Southern California Edison Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 5, 2010 Decided May 4, 2010

No. 05-1327

SOUTHERN CALIFORNIA EDISON COMPANY,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

NORTHERN CALIFORNIA POWER AGENCY, ET AL.,
INTERVENORS

Consolidated with 08-1384

On Petitions for Review of Orders
of the Federal Energy Regulatory Commission

Jennifer L. Key argued the cause for petitioner. With her on
the briefs were Charles G. Cole, Alice E. Loughran, Jennifer
Hasbrouck, and Anna J. Valdberg.

Robert M. Kennedy, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were Thomas R. Sheets, General Counsel, and Robert H.
Solomon, Solicitor.
 2

Ashley C. Parrish argued the cause for intervenors Dynegy
Moss Landing, LLC, et al. in support of respondent. With him
on the brief were Neil L. Levy, David G. Tewksbury, Michael J.
Rustum, Woody N. Peterson, David C. Dickey, and Christopher
C. O'Hara. Betsy R. Carr, Gretchen Schott, and Robert C.
Fallon entered appearances.

Before: SENTELLE, Chief Judge, GARLAND, Circuit Judge,
and SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.

SILBERMAN, Senior Circuit Judge: FERC approved a tariff
filed by the California Independent System Operator
(“CAISO”), manager of California’s electric power transmission
grid. Southern California Edison petitions for review of that
FERC order because the tariff permitted generators of electricity
to avoid paying significant retail charges for the energy they
used – whether self-generated or not – for their own heating,
lighting, air conditioning and office equipment needs, called
“station power.” Petitioners assert that FERC, which has
undoubted jurisdiction to regulate wholesale sales and
transmission charges, has exceeded its authority by insisting that
the same method used for calculating transmission charges for
station power be used to calculate retail charges.

I

As we explained once before in Niagara Mohawk Power
Corp. v. FERC, 452 F.3d 822 (D.C. Cir. 2006), involving the
New York market, the Commission ordered the unbundling of
electric energy markets in Order 888, whereby vertically
integrated utilities that owned generation, transmission and
distribution facilities and sold them as a package were obliged
 3

to sell transmission services separately. They were required to
file open access transmission tariffs applicable to both their own
electrical transmissions and those provided to independent
generators. The order also encouraged the creation of non-profit
independent system operators (ISOs) to ensure competitive
pricing of transmission services and reduce the market power of
the utilities. CASIO is one those ISOs.

Just as in New York, unbundling caused a sea change in
California. The three largest investor-owned utilities divested
most – but not all – of their generating facilities and now operate
primarily as owners of transmission facilities and providers of
retail services. The companies that purchased generating
facilities from the utilities, by contrast, sell wholesale power.
FERC has jurisdiction over wholesale sales and transmission,
whereas the states maintain jurisdiction over retail distribution.

Under this new regimen, the generators’ use of “station
power” became a contentious issue. Prior to unbundling,
utilities which owned and operated the generators would not, of
course, charge themselves for the use of station power; they
simply subtracted (“netted”) their own use against their gross
output. But now, when the generating facilities use station
power – even when they get it from their own facilities – it is
arguably functionally equivalent to a retail sale falling within the
jurisdiction of the states, not FERC. That raises the question of
how to calculate properly the charges the utilities can impose on
the generators for their use of station power. In other words,
what is the appropriate netting period by which it should be
determined how much power a generator took for its own station
power needs? FERC has the undeniable right to approve the
netting methodology to determine how much electricity
generators deliver to and take from the grid for transmission
purposes, but in both Niagara Mohawk and this case, the FERC-
 4

approved tariff required the same methodology for both
transmission and local use.

