United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 27, 2006 Decided January 5, 2007
No. 05-1231
SACRAMENTO MUNICIPAL UTILITY DISTRICT,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORP., ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Harvey L. Reiter argued the cause for petitioner. With him
on the briefs were Glen L. Ortman, Dennis Lane, Lucy Holmes
Plovnick, and Linda M. Nagel.
Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor. Judith A. Albert, Attorney, entered an
appearance.
Michael E. Ward, Anthony J. Ivancovich, Daniel J.
2
Shonkwiler, Mark D. Patrizio, and Stuart K. Gardiner were on
the brief for intervenors California Independent System
Operator Corporation, et al. in support of respondent.
Before: GINSBURG, Chief Judge, and SENTELLE and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: For the second time in as many
years, petitioner, a local utility, seeks review of a Federal
Energy Regulatory Commission order denying it the opportunity
to continue purchasing transmission services through a contract
that expired at the end of 2004. Finding petitioner’s claims
meritless, we deny the petition.
I.
Under a contract signed in 1967, Pacific Gas & Electric
(PG&E) and several other California utilities provided
petitioner, the Sacramento Municipal Utility District (SMUD),
long-term firm transmission service. For those uninitiated in the
intricacies of energy regulation, “[f]irm service permits
customers to demand transmission at any time, while non-firm
service permits the utility to cut service when there is not
enough excess capacity.” Transmission Access Policy Study
Group v. FERC, 225 F.3d 667, 730 (D.C. Cir. 2000) (per
curiam). The contract permitted SMUD to demand 200
megawatts of transmission service—at any time for a fixed
rate—over a series of high-voltage transmission facilities known
as the Pacific Intertie. Consisting of two 500 kilovolt lines
running from the Pacific Northwest through California, the
Intertie allows California utilities to purchase power from
sources in Oregon and Washington. Critical to the issue before
us, PG&E had a similar contract with the Western Area Power
3
Administration (Western). The SMUD and Western contracts
(like other PG&E firm service contracts relating to the Intertie)
expired on December 31, 2004.
As we explained in Sacramento Municipal Utility District
v. FERC, 428 F.3d 294 (D.C. Cir. 2005) (hereinafter Sacramento
I), while Western and SMUD were receiving service under these
contracts, the state of California and FERC “radically
restructur[ed]” California’s energy market. Id. at 296. As part
of the restructuring, FERC “required utilities to ‘unbundle’ their
electricity generation and transmission services and to file new
‘open access’ tariffs . . . guaranteeing non-discriminatory access
to their transmission facilities by competing generators.” Id. at
295-96; see also Promoting Wholesale Competition Through
Open Access Non-Discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utilities
and Transmitting Utilities, F.E.R.C. Stats & Regs. ¶ 31,036 at
31,634-38 (1996) (summarizing FERC’s new regulation). At
the same time, California created the California Independent
System Operator Corporation (CAISO), a non-profit
organization that took over operation (but not ownership) of
many transmission facilities, including the portions of the
Pacific Intertie owned by PG&E. A year later (in a proceeding
in which SMUD intervened) FERC approved a new tariff
proposed by CAISO, under which CAISO no longer offers long-
term firm transmission service, but instead requires utility
customers to request transmission capacity in “real time,” i.e.,
on either an hour-ahead or day-ahead basis. See Sacramento I,
428 F.3d at 297 (explaining CAISO tariff); Pac. Gas & Elec.
Co., 81 F.E.R.C. ¶ 61,122 at 61,435 (1997) (hereinafter CAISO
II) (approving CAISO tariff). Utilities are then charged an
access fee, as well as a “congestion price” that fluctuates with
demand. The CAISO tariff provides transmission service to any
utilities willing to pay the congestion charge. Sacramento I, 428
F.3d at 297.
4
Recognizing that CAISO’s new service model represented
a significant change for the utilities, “the Commission . . .
declined to abrogate existing contracts and ordered customers to
take service under the [CAISO] tariff upon contract expiration.”
Id.; see also CAISO II, 81 F.E.R.C. at 61,470-71. For this
reason, SMUD and Western continued receiving transmission
service under the 1967 contracts until they expired at the end of
2004. In addition to delaying implementation of the open-access
tariff for these utilities, FERC required CAISO to find ways to
allow utilities to hedge the risk of price fluctuations, Pac. Gas
& Elec. Co., 80 F.E.R.C. ¶ 61,128 at 61,427 (1997) (hereinafter
CAISO I), and later adopted a CAISO proposal that mitigated
risk through the use of short-term tradeable financial
instruments, see Cal. Ind. Sys. Operator Corp., 87 F.E.R.C. ¶
61,143, at 61,569-82 (1999). At oral argument in this case,
FERC’s counsel indicated the Commission is now investigating
longer-term risk mitigation strategies through a comprehensive
market redesign proceeding. Oral Arg. at 24:30.
