Transmission Agency v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 14, 2007 Decided July 20, 2007

No. 05-1402

TRANSMISSION AGENCY OF NORTHERN CALIFORNIA, ET AL.,
PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

SOUTHERN CALIFORNIA EDISON COMPANY, ET AL.,
INTERVENORS

Consolidated with
06-1246

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

Dennis M.P. Ehling argued the cause for petitioners. With
him on the briefs were Roger D. Stark, Wallace L. Duncan,
James D. Pembroke, Michael Postar, Peter J. Scanlon, Sean M.
Neal, and Kristen Connolly McCullough.

Wallace F. Tillman, Lisa G. Dowden, Daniel I. Davidson,
Robert C. McDiarmid, Susan N. Kelly, Jonathan D. Schneider,
 2

Harvey L. Reiter, and Linda M. Nagel were on the briefs for
intervenor and amici curiae in support of petitioner. Eugene
Tillman entered an appearance.

Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.

Stuart K. Gardiner argued the cause for intervenors in
support of respondent. With him on the brief were Anna J.
Valdberg, Jennifer L. Key, Michael E. Ward, Anthony J.
Ivancovich, Daniel J. Shonkwiler, Erik N. Saltmarsh, and Jeffrey
A. Diamond. Victoria S. Kolakowski entered an appearance.

Before: GINSBURG, Chief Judge, and HENDERSON and
GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge: Petitioners challenge three orders1
of the Federal Energy Regulatory Commission (“FERC”) that
require the City of Vernon, California (“Vernon”) to issue
refunds to the California Independent System Operator
Corporation (“CAISO”) for overcollection of its transmission
revenue requirement (“TRR”).2 Any opinion whose opening

1
City of Vernon, Cal., 111 FERC ¶ 61,092 (2005) (Opinion
No. 479); City of Vernon, Cal., 112 FERC ¶ 61,207 (2005) (Opinion
No. 479-A); City of Vernon, Cal., 115 FERC ¶ 61,297 (2006)
(Opinion No. 479-B).
2
A TRR “consists of the costs and rate of return to which the
utilities are entitled as participating transmission owners.” Pacific
Gas & Elec. Co. v. FERC, 306 F.3d 1112, 1114 (D.C. Cir. 2002). The
 3

sentence includes three acronyms, one footnote that refers to
three FERC orders and another that requires a definition of an
accounting procedure is likely to be about a matter of some
complexity. Fortunately, the legal issue that resolves the
controversy before us is not so complex as the dispute itself, and
because this case is a continuation of the litigation that resulted
in our decision in Pacific Gas & Electricity Company v. FERC,
306 F.3d 1112 (D.C. Cir. 2002) (“PG&E”), we have some prior
familiarity with the events and disputes out of which it arose.

In PG&E, we were asked to review a challenge brought by
some existing PTOs of CAISO to a FERC order that approved
the TRR Vernon filed when it sought to become a PTO as well.
We concluded that FERC had failed to demonstrate that
CAISO’s rates (also referred to as the “transmission access
charge” or “TAC”) would be just and reasonable if Vernon were
to participate under the proposed TRR. On remand, FERC
issued three orders directing Vernon to pay refunds to CAISO
so as to restore CAISO’s just and reasonable rate. Vernon now
petitions for review of these orders and asks us to consider
whether FERC has authority (1) to review Vernon’s TRR under
the just and reasonable standard and (2) to order Vernon to
refund any overcollection of its TRR.

Joining Vernon are the Transmission Agency of Northern
California (“TANC”), the City of Santa Clara, California, the
City of Redding, California, and M-S-R Public Power Agency

parties in this case use this term, as do we, to refer both to the detailed
revenue requirement a utility would submit to CAISO and FERC in
order to become a participating transmission owner (“PTO”) of
CAISO and to the monetary compensation a PTO would collect from
CAISO.
 4

(collectively, the “TANC Parties”).3 Together, they argue that
because Vernon, as a municipality, is exempted from the Federal
Power Act when it provides transmission services, see E. Ky.
Power Coop., Inc. v. FERC, No. 06-1003, slip op. at 10-11 (D.C.
Cir., June 15, 2007) (citing United States v. Pub. Util. Comm’n
of Cal., 345 U.S. 295, 315 (1953)), FERC has no authority to
order Vernon to pay refunds. For the reasons set forth below,
we hold that although FERC has sufficiently demonstrated its
authority to review Vernon’s TRR under the just and reasonable
standard, FERC lacks jurisdiction to order Vernon to pay
refunds to CAISO. Accordingly, we vacate the portions of the
orders requiring refunds by Vernon and remand for further
proceedings.

I.

The Federal Power Act (“FPA”) grants FERC authority “to
provide effective federal regulation of the expanding business of
transmitting and selling electric power in interstate commerce.”
New York v. FERC, 535 U.S. 1, 6 (2002) (citing Gulf States Util.
Co. v. FPC, 411 U.S. 747, 758 (1973)). Section 205 of
subchapter II under the FPA permits FERC to ensure that “all
rates and charges made, demanded, or received by any public
utility for or in connection with the transmission or sale of
electric energy” subject to its jurisdiction are “just and
reasonable.” FPA § 205, 16 U.S.C. § 824d(a).

