Braintree Electric Department v. FERC, No. 09-1231 (D.C. Cir. Feb. 7, 2012), http://www.cadc.uscourts.gov/internet/opinions.nsf/DB24885C8D655AFB8525799D00548367/$file/09-1231-1356885.pdf
In Braintree Electric Light Department v. FERC, Nos. 09-1231 et al. (D.C. Cir. Feb. 7, 2012), the D.C. Circuit rejected a challenge by municipally-owned utilities in southeastern Massachusetts to four FERC orders that denied the petitioners' claim that they were being unjustly charged in order to maintain electric system reliability on Cape Cod. The dispute was first addressed in a FERC-approved settlement agreement that reserved certain litigation rights to the petitioners. The Court held that FERC was entitled to deference in construing the settlement agreement without the agency making an explicit finding of ambiguity, and that FERC reasonably interpreted the agreement's litigation rights provisions to bar petitioners' claims.
This dispute arises from a 2006 decision of the ISO New England (ISO-NE) that operating two otherwise uneconomic oil-fired generators on Cape Cod would be necessary to avoid blackouts on Cape Cod. Under ISO-NE's tariff, the costs of operating these units were allocated to all of southeastern Massachusetts, including the service areas of Braintree Electric Light Department and other municipal electric utilities that were not located on Cape Cod. Braintree v. FERC, slip op. at 2-3. The municipal utilities disputed the charges, and a FERC-mediated settlement agreement adjusted the payments, but stated that future charges would be paid by all load serving entities under the ISO-NE tariff, subject to certain litigation rights. Id. at 3-5.
Invoking their reserved rights, the municipal utilities filed a complaint at FERC in 2008, arguing that they should no longer be allocated costs for the Cape Cod units because alternative power system arrangements could maintain reliability and because the region over which the oil units' costs were spread should be redefined. Id. at 5. FERC rejected the proffered reliability alternative because it would degrade reliability, and found that the settlement agreement barred the utilities from litigating the allocation of the charges. FERC found that the agreement also barred dispute of the reliability area boundary change because that issue became hypothetical after ISO-NE redefined the reliability area in its tariff in 2009. Id. at 5-6.
On review, the Court held that FERC's interpretation of the settlement agreement was entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Slip op. at 7. The Court rejected petitioners' argument that FERC must make an explicit finding of ambiguity in the settlement agreement, stating that "the Chevron two-step is a dance for the court, not the Commission." Id. at 8. If FERC erroneously asserts that the plain language of relevant wording is unambiguous, the Court said, it "'must remand the matter to the Commission to require the agency to consider the question afresh in light of the ambiguity we see.'" Id. (quoting Ameren Servs. Co. v. FERC, 330 F.3d 494, 498-99 (D.C. Cir. 2003)). The Court also deferred to FERC's technical judgment that the reliability alternative proffered by petitioners would expose Cape Cod to an unacceptable risk of involuntary load shedding. Id. at 9 (citing B&J Oil & Gas v. FERC, 353 F.3d 71, 76 (D.C. Cir. 2004)).
On the merits, the Court held that FERC reasonably rejected the utilities' argument that their dispute over billing raised only hypothetical reliability concerns because implementation of actual alternative reliable system configurations was the subject of the petitioner's reserved rights in the settlement agreement. Id. at 10-11. The Court also upheld FERC's conclusion that, following the realignment of the reliability region in 2009, the settlement precluded a claim for relief based on a hypothetical retroactive change to the reliability region for 2008 cost allocation purposes because the settlement agreement was ambiguous on that point. Id. at 13-14. FERC's reading of the settlement was "reasonable and entitled to deference," the Court said. Id. at 15.
The Court further held that FERC reasonably found that petitioners' argument that the agency's determinations violate cost causation principles went beyond the scope of litigation rights reserved in the settlement. Id. at 16. Given that FERC has a valid basis for its decision not to entertain that argument, the Court determined that it need not consider petitioners' cost causation argument on the merits, stating that "[w]hen an agency offers multiple grounds for a decision, we will affirm the agency so long as any one of the grounds is valid, unless it is demonstrated that the agency would not have acted on that basis if alternative grounds were unavailable." Id. at 16 n.8 (quoting BDPCS, Inc. v. FCC, 351 F.3d 1177, 1183 (D.C. Cir. 2003)).
