Pac Gas & Elec Co v. FERC

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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 12, 2004 Decided July 9, 2004

No. 03-1025

PACIFIC GAS AND ELECTRIC COMPANY,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

CALIFORNIA POWER EXCHANGE CORPORATION, ET AL.,
INTERVENORS

Consolidated with
03-1108, 03-1305

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

Stan Berman argued the cause for petitioner. With him
on the briefs were Paul B. Mohler and Mark D. Patrizio.
Joseph H. Fagan entered an appearance.
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.
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Beth G. Pacella, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Cynthia A. Marlette, General Counsel, Dennis
Lane, Solicitor, and Larry D. Gasteiger, Attorney.
Robert H. Loeffler, Paul W. Fox, Andrea M. Settanni,
Margaret A. Moore, and Alan Z. Yudkowsky were on the
brief for intervenors. Bruce A. Eisen and David O. Bickart
entered appearances.
Before: EDWARDS, SENTELLE and TATEL, Circuit Judges.
Opinion for the Court filed by Circuit Judge SENTELLE.
SENTELLE, Circuit Judge: Petitioner, the Pacific Gas &
Electric Company (‘‘PG&E’’), seeks this Court’s review of
final orders issued by the Federal Energy Regulatory Com-
mission (‘‘FERC’’) that establish a procedure for funding the
wind-up costs of the now-defunct California Power Exchange
Corporation (‘‘CalPX’’). Those orders established a regime
whereby former CalPX customers, like PG&E, were assessed
a charge for CalPX’s wind-up costs that correlated to the
absolute value of any outstanding account balances the cus-
tomers had with CalPX as of March 13, 2002. Because the
cost-allocation methodology is both unreasonable and violates
the filed-rate doctrine, we vacate the orders and remand the
matter to FERC for further consideration.

I. Background
In 1996, California restructured its electric power industry
to a market-based rate system. In doing so, it created
CalPX, a non-profit entity that provided various auction mar-
kets for the trading of electricity under FERC-approved
tariff and rate schedules. Under this system, CalPX deter-
mined the amounts to be paid by buyers purchasing power
and how those amounts would be distributed to the sellers.
CalPX recovered its administrative costs by assessing a
FERC-approved charge to entities using its services.
 3

