Court Opinion

ID: 3048937
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:25:13.967412+00
Date Added: 2024-06-11T12:47:55.750560
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

CALIFORNIA DEPARTMENT OF WATER      
RESOURCES,
                                          No. 04-76131
                      Petitioner,
               v.                         FERC No.
                                           ER99-2326
FEDERAL ENERGY REGULATORY
                                            OPINION
COMMISSION,
                     Respondent.
                                    
        On Petition for Review of an Order of the
         Federal Energy Regulatory Commission

                  Argued and Submitted
        January 8, 2007—San Francisco, California

                    Filed June 7, 2007

     Before: Procter Hug, Jr., A. Wallace Tashima, and
            William A. Fletcher, Circuit Judges.

                Opinion by Judge Tashima

                           6901
               CAL DEP’T OF WATER v. FERC            6903

                       COUNSEL

Deborah L. Barnes, Deputy Attorney General, Sacramento,
California, for the petitioner.

Carol J. Banta, Office of General Counsel, Federal Energy
Regulatory Commission, Washington, DC, for the respondent.
6904                CAL DEP’T OF WATER v. FERC
Mark D. Patrizio, San Francisco, California, for respondent-
intervenor Pacific Gas and Electric Company.

Jennifer L. Key, Steptoe & Johnson, Washington, DC, for
respondent-intervenor Southern California Edison Company.

Michael E. Ward, Alston & Bird, Washington, DC, and
Charles F. Robinson, Folsom, California, for respondent-
intervenor California Independent System Operator Corpora-
tion.

                              OPINION

TASHIMA, Circuit Judge:

   The California Department of Water Resources (“DWR”)
petitions for review of a Federal Energy Regulatory Commis-
sion (“FERC”) order permitting intervenor Pacific Gas and
Electric Company (“PG&E”) to include in its tariff for use of
PG&E power transmission lines charges for $132 million
worth of various facilities previously classified as generation
tie lines and generation step-up transformers (“GSUs”).1
PG&E, a utility which owns the high-voltage electricity trans-
mission lines in California, is required to allow anyone to
transmit power over these lines. PG&E may recover costs
associated with transmission by charging users a tariff, sub-
ject to FERC approval. FERC determined that, because all of
the facilities at issue perform some transmission function,
  1
    DWR is the state agency responsible for the control and management
of much of California’s water supply. DWR is considered a third-party
generator, as it produces electricity at hydroelectric and coal plants and
then transfers this electricity to its pumping stations using transmission
service purchased from PG&E and other providers. DWR also sells
energy. In 2003, it sold 1.00 million MWh of energy to utilities and power
marketers on energy wholesale markets, transmitted through PG&E facili-
ties. According to DWR, it uses its own generation step-up transformers
and generation tie lines, all of which it pays for itself.
                  CAL DEP’T OF WATER v. FERC                 6905
PG&E could include their cost in its tariff and roll in the facil-
ities’ costs equally to all transmission users. We have jurisdic-
tion pursuant to 16 U.S.C. § 825l(b) over this petition for
review of an order issued by FERC. We deny DWR’s petition
for review because its various claims of error are unfounded.
FERC’s decision to categorize the facilities as “transmission”
based on an exclusive use test and to roll in their costs does
not conflict with FERC precedent and is a reasonable
approach to allocate the cost of facilities whose operation
benefits all grid users. We also hold that FERC’s decision was
supported by substantial evidence and that DWR was not
deprived of any due process rights by the allowance of a par-
ticular witness’s testimony.

I.    BACKGROUND

     A.   Statutory and Regulatory Background

   The Federal Power Act (“FPA”), Pub. L. No. 66-280, 41
Stat. 1063 (codified as amended in scattered sections of 16
U.S.C.), provides that a utility may not charge rates that
“make or grant any undue preference or advantage to any per-
son or subject any person to any undue prejudice or disadvan-
tage.” 16 U.S.C. § 824d(b). Similarly, under § 205(a) of the
FPA, a utility may charge only rates that are “just and reason-
able.” Pub. L. No. 74-333, 49 Stat. 803, 851 (codified as
amended in 16 U.S.C. § 824d(a)). Utilities must submit their
rate schedules to FERC for review and approval. 16 U.S.C.
§ 824d(c)-(e).