In the past, the monopoly control of vertically-integrated
utilities presented a major structural problem in the electricity
industry because consumers were forced to pay a single price for
“bundled” generation, transmission, and distribution services.
See, e.g., Midwest ISO Transmission Owners v. FERC, 373 F.3d

3
Of these petitioners, only Vernon has thus far sought to join
CAISO.
 5

1361, 1363 (D.C. Cir. 2004) (“Midwest ISO”); Pub. Util. Dist.
No. 1 of Snohomish Co. v. FERC, 272 F.3d 607, 610 (D.C. Cir.
2001) (“Snohomish”). In an attempt to correct this problem,
FERC implemented several policies to minimize anticompetitive
behavior among transmission-owning public utilities. FERC
began by requiring “utilities that owned transmission facilities
to guarantee all market participants non-discriminatory access
to those facilities,” Midwest ISO, 373 F.3d at 1363 (citing
Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities, 61
Fed. Reg. 21,540, 21,550-52 (1996) (“Order No. 888”)). Next,
FERC encouraged, but did not require, the development of
umbrella entities called independent system operators (“ISOs”)
and regional transmission organizations (“RTOs”). See id. at
1364. FERC encouraged public utilities to participate in these
organizations, which would manage the transmission facilities
of each of its members and return to them the revenues set forth
in the TRRs. By assuming operational control but not
ownership of the transmission facilities, ISOs (which manage
RTOs) would separate “operation of the transmission grid and
access to it from economic interests in generation[,]” Order No.
888, 61 Fed. Reg. at 21,551, and promote efficiency by taking
advantage of economies of scale in segmentation and control of
facilities, see Midwest ISO, 373 F.3d at 1364. Finally, FERC
encouraged “all transmission-owning entities in the Nation,
including non-public entities [e.g., governmental entities],”4

4
The term “non-public entity,” or its equivalent “non-public
utility,” can be confusing even to the careful reader. The FPA defines
a “public utility” as “any person who owns or operates facilities
subject to the jurisdiction of [FERC.]” FPA § 201(e), 16 U.S.C.
§ 824(e). FERC refers to utilities wholly-owned by governmental
entities as “non-public utilities” or “non-public entities” because
governmental entities are exempt from the FPA and therefore exempt
from FERC’s jurisdiction when they provide transmission services.
 6

Regional Transmission Organizations, Order No. 2000, 65 Fed.
Reg. 810, 811 (1996) (emphasis added); see also Order No. 888,
61 Fed. Reg. at 31,780-81, to voluntarily place their
transmission facilities under the control of RTOs, see Order No.
2000, 54 Fed. Reg. at 811, some of which would be managed in
turn by ISOs, id.; see also Order No. 888, 61 Fed. Reg. at
21,595-96.

This last step created a complication from which this case
arises. Because governmental entities are exempt from the FPA,
see FPA § 201(f), 16 U.S.C. § 824(f), FERC cannot regulate
them even when they join regulated ISOs. See PG&E, 306 F.3d
at 1114. It is settled, however, that “FERC may analyze and
consider the rates of non-jurisdictional utilities to the extent that
those rates affect jurisdictional transactions.” Id. (citations
omitted). In other words, FERC may consider the rates of a
municipal utility PTO to the extent that they affect the rates of
the ISO, which is subject to the FPA.

Established in 1997 by the State of California, CAISO is an
ISO subject to the FPA. Initially, it had three PTOs, each
subject to FERC’s jurisdiction—Pacific Gas & Electric
Company, Southern California Edison Company, and San Diego
Gas & Electric Company. Under § 205, FERC had authority to
examine these PTOs’ TRRs to ensure that they were just and
reasonable. On March 31, 2000, CAISO proposed to amend its
tariff to allow non-jurisdictional utilities, including
governmental entities, to become PTOs. See Cal. Indep. Sys.
Operator Corp., 91 FERC ¶ 61,205, 61,720 (2000). Although
the aim of the proposal was consistent with FERC’s effort to
encourage non-jurisdictional entities to become PTOs, FERC
nonetheless determined that this particular proposal was at odds
with FERC’s regulatory responsibility because it barred any
FERC review of the TRRs of non-jurisdictional entities. See id.
at 61,724. Careful to disavow any intention “to broaden the
 7

applicability of Section 205 to non-public utilities,” id. (internal
quotation and citation omitted), FERC accepted a revised
CAISO proposal only when it required non-jurisdictional PTOs
to submit their TRRs to either an ISO panel subject to FERC
review or directly to FERC. See Cal. Indep. Sys. Operator
Corp., 93 FERC ¶ 61,104, 61,287-89 (2000).

