Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify
the Clerk of any formal errors in order that corrections may be made
before the bound volumes go to press.
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
–————
Argued February 26, 2004 Decided May 14, 2004
No. 02–1358
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
TRANS–ELECT, INC., ET AL.,
INTERVENORS
–————
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
–————
Todd Edmister argued the cause for petitioner. With him
on the briefs was Arocles Aguilar. Gary M. Cohen entered
an appearance.
Dennis Lane, Solicitor, Federal Energy Regulatory Com-
mission, argued the cause for respondent. With him on the
brief was Cynthia A. Marlette, General Counsel.
Before: SENTELLE, RANDOLPH, and ROGERS, Circuit Judges.
Opinion for the Court filed by Circuit Judge RANDOLPH.
Opinion concurring in part and dissenting in part filed by
Circuit Judge ROGERS.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
RANDOLPH, Circuit Judge: High voltage transmission lines,
known as Path 15, extend from southern to northern Califor-
nia. Path 15 is the principal means of transmitting electricity
between these two regions of the state and into the Pacific
Northwest. Energy produced in Southern California comes
mainly from natural gas-fired generators; in Northern Cali-
fornia 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.
The issue in this case is whether the Federal Energy
Regulatory Commission properly approved, as part of a pro-
ject to increase the capacity of Path 15, incentives for Pacific
Gas and Electric Company (PG&E) to recover its costs in
building or upgrading facilities.
The issue arose during Commission proceedings under
§ 205 of the Federal Power Act, 16 U.S.C. § 824d, in which
the Western Area Power Administration (WAPA), on behalf
of itself and PG&E and Trans–Elect, Inc., sought approval of
a Letter Agreement setting forth the rights and obligations of
the parties with respect to the Path 15 Project. WAPA, a
component of the United States Department of Energy,
markets and transmits electric power from hydroelectric pro-
jects in the West using Path 15. In May 2001 the National
Energy Policy Report recommended to the President that
WAPA be authorized to seek ways to alleviate the Path 15
bottleneck. In a public notice WAPA sought statements of
interest from private parties willing to invest in the construc-
tion of Path 15 upgrades. 66 Fed. Reg. 31,909 (June 13,
2001). This resulted in WAPA’s selection of PG&E and
Trans–Elect as its partners in the building of a new 500 kV
transmission line.
The terms of the partnership were memorialized in the
Letter Agreement. Although the Letter Agreement dealt
with many subjects, such as ownership rights, transmission
system rights and responsibilities for raising capital to fund
3
construction, the only questions brought to this court are the
Commission’s approval of a 200 basis point incentive on
PG&E’s return from the new Path 15 facilities it constructs
or upgrades and PG&E’s calculation of depreciation expense
using a 10 year life for those facilities.
The Public Utilities Commission of the State of California
(CPUC), the petitioner here, opposed the PG&E incentives in
the original § 205 proceeding, Western Area Power Admin.,
99 F.E.R.C. ¶ 61,306 (2002), and in a request for rehearing,
Western Area Power Admin., 100 F.E.R.C. ¶ 61,331 (2002).
It has several arguments. The first is that the Commission
erred in not requiring PG&E to submit cost of service data
and other information required by 18 C.F.R. § 35.13. The
regulation, and the other authorities CPUC cites, apply when
a utility proposes a rate change ‘‘to supersede, supplement or
otherwise change the provisions of a rate schedule filed with
the Commission.’’ 18 C.F.R. § 35.13(a). On the face of it,
the regulation is inapposite. PG&E did not seek to change
any of its existing rate schedules. It sought Commission
approval, in advance of construction, of incentives when it
makes a rate filing in the future with respect to the new Path
15 facilities. At that point the Commission will still have to
determine whether the proposed rate schedules are just and
reasonable. The Commission made this clear enough. ‘‘As
we do not have before us an agreement establishing rates, we
take no position, but rather reserve judgment, on all rate
issues TTT not specifically delineated as rate principles’’ in the
Letter Agreement. 99 F.E.R.C. at 62,277 n.2. And ‘‘[w]hile
we are accepting the Letter Agreement for filing, [finding it
just and reasonable,] we note, however, that it is only a
preliminary step that allows the Path 15 participants to move
forward and not the last opportunity for the Commission to
review matters that are subject to its jurisdiction.’’ Id. at
62,281.