   Historically, electric utilities operated as vertically inte-
grated monopolies. New York v. FERC, 535 U.S. 1, 5 (2002).
One utility offered a “bundled” service, whereby customers
paid a single price for generation, transmission, and distribu-
tion of electricity. Id. “Competition among utilities was not
prevalent.” Id. Although the number of power suppliers has
increased dramatically since the advent of federal regulation
in the 1930s, until recently, public utilities continued to retain
6906               CAL DEP’T OF WATER v. FERC
control of the transmission lines that must be used for electric-
ity delivery. Id. at 7-12.

   After determining that utilities were discriminatorily deny-
ing competitor power suppliers access to utilities’ electricity
transmission lines, FERC, in 1996, issued Order No. 888.
Order No. 888, Promoting Wholesale Competition Through
Open Access Non-Discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utili-
ties and Transmitting Utilities, F.E.R.C. Stats. & Regs.
¶ 31,036, 61 Fed. Reg. 21,540, 21,541 (May 10, 1996) (codi-
fied as revised at 18 C.F.R. pts. 35, 385).2 The Order required
public utilities that own, control, or operate transmission facil-
ities to file open access tariffs under which they agree to pro-
vide non-discriminatory access to their transmission networks
in addition to the point-to-point service the utilities had been
offering. Id.; see also New York, 535 U.S. at 11-12. The Order
also required utilities to “functionally unbundle” their rates by
separately stating rates for generation, transmission, and
ancillary services. Order No. 888, 61 Fed. Reg. at 21,552; see
also New York, 535 U.S. at 11.

  B.    Procedural History

   On November 26, 1996, FERC authorized the formation of
the California Independent System Operator Corporation
(“California ISO” or “ISO”) to operationalize Order No. 888
in the state. See Pac. Gas & Elec. Co., 77 F.E.R.C. ¶ 61,204
(1996) (as amended). The order also conditionally granted
  2
   For the revisions and clarifications of Order No. 888, see New England
Power Co., 76 F.E.R.C. ¶ 61,009 (1996) (Order No. 888), 76 F.E.R.C.
¶ 61,347 (1996), and 79 F.E.R.C. ¶ 61,182 (1997), on reh’g, F.E.R.C.
Stats. & Regs. ¶ 31,048, 62 Fed. Reg. 12,274 (Mar. 14, 1997), (Order No.
888-A) on reh’g, 81 F.E.R.C. ¶ 61,248, 62 Fed. Reg. 64,688 (Nov. 15,
1997) (Order No. 888-B), on reh’g, 82 F.E.R.C. ¶ 61,046 (1998) (Order
No. 888-C), aff’d in relevant part, Transmission Access Policy Study
Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom. New York
v. FERC, 535 U.S. 1 (2002).
                    CAL DEP’T OF WATER v. FERC                        6907
joint applications by PG&E, San Diego Gas & Electric Com-
pany, and Southern California Edison Company (collectively
the “Companies”) to categorize certain assets as “transmis-
sion,” and to convey operational control of any “transmis-
sion” facilities to the ISO.3 Id. at 61,795-96, 61,822; see Pac.
Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122, 61,435 (1997) (condi-
tionally authorizing transfer of certain of the Companies’
transmission facilities to the ISO), aff’d, 82 F.E.R.C. ¶ 61,223
(1998).

   The 1996 order further required PG&E and the other com-
panies to submit tariffs, known as “Transmission Owner Tar-
iffs” or “Transmission Revenue Requirements,” designed to
recoup the revenue that they, as the owners of the facilities,
turned over to ISO control. 77 F.E.R.C. ¶ 61,204, at 61,798-
800, 61,826-27.