Early in 2004, PG&E filed for permission to terminate
transmission service to SMUD and Western upon the expiration
of their contracts at the end of that year. Shortly thereafter,
PG&E and CAISO began negotiations with Western—but not
with SMUD—to continue transmission service outside the
CAISO tariff. Unlike SMUD, Western owns and operates a
segment of one of the two transmission lines that make up the
Pacific Intertie. PG&E owns and CAISO operates the remainder
of this line. Absent an agreement similar to Western’s 1967
contract with PG&E, utility customers receiving power
transmitted along the Intertie would be charged twice, once by
CAISO and again by Western (a phenomenon FERC calls
“pancaked rates”). Pac. Gas & Elec. Co., 109 F.E.R.C. ¶ 61,255
at 62,213 (2004) (hereinafter Initial Order). Western, CAISO,
and PG&E, however, negotiated a “Transmission Exchange
5
Agreement,” whereby the parties agreed to exchange
transmission without charging each other transmission rates,
including congestion charges. This Agreement effectively
shielded Western from the risks of congestion pricing under the
CAISO tariff in exchange for providing CAISO and its
customers rate-free capacity on Western’s portion of the Pacific
Intertie. Calling the Transmission Exchange Agreement a
“unique agreement which is beneficial to all the parties,” FERC
approved it, along with PG&E’s termination of service to
Western under the 1967 contract. Id. at 62,212-13.
Although SMUD lodged no objection to the Transmission
Exchange Agreement, it opposed PG&E’s filing to terminate its
own service, alleging that termination would harm the public
interest by subjecting SMUD to the financial risks of congestion
pricing under the CAISO tariff. SMUD also asserted that
PG&E’s refusal to negotiate a successor agreement similar to
the new Western agreement was discriminatory. Based on these
arguments, SMUD urged FERC to reject PG&E’s filing, or in
the alternative, to suspend termination until the Commission
could conduct an evidentiary hearing to resolve the issues.
FERC rejected SMUD’s arguments, denied its request for
an evidentiary hearing, and accepted PG&E’s notice of
termination. Id. at 62,215. SMUD sought rehearing, reiterating
its arguments and asserting that FERC should have reviewed
PG&E’s termination request under a “public interest” rather than
a “just and reasonable” standard. FERC denied rehearing, Pac.
Gas & Elec. Co., 111 F.E.R.C. ¶ 61,175 at 61,849 (2005)
(hereinafter Rehearing Order), and SMUD now petitions for
review, see 16 U.S.C. § 825l(b) (granting judicial review of
FERC orders made under the Federal Power Act).
6
II.
Because termination of transmission service constitutes a
rate change requiring FERC approval under section 205(d) of
the Federal Power Act (FPA), 16 U.S.C. § 824d(d), a
transmission service provider must file with FERC before
terminating service, even if service is provided under a contract
ending on its own terms. See also 18 C.F.R. § 35.15(a). SMUD
first argues that FERC may accept a filing requesting
termination of service only if the termination serves the “public
interest.” SMUD roots this contention in dictum from
Pennsylvania Water & Power Co. v. Federal Power
Commission, 343 U.S. 414 (1952), in which the Supreme Court
held that FERC’s predecessor agency, the Federal Power
Commission (FPC), had statutory authority to order Penn Water
to continue its practice of integrating its power output with that
of another public utility. Id. at 422-23. The Court explained
that Penn Water could nonetheless seek Commission approval
to discontinue service under FPA section 205(d), “provided
Penn Water can prove that its wishes are consistent with the
public interest.” Id. (emphasis added). SMUD also points to
two previous FERC orders, in which the Commission stated that
“proposed termination[s] must be shown to be consistent with
the public interest.” Fla. Power & Light Co., 3 F.E.R.C. ¶
61,081 at 61,231 (1978); see also Pub. Serv. Co. of Ind., 10
F.E.R.C. ¶ 61,277 at 61,537 (1980). According to SMUD, by
refusing to make a public interest determination, FERC departed
from these precedents without explanation.