The information before the Commission indicated that Path
15 was ‘‘a uniquely critical path,’’ that congestion had ‘‘serious
impacts on the ability to move power,’’ that the Path 15
Project would cost $306 million, and that congestion costs to
California energy consumers amounted to $222 million in just
4
the 16 months prior to December 2000. 100 F.E.R.C. at
62,539 & n.4. It was entirely proper for the Commission to
make this cost comparison, even though – as CPUC points
out – the costs of operating the upgrades will have to be
added to the costs of constructing them. Of course, ratepay-
ers will not have to pay the entire $306 million in one year;
the cost will be spread out over the life of the facility. The
Commission knew this and it knew as well that unless it
approved the PG&E incentives, the project would likely not
be built in the near future. The proposal embodied in the
Letter Agreement was the only one that materialized in
response to WAPA’s public notice.
CPUC had argued that the Commission could not take into
account the importance of a project in ratemaking proceed-
ings and that it therefore acted improperly in considering the
need for the Path 15 Project when it approved the PG&E
incentives. In its reply, CPUC wisely disavowed this argu-
ment. A primary purpose of the Federal Power Act, and its
counterpart, the Natural Gas Act, ‘‘was to encourage the
orderly development of plentiful supplies of electricity and
natural gas at reasonable prices.’’ NAACP v. FPC, 425 U.S.
662, 670 (1976). To carry out this purpose the Commission
may consider non-cost factors as well as cost factors in
setting rates. See Permian Basin Area Rate Cases, 390 U.S.
747, 791, 815 (1968). Citing these and other authorities, the
Commission correctly argues that using pricing incentives to
increase the supply of energy available to customers is a
valid, non-cost consideration in setting rates. See Farmers
Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1503 (D.C.
Cir. 1983); Interstate Natural Gas Ass’n of Am. v. FERC,
285 F.3d 18, 33–34 (D.C. Cir. 2002). Our decision thirty years
ago in Consumers Union v. FPC, 510 F.2d 656, 660 (D.C. Cir.
1974), held as much: ‘‘reliance on non-cost factors has been
endorsed by the courts primarily in recognition of the need to
stimulate new suppliesTTTT’’
Although it was well-known that Path 15 was constrained
and although this suggested a ready market if new transmis-
sion lines were built, no party stepped forward to construct
upgrades. Only after WAPA issued its request for proposals
5
did it find participants for the project, and then only if
incentives were offered. As the Commission also points out,
the incentives amounted to a small portion of total energy
costs and are greatly outweighed by the benefits consumers
will receive. See Brief for Respondent at 18, citing Removing
Obstacles to Increased Electric Generation and Natural Gas
Supply in the United States, 94 F.E.R.C. ¶ 61,272, reh’g
denied, 95 F.E.R.C. ¶ 61,225, at 61,765, order on reh’g, 96
F.E.R.C. ¶ 61,155, order on reh’g, 97 F.E.R.C. ¶ 61,024 (2001).
Rather than dispute the Commission’s judgment regarding
the potential benefits of the Path 15 Project to energy
customers, CPUC argues that the costs of the incentives
could have been avoided because either the Commission or
CPUC could have compelled PG&E to perform the upgrades.
The Commission’s failure to consider this alternative, CPUC
argues, rendered its decision arbitrary and capricious under
cases such as Farmers Union, 734 F.2d at 1511. This
objection was not raised in CPUC’s rehearing petition and we
therefore lack jurisdiction to consider it. See 16 U.S.C.
§ 825l(b); City of Orville v. FERC, 147 F.3d 979, 990 (D.C.
Cir. 1998).
CPUC’s only other argument worth mentioning is that the
Commission unlawfully extended the deadline set in the Re-
moving Obstacles Orders. ‘‘In light of the severe electric
energy shortages facing California and other areas of the
West in recent months TTT the Commission TTT has examined
all of its rate and facility certification authorities in the areas
of electric energy TTT to determine how it can help increase
electric energy supply.’’ 94 F.E.R.C. at 61,967. The Com-
mission sought to foster ‘‘the installation of critical transmis-
sion investment,’’ id. at 61,969, by offering incentives to
increase the supply of energy. Among these were the same
200 basis point and 10 year depreciable life incentives con-
tained in the Letter Agreement for PG&E. Id. at 61,969–70.
The Removing Obstacles Orders offered these incentives, and
others, for all projects in California (and elsewhere in the
West) that increase transmission capacity, on condition that
the project went into service by November 1, 2001. 94
F.E.R.C. at 61,969–70.