   In March 1999, PG&E filed a Transmission Owner Tariff,
which purported to establish charges for transmission service
provided under the California ISO open access tariff. Pac.
Gas & Elec. Co., 87 F.E.R.C. ¶ 61,218, 61,859 (1999). In
May 1999, FERC accepted the proposed tariffs for filing. Id.
at 61,861. It suspended and set for a hearing proposed revi-
sions to the rates, terms, and conditions for transmission ser-
vice under PG&E’s tariff. Id. The purpose of the hearing was
to determine whether the proposed rates were unjust and
unreasonable. See id. FERC initiated an investigation under
   3
     As originally conceived, the ISO was formed as a non-profit corpora-
tion that would operate, but would not own, the transmission grid. 77
F.E.R.C. ¶ 61,204, at 61,795-98. As an organization independent of the
utilities, the ISO schedules power delivery, controls and manages the
grid’s operation, and collects a transmission access charge from those who
withdraw power from the grid, remitting the revenue to the transmission
line owners (such as PG&E). Id. at 61,798-99. Since the time of the 1996
order, changes not relevant to this proceeding have been made to the
ISO’s responsibilities in light of California’s 2001 energy crisis. See gen-
erally Pub. Utils. Comm’n v. FERC, 462 F.3d 1027, 1041-43 (9th Cir.
2006) (as amended).
6908                CAL DEP’T OF WATER v. FERC
§ 206 of the Federal Power Act, Pub. L. No. 74-333, 49 Stat.
803, 852 (codified as amended at 16 U.S.C. § 824e), and
established a refund effective date. Id. at 61,859. The parties
subsequently filed partial settlements, approved by FERC,
resolving all but two issues related to the filing. Pac. Gas &
Elec. Co., 90 F.E.R.C. ¶ 61,093, 61,303 (2000); Pac. Gas &
Elec. Co., 91 F.E.R.C. ¶ 61,090, 61,318 (2000).4

   After the hearing, the presiding judge issued an initial deci-
sion which rejected in large part PG&E’s request to include
the facilities in its Transmission Revenue Requirement. Pac.
Gas & Elec. Co., 97 F.E.R.C. ¶ 63,014, 63,061-62 (2001).
The judge excluded from the Transmission Revenue Require-
ment all facilities that performed both network transmission
and generation tie functions. He found that $26 million worth
of facilities were dedicated entirely to network transmission,
and could be recovered by PG&E. Id. at 63,062.

   In Opinion No. 466, FERC reversed the initial decision.
Pac. Gas & Elec. Co., 104 F.E.R.C. ¶ 61,226 (2003). FERC
held that the proper test to determine which facilities were to
be included in PG&E’s Transmission Revenue Requirement
was whether the facilities had been transferred to the control
of the ISO. Id. at 61,790. If they had, then the facilities would
be included in the rate base; otherwise they would be excluded.5
Id.

   In Opinion No. 466-A, FERC granted rehearing. Pac. Gas
& Elec. Co., 106 F.E.R.C. ¶ 61,144, 61,479 (2004). It found
that ISO control, although necessary, was not the only consid-
  4
     PG&E subsequently made another filing, which was also settled. As a
result, the rates at issue in this proceeding were effective for only ten
months, from the disputed tariff’s effective date (May 31, 1999) until the
effective date of PG&E’s later-filed tariff (April 1, 2000).
   5
     At the time, it was claimed that PG&E had failed to turn over properly
to ISO control the loop or transformer facilities at issue. However, the par-
ties represented at oral argument before this court that PG&E has since
submitted the proper filings to turn over control of the facilities.
                         CAL DEP’T OF WATER v. FERC                    6909
eration in determining whether the facilities could be included
in the Transmission Revenue Requirement. Id. at 61,480-82 &
61,482 n.44. Opinion No. 466-A nevertheless affirmed that
the facilities should be included, because all of the facilities
performed a transmission function and because FERC policy
favored rolling in the costs of transmission facilities. Id. at
61,480-82.

  FERC denied rehearing in Opinion No. 466-B, Pac. Gas &
Elec. Co., 108 F.E.R.C. ¶ 61,297, 62,508 (2004), and DWR
petitioned this court for review.

  C.        Facilities

   The facilities at issue were separated by the presiding judge
into three groups. The characterization of the facilities was
largely based on the testimony of PG&E witness Robert Jen-
kins.

       1.    Loop Facilities.

   Three 500 kV transmission lines comprise the Diablo Can-
yon Loop.6 The lines connect the Diablo Canyon Nuclear
Power Plant to the grid and also provide parallel transmission
paths between two substations (Gates and Midway). Power
flows from the Diablo Canyon Nuclear Power Plant onto the
grid through the Diablo Loop. In addition, the Diablo Canyon
Loop forms part of the 500kV system which runs through
California on a separate corridor (a parallel path) to Path 15.7
  6
     A looped circuit provides two sources of power to a load or a substa-
tion, so that if one is deenergized, the remaining source continues to pro-
vide power.
   7
     Path 15, a network of high voltage transmission lines, has been
described as follows:
      Path 15 is the principal means of transmitting electricity between
      [Northern and Southern California] and into the Pacific North-
      west. Energy produced in Southern California comes mainly
6910               CAL DEP’T OF WATER v. FERC
According to Jenkins, if the parallel path were not there,
transfers along Path 15 would have to be reduced by as much
as 25 percent.