Freeport-McMoRan Corporation v. FERC, No. 08-1349 (D.C. Cir. Jan. 17, 2012), http://www.cadc.uscourts.gov/internet/opinions.nsf/1C5AD12D8732726D852579880056CBBC/$file/08-1349-1352748.pdf.
In Freeport-McMoRan Corporation v. FERC, No. 08-1349 (D.C. Cir. Jan. 17, 2012), the D.C. Circuit denied two petitions for review of FERC orders concerning El Paso Natural Gas Company's 2005 pipeline rate case and settlement. The Court upheld FERC's determination that a provision of a 1996 settlement between El Paso and its customers remains in effect and limited the rates El Paso could charge certain of its shippers in its 2005 rate case. The Court further found that none of petitioners' arguments concerning FERC's application of that provision could overcome the elevated degree of deference it accords to FERC's interpretation of settlement provisions.
The dispute goes back to 1996, when El Paso's California-based shippers relinquished or "turned back" their capacity rights on El Paso's system as a result of California's restructuring of its electric industry. Freeport-McMoRan, slip op. at 3. This left roughly 35% of El Paso's total capacity unsubscribed, which threatened to increase the costs El Paso needed to recover from its remaining shippers drastically and thereby increase the rates charged to its remaining customers. Id. El Paso and its customers entered into a settlement (the "1996 Settlement"), approved by FERC, to spread the risk associated with the turned back capacity between El Paso and its customers. Id. at 3-4. In addition, Article 11.2 of the 1996 Settlement capped the rates El Paso could charge after the settlement term ended to those shippers with contracts in effect on December 31, 1995 and that remained in effect--in their 1996 form or as amended--on January 1, 2006. Id. at 4.
In 2000, El Paso experienced a shortfall of capacity on its system. El Paso was not able to meet all of its shippers' demands and thus invoked a tariff provision allowing it to curtail shippers on a pro rata basis. Id. El Paso's invocation of its curtailment authority disrupted service and caused shippers to file complaints with FERC. Id. In response, FERC instituted a "Capacity Allocation Proceeding" and issued a series of orders between 2002 and 2004 (the "CAP Orders"). Id. Without faulting either El Paso or its customers, FERC determined that El Paso's routine use of curtailment was not just and reasonable and invoked its Mobile-Sierra doctrine authority to prohibit contracts that are against the public interest. Id. at 4-5 (quoting United Distrib. Cos. v. FERC, 88 F.3d 1105, 1131 (D.C. Cir. 1996)). FERC directed El Paso to reserve the capacity needed to satisfy its existing contract demand customers and allocate all remaining capacity, including the turned back capacity, to its former full requirements customers, whose contracts were converted to contract demand contracts. Id. at 5. To implement the CAP Orders, FERC revised portions of the 1996 Settlement, rejected the contention of some shippers that the 1996 Settlement should be abrogated entirely, and left the 1996 Settlement's rate caps intact. Id.
In June 2005, El Paso filed a general rate case (the "2005 Rate Case") proposing rates to go into effect at the end of the 1996 Settlement term, including a proposal for rates above the Article 11.2 cap for shippers covered by that provision, based on El Paso's assertion that the provision had been abrogated by the CAP Orders. Id. FERC suspended the proposed rate increase and stated that it would not consider in its analysis of El Paso's rates Freeport-McMoRan's claim that El Paso had previously withheld capacity. Id. at 5-6. On March 20, 2006, FERC issued an order concluding the CAP Orders had not abrogated Article 11.2. Id. at 6. FERC also determined that Article 11.2 limited the rates El Paso could charge its former full requirements customers, but did not limit the rates El Paso could charge for capacity added to its system after the 1996 Settlement. Id. With rehearing requests of the March 2006 Order pending, El Paso and its shippers filed a proposed settlement of the 2005 Rate Case in December 2006 (the "2006 Settlement"). Id. FERC approved the 2006 Settlement, which did not resolve the Article 11.2 issues, over the objection of only one party: Freeport-McMoRan. Id.