On August 30, 2000, Vernon, seeking to become a PTO of
CAISO, filed its TRR. See City of Vernon, Cal., 93 FERC
¶ 61,103, 61,283 (2000). FERC accepted Vernon’s proposal
subject to certain modifications (of no significance here), see
Cal. Indep. Sys. Operator, 94 FERC ¶ 61,148 (2001), which
Vernon made. See City of Vernon, Cal., 94 FERC ¶ 61,344
(2001). Two of CAISO’s PTOs appealed FERC’s decision to
accept Vernon’s proposal on the ground that Vernon’s TRR did
not meet § 205’s “just and reasonable” standard and that FERC
had failed to adequately consider how Vernon’s participation
and its TRR would affect CAISO’s overall rates. See PG&E,
306 F.3d at 1114.

It should not be surprising that these PTOs were troubled by
FERC’s approval of Vernon’s TRR. Because CAISO’s rates are
based on the TRRs of each of the PTOs, a Vernon TRR that is
not just and reasonable could frustrate FERC’s effort to ensure
that CAISO’s rates are. Observing this, in PG&E we held that
“FERC never clarified or developed either the approach or the
standard that it applied” to review Vernon’s TRR, id. at 1118,
and remanded the case “so that FERC can articulate with clarity
what approach and standard are governing its review and how
both ensure CAISO’s rates are just and reasonable under § 205,”
id. at 1119.

On remand, FERC held a hearing and collected comments
from interested parties, including Vernon, the TANC Parties,
and the other PTOs of CAISO. In the Initial Decision, the
 8

Administrative Law Judge (“ALJ”) “concluded that Vernon’s
TRR should be subject to a Section 205 like review, in order to
ensure that its inclusion in the [CAISO rate] results in just and
reasonable [CAISO] rates.” City of Vernon, Cal., 109 FERC
¶ 63,057, 65,131 (2004) (emphasis added). Reflecting the
tension between Vernon’s exemption from the FPA and FERC’s
duty to ensure that CAISO’s rates are just and reasonable, the
ALJ left the standard of review vague, providing only that “each
element of Vernon’s TRR must be closely scrutinized using a
method approximating a Section 205 review.” Id. at 65,135
(emphasis added). The ALJ made no determination whether
FERC has authority to order a non-jurisdictional entity to pay
refunds to an ISO, because it believed that Vernon’s
overcollection could eventually “be netted out in the ISO’s
balancing account.” Id. at 65,141 n.41.

In Opinion No. 479, FERC affirmed much of the ALJ’s
Initial Decision but clarified that Vernon’s TRR should be
reviewed under § 205’s “just and reasonable” standard. 111
FERC ¶ 61,092, 61,428 (2005). “Vernon having voluntarily
made its TRR part of a jurisdictional rate, the TRR is subject to
our § 205 jurisdiction and both can and must be reviewed
thereunder.” Id. at 61,429. Vernon sought a rehearing of
Opinion No. 479 on the ground, inter alia, that FERC
overstepped its authority in subjecting Vernon to a full-scale
§ 205 review.

In Opinion No. 479-A, FERC denied rehearing of Opinion
No. 479 and emphasized that it read PG&E as “fully endorsing”
FERC’s § 205 review of Vernon’s TRR. 112 FERC ¶ 61,207,
2005 WL 2030491, at *5 (2005). Throughout the PG&E
remand litigation, Vernon had argued that FERC was without
authority to order Vernon to pay refunds, see, e.g., id. at *15, but
FERC only finally addressed this question in Opinion No. 479-
A. FERC determined that the refund issue was governed by
 9

section 16.2 of CAISO’s Transmission Control Agreement with
Vernon (“Agreement”), which obligated Vernon to pay refunds
for any overcollection it received from CAISO.5 See id. at *17.
FERC concluded that “the ISO had proposed section 16.2
specifically to remedy the situation in which a
‘non-jurisdictional Participating Transmission Owner, such as
Vernon, will not be obligated to adjust rates or make refunds in
accordance with the ISO Tariff,’” id. at *16 (citation omitted),
and accordingly directed Vernon to pay refunds to CAISO, id.
at *16-18. In response to Vernon’s argument that the disputed
order constituted an unlawful exercise of jurisdiction over
Vernon’s non-jurisdictional activity (i.e., the ratemaking activity
of a governmental entity), FERC viewed the order as an
appropriate exercise of its “jurisdiction over the ISO’s TAC rate,
of which Vernon’s TRR is a component.” Id. at *5. Vernon

5
Section 16.2 provides:

Each Participating [Transmission Owner] whether or
not it is subject to the rate jurisdiction of FERC
under section 205 and section 206 of the Federal
Power Act shall make all refunds, adjustments to its
Transmission Revenue Requirement, and adjustments
to its [Transmission Owner] Tariff, and do all other
things required of a Participating [Transmission
Owner] to implement any FERC order related to the
ISO Tariff, including any FERC order that requires
the ISO to make payment adjustments or pay refunds
to, or receive prior period overpayments from, any
Participating [Transmission Owner]. All such
refunds and adjustments shall be made, and all other
actions taken, in accordance with the ISO Tariff,
unless the applicable FERC order requires otherwise.