   The Morro Bay Loop consists of six 230 kV lines that run
through the Los Padres area of the PG&E electric transmis-
sion system. The Loop connects the Morro Bay Power Plant
to the grid. The Loop also provides parallel paths to the Dia-
blo Canyon Loop and to Path 15. Finally, according to Jen-
kins, the Loop serves to deliver “load,” the electrical power
required at a specific point, to the local area. During periods
of high local generation, excess power is delivered via the
Loop into the rest of the system. During periods of low or no
generation, the Loop imports power into the area to serve the
local load.

   The Moss Landing Loop consists of 500 kV transmission
lines, connecting the Moss Landing Power Plant and a Moss
Landing transformer to the grid. The Loop connects to the
Metcalf substation, and is one of two 500 kV transmission
lines feeding that substation. The Metcalf substation serves
load to the local area. According to Jenkins, if not for the sup-
port of the Moss Landing Loop, the load in the Central Coast
area would need to be curtailed and large portions of southern
Silicon Valley would experience an endangered power sup-
ply, as the subsequent loss of the other 500 kV transmission

    from natural gas-fired generators; in Northern California and the
    Pacific Northwest, hydroelectric generation predominates. In the
    winter, energy typically flows from south to north. Summer flows
    are in the opposite direction. The movement of power along Path
    15 is often constrained because of its lack of capacity to handle
    the transmission of power in the summer and winter months.
Pub. Utils. Comm’n v. FERC, 367 F.3d 925, 927 (D.C. Cir. 2004). In
Opinion No. 466-A, FERC took notice of the fact that the Morro Bay and
Moss Landing Loops formed a parallel path to Path 15. 106 F.E.R.C.
¶ 61,144, at 61,481.
                 CAL DEP’T OF WATER v. FERC                 6911
line that feeds the Metcalf substation would result in the inter-
ruption of “hundreds to thousands” of megawatts of load.

    2.    Dual Function Facilities.

   Several transformer banks, collectively worth approxi-
mately $17 million, were classified as “dual function” by
PG&E. These transformers are located at PG&E plants. The
transformers “step up” the voltage of power generated at the
plant to make it compatible with the grid’s voltage. The trans-
formers are considered dual function because they also serve
the grid, transforming power that passes through between var-
ious transmission-level voltages.

    3.    Network-Only Facilities.

   Finally, $26 million worth of facilities were classified as
transmission-only or network-only. These facilities consist of
transformer banks and lines connecting network stations. The
transformer banks are located at generating stations that have
been decommissioned. The transformers operate only as inter-
change banks, transforming power passing through between
various transmission-level voltages. Two 230 kV lines were
previously connected to generators but have been reconfig-
ured so that they now connect network stations.

  D.     Methods of Pricing Transmission Services

   The two types of pricing structures at issue in this case are
rolled-in pricing and subfunctionalized pricing. “When a util-
ity uses the rolled-in allocation method for transmission costs,
all customers share proportionately in the ownership, opera-
tion, and maintenance costs of all transmission facilities.”
Sierra Pac. Power Co. v. FERC, 793 F.2d 1086, 1088 (9th
Cir. 1986). Rolled-in pricing of transmission facilities is the
method traditionally used in the industry. See Pac. Gas &
Elec. Co., 53 F.E.R.C. ¶ 61,146, at 61,521 (1990) (Opinion
No. 356).
6912             CAL DEP’T OF WATER v. FERC
   In 1978, PG&E developed a “subfunctional” pricing
method for its wholesale transmission rates. Id. at 16,520.
Subfunctional allocation was implemented in response to the
complaint of a transmission-only customer that it should not
have to pay PG&E’s “fully allocated” transmission rates
because those rates included the cost of PG&E’s generation
tie lines, which the customer did not use. According to the
PG&E employee who developed the rate methodology,
PG&E “develop[ed] the subfunctionalized transmission rate
method in order to more accurately track the costs of custom-
ers.”