On review, El Paso argued the CAP Orders abrogated Article 11.2 of the 1996 Settlement by "fundamentally altering the bargain underlying the 1996 Settlement." Id. at 8. FERC's first counter argument was procedural, i.e., that El Paso was untimely, raising the abrogation argument only during the 2005 Rate Case not during the Capacity Allocation Proceeding itself. Id. The Court rejected this argument, noting that FERC "sang a different tune during the Capacity Allocation Proceeding itself," even assuring the parties in the Capacity Allocation Proceeding that El Paso's next rate filing would provide an opportunity to review the justness and reasonableness of El Paso's rates. Id. at 8-9. The Court, however, accepted FERC's determination on the merits of El Paso's argument, finding FERC's reasoning sound. Id. at 9. FERC found the CAP Orders had neither changed the bargain of the 1996 Settlement nor abrogated Article 11.2 because El Paso's ability to remarket the turned back capacity under the 1996 Settlement was always subject to its contractual obligations to its full requirements customers. Id. FERC concluded, therefore, that allocating the turned back capacity to El Paso's full requirements shippers in the CAP Orders "merely enforced the obligations El Paso already had when it entered into the 1996 Settlement." Id.
The Court then turned to petitioners' arguments concerning FERC's application of Article 11.2. El Paso advanced three arguments that FERC applied Article 11.2 too broadly, while Freeport-McMoran argued the opposite, making two arguments that FERC applied Article 11.2 too narrowly. Id. at 11-12. The Court found that none of the five could overcome "the 'high degree of deference' [it] afford[s] to the Commission's interpretation of settlement provisions." Id. at 12 (quoting Transcontinental Gas Pipe Line Corp. v. FERC, 485 F.3d 1172, 1178 (D.C. Cir. 2007)). Specifically, notwithstanding El Paso's arguments to the contrary, the Court found FERC had "reasonably determined" the full requirements contracts converted to contract demand contracts in the Capacity Allocation Proceedings were "amended" within the meaning of Article 11.2 (slip op. at 12), had "reasonably determined" the Article 11.2 rate cap applied to the turned back capacity (id. at 13), and had reasonably found the applicable Article 11.2 rate cap for the turned back capacity was determined by the Article 11.2 shipper's delivery point rather than by the relinquishing shipper's delivery point (id. at 14). Further, despite Freeport-McMoRan's claims, the Court found reasonable FERC's determination that Article 11.2 rate caps did not limit the rates for capacity added to the El Paso system after the 1996 Settlement, as well as FERC's adoption of a presumption as to the amount of capacity on El Paso's system on December 31, 1995. Id. at 15-19.
Finally, the Court rejected Freeport-McMoRan's claim that FERC's approval of the 2006 Settlement over Freeport-McMoRan's objections was procedurally and substantively infirm. The Court upheld FERC's finding that Freeport-McMoRan was collaterally estopped by the CAP Orders from raising El Paso's "capacity withholding liability" (arising from a 2002 administrative law judge decision that FERC subsequently vacated). Id. at 19-21. With respect to Freeport-McMoRan's substantive argument regarding the 2006 Settlement, the Court found FERC's approval of the 2006 Settlement appropriate "under the so-called second Trailblazer approach," under which FERC may approve a contested settlement if it leaves the contesting party "'in no worse position . . . than if the case were litigated,' and 'the overall result is just and reasonable.'" Id. at 21 (quoting Trailblazer Pipeline Co., 87 FERC P 61,110, 61,349 (1999)).
Indiana Utility Regulatory Commission v. FERC, No. 10-1313 (D.C. Cir. Jan. 17, 2012), http://www.cadc.uscourts.gov/internet/opinions.nsf/23D608DE3B1E818D852579880056CBED/$file/10-1313-1352763.pdf.