In a series of orders involving the Pennsylvania-New
Jersey-Maryland electricity market and the New York electricity
market, FERC set forth its policies relating to station power
procurement and delivery. FERC first approved a tariff filed by
the independent operator of the Pennsylvania-New Jersey-
Maryland market allowing generators to net the station power it
consumed against the station power it supplied on an hourly
basis.1 As we explained in Niagara Mohawk, 452 F.3d at 825,
under that tariff, generators that pulled station power off the grid
for fifty minutes but supplied in excess of that amount in the
next ten minutes would be deemed to have supplied the net
amount to the grid and consumed nothing. FERC later accepted
a modification of the tariff that changed the netting period from
one hour to one month. As should be apparent, if a generator is
permitted to net its power use against its power output on a
monthly basis, as opposed to an hourly basis, its costs will be
lower – we are led to believe considerably lower – because a
generator could often produce enough power in a month to
totally avoid any retail charges, but that is more difficult if the
netting period is only an hour. FERC rejected arguments that
the provision of station power constituted retail sales outside its
jurisdiction on the ground that when a generator is net positive
over a month no sale has taken place. FERC later approved a
one-month netting period in a tariff filed by the New York ISO.2

1
See PJM Interconnection, LLC, 94 FERC ¶ 61,251 at 61,891-92
(2001), reh’g denied, 95 FERC ¶ 61,333 (2001).
2
See Nine Mile Point Nuclear Station LLC v. Niagara Mohawk
Power Corp., 105 FERC ¶ 61,336 (2003).
 5

In 2004, shortly after FERC issued its orders in the
Pennyslvania-New Jersey-Maryland and New York markets,
Duke Energy, an independent generator in California filed a
complaint asking FERC to compel the CAISO to switch from a
one-hour netting interval to a monthly interval. The generator
also asked that FERC preempt any state-authorized retail
charges for generators that are net positive for a month. Edison,
the petitioner here, objected, arguing that FERC lacked
jurisdiction over retail energy sales. FERC, however,
determined that the CAISO tariff did not conform to its station
power policies as set forth in the Pennsylvania-New Jersey-
Maryland and New York orders. It ordered CAISO to revise its
tariff and added that because a one month netting interval had
become a standard, FERC would require strong justification for
any other netting interval.3 Edison unsuccessfully sought
rehearing and then sought review in this court. We held that
petition in abeyance pending FERC approval of a revised
CAISO tariff, which it later did.

Edison again sought rehearing of FERC’s approval of the
revised tariff, but in the interim, proposed to alter its retail tariff
on file with the California Public Utilities Commission. This
time Edison proposed to assess stranded cost or consumption
charges rather than retail delivery charges on what it regarded as
net positive generators. Edison contended that the state could
allow it to assess such charges even if FERC determines that no
sale had taken place. But the generators asked FERC to reject
that approach as well in its response to Edison’s rehearing
petition.

3
Duke Energy Moss Landing LLC v. Cal. Indep. Sys. Operator
Corp., 109 FERC ¶ 61,170 (2004).
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FERC again denied rehearing, relying on its jurisdiction
over the transmission of station power. It also rejected Edison’s
alternative argument that it could charge generators even though
they were net positive for a month for stranded costs or
consumption charges. According to the Commission, such
charges would impair the ability of generators to utilize the
netting provisions of CAISO’s tariff and would force them to
pay “for fictitious energy purchases, when they are, in fact, self-
supplying.” FERC relied on our decision in Niagara Mohawk
– which was issued while the rehearing request was pending
before the Commission – in which we denied a challenge to the
one-month netting period approved by FERC for the New York
market.4 When petitioners sought review of this order, it was
consolidated with the first petition initially held in abeyance.

II

The issue before us is stark. Petitioners assert that FERC,
by insisting that the netting period it approved to calculate
energy delivered to and taken from the grid by generators for
transmission charges must also govern charges the utilities seek
to impose for the generator’s own use of power, has exceeded its
jurisdiction.

It should be noted that although FERC insists that it can
determine that no retail sale has taken place (or that a
consumption charge is legitimate) it does not rest on its

4
See Cal. Indep. Sys. Operator Corp., 125 FERC ¶ 61,072
(2008).
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wholesale jurisdiction5 but rather only on its jurisdiction over
transmission. Its primary justification in both its order and
before us is our own opinion in Niagara Mohawk where, to be
sure, we rejected a similar argument presented by New York
utilities and the New York State Public Service Commission.
But we think FERC overreads that case. We noted then that
“[p]etitioner’s statutory argument is not insubstantial,” that the
Commission’s rationale is “a bit confusing,” and, perhaps even
more skeptically, “that the Commission has not clearly
articulated why [its jurisdiction over interstate transmission]
permits it to determine that no sale of any kind – including a
retail sale – takes place.” 452 F.3d at 828. Indeed that troubling
case was resolved based on a concession petitioners made – not
made by petitioners here. In Niagara Mohawk, it was conceded
that FERC could, within its authority, dictate an hourly netting
period for retail sales; petitioners only objected to the tariff’s
monthly netting period. We could discern no principled basis
for distinguishing those two periods as it related to FERC’s
jurisdiction. If the Commission could legally require an hourly
netting period for retail sales it seemed analytically impossible
to challenge a monthly netting period on jurisdictional grounds.