   PG&E studied its transmission facilities and assigned each
facility a subcategory based on the facility’s function within
the transmission category. “Transmission” referred to line and
substation facilities with nominal operating voltages of at
least 50 kV. The five subcategories or “subfunctions” are: (1)
backbone; (2) generation tie; (3) system interconnection; (4)
exclusive use; and (5) area transmission. See id. at 61,520-21
(describing the subfunctions). Customers were charged “post-
age stamp” rates for each subfunction utilized, meaning the
rate was set without regard to the distance the power traveled.
See id. at 61,521 (giving examples of transmission rates bro-
ken out by subfunction).

   Generation ties were defined as transmission facilities with
the primary purpose of providing electrical paths between
generating facilities and the integrated transmission network.
Id. at 61,520 n.65. Under the subfunctionalized method, the
loops and transformers in this case were classified as genera-
tion tie.

II.    ANALYSIS

  A.    Standards of Review

  We must uphold FERC orders unless they are “arbitrary,
capricious, an abuse of discretion, unsupported by substantial
                 CAL DEP’T OF WATER v. FERC                6913
evidence, or not in accordance with the law.” Cal. Dep’t of
Water Res. v. FERC, 341 F.3d 906, 910 (9th Cir. 2003); see
5 U.S.C. § 706(2)(A). If the record “reflects that the decision
was based on a consideration of relevant factors, and there
was no clear error of judgment,” FERC’s decision is not arbi-
trary and capricious. Cal. Dep’t of Water Res., 341 F.3d at
910 (internal quotation marks and citation omitted). FERC
must provide a coherent and adequate explanation of its deci-
sions. See E. Tex. Elec. Coop., Inc. v. FERC, 331 F.3d 131,
136 (D.C. Cir. 2003).

   Deference is owed to FERC’s interpretation of its own reg-
ulations, unless plainly erroneous. See Friends of the Cowlitz
v. FERC, 253 F.3d 1161, 1166 (9th Cir. 2001), amended by
282 F.3d 609 (9th Cir. 2002). Deference is also owed to
FERC’s interpretation of the FPA, the law it is charged with
administering. See Cal. Trout, Inc. v. FERC, 313 F.3d 1131,
1133-34 (9th Cir. 2002) (noting Chevron deference). Simi-
larly, it is appropriate to give deference to FERC’s interpreta-
tions of its own orders. See Mid-Continent Area Power Pool
v. FERC, 305 F.3d 780, 783 (8th Cir. 2002) (citing Minn.
Power & Light Co. v. FERC, 852 F.2d 1070, 1072 (8th Cir.
1988)).

   When an agency has adopted a general policy, “an irratio-
nal departure from that policy (as opposed to an avowed alter-
ation of it) could constitute action that must be overturned as
‘arbitrary, capricious, [or] an abuse of discretion.’ ” INS v.
Yueh-Shaio Yang, 519 U.S. 26, 32 (1996) (citing 5 U.S.C.
§ 706(2)(A)) (alteration in the original). Finally, FERC’s fac-
tual findings are conclusive if the findings are supported by
substantial evidence. See 16 U.S.C. § 825l(b).

  B.   Adoption of Rolled-In Pricing Was Proper

  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 “transmis-
sion” and rolled in their costs after considering the facilities’
functions and the methodology utilized in previous adjudica-
tions involving transmission tariffs.

    1.   FERC Permissibly Classified the Facilities as
         “Transmission” Because They Performed Some
         Transmission Function.

   FERC classified all of the facilities at issue as “transmis-
sion” despite the fact that the bulk of the facilities serve gen-
eration 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 presid-
ing judge called this benchmark the “exclusive use” test
because it classified facilities as “generation” for costing pur-
poses (i.e., excluded from rolled-in pricing) only if the facili-
ties 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 con-
flated 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 ser-
vice 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 “transmis-
sion.”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 benefit-
ting 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 approxi-
mately 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 (sup-
porting PG&E generation) and transform power that passes
through the banks between various levels of voltage (a trans-
mission 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 decom-
missioned.

   [3] The facilities were all shown to perform some transmis-
sion 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 utili-
ties across rate proceedings, and was not arbitrary or capri-
cious.