In 2000, wholesale prices for electricity in California in-
creased dramatically and resulted in the now-infamous Cali-
fornia energy crisis. PG&E paid the higher prices, but owing
to price freezes on retail rates, PG&E could not pass along
the increased costs to its customers. Ultimately, PG&E
could not meet its obligations to CalPX, its credit ratings
were reduced, and it filed for Chapter 11 bankruptcy.
Shortly thereafter, FERC began an investigation into the
California energy crisis. The many matters at issue in that
investigation have been consolidated and are collectively re-
ferred to as ‘‘the Refund Proceedings.’’ Those Refund Pro-
ceedings are massive in scope, but only a narrow segment is
pertinent to this case, as detailed below.
FERC first determined that prospective relief was insuffi-
cient, and that refunds related to transactions in the electrici-
ty spot markets operated by the California Independent
System Operator (‘‘CAISO’’) and CalPX were appropriate.
Refunds of approximately three billion dollars have been
tentatively granted. San Diego Gas & Elec. v. Sellers of
Energy and Ancillary Services into Markets Operated by the
Cal. Indep. Sys. Operator and the California Power Exch.,
102 FERC ¶ 61,317, order on reh’g, 105 FERC 61,066 (2003).
These determinations are on appeal before the United States
Court of Appeals for the Ninth Circuit. Cal. Pub. Util.
Comm’n v. FERC, Nos. 01-71051, et al. (9th Cir.). In addi-
tion to the Refund Proceedings, the events surrounding the
California energy crisis have spawned a variety of litigation,
some of it criminal.
Also as a result of the California energy crisis, CalPX was
suspended from operating its markets. In re Cal. Power
Exch., 245 F.3d 1110, 1119 (9th Cir. 2001). In October 2001,
sellers in the California market, acting through the ‘‘CalPX
Creditors Committee,’’ filed a proposal with FERC request-
ing a distribution of CalPX funds. FERC deferred the issue,
pending resolution of the Refund Proceedings. San Diego
Gas & Elec. v. Sellers of Energy and Ancillary Services into
Markets Operated by the Cal. Indep. Sys. Operator and the
California Power Exch., 97 FERC 61,301, 62,417 (2001).
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FERC has also denied several other requests from individual
sellers to release CalPX collateral and funds, again stating
that the proper allocation cannot be made until the Refund
Proceedings are resolved. FERC’s denials of these requests
are on appeal to this Circuit. Constellation Power Source,
Inc. v. FERC, No. 02-1367 (consolidated with Powerex Corp.
v. FERC, No. 03-1285).
With CalPX out of the energy business, its sole remaining
function is ‘‘winding up’’ its business affairs. This includes
several responsibilities, such as: (1) acting as custodian of
certain financial rights owed by and to participants in its
defunct markets; (2) acting as records custodian for transac-
tions in California’s markets; and (3) participating in ongoing
Commission and judicial proceedings. In other words, CalPX
is complying with the Refund Proceedings. Because it is no
longer in the energy business, CalPX has no current funding
source during the wind-up period. According to CalPX,
without some source of revenue, it would have exhausted its
reserve of operating funds by August of 2002. FERC’s
attempt to remedy this problem is the subject of this petition.
In order to recover its operating cost during the wind-up
period, CalPX filed a new rate schedule under the Federal
Power Act § 205, 16 U.S.C. § 824d, to ‘‘apportion the costs of
CalPX’s wind-up and ongoing operations equitably among the
participants for whose benefit CalPX is continuing those
operations.’’ FERC agreed, and ultimately adopted a regime
whereby CalPX’s costs would be allocated among its partici-
pants in proportion to their relative exposure, as measured by
the absolute value of their current payables and receivables,
with CalPX. FERC stated that ‘‘[t]his is consistent with the
fact that CalPX’s ongoing activities are essentially centered
around the appropriate and orderly disposition of these pay-
ables and receivables.’’ Cal. Power Exch., 100 FERC 61,178,
61,637 (2002). Thus, any party that has a balance (positive or
negative) outstanding with CalPX is required to pay a per-
centage of CalPX’s wind-up costs equal to its percentage of
the total outstanding account balances. Additionally, FERC
found that CalPX was required to use ‘‘the most current
account information,’’ which was reflected in the March 13,
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2002 Account summaries (the ‘‘Account Balances’’). Id. Fur-
thermore, recognizing that the outstanding balances would
change pursuant to the ongoing Refund Proceedings, FERC
required CalPX to modify the allocation in subsequent six-
month rate filings to track any changes. Id. From that time
until oral argument in this case, the March 13, 2002 Account
Balances have been used for each six-month period. Finally,
FERC also excluded CAISO’s account balance, which is the
largest outstanding balance amount in CalPX’s account, from
the cost allocation.
PG&E, among others, sought a rehearing of FERC’s Au-
gust 8, 2002 Order that adopted CalPX’s wind-up charges.
PG&E argued that FERC’s Order violated the filed-rate
doctrine by imposing new charges for past services. FERC
disagreed, claiming that PG&E was confusing two distinct
issues: rates previously charged for transactions in the
CalPX market; and the responsibility for newly incurred
wind-up costs. PG&E also challenged CalPX’s reliance on
March 13 Account Balances as the basis for allocating cost
among participants. FERC denied rehearing on this claim as
well, because it ‘‘believe[d] that the primary focus of CalPX’s
on-going activities is to support this Commission’s efforts to
calculate just and reasonable rates and associated refunds’’
for participants in CalPX’s markets, including PG&E. Cal.
Power Exch., 101 FERC 61,330, 62,370 (2002). According to
FERC, ‘‘each participant’s Account Balance was the best
approximation of what the participant would ultimately owe
to, or be owed by, the CalPX,’’ once all the refund proceed-
ings and related matters were resolved. Id.
PG&E further argued that CAISO’s account balance should
have been included in the cost allocation. FERC defended
the exclusion of CAISO’s balance from the cost allocation on
the ground that ‘‘any real-time energy charges assessed to
CalPX by CAISO would have been assessed to it as a
scheduling coordinator for its customers; i.e. PG&E.’’ Cal.
Power Exch., 102 FERC 61,208, 61,606 (2003). Therefore,
those amounts were already reflected in the Account Balances
and used to determine the cost allocation. Any counting of
CAISO’s balances would therefore result in double-counting,
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because FERC considers CAISO a flow-through entity.
FERC offered the further justification that CAISO, as a non-
profit entity, had no stake in the outcome of the Refund
Proceedings. Id.
Having not received the relief it requested below, PG&E
now petitions this Court for review of FERC’s orders. Un-
der the current scheme, PG&E pays 76 percent of CalPX’s
wind-up costs.