We see no merit in SMUD’s argument. The words “public
interest” appear nowhere in section 205(d). Instead, the statute
requires FERC to determine whether a proposed change in
service is “just and reasonable” and free from “any undue
preference or advantage.” 16 U.S.C. § 824d(a), (b). Nothing in
Penn Water, moreover, suggests that in using the term “public
7
interest” the Supreme Court intended to expand the scope of the
Commission’s inquiry beyond these statutory criteria. Nor, as
FERC indicated in its rehearing order, has the Commission ever
defined the scope of its inquiry differently. See Rehearing Order
at 61,851 (referring to cases cited by SMUD in support of its
position, “[i]n these cases, the Commission determined that it
should make a just and reasonable determination”); El Paso
Elec. Co., 107 F.E.R.C. ¶ 61,314 at 62,475 (2004) (“[T]he notice
of cancellation has not been shown to be just and reasonable,
and may be unjust, unreasonable, unduly discriminatory, or
preferential, or otherwise unlawful.”); Cinergy Servs., Inc., 93
F.E.R.C. ¶ 61,308 at 62,059 (2000) (stating that standard for
approving notice of termination is whether termination “is not
unjust, unreasonable, unduly discriminatory or preferential, or
otherwise unlawful”). To be sure, in Public Service Co. of
Indiana, FERC did use the term “public interest.” In that case,
however, it equated “public interest” with a showing that a
termination filing is “unjust, unreasonable, unduly
discriminatory, preferential, or otherwise unlawful,” 10 F.E.R.C.
at 61,537, all terms clearly derived from the section 205(d)
criteria.
In only one case, Florida Power & Light, has FERC defined
its termination inquiry in terms that differ from section 205(d)’s
criteria. 3 F.E.R.C. at 61,231. As FERC made clear in its
rehearing order in this case, however, Florida Power & Light is
distinguishable, as it involved a contractual dispute over whether
a utility had agreed to a termination clause, not, as here, a filing
for termination of service on a contract ending on its own terms.
Rehearing Order at 61,851. Much like Penn Water, Florida
Power & Light, after resolving the disputed issues in the case,
merely adds that even without the contract’s termination
provision, the service provider retains the option of filing a
motion to terminate its service under 18 C.F.R. § 35.15, and
broadly states that the requested termination “must be shown to
8
be in the public interest.” 3 F.E.R.C. at 61,231. Nowhere in
Florida Power & Light did FERC suggest that it had authority
to consider factors not found in the statute.
Alternatively, SMUD argues that even if FERC may
confine its review to whether termination of service was just,
reasonable, and non-discriminatory, the Commission failed to
make a “just and reasonable” finding here. We see no merit in
this argument either. Although FERC never said in so many
words that PG&E’s termination of service would be just and
reasonable, it essentially used that standard in responding to
SMUD’s claims. See Rehearing Order at 61,852. In our view,
this satisfies FERC’s responsibilities under section 205(d).
III.
SMUD’s two substantive complaints about FERC’s order,
each of which it insists required a hearing, fall under two
different subsections of FPA section 205(d). SMUD first
contends that termination of its transmission service under the
1967 contract was not in the “public interest”—or to use the
proper standard from the statute, not just and
reasonable—because service termination would subject the
company to greater risks of price fluctuation under the CAISO
tariff. See 16 U.S.C. § 824d(a) (requiring rates to be “just and
reasonable”). Second, SMUD claims that PG&E’s and
CAISO’s negotiation of a successor agreement with Western,
but not with SMUD, amounted to undue discrimination. See 16
U.S.C. § 824d(b) (requiring rates to be free from “undue
preference” or “unreasonable difference[s]”). We consider each
claim in turn.
In support of its first argument, SMUD contends that FERC
failed to consider evidence that it would be “unable to secure
firm delivery of power it has purchased under long-term firm
9
supply” pursuant to the CAISO tariff. Pet’r’s Br. at 28. The
CAISO tariff, however, does not deny transmission service to
the company. Under CAISO’s open-access tariff, SMUD can
always access the power it purchased through long-term supply
contracts, though it may have to pay congestion pricing to do so.
Therefore, as FERC correctly recognized, the company is not
challenging PG&E’s termination of its service, but instead is
again collaterally attacking the adequacy of the service provided
under the CAISO tariff. See Pet’r’s Br. at 25-27; Initial Order
at 62,215 (stating that Commission had already determined in
Sacramento I litigation that “while SMUD would take service
under the rates, terms and conditions of the CAISO Tariff, it
would not be denied access to transmission service”); Rehearing
Order at 61,852 (“SMUD is not being denied access to the
transmission system, it is merely required to access it in the
same manner as other CAISO customers.”).