Opinion No. 479-A, 2005 WL 2030491, at *16 (citing Ex. S-3 in
Docket No. ER00-2019 et al.) (emphasis added).
 10

sought a rehearing of Opinion No. 479-A, requesting a
determination that FERC had no authority to require a municipal
utility to pay refunds. The TANC Parties, who, as governmental
entities, would be affected by FERC’s conclusions in Opinions
No. 479 and No. 479-A, sought review of the two orders in this
Court.

In Opinion No. 479-B, FERC denied rehearing of Opinion
No. 479-A, see 115 FERC ¶ 61,297, 62,059 (2006), and held
that the Agreement, which had been accepted by FERC,
provided a basis for FERC’s authority to order compliance with
its refund terms. Because Vernon “bound itself contractually,”
FERC concluded that it could properly hold Vernon to its
commitment despite Vernon’s status as a municipal utility
exempt from FPA regulation. Id. at 62,064. Vernon’s timely
petition for review followed, and Vernon’s petition was
consolidated with the TANC Parties’ petition for review of
Opinions No. 479 and No. 479-A.

II.

We begin by determining whether we have jurisdiction to
review petitioners’ claims. Section 313(b) of the FPA provides
that a party seeking judicial review of a FERC order must be
“aggrieved” by that order. FPA § 313(b), 16 U.S.C. § 825l(b).
“A party is aggrieved within the meaning of § 313(b) if it can
establish both the constitutional and prudential requirements for
standing.” Snohomish, 272 F.3d at 613. To establish
constitutional standing, petitioners must show three elements:
(1) injury in fact, (2) causation, and (3) redressability. See, e.g.,
GrassRoots Recycling Network, Inc. v. EPA, 429 F.3d 1109,
1111-12 (D.C. Cir. 2005) (citing Lujan v. Defenders of Wildlife,
504 U.S. 555, 560-61 (1992)). To establish prudential standing,
petitioners must show that “the interest sought to be protected by
the complainant is arguably within the zone of interests to be
 11

protected or regulated by the statute.” Ass’n of Data Processing
Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970).

We have no trouble finding jurisdiction to review claims
initially raised by Vernon under administrative review by FERC.
Vernon has constitutional standing. It has been injured in fact
because it was ordered to make payments out of its treasury, the
injury was caused by FERC’s orders, and this Court can redress
Vernon’s injury if FERC’s order is contrary to law. Vernon also
has prudential standing. Because Vernon sought to become a
PTO of CAISO, its relationship with CAISO falls within the
zone of interests protected by the FPA.

Were the consolidated petition before us to include only
arguments previously raised by Vernon in its administrative
hearing, we would not need to resolve whether the TANC
Parties also have standing. See, e.g., Ry. Labor Executives’
Ass’n v. United States, 987 F.2d 806, 810 (D.C. Cir. 1993) (“[I]f
one party has standing in an action, a court need not reach the
issue of the standing of other parties when it makes no
difference to the merits of the case.” (citing Doe v. Bolton, 410
U.S. 179, 189 (1973))). But the petition raises an additional
argument not previously raised by Vernon—namely, that FERC
should apply a “comparability standard” to review Vernon’s
TRR. See Petitioners’ Br. at 37. Because Vernon cannot raise
this argument for the first time before us, see Entergy Srvs., Inc.
v. FERC, 391 F.3d 1240, 1247 (D.C. Cir. 2004) (“Parties
seeking review of FERC orders must petition for rehearing of
those orders and must themselves raise in that petition all of the
objections urged on appeal.” (quoting Platte River Whooping
Crane v. FERC, 875 F.2d 109, 113 (D.C. Cir. 1989)) (emphasis
in original)), we must determine whether TANC, alone among
the TANC Parties to have raised this argument at the
administrative hearing, see Opinion No. 479-A, 111 FERC at
61,427, has standing.
 12

For TANC to have standing, its injury-in-fact must be “(a)
concrete and particularized and (b) actual or imminent, not
conjectural or hypothetical.” Lujan, 504 U.S. at 560 (quotation
marks and citations omitted). The TANC Parties argue that they
each have standing “because they are governmental entities . . .
and FERC’s orders are an important factor in determining
whether ever becoming a PTO is advisable for these entities.”
Petitioners’ Br. at 20 (emphasis added). But none of the TANC
Parties has yet sought to participate in CAISO, nor has any
developed revenue requirements for such participation, or
submitted them to be reviewed by FERC, or been ordered by
FERC to pay refunds. Even if the resolution of Vernon’s
petition could affect the TANC Parties’ decision to join CAISO,
at the end of the day, participation in CAISO is not compulsory,
but is voluntary. Because their alleged injury is speculative at
best, the TANC Parties lack constitutional standing and
therefore none of them may bring this petition. Vernon alone
has standing to challenge these orders, and accordingly, we
address only the arguments raised by Vernon at the
administrative proceedings.

III.

We first consider whether FERC, in its effort to ensure that
CAISO’s rates are just and reasonable under § 205, may review
Vernon’s TRR under the same just and reasonable standard. We
begin by determining the appropriate standard of review for our
analysis of this question.