II. Analysis
A reviewing court sets aside final action of FERC if that
action is arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law. 5 U.S.C. § 706(2)(A);
Sithe/Independence Power Partners v. FERC, 165 F.3d 944,
948 (D.C. Cir. 1999). FERC ‘‘must be able to demonstrate
that it has made a reasoned decision based upon substantial
evidence in the record.’’ Northern States Power Co. v.
FERC, 30 F.3d 177, 180 (D.C. Cir. 1994). We also must
ensure that FERC ‘‘articulate[s] a satisfactory explanation for
its action including a rational connection between the facts
found and the choice made.’’ Motor Vehicle Mfrs. Ass’n of
the United States, Inc. v. State Farm Mut. Ins. Co., 463 U.S.
29, 43 (1983) (quotations omitted). For reasons more fully set
forth below, we hold that FERC’s decision does not survive
that standard of review.
A. The Filed-Rate Doctrine and Rule Against Retroactive
Ratemaking
Citing the filed-rate doctrine, PG&E contends that FERC
erred in allocating CalPX’s administrative wind-up costs
based on balances PG&E incurred for previous transactions.
The filed-rate doctrine ‘‘bars a regulated seller TTT from
collecting a rate other than the one filed with the Commission
and prevents the Commission itself from imposing a rate
increase for [power] already sold.’’ Arkansas Louisiana Gas
Co. v. Hall, 453 U.S. 571, 578 (1981). According to PG&E’s
theory of the case, FERC violated the filed-rate doctrine and
the rule against retroactive ratemaking by effectively chang-
ing the rate of those previous purchases. It did so by using
 7

outstanding balances resulting from those prior transactions
to determine PG&E’s share of CalPX’s current operating, or
wind-up, costs. PG&E points out that at the time it took
service from CalPX, it paid CalPX a FERC-accepted tariff
designed to cover CalPX’s administrative costs. Now, howev-
er, FERC is using those same prior transactions to determine
how much PG&E should pay in new charges to cover CalPX’s
new administrative costs.
According to PG&E, ‘‘the wind-up charges are additional
charges for further administrative activities related to service
that has already been provided.’’ Furthermore, ‘‘winding-up
its operations is merely a euphemism for continued billing
adjustments for service taken in the 2000 and 2001 period.’’
In other words, these new charges reflect an additional
charge, not related to any new FERC-jurisdictional business.
Even FERC admits that ‘‘costs are being incurred to resolve
matters related to the market as it operated during [the
customer’s] participation.’’ Cal. Power Exch., 101 FERC
61,330.
PG&E argues the imposition of this fee violates the filed-
rate doctrine. This Court has held that ‘‘even costs TTT
incurred in order to provide current or future service cannot
be retroactively billed to customers based on their past
purchasing decisions.’’ Panhandle Eastern Pipeline Co. v.
FERC, 95 F.3d 62, 68 (D.C. Cir. 1996). PG&E argues it is
now paying a surcharge on the previous service with no notice
of the potential increased charge at the time of the prior
transactions. We have repeatedly held that customers must
have adequate notice before the approved rate is changed.
See Pub. Utils. Comm’n of Cal. v. FERC, 988 F.2d 154, 164
(D.C. Cir. 1993); Transwestern Pipeline Co. v. FERC, 897
F.2d 570, 579-80 (D.C. Cir. 1990); Columbia Gas Transmis-
sion v. FERC, 831 F.2d 1135, 1140-42 (D.C. Cir. 1987).
For its part, FERC contends that because the charges are
new charges for the costs of CalPX to wind-up its operations,
it is not engaged in retroactive rulemaking, nor does its action
violate the filed-rate doctrine. FERC argues that ‘‘PG&E
TTT confuses two distinct issues: rates previously charged for
 8