We rejected such a collateral attack in Sacramento I and do
so again here. Sacramento I, 428 F.3d at 298-99 (“[SMUD]
ultimately challenges the validity of the [CAISO] tariff itself,
arguing that its system of congestion pricing and firm
transmission rights . . . fails to provide a service that is as good
or superior to that under the Order No. 888 pro forma tariff . . .
. [T]he time for seeking judicial review [of the CAISO tariff] has
long since passed.”). FERC acknowledges the significant
financial risks of congestion pricing, CAISO I, 80 F.E.R.C. at
61,427, and is now addressing these concerns through a
comprehensive market redesign proceeding, see Rehearing
Order at 61,852. It is in those proceedings in which SMUD
should raise its concerns about congestion pricing. The fact that
CAISO’s tariff may be imperfect for SMUD’s needs gives us no
authority to overturn FERC’s perfectly rational decision that
SMUD must, in the meantime, operate under the same tariff and
incur the same risks as other California utilities.
10
In support of its second claim—that termination of service
under the 1967 contract was discriminatory—SMUD points out
that although PG&E, along with CAISO, negotiated a successor
agreement with Western, it rebuffed SMUD’s requests to
negotiate a similar successor agreement. In order for PG&E’s
refusal to negotiate a successor agreement with SMUD to
constitute undue discrimination, SMUD must demonstrate it is
similarly situated to Western. See Ohio Power Co. v. FERC,
744 F.2d 162, 165 n.3 (D.C. Cir. 1984) (summarily rejecting
claim where parties were not similarly situated). According to
SMUD, it is so situated because PG&E proposed to terminate
both its and Western’s 1967 transmission contracts. In support,
SMUD submitted an affidavit from Brian Jobson, a SMUD
employee responsible for administering the company’s
transmission contracts, who explained that SMUD, like Western,
offered to exchange some transmission capacity with PG&E and
CAISO. Jobson Aff. at 4. Because SMUD was “not in a
position to swap transmission capacity of [the] magnitude”
proposed in the Transmission Exchange Agreement, the
company proposed to compensate PG&E for firm transmission
through a more limited transmission exchange as well as
“monetarily . . . as it has since 1967.” Id. Relying on this
affidavit, SMUD argues that its proposal raised a genuine issue
of fact requiring FERC to have conducted a hearing regarding
whether SMUD and Western were similarly situated.
In rejecting SMUD’s request for a hearing, FERC explained
that Western and SMUD were not similarly situated because
SMUD, unlike Western, owns no portion of the Intertie and thus
“cannot offer a similar capacity exchange between California
and the Pacific Northwest markets.” Rehearing Order at 61,852.
Not only does SMUD fail to challenge FERC’s conclusion, but
the Jobson affidavit fully supports it, acknowledging the
company’s inability to swap transmission capacity at anywhere
near the same magnitude as Western. Jobson Aff. at 4.
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According to Jobson, SMUD offered 100 megawatts of
transmission service to CAISO. See Jobson Aff. at 5. By
comparison, under the Transmission Exchange Agreement,
Western will provide CAISO with twelve times that amount.
Initial Order at 62,212. Moreover, SMUD made no showing
that even the limited transmission capacity it offered would
benefit other market participants—a factor FERC found crucial
when approving Western’s Transmission Exchange Agreement.
Id. at 62,212-13, 62,215.
Implicitly acknowledging its inability to offer a
transmission capacity exchange comparable to Western’s,
SMUD principally argues that FERC’s decision conflicts with
agency precedent, namely Mid-Continent Area Power Pool, 58
F.P.C. 2622 (1977), aff’d sub nom. Cent. Iowa Power Coop.,
Inc. v. FERC, 606 F.2d 1156 (D.C. Cir. 1979). Mid-Continent
involved a pooling arrangement that allowed utilities to
exchange power on a short-term basis in order to stagger
generator construction—a practice called “reserve sharing.” 606
F.2d at 1160-61. The arrangement created two classes of
participants, with power companies having less transmission
capacity receiving fewer services and less representation on pool
committees. Id. at 1170. The FPC, FERC’s predecessor, held
that the two-class system amounted to undue discrimination,
reasoning that, so long as the small generators provided either
monetary or in-kind compensation for the transmission services
they received, these utilities must be allowed to participate fully
in the pooling arrangement. Id. at 1170 & n.46. From Mid-
Continent, SMUD extrapolates the proposition that “it [is]
discriminatory to deny a transmission service to a party based on
its inability to offer an in-kind exchange, so long as it is willing
to compensate the provider for the service monetarily.” Pet’r’s
Br. at 32. Applying that principle to this case, SMUD asserts
that FERC improperly considered the company’s inability to
provide service over the Intertie. SMUD also alleges that FERC
12
acted arbitrarily by failing even to acknowledge its Mid-
Continent–based argument.