     2.   FERC Policy Consistently Favors Rolled-In
          Transmission Pricing.

   [4] FERC precedent clearly demonstrates a consistent pol-
icy 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 Utili-
ties 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 func-
tion at all and were appropriately separated from transmission pricing.
Despite DWR’s reliance on this case, we do not find any substantial sup-
port 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 high-
voltage 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 produc-
tion (power generation) function than in a transmission func-
tion. 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 includ-
able 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 “Commis-
sion 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 method-
    ology 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 inte-
       grated system.

12 F.E.R.C. ¶ 61,169, at 61,420 (internal citations omitted).
Because Otter Tail’s system was integrated, a rolled-in alloca-
tion method was appropriate. Id.

   [5] Under Otter Tail’s rationale, it is irrelevant whether the
loops and transformer banks directly serve the power require-
ments 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.

       3.   FERC Has Not Changed Its Policy Toward the
            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 Stan-
dard 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 trans-
mission 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 trans-
mission services, with the goal of remedying undue discrimi-
nation 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 Transmis-
sion 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 Organiza-
tions, [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 orga-
nizations, which are not at issue in this case.
   15
      Remedying Undue Discrimination Through Open Access Transmis-
sion Service and Standard Electricity Market Design, [1998-2002 Pro-
posed 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 Proce-
dures, 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 trans-
mission 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

       4.   FERC Has Sanctioned No Special Pricing Policy
            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 exam-
ple, 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 flexi-
ble approach to assigning the costs of constructing interconnection facili-
ties 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 con-
trast, the facilities in this case were not newly-constructed and such incen-
tives 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 estab-
lishing 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 high-
lights, 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) (Opin-
ion 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 meth-
odology 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 *7 (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 *1 (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 sched-
ule. 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 “grandfa-
thering” 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 subfunctional-
ized method, it has not expressed the sort of favorable opin-
ions 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 play-
ing 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 Coun-
try Res. v. FERC, 255 F.3d 741, 744-47 (9th Cir. 2001).
                  CAL DEP’T OF WATER v. FERC                  6923
  C.   Due Process and Substantial Evidence

   DWR argues that the testimony of PG&E witness Robert
Jenkins, upon which FERC relied heavily, violated DWR’s
right to due process and that the order is not supported by sub-
stantial evidence. Jenkins was properly heard as a rebuttal
witness. Moreover, Jenkins’ written testimony was available
one month before he testified. DWR therefore had notice of
his testimony and was free to object to it or seek to present
additional responsive testimony. DWR did neither. Thus,
DWR’s objections to this testimony are meritless. Cf. Pub.
Serv. Comm’n v. FERC, 397 F.3d 1004, 1011-12 (D.C. Cir.
2005) (concluding that the Commission violated petitioners’
due process rights when it adopted a rate premium sua sponte
and without evidence in the record). DWR’s remaining objec-
tions are equally without merit. They merely reiterate DWR’s
own dissatisfaction with FERC’s determination rather than
identify any objective shortcomings in the evidence or the
procedures followed. Accordingly, we find no error on either
count.

III.   CONCLUSION

   FERC did not act arbitrarily or capriciously in allowing
PG&E to roll in the costs of the three sets of facilities at issue.
The facilities each serve a network transmission function.
FERC employed a test whereby any showing of a network
transmission function suffices to bring the facility into the
transmission tariff. Only facilities that perform exclusively
generation-related functions are generation-related for pur-
poses of the tariff. DWR cites no precedent which bars FERC
from applying the “exclusive use” test adopted here. More-
over, the test is in line with FERC precedent and thus pro-
vides consistent treatment of transmission pricing.

   DWR’s objections to the rolled-in cost allocation method
associated with the tariff are also unfounded. FERC has con-
sistently required rolled-in pricing for the facilities compris-
6924            CAL DEP’T OF WATER v. FERC
ing the integrated transmission grid, based on the rationale
that transmission customers all benefit from the operation of
the integrated grid. FERC has not moved away from favoring
rolled-in pricing for high-voltage transmission facilities and
has never endorsed PG&E’s previous subfunctionalized
method. Finally, DWR’s due process and substantial evidence
objections are unsupported by the record.

  Accordingly, DWR’s petition for review is DENIED.