transactions in the CalPX markets TTT and responsibility for
the CalPX’s newly incurred wind-up administrative costs.’’
Cal. Power Exch., 101 FERC 61,330 at 62,370. According to
FERC, these new administrative costs are occurring precisely
for the benefit of parties like PG&E, so that there can be an
appropriate and orderly disposition of payables and receiv-
ables. FERC admits that the allocation of the wind-up costs
are based on previous purchases, but argues that nothing in
the filed-rate doctrine or rule against retroactive ratemaking
prohibits such action. FERC also claims that PG&E was on
notice, as FERC publicly issued orders that CalPX would
have to perform wind-up activities. Id.
We agree with PG&E. FERC’s imposition of additional
charges on CalPX’s customers allocated on the basis of their
prior purchases without reflection of any new jurisdictional
services directly violates the filed-rate doctrine or the rule
against retroactive ratemaking. Otherwise put, the assess-
ment of the wind-up charges is directly tied to past jurisdic-
tional services – specifically, the outstanding balances result-
ing from CalPX’s operation of a wholesale electricity market.
CalPX’s former customers, including PG&E, have already
paid the filed rate for this service. Therefore, any imposition
of new costs based on these previous transactions is prohibit-
ed.
Moreover, the former CalPX participants, like PG&E, had
no notice at the time they paid the filed rate that they would
be assessed an additional charge at a later date because they
used those services. In an effort to show that market
participants were on notice that CalPX would have to perform
wind-up activities, FERC points to an Order issued on De-
cember 20, 2002 where it stated as much. This Order, issued
well after CalPX ceased operations, obviously could not have
given notice to market participants at the time of their
purchasing decisions.
B. Cost-Causation Principles
PG&E also challenges the use of the March 13 Account
Balances as violating cost-causation principles. ‘‘It has been
traditionally required that all approved rates reflect to some
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degree the costs actually caused by the customer who must
pay them.’’ K N Energy v. FERC, 968 F.2d 1295, 1300 (D.C.
Cir. 1991). According to PG&E, the account balances of
individual CalPX participants have no causal relationship to
the wind-up costs. Specifically, PG&E is paying 76 percent
of the wind-up costs because it was in bankruptcy and not
able to pay off its account balances prior to March 13, 2002.
PG&E then identifies California Edison, which also had large
account balances, but came into sufficient cash to pay off its
account two weeks prior to March 13. Now, California
Edison owes 0.72 percent of CalPX’s wind-up costs, while
PG&E owes 76 percent. According to PG&E, the system
simply punishes those with outstanding balances, although it
is not based on any causation or potential reward. CalPX
would be doing the exact same work if PG&E had paid off its
balances, but PG&E would not be required to pay the same
amount. In sum, PG&E argues that there is no record
evidence, or logical link, between the outstanding account
balances and the CalPX’s wind-up cost.
FERC claims that the order applied the ‘‘well-established
ratemaking principle that ‘costs should be allocated, where
possible, to customers based on customer benefits and cost
incurrence.’ ’’ Cal. Power Exch., 101 FERC 61,330 at 62,370.
FERC argues that it has used this procedure before, and
cites instances where this Court affirmed a roll-in to all
transmission customers of system-upgrade costs because
those improvements benefitted the entire system. See Mass.
Elec. Co. v. FERC, 165 F.3d 922, 927–28 (D.C. Cir. 1999).
From that starting proposition, FERC argues that it found
‘‘the magnitude of each Account Balance correlates with the
importance to each participant of the Commission’s efforts to
calculate just and reasonable rates and associate refunds, if
any, because the larger the Account Balance, the greater the
impact of the refund proceeding on the participant.’’ Cal.
Power Exch., 101 FERC 61,330 at 62,370. In other words,
FERC argues that the size of a customer’s account balance
approximates their ‘‘stake’’ in CalPX’s wind-up activities.
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FERC’s argument fails. There is nothing in the record to
support any correlation between the size of an account bal-
ance and the magnitude of the relevant former CalPX cus-
tomer’s likely benefit from, or stake in, CalPX’s wind-up
activities. An example shows the fallacy of FERC’s argument:
had PG&E completely paid off its account at the same time as
California Edison, it would have the same stake in the
outcome and, more importantly, CalPX’s wind-up costs would
be the same, but PG&E would not be paying 76 percent of
the cost. FERC basically gives this argument away in its
brief while defending a separate point. It concedes that
‘‘even if [PG&E] paid off its account balance, it would not
impact the [CalPX’s] continuing obligations.’’
Finally, FERC’s reliance on Massachusetts Electric is mis-
placed. That case involved FERC’s decision to pass along
costs associated with improving a system to all of the sys-
tem’s users. 165 F.3d at 927-28. It simply stands for the
proposition that ‘‘when a system is integrated, any system
enhancements are presumed to benefit the entire system.’’
Id. at 927. That general proposition is not at issue in this
case.
In sum, other than the fact that outstanding account bal-
ances are a mathematically simple way to allocate cost, we
can find no reason why they serve as an appropriate or
reasonable basis for doing so. FERC’s method of allocating
cost is unreasonable, and cannot meet the basic requirements
imposed by the cost-causation principle.
C. Exclusion of CAISO’s Account Balance
PG&E also argues that even if every other aspect of the
allocation is legitimate, the exclusion of sales to CalPX
through CAISO markets improperly increases the burden on
PG&E. CAISO has the largest outstanding balance of any
customer, but FERC decided to exempt that balance from the
equation because CAISO was a scheduling coordinator for
other entities, like PG&E. According to FERC, because the
costs would be passed on to CAISO’s customers, like PG&E,
including CAISO’s balance would be ‘‘double counting.’’
 11