Although agencies act arbitrarily when they depart from
precedent without explanation, see Greater Boston Television
Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970) (“[A]n
agency changing its course must supply a reasoned analysis
indicating that prior policies and standards are being deliberately
changed, not casually ignored.”), FERC departed from precedent
in this case only if Mid-Continent, as SMUD insists, actually
stands for the proposition that distinguishing between in-kind
and monetary contributions is always discriminatory. See
Interstate Quality Servs. v. R.R. Ret. Bd., 83 F.3d 1463, 1465
(D.C. Cir. 1996) (rejecting claim that decision must be
remanded to agency where cited precedents were inapplicable).
Mid-Continent stands for no such principle. In Mid-Continent,
the Commission found the agreement discriminatory because the
distinction between in-kind and monetary compensation was not
“reasonably related to the . . . objectives” of the challenged
agreement. 58 F.P.C. at 2635 (emphasis added). In affirming,
we reiterated that “the Commission held that exclusion of small
generator systems was not reasonably related to [the
agreement’s] objectives.” Cent. Iowa Power, 606 F.2d at 1172
(emphasis added). In this case, SMUD does not argue, nor
could it, that the ability to provide transmission capacity bears
no reasonable relationship to the exchange of capacity in the
Transmission Exchange Agreement. Indeed, exchange of
transmission capacity is the very purpose of the agreement.
Furthermore, while FERC did fail to cite Mid-Continent, it
responded to SMUD’s Mid-Continent–based argument,
explaining in the rehearing order that while SMUD “argues that
the Commission has held that the lack of transmission facilities
to exchange in kind should not foreclose a utility from access to
transmission service, this is not relevant . . . . SMUD is not
13
being denied access to the transmission system, it is merely
required to access it in the same manner as other CAISO
customers.” Rehearing Order at 61,852. As we see it, then,
FERC distinguished Mid-Continent on the grounds that it found
discrimination in that case precisely because small generators
were “denied access” to services under the pooling arrangement
for reasons not “reasonably related” to the purposes of the
arrangement. See Mid-Continent, 58 F.P.C. at 2635. SMUD
faces no similar denial of transmission service. Under CAISO’s
open-access tariff, SMUD may request as much transmission
service as it needs, provided it pays the congestion charges.
While FERC could have done a better job of explaining how it
distinguished Mid-Continent, “[w]e may permit agency action
to stand without elaborate explanation where distinctions
between the case under review and the asserted precedent are so
plain that no inconsistency appears.” Bush-Quayle ’92 Primary
Comm., Inc. v. FEC, 104 F.3d 448, 454 (D.C. Cir. 1997).
For the foregoing reasons, FERC’s orders are neither
arbitrary nor capricious. See, e.g., Constellation Energy
Commodities Group v. FERC, 457 F.3d 14, 19 (D.C. Cir. 2006)
(“As always, we will set aside a decision of the Commission
only if it is arbitrary and capricious or otherwise contrary to
law.”). As FERC explained, SMUD was not similarly situated
to Western because, unlike Western, it owned no portion of the
Intertie. FERC also adequately distinguished the principle
SMUD gleans from Mid-Continent. Here, unlike in Mid-
Continent, the distinction FERC drew between in-kind and
monetary contributions was reasonably related to the goals of
the challenged agreement. Finally, because SMUD’s own
affidavit acknowledges the company’s inability to offer an
exchange comparable to Western’s, we see no abuse of
discretion in FERC’s decision to resolve this issue on the written
record without an evidentiary hearing. See Moreau v. FERC,
982 F.2d 556, 568 (D.C. Cir. 1993) (“[E]ven where there are . .
14
. disputed issues, FERC need not conduct . . . a hearing if they
may be adequately resolved on the written record.”).
IV.
While SMUD obviously prefers firm service to CAISO’s
congestion pricing scheme, it may not collaterally attack the
CAISO tariff in this proceeding. We deny its petition for
review.
So ordered.