The Commission contends that elsewhere in our opinion we
rested on more than petitioner’s concession, but that is not so.
We did say that Order 888 “did not buttress petitioner’s
jurisdictional argument,” just because FERC interpreted it as
treating large industrial consumers who took their power directly
from generators as subject to retail sales charges. Id. at 829.
But that is the opposite situation from the case before us. By
allowing the states to impose retail charges on end users who

5
That is not to suggest that we see any stronger basis for FERC
to rest on that ground.
 8

were ostensibly taking wholesale purchases, FERC was allowing
states to prevent the bypassing of utilities (in order to permit
utilities to recover stranded costs) by regulating in an area that
FERC arguably could have reserved for itself.6

Still FERC (and the intervenor) assert that whatever we said
in Niagara Mohawk, we could not have rested on petitioner’s
concession because we were under an independent obligation to
determine FERC’s jurisdiction. In support of that rather
extraordinary claim – it is not the more familiar argument that
a court has an independent duty to determine its jurisdiction –
the Commission relies on Columbia Gas Transmission Corp. v.
FERC, 404 F.3d 459 (D.C. Cir. 2005). That is quite a reach. In
that case FERC argued that it had jurisdiction to enforce a tariff
filing covering “gathering facilities,” over which FERC
ostensibly lacked jurisdiction, because no one had objected to
the filing. We rejected that argument pointing out that FERC
could not obtain jurisdiction merely because a party had failed
to raise a jurisdictional objection at the time of the filing. Id. at
462-63. The parties’ “waiver” could not confer jurisdiction on
FERC. The petitioner in that case did ultimately object to
FERC’s jurisdiction before the Commission and, more
importantly, did so in our court. A party can and does waive
any argument not presented in our court except those going to
our own jurisdiction or similar structural issues and a concession
is analogous to a waiver. The Columbia Gas case is, thus,
obviously inapposite.

In this case, by contrast to Niagara Mohawk, petitioners
have consistently maintained that FERC has no authority to set

6
We also concluded that FERC’s refusal to extend that fiction to
New York’s generators was not unreasonable. Id. at 829.
 9

any netting period to determine whether a retail sale occurs or to
determine whether the utilities are otherwise permitted to
impose consumption charges. We therefore must consider
FERC’s (and intervenor’s) arguments independent of Niagara
Mohawk. The Commission claims that it is not encroaching on
California’s jurisdiction over retail sales because no retail sale
has taken place if in a month a generator delivers more
electricity to the grid than it takes. But it might be asked why a
month, rather than a longer period, during which it would be
even less likely for a generator to be regarded as net negative.
Ironically, FERC’s one month netting period to determine
whether a retail sale took place implicitly concedes (somewhat
analogous to petitioner’s concession in Niagara Mohawk)7
whether a retail sale occurs depends, in its view, on the length
of the netting period, which seems rather arbitrary and
unprincipled – certainly as a jurisdictional standard.

Perhaps of even greater difficulty, we do not understand
why FERC is empowered to conclude that a retail sale has not
taken place unless it can claim the transaction is, instead, a
wholesale sale or a transmission. To simply declare that the
state lacks jurisdiction because FERC believes no retail sale has
taken place really begs the jurisdictional question. Unless a
transaction falls within FERC’s wholesale or transmission
authority, it doesn’t matter how FERC characterizes it. And, of
course, FERC’s assertion doesn’t ever purport to answer

7
FERC argues that the petitioners in this case made the same
concession as the Niagara Mohawk petitioners by failing to object to
a portion of the tariff allowing “Permitted Netting.” But the
“Permitted Netting” provision does not impose a netting period for
retail sales and so is unlike the issue conceded by the Niagara
Mohawk petitioners.
 10

petitioner’s argument that the utilities are, in any event, entitled
to impose a consumption charge.