In general, “[w]e set aside a decision of the FERC only if it
is arbitrary and capricious or otherwise contrary to law.” Envtl.
Action, Inc. v. FERC, 939 F.2d 1057, 1061 (D.C. Cir. 1991)
(citation omitted); see also Administrative Procedure Act, 5
U.S.C. § 706(2). “In making this determination, ‘[we] must
consider whether the decision was based on a consideration of
 13

the relevant factors and whether there has been a clear error of
judgment . . . . [We are] not empowered to substitute [our]
judgment for that of the agency.’” ExxonMobil Gas Mktg. Co.
v. FERC, 297 F.3d 1071, 1083 (D.C. Cir. 2002) (citations and
internal quotation marks omitted). “[W]here an agency departs
from established precedent without a reasoned explanation, its
decision will be vacated as arbitrary and capricious.” ANR
Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C. Cir.1995).

Petitioners argue that because Vernon is exempt from FPA
jurisdiction, FERC’s § 205 review of its TRR is beyond the
scope of FERC’s statutory authority. But once Vernon becomes
a PTO, its TRR becomes a component of the rate design under
which CAISO operates. And as we acknowledged in PG&E,
“FERC may analyze and consider the rates of non-jurisdictional
utilities to the extent that those rates affect jurisdictional
transactions.” PG&E, 306 F.3d at 1114 (citations omitted). The
new question for us involves the appropriate standard under
which FERC should review the rates of non-jurisdictional
utilities like Vernon when those rates affect jurisdictional
transactions. When FERC considered this question in Opinion
No. 479, it found itself constrained by several competing
factors: (i) its lack of statutory authority to regulate Vernon; (ii)
its duty to ensure that CAISO’s rates are just and reasonable;
(iii) the mandate of this Court in PG&E that FERC adequately
explain how Vernon’s participation in CAISO can ensure that
CAISO’s rates will remain just and reasonable; and (iv) the
economic reality that CAISO’s rates are affected by the rate
designs of each PTO. See Opinion No. 479, 111 FERC at
61,428. FERC held a hearing, received comments, and
considered briefs filed by numerous interested parties, including
jurisdictional PTOs and non-jurisdictional entities seeking to
become PTOs. FERC considered alternative standards of
review, including the “substantial evidence” standard suggested
 14

by Vernon,6 see Opinion No. 479, 111 FERC at 61,427, the
“comparability standard” suggested by TANC,7 see id.; Opinion
No. 479-A, 2005 WL 2030491, at *8 (rejecting the
comparability standard because it applies only to non-
jurisdictional rates), and the “section 205-like” standard
suggested by the ALJ, see Opinion No. 479, 111 FERC at
61,429. Ultimately, however, FERC rejected these limited
standards and concluded that Vernon’s TRR would be subject to
§ 205’s “just and reasonable” standard. Because “Vernon has no
obligation to CAISO ratepayers who will foot the bill for the
TRR,” id., FERC reasoned, unless FERC reviews the individual
components of Vernon’s TRR under the “just and reasonable”
standard, “Vernon has every incentive to increase its TRR at the
expense of non-Vernon CAISO ratepayers, as their subsidy
grows with the TRR and inures to Vernon’s benefit,” id. FERC
6
Vernon proposed the following standard:

The proper standard of review for [FERC] to apply to
Vernon’s TRR, or any nonjurisdictional
[Participating Transmission Owner’s] TRR, is (1)
whether the Vernon City Council’s determinations
were arbitrary and capricious and not based upon
substantial evidence, and (2) whether substantial
evidence in fact demonstrates that the ISO’s rates will
be just and reasonable after the inclusion of Vernon’s
TRR.

Opinion No. 479, 111 FERC at 61,427 (citing Vernon’s Brief on
Exceptions at 13).
7
Under this standard, “‘[a]n open access tariff that is not
unduly discriminatory or anticompetitive should offer third parties
access on the same or comparable basis, and under the same or
comparable terms and conditions, as the transmission provider’s uses
of its [own] system.’” Alliant Energy Corp. v. FERC, 253 F.3d 748,
751 n.3 (D.C. Cir. 2001) (quoting Transmission Pricing Policy
Statement, 59 Fed. Reg. 55,031, 55,034 (1994)).
 15

thus concluded, “the only way to ensure that CAISO’s rate is
just and reasonable is for FERC to examine each component of
Vernon’s TRR under the full review.” Id. at 61,428 (emphasis
in original). We find that FERC was neither arbitrary nor
capricious in its decision. FERC properly considered the
relevant factors, provided an adequate and reasoned explanation
for its holding, and committed no clear error.

Petitioners’ arguments to the contrary are unavailing. First,
petitioners argue that because the PG&E Court directed FERC
to ensure that CAISO’s rates (not Vernon’s TRR) were just and
reasonable, FERC should have subjected only CAISO’s rates to
the just and reasonable standard. But FERC has sufficiently
demonstrated that it is impossible to ensure that CAISO’s rates
are just and reasonable without reviewing Vernon’s TRR under
the same standard. See Opinion No. 479, 111 FERC at 61,428.
Nothing in PG&E prohibits FERC from reviewing Vernon’s
TRR under the just and reasonable standard, and it is not within
our discretion to second-guess FERC’s determination after such
a meticulous process and analysis. See Motor Vehicle Mfrs.
Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 43 (1983) (“The scope of review under the ‘arbitrary and
capricious’ standard is narrow and a court is not to substitute its
judgment for that of the agency.”).