PG&E claims that this explanation does not square with
FERC’s allocation methodology. Because FERC considers
absolute outstanding account balances in allocating costs, a
buyer and a seller could be assessed a charge on an account
for the same megawatt sold. Thus, double-counting exists
under the regime, but not if the seller was CAISO.
FERC responds that while sellers’ and buyers’ outstanding
balances are equally assessed, the same balance is not double
counted. Because any amount assessed to CAISO would also
be assessed to its customers, the result would be double
counting the same account, not counting two different ac-
counts from the same transaction. Finally, FERC cites the
fact that CAISO is a not-for-profit entity with no stake in the
Refund Proceedings – any refunds will flow through CAISO
directly to its customers. In sum, FERC contends that
because CAISO is a flow-through entity, the cost allocation is
properly assessed on its customers, not on it.
Again, FERC’s arguments are unconvincing. FERC’s dou-
ble-counting argument makes no sense in light of its justifica-
tion for its cost-allocation scheme. If, as FERC argues, the
absolute value of a party’s balance correlates with the magni-
tude of its stake in CalPX’s wind-up activities, then CAISO’s
stake should be proportional to its balance. The fact that the
money owed by CalPX to CAISO is the ‘‘same’’ money owed
to CalPX by participants, such as PG&E, has no bearing on
CAISO’s stake as a CalPX creditor in the calculation of
refunds. As to FERC’s assertion that CAISO has no stake in
CalPX’s wind-up activities because any money refunded to
CAISO would simply pass through to CAISO’s customers,
CAISO’s outstanding account balance would be just as reflec-
tive of its customers’ stake in the outcome as PG&E’s out-
standing balance is reflective of its stake. Knowing that, and
taking FERC’s position that CAISO is a flow-through entity,
FERC has not explained why CAISO should not be induced
to pass along the costs of CalPX’s wind-up activities to its
customers. To the extent that using outstanding account
balances would be appropriate, FERC has erred in excluding
CAISO’s balance.
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As to CAISO’s non-profit status, we can find no reason why
that status limits what it has at ‘‘stake’’ in the proceeding.
Any number of entities operating in energy markets may be
classified as non-profit, and FERC has offered no convincing
reason why they should be treated differently in this case.

III. Conclusion
Because FERC’s cost-allocation methodology is both unrea-
sonable and violates the filed-rate doctrine, the petitions are
granted, and the orders are vacated and remanded to FERC
for further consideration.