6
PG&E’s construction of upgrades on Path 15 would not
meet this deadline and, so CPUC argues, the Commission
acted contrary to the condition set forth in the Removing
Obstacles Orders. We think not. It is true that the Letter
Agreement borrowed from those orders by duplicating the
incentives and it is also true that WAPA justified the number
of basis points and the extent of depreciable life by relying on
the Commission’s justifications for choosing these figures.
But WAPA did not ask the Commission to extend the dead-
line in the Removing Obstacles Orders and the Commission,
in addressing CPUC’s contention, stated that its decision here
was independent of those orders. Rather than automatically
extending these two incentives to all projects, the Commission
proceeded on the basis that the incentives were warranted in
this particular case for the reasons we have already given.
The Removing Obstacles Orders itself contemplated that after
the deadline passed, the Commission still might approve
incentives ‘‘on a case-by-case basis,’’ which is what it has done
here. 95 F.E.R.C. at 61,762.
We have considered and rejected CPUC’s other arguments.
The petition for judicial review is denied.
1
ROGERS, Circuit Judge, concurring in part and dissenting in
part: It may well be, as the court concludes, see Opinion at 3,
that the Commission can properly depart from its usual
ratemaking principles and procedures by pre-approving rate
incentives to encourage the building of a needed project. But
the Commission has failed to provide virtually any explana-
tion, much less an adequate one, for why the specific incen-
tives that it approved for PG&E are appropriate for the Path
15 expansion. Accordingly, I would grant the petition and
remand the case to the Commission for further explanation.
The court is in agreement regarding the general principles
that must guide our review. Nothing was per se impermissi-
ble about the Commission’s decision to ‘‘pre-approve’’ ele-
ments of PG&E’s rates for the Path 15 expansion in advance
of a full rate case under 16 U.S.C. § 824d (2004). Although
there has not yet been a formal rate proceeding to determine
the final rates consumers will pay for transmission of energy
through the expanded Path 15, an incentive-based multi-party
agreement may, as counsel for the Commission argued, be a
practical necessity to secure financing for some projects.
Further, as a general matter, the Commission may take non-
cost factors into account in setting rates. See Opinion at 4.
Such factors include incentives to further other statutory
policies, such as ensuring energy availability, even if those
incentives create returns more generous than would result
from cost-based ratemaking. See In re Permian Basin Area
Rate Cases, 390 U.S. 747, 796–98 (1968); Interstate Natural
Gas Ass’n v. FERC, 288 F.3d 18, 33–34 (D.C. Cir. 2002).
Likewise, there is nothing inconsistent between the Commis-
sion’s order approving incentives for PG&E and the Remov-
ing Obstacles orders the Commission issued to encourage
energy availability during California’s energy crisis. See
Opinion at 5–6. While the Path 15 project would not have
qualified for favorable rate treatment under the Removing
Obstacles orders themselves, nothing in those orders preclud-
ed the Commission from offering similar incentives in the
future.
These general principles include, however, a requirement
that the Commission must ensure that rate increases that are
2
likely to follow as a result of the incentives are ‘‘needed, and
[are] no more than is needed, for the purpose.’’ In Farmers
Union Cent. Exch. v. FERC, 734 F.2d 1486 (D.C. Cir. 1984),
the court rejected incentive rates the Commission had set for
oil pipelines, in light of the principle that while non-cost
factors can permissibly be integrated into rates, the Commis-
sion ‘‘must see to it that the increase is in fact needed, and is
no more than is needed, for the purpose.’’ 734 F.2d at 1503
(quoting City of Detroit v. FPC, 230 F.2d 810, 817 (D.C. Cir.
1955)). As petitioner, the Public Utilities Commission of the
State of California (‘‘PUCC’’), points out, in Farmers Union
the court ‘‘expressly rejected the argument that the FERC’s
desire to increase capacity can support blanket application of
ROE [i.e., return on equity] incentives in connection with an
ROE incentive program,’’ requiring the Commission instead
to ‘‘ ‘calibrate the relationship between increased rates and
the attraction of new capital’ [and] TTT consider ‘reasonable
alternatives to its chosen policy and [ ] give a reasoned
explanation for its rejection of such alternatives.’ ’’ Pet. Br.
at 15 (quoting Farmers Union, 734 F.2d at 1503, 1511). The
court recently reaffirmed this principle in Mo. Pub. Serv.