Second, petitioners argue that FERC ignored its own
precedent, in which it has previously held that FERC “cannot
review [a non-jurisdictional transmission owner’s] rates under
the Section 205 just and reasonable standard . . . .” Petitioners’
Br. at 14 n.34 (quoting Cal. Indep. Sys. Operator Corp., 91
FERC ¶ 61,205, 61,724 (2000)). As we have previously noted,
“where an agency departs from established precedent without a
reasoned explanation, its decision will be vacated as arbitrary
and capricious.” ANR Pipeline Co., 71 F.3d at 901. In Opinion
No. 479-A, FERC explained its departure by reasoning that it
 16

read PG&E as “fully endorsing” FERC’s § 205 review of
Vernon’s TRR. 2005 WL 2030491, at *5. Petitioners are
therefore correct that FERC has not in the past reviewed a non-
jurisdictional entity’s TRR under § 205’s just and reasonable
standard—indeed, before PG&E, FERC accepted Vernon’s TRR
without reviewing it under this standard. But in light of our
discussion and holding in PG&E, where we specifically
instructed FERC to “ensure that CAISO’s rates meet the just and
reasonable standard of § 205,” 306 F.3d at 1121, we find
FERC’s departure from precedent justified and in compliance
with our instructions. Under the circumstances, FERC was
neither arbitrary nor capricious in subjecting Vernon’s TRR to
the just and reasonable standard.8
8
In a related argument, Vernon specifically faults FERC for
not applying the “prudence” standard to judge the “pass-through”
costs of Vernon’s TRR. In PG&E, we held that it was “unclear under
what standard FERC reviewed Vernon’s TRR to ensure that a pass
through of its costs by the CAISO would be just and reasonable.” 306
F.3d at 1117. We also noted that although “[in] its brief, FERC
recognizes that it generally judges pass-through costs using this
prudence test . . . , this prudence standard is nowhere to be found in
the Orders at issue.” Id. The PG&E Court did not, however, require
FERC to apply the prudence standard on remand—nor do we think it
is appropriate in this case. The prudence standard

requires a complainant alleging that some aspect of a
utility’s rate or practice is unjust or unreasonable to
present evidence sufficient to raise serious doubt that
a reasonable utility manager, under the same
circumstances and acting in good faith, would not
have made the same decision and incurred the same
costs. If the petitioner clears this initial hurdle, the
utility has the burden of presenting evidence
sufficient to dispel those doubts. If it cannot, the
complainant wins.

Ind. Mun. Power Agency v. FERC, 56 F.3d 247, 253 (D.C. Cir. 1995)
 17

IV.

Petitioners next argue that FERC, even if it may review
Vernon’s TRR, lacks authority to order Vernon to pay refunds.
On this point, we agree with petitioners because the structure of
the FPA clearly reflects Congress’s intent to exempt
governmental entities from FERC’s refund authority. Again, we
begin our analysis with our standard of review.

Because “FERC is a ‘creature of statute,’ and the agency has
‘only those authorities conferred upon it by Congress,’” Nat’l
Ass’n of Regulatory Util. Comm’n, 475 F.3d 1277, 1286 (D.C.
Cir. 2007) (“NARUC”), FERC exceeds its jurisdiction under the
APA if it regulates an entity that Congress has explicitly
exempted from the statute, see, e.g., Michigan v. EPA, 268 F.3d
1075, 1081 (D.C. Cir. 2001) (stating that in the absence of
statutory authorization for its act, an agency’s “action is plainly
contrary to law and cannot stand” (citations omitted)); Atlantic
City Elec. Co. v. FERC, 295 F.3d 1, 3 (D.C. Cir. 2002). In
determining whether FERC has acted beyond its jurisdiction, we
grant FERC Chevron deference. See NARUC, 475 F.3d at 1279
(“FERC’s interpretations of the jurisdictional provisions of the
Federal Power Act . . . enjoy Chevron deference.” (citation
omitted)). We therefore review petitioners’ jurisdictional
challenge to FERC’s orders by applying the two-step analysis of
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837 (1984). Under this analysis, we first determine
“whether Congress has directly spoken to the precise question

(citations omitted). As such, the standard provides a mechanism by
which a complainant can challenge a utility’s rate under the just and
reasonable standard; it is an evidentiary tool designed to facilitate a
rate challenge. Once FERC reviews Vernon’s TRR under the just and
reasonable standard, however, it is no longer necessary for FERC to
consider this standard.
 18

at issue.” Id. at 842. “If the intent of Congress is clear, that is
the end of the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of Congress,”
id. at 842-43; see also Am. Library Ass’n v. FCC, 406 F.3d 689,
699 (D.C. Cir. 2005) (an “agency’s interpretation of [a] statute
is not entitled to deference absent a delegation of authority from
Congress to regulate in the areas at issue” (emphasis in original)
(citation omitted)). “[I]f the statute is silent or ambiguous with
respect to the specific issue,” Chevron, 467 U.S. at 843, we
proceed on to the second step, in which we ask “whether the
agency’s answer is based on a permissible construction of the
statute,” id., and we uphold the agency’s interpretation as long
as it is reasonable. See Village of Bergen v. FERC, 33 F.3d
1385, 1389 (D.C. Cir. 1994).

