)); H.R. Rep. No. 96-976, pt. 2, at 36 (1980) (stating that “[t]he lowest rates will be reserved for the normal loads . . . of preference utilities”). [8] BPA’s rate determination, however, accords with the notion that preference customers enjoy price benefits. After all, the preference rate will always be lower than even the lowest possible DSI rate, which consists of the preference rate plus “the typical margins included by [preference customers] in their retail industrial rates.” 16 U.S.C. § 839e(c)(2). Moreover, if FBS resources, including replacement resources, are not sufficient to satisfy BPA’s contractual obligations to its non preference customers, BPA may not allocate to its preference customers the costs of acquiring non-FBS power. BPA may, however, allocate the cost of FBS resources, including replacement resources, to both its preference and nonpreference customers. We therefore hold that BPA’s decision to set a preference rate that reflects the cost of FBS replacement resources was based on a permissible construction of the NWPA.2 2 We also grant BPA’s motion to strike petitioners’ argument regarding BPA’s failure to adopt a rate surcharge under section 7(b)(3) of the NWPA, 16 U.S.C. § 839e(b)(3). Petitioners did not preserve this issue for appeal in their Partial Stipulation and Settlement Agreement, and we therefore do not consider it here. 4908 GOLDEN NORTHWEST ALUMINUM v. BPA