Com’n v. FERC, 337 F.3d 1066, 1071 (D.C. Cir. 2003).
In general, cost-based ratemaking already ensures just and
reasonable rates by providing for the recovery of costs, plus a
rate of return on equity commensurate with investments
bearing similar risk. If the Commission wants to depart from
this formula and offer additional incentives, it must carefully
tailor them, lest it run afoul of the requirement that rates be
‘‘just and reasonable.’’ Otherwise, the ‘‘incentives’’ are noth-
ing but windfalls. While the Commission’s action here is not
a final rate order, the Commission does not dispute that it has
established two elements of a future rate order. See Western
Area Power Admin., 99 FERC ¶ 61,306, 62,277 n.2 (2002). If
so, then the Commission must explain why this particular
departure from cost-based ratemaking, namely, a 200 basis
point increase to PG&E’s return on equity and a 10–year
depreciation schedule, was necessary or appropriate for the
Path 15 project. These incentives are not insignificant: in
scope, they are identical to the crisis rates the Commission
3
offered at the peak of the California energy shortage to
encourage the quick completion of projects that could allevi-
ate immediate shortages. See Removing Obstacles to In-
creased Electric Generation and Natural Gas Supply in the
United States, 94 FERC ¶ 61,272, 61,969 (2001). It is not
enough to state that the Commission may offer incentives
generally, see Opinion at 4: the court must ask whether it
reasonably decided to offer these incentives specifically. Cf.
Farmers Union, 734 F.2d at 1503.
The Commission’s only stated reason for accepting the
particular incentives that PG&E requested was that the letter
agreement between the Western Area Power Administration,
TransElect and PG&E was the only bid for the Path 15
expansion project. The letter agreement was the ‘‘result of a
request for proposals intended to achieve the most favorable
terms possible,’’ and ‘‘[a]lthough a proposal for upgrades to
Path 15 with lesser or no incentives would have been wel-
comed, no such proposal materialized,’’ so the letter agree-
ment was the ‘‘best option available.’’ Western Area Power
Admin., 100 FERC ¶ 61,331, 62,539 (2002). The Commis-
sion’s only-bid explanation essentially posits that this is a
take-it-or-leave-it offer: PG&E will only participate in the
Path 15 project if given the rate incentives requested. But
PG&E asked for three things: a 200 basis point increase to
its return on equity, a ten-year depreciation schedule, and a
reasonable industry target capital structure to be requested
in a future rate filing. Although the Commission approved
only the first two, PG&E did not withdraw from the project
or request rehearing of the Commission’s rejection of its
requested capital structure. If the take-it-or-leave-it nature
of the letter agreement necessitated acceptance of its terms,
why did the Commission consider itself free to reject one of
them? And why did the Commission conclude that the target
capital structure was unnecessary to induce PG&E’s partic-
ipation in the project, but the return on equity and deprecia-
tion schedule were? The orders on review provide no an-
swers to these questions because the Commission’s analysis of
the need for the incentives is confined to cursory statements
that ‘‘under the unique circumstances of this case a 200 basis
4
point incentive is appropriate,’’ 99 FERC ¶ 61,306 at 62,280,
and that the requested incentives were the ‘‘best option
available.’’ 100 FERC ¶ 61,331 at 62,539. The PUCC may
have waived its narrow contention that the costs of the
incentives could have been avoided by compelling PG&E to
perform the relevant work, see Opinion at 5, but not its
broader contention that the Commission — unlike the PUCC,
which was in the process of conducting hearings examining
the alternative ways of alleviating Path 15 congestion when
the Commission issued the orders here, over PUCC’s objec-
tion — failed to compile any record evidence as to whether
the incentives requested in the letter agreement were appro-
priate or engage in any reasoned consideration of alterna-
tives, i.e., to correlate the size of the incentives with the need
for them.
Because the Commission’s cursory and piecemeal accep-
tance of the requested incentives in the letter agreement
based on the importance of the project and its purported cost-
benefits fails to meet its obligation, when incorporating non-
cost based incentives into rates, to ‘‘see to it that the increase
is in fact needed, and is no more than is needed,’’ Farmers
Union, 734 F.2d at 1503 (emphasis added), I would grant the
petition and remand the case for the Commission to explain
how the rate incentives are tailored to the Path 15 project.