In Indiana Utility Regulatory Commission v. FERC, No. 10-1313 (D.C. Cir. Jan. 17, 2012), the D.C. Circuit rejected a state utility commission’s challenge to FERC’s acceptance of a procedure that allows retail demand-response resources to participate in PJM’s wholesale energy market. The Court found that the state commission waived certain arguments by failing to raise them with specificity in its request for rehearing of FERC’s order. The Court then denied the remaining objections in light of the substantial deference it gives to FERC’s interpretations of its own orders.
As relevant here, demand-response resources are entities that reduce their electricity consumption in exchange for wholesale energy market payments. In Order No. 719, FERC required RTOs to accept demand-response offers from aggregators of retail energy customers, unless the relevant state regulator prohibited their participation. FERC explained that its rule was not intended to interfere with retail demand-response programs, to raise concerns about the boundaries between state and federal jurisdiction, or to impose undue burdens on state regulatory authorities.
PJM filed a tariff in compliance with Order No. 719. Under the tariff, upon receiving an aggregator’s application, PJM notifies the retail utility that serves the customers being aggregated. IURC v. FERC, slip op. at 5. The retail utility then has 10 days to challenge the application and to show that the customer is ineligible under state law to sell demand response in PJM’s market. Id. Otherwise, PJM presumes the customer is eligible under state law and accepts the application. Id.
In response to Order No. 719, the Indiana Utility Regulatory Commission prohibited Indiana retail customers from selling demand response in wholesale markets without its prior approval. Id. at 5. It later protested PJM’s tariff filing as an interference with its retail regulatory regime, and sought rehearing of FERC’s acceptance of the tariff provision. Id. at 5-6.
The D.C. Circuit held that the Indiana Commission waived its jurisdictional objections to FERC’s order by failing to state them with sufficient specificity on rehearing. According to the Court, the Indiana Commission’s rehearing petition included just a single sentence touching on jurisdictional issues, which purported to maintain previously-articulated objections. That was insufficient, the Court held, to overcome the Federal Power Act’s “strict limitation” on judicial review. Id. at 6. Under FPA Section 313, judicial review is available only for those objections that were “urged before the Commission [on rehearing,] unless there is reasonable ground for [the petitioner’s] failure to do so.” 16 U.S.C. § 825l(a). The Court found that prerequisite was not satisfied, by “referring only in a general way” to arguments made in previous filings. IURC v. FERC, slip op. at 8 (quoting Conn. Dep’t of Pub. Util. Control v. FERC, 593 F.3d 30, 36 (D.C. Cir. 2010)). Nor did it matter that FERC was aware of the Indiana Commission’s jurisdictional concerns. Because FPA Section 313 limits judicial review to the grounds “set forth specifically” in the petitioner’s rehearing request, “[i]t … matters not what the Commission knew or should have known” about the petitioner’s claims. Id. at 8. In this respect, the FPA “differ[s] fundamentally” from other judicial-review statutes, which might excuse a failure to exhaust remedies so long as an agency has considered the argument at the urging of another party. Id. (quoting ASARCO, Inc. v. FERC, 777 F.2d 764, 774 n.7 (D.C. Cir. 1985)).
As to the merits, the Indiana Commission complained that FERC erred in putting the onus on the retail utility, rather than the demand-response aggregator, to check retail customers’ eligibility to sell demand response in wholesale markets. The Court readily upheld FERC’s decision, however, based on the Court’s “substantial deference” to FERC’s interpretation of its own orders—such as Order No. 719—which the Court upholds unless “plainly erroneous.” Id. at 9-10 (quotations omitted). The Court agreed with intervenor PJM that “a case probably could be made” under Order No. 719 for either outcome, that is, for placing responsibility on the aggregator or on the utility, but that “merely underscores” the reasonableness of FERC’s decision. Id. at 11 (quoting intervenor brief). Having upheld FERC’s decision on a “substantial deference” standard, the Court found no occasion to pass on FERC’s claim that an even more deferential standard applies to FERC ratemaking. Id. at 10 (quoting Alcoa Inc. v. FERC, 564 F.3d 1342, 1347 (D.C. Cir. 2009) (applying “highly deferential” standard).