The Commission appears to alternatively assert that to
recognize the utilities’ right to use a different netting period for
generators use of station power as a retail sale under state law
would cause a conflict with FERC’s different netting period for
transmission. That is a familiar sort of preemption argument,
but we do not see the conflict. After all FERC has succeeded
through its unbundling initiative in creating separate markets for
wholesale sales, transmission, and retail sales and distribution.
Why should different pricing techniques cause a conflict? The
Commission relies on Conn. Dep’t of Pub. Util. Control v.
FERC, 569 F.3d 477 (D.C. Cir. 2009) and Nat’l Ass’n of
Regulatory Util. Comm’rs v. FERC, 475 F.3d 1277 (D.C. Cir.
2007), but we think those cases do not support FERC because
the impact on state jurisdiction in both cases was indirect and
incidental.

In the Connecticut case, petitioners challenged the
Commission’s authority to approve the “installed capacity
requirement,” under its wholesale and transmission jurisdiction,
a mechanism in the New England independent service operator’s
tariff that sets the amount of capacity that must be maintained to
ensure reliable operation of the bulk power system. The
petitioners in that case argued that this constituted a de facto
regulation of generation facilities, a matter exempted from the
Commission’s jurisdiction. We rejected the argument,
explaining that even though a higher “installed capacity
requirement” may provide a market incentive for the
construction of additional generation facilities, it was not an
impermissible direct regulation of generation facilities. 569
F.3d at 481-82 (emphasis added). And in Nat’l Ass’n of
Regulatory Util. Comm’rs, petitioners argued that the
 11

Commission could not regulate facilities that were jointly owned
by private firms and states because the Federal Power Act
exempts states from federal regulation. We easily rejected that
challenge noting that the argument offered by petitioners could
allow utilities to escape regulation by simply partnering with a
nonjurisdictional co-owner. We approved FERC’s conclusion
that it could regulate “notwithstanding incidental effects on
nonjurisdictional entities.” 475 F.3d at 1281 (emphasis added).
Here by contrast FERC’s order does not just sideswipe state
jurisdiction; it attacks it frontally.

Intervenors, a group of independent generators asserting a
conflict theory not advanced by FERC, claim that inconsistent
methods of netting will result in generator’s costs being
“trapped.” They draw upon a Supreme Court case, Nantahala
Power and Light Co. v. Thornburg, 476 U.S. 953 (1986). There
a utility bought power wholesale from the TVA and sold it at
retail in North Carolina. The North Carlina PUC calculated the
utilities costs differently (lower) than did FERC in setting the
wholesale rate with the result that the utility could not recover
its wholesale costs at retail – power would have to have sold at
a loss. It was in that sense that the Supreme Court held utilities
costs were “trapped” and FERC’s wholesale rate regulation
would be undermined; therefore the state’s cost calculation was
preempted. We do not see any such claim in this case, but, in
any event, FERC did not rely on this rationale in any of the
orders under review, so we could not affirm on this basis under
SEC v. Chenery Corp., 318 U.S. 80, 87-88 (1943), even if we
thought it meritorious.

It is, of course, true that under differing netting periods
FERC can conclude that no transmission for station power took
place in a month in which California would recognize retail
sales of that power, but that is hardly a conflict. As we have
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noted, in an unbundled market, transmission and power are
procured through separate transactions. And, as we recognized
in Niagara Mohawk, the netting periods for power and
transmission need not be the same. 452 F.3d at 830. In that
regard, petitioners point out that CAISO’s tariff uses an hourly
netting period for certain “transmission-related services.” It is
thus possible for a generator to incur “transmission-related
service” charges while not having to pay for transmission itself,
which under FERC’s logic, would also seem to be a conflict, yet
FERC did not object to that portion of the tariff.

The Commission is rather obviously concerned about the
competitive position of the independent generators vis-a-vis
those utilities who still maintain their own generator capacity.
Indeed, that appears to be the underlying policy reason that
drives FERC’s opinions. But FERC has yet to explain why that
general concern can be grounds to preempt the state’s authority
to set the netting period for station power – i.e., the pricing
mechanism – in the retail market or to allow utilities to impose
consumption charges.

Accordingly we vacate and remand for further proceedings
consistent with this opinion.

So ordered.