In this case, we need go no further than step one of Chevron
to hold that FERC acted contrary to law when it ordered Vernon
to pay refunds to CAISO. Section 201(f) of the FPA
unequivocally exempts from subchapter II “any political
subdivision of a State . . . unless [included by] specific
reference . . . .” FPA § 201(f), 16 U.S.C. § 824(f). The
implication of this exemption is clear: subsections of subchapter
II do not apply to governmental entities (including
municipalities) unless a provision expressly provides FERC with
such authority. We find it significant that Congress has in fact
authorized FERC with limited refund authority in subchapter II
in order to ensure that its jurisdictional entities maintain just and
reasonable rates. Section 206(b) gives FERC authority to order
“[a] public utility to make refunds of any amounts paid . . . in
excess of those which would have been paid under the just and
reasonable rate.” FPA § 206(b), 16 U.S.C. 824e(b). This
subsection, however, does not apply to Vernon because a
municipality is not a public utility. See, e.g., Bonneville Power
Admin. v. FERC, 422 F.3d 908, 916-17 (9th Cir. 2005) (“BPA”)
(demonstrating the difference between municipalities and public
 19

utilities under the FPA). Congress has therefore specifically
exempted governmental entities from subchapter II of the FPA
and has only provided FERC with refund authority over public
utilities without making any reference to governmental entities.
The intent of Congress is clear from the plain language of the
statute: FERC has no authority to order Vernon to pay refunds
to CAISO.

FERC’s alternative interpretation is impermissible. It
argues that “the agency here is legitimately employing its
section 205 authority to assure that a jurisdictional rate of a
jurisdictional utility . . . is just and reasonable.” Respondent’s
Br. at 36. But because nothing in the language of § 205
contravenes § 201(f)’s specific exemption of municipalities, the
plain language of Congress remains dispositive on this point. A
recent and similar case from the Ninth Circuit reflects this
conclusion. In BPA, the Ninth Circuit reviewed FERC orders
requiring both public and non-public utilities to make refunds to
California ratepayers for excess charges these utilities collected
in some spot market transactions. The central issue was
“whether FERC’s authority to order refunds is based on the
identities of the sellers subject to the refund order, i.e., public
versus non-public utilities, or on the nature of the transactions,
i.e., FERC’s broad regulatory authority over the sale of electric
energy for resale in interstate commerce.” Id. at 911 (emphases
added). Relying on the “clear and unambiguous” text of
§ 201(f) of the FPA, id., and refusing “to second guess
Congress’s judgment as to the breadth of FERC’s refund
authority” as provided by § 206(b), id., the Court held that
FERC’s authority is based on the identities of the sellers, rather
than the nature of the transactions. See id. at 916. The Court
thus “conclude[d] that FERC does not have refund authority
over wholesale electric energy sales made by governmental
entities and non-public utilities.” Id. at 911. The Court noted
that “FERC’s long-standing interpretation of §§ 205 and 206
 20

confirms that governmental entities/non-public utilities lie
outside its rate-making and refund authority,” id. at 921, and
held that “FERC cannot expand its statutory authority to reach
governmental entities/non-public utilities through § 206(b)
simply because such entities voluntarily participated in markets
approved by FERC that involved FERC-jurisdictional wholesale
sales of electric energy in interstate commerce.” Id. at 924. We
agree with the BPA Court that FERC’s refund authority under
the FPA is ultimately determined by the “identities of the sellers
subject to the refund order,” 422 F.3d at 911, and see no
meaningful distinction between BPA and the case before us.9

9
In support of FERC’s refund authority under § 205,
intervenors cite NARUC and United Distribution Companies v. FERC,
88 F.3d 1105 (D.C. Cir. 1996) (“UDC”) to argue that non-
jurisdictional entities must comply with FERC’s regulation of
jurisdictional transactions. See Joint Br. of Intervenors in Support of
Respondent at 24-25. In NARUC, we held that FERC may require all
electrical transmission facilities—jurisdictional and non-
jurisdictional—to adopt a standard agreement for interconnecting with
generators, because FERC has jurisdiction over interstate
transmissions and wholesale sales. See 475 F.3d at 1279-81.
Similarly, in UDC, we held that when municipally-owned local gas
distribution companies (non-jurisdictional entities under the Natural
Gas Act) participate in transportation provided by interstate pipelines
(services over which FERC has jurisdiction) they must comply with
FERC rules governing these services. See 88 F.3d at 1153-54. In both
cases, however, FERC’s jurisdiction extended to non-jurisdictional
entities only insofar as FERC had authority to dictate the terms of their
participation in jurisdictional services or transactions. By analogy,
FERC, in complying with its duty to ensure that CAISO’s rates are
just and reasonable, may justifiably subject Vernon’s TRR to a § 205
review before approving Vernon’s participation in CAISO. This
authority does not, however, extend to FERC ordering Vernon to pay
refunds for any surplus revenue Vernon may have collected under the
TRR. Neither NARUC nor UDC can be read as supporting such broad
regulatory authority.
 21

FERC’s reliance on the Agreement between CAISO and
Vernon is misplaced. In Order No. 479-A, FERC reasonably
read the Agreement as obligating Vernon to “make all
refunds . . . required of a [PTO] to implement any FERC order
related to the ISO Tariff.” 2005 WL 2030491, at *16. FERC
concluded that “[i]t is difficult to read [Section 16.2 of the
Agreement] as anything but an explicit agreement by a non-
jurisdictional [PTO] to make refunds arising from any [FERC]
order to the ISO, from which they would otherwise be immune
by statute.” Id. But even if FERC’s interpretation of the
Agreement were correct, FERC has cited no persuasive
authority to support its claim that the Agreement therefore
provides FERC with authority to order Vernon to issue refunds
to CAISO where Congress has not granted such authority.

We find FERC’s reference to Alliant Energy v. Nebraska
Public Power District, 347 F.3d 1046 (8th Cir. 2003)
unproductive. In Alliant Energy, the Nebraska Public Power
District (“NPPD”), a non-jurisdictional governmental utility,
signed a usage agreement with the members of the Mid-
Continent Area Power Pool (“MAPP”), a voluntary association
of energy companies. A section of the agreement allowed
MAPP members (a group that now included NPPD) to collect
tariffs for non-MAPP members’ use of their system. See id. at
1049. FERC issued an order requiring the MAPP to remove this
section and retroactively ordered the MAPP members to refund
the tariffs. See id. When the NPPD refused to comply with
FERC’s modification of the agreement on the ground that FERC
had no jurisdiction over the NPPD, the remaining MAPP
members sued the NPPD. The Eighth Circuit held that because
the enabling agreement provided that its terms are subject to
regulatory authorities, see id. at 1050, the NPPD bound itself to
any modification of the agreement ordered by FERC, and
therefore, was contractually required to refund appropriate
charges pursuant to FERC’s order, see id. But Alliant Energy
 22

involved a judicial order of refunds, and not an agency order.
FERC had not ordered the NPPD to pay a refund, but stated only
that the NPPD was contractually required to do so.10 See id. at
1050-51. The Eighth Circuit clearly held that “we are not
enforcing the FERC order; instead, we are enforcing an
agreement, which NPPD freely entered.” Id.

FERC’s alternative theory—that it has authority to enforce
the Agreement because it was filed by CAISO, a jurisdictional
entity, and approved by FERC—still cannot overcome the plain
language of Congress. We have previously held that “as a
statutory entity, [FERC] cannot acquire jurisdiction merely by
agreement of the parties before it.” Columbia Gas Transmission
Corp. v. FERC, 404 F.3d 459, 463 (D.C. Cir. 2005) (quoting
Am. Mail Line Ltd. v. FMC, 503 F.2d 157, 170 (D.C. Cir. 1974))
(quotation marks omitted). Though FERC argues that “the FPA
obviously contemplates non-jurisdictional parties entering into
and being bound by jurisdictional contracts, and further
contemplates that FERC should enforce these contracts,”
Respondent’s Br. at 39, it fails to explain how the FPA, which
by its express terms exempts governmental entities from
FERC’s refund authority, can simultaneously be read to support
FERC’s refund authority over a governmental entity (i.e.,
Vernon, a municipality).

In conclusion, while we find FERC’s review of Vernon’s
TRR to have been based on a consideration of the relevant

10
In fact, FERC had previously defined the scope of its refund
order narrowly as to exclude any jurisdiction over the NPPD. See
Mid-West Continent, 89 FERC ¶ 61,135, 61,387 (1999) (“We note that
Nebraska District, as a utility owned and operated by the State of
Nebraska, is not a public utility under the FPA. Therefore, we cannot
assert jurisdiction over Nebraska District and the requirements in our
[refund] order apply only to the public utility members of MAPP[.]”).
 23

factors and, therefore, neither arbitrary nor capricious, we
cannot reconcile the clear and unambiguous language of
§ 201(f) with FERC’s refund order. Accordingly, we vacate the
portions of FERC’s orders directing Vernon to refund CAISO.11

V.

For the foregoing reasons, we grant the petition for review
and remand the case for further proceedings.

So ordered.

11
Although Vernon also argues that FERC’s orders violate the
Tenth Amendment because those orders “supplant the authorized
rate-making decisions of the Vernon City Council” and “command
that Vernon make improper payments out of its treasury,” Petitioners’
Br. at 39, we need not address this argument because we grant the
petition for review on statutory grounds. See, e.g., Am. Dental Ass’n
v. Shalala, 3 F.3d 445, 448 (D.C. Cir. 1993) (declining to reach
appellant’s alternative arguments once the issue was decided in its
favor).