City of Anaheim v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 10, 2008 Decided February 27, 2009

No. 07-1222

CITY OF ANAHEIM, CALIFORNIA, ET AL.,
PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION,
ET AL.,
INTERVENORS

Consolidated with 07-1319, 08-1021

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

Bonnie S. Blair argued the cause for petitioners. With
her on the briefs were Ransom E. Davis and Margaret E.
McNaul.

Beth G. Pacella, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
 2
With her on the brief were Cynthia A. Marlette, General
Counsel, and Robert H. Solomon, Solicitor.

Before: TATEL and KAVANAUGH, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge
KAVANAUGH.

KAVANAUGH, Circuit Judge: A basic principle of
administrative law is that agencies must comply with the
requirements and limits contained in the text of applicable
statutes. Courts afford “Chevron deference” to an agency’s
authoritative and reasonable interpretation of an ambiguous
statutory provision. But we give no deference to an agency
interpretation that fails to comport with the plain statutory
language. The precise words of the statutory text matter.

This case is a good example. When the Federal Energy
Regulatory Commission receives a complaint under § 206 of
the Federal Power Act and finds that the rate charged by an
energy supplier is “unjust” or “unreasonable,” the
Commission “shall determine the just and reasonable rate . . .
to be thereafter observed and in force, and shall fix the same
by order.” 16 U.S.C. § 824e(a) (emphases added). That
statutory provision prohibits FERC from setting rates
retroactively in cases governed by § 206(a).

Here, California wholesale electricity generators filed a
§ 206 complaint alleging that they were under-compensated
as a result of the FERC-approved rate they were required to
charge to local cities and other electricity purchasers. FERC
agreed and ordered a rate increase requiring the cities to pay
more for electricity purchased from those generators. The
controversy arises because FERC applied the rate increase
 3
retroactively. Perhaps FERC’s retroactivity mandate was
well-founded as a matter of policy. But retroactive rate
increases of this kind flatly violate the plain language of
§ 206(a). We therefore vacate the relevant Orders to the
extent they allowed retroactive rate increases and remand the
matter to FERC.

I

In 2001, California experienced an electricity crisis. In
response, the Federal Energy Regulatory Commission
imposed what is known as a “must-offer obligation.” The
must-offer obligation required most wholesale electricity
generators serving California markets to supply available
electrical capacity – that is, capacity that had not already been
contracted for – at specified rates to electricity purchasers.

The must-offer obligation was designed as a temporary
measure to deal with the critical energy shortfall. In fact, the
must-offer obligation stayed in place for several years.
Generators began to object, arguing that the must-offer
obligation under-compensated them for the costs of energy
production. The compensation shortfall, they said,
discouraged their production of new and much-needed
energy-generating units.

So on August 26, 2005, electricity generators (through
the Independent Energy Producers Association) filed a § 206
complaint with FERC. The complaint alleged both that the
must-offer obligation did not justly and reasonably
compensate generators and that so-called Reliability Capacity
Services Tariff (or RCST) rates should replace the must-offer
obligation.
 4
On July 20, 2006, FERC issued an Order in which it
agreed with the generators that the must-offer obligation was
no longer just and reasonable. But at that time, FERC did not
find the proposed RCST rates to be just and reasonable.
Rather, FERC stated that it would fix the new rate in the
future.

Seven months later, on February 13, 2007, FERC issued
Orders determining that modified RCST rates were just and
reasonable. FERC also made those rates retroactively
effective to June 1, 2006.

Six cities – Anaheim, Azusa, Banning, Colton, Pasadena,
and Riverside – have objected that FERC had no legal
authority to apply the new rates retroactively.

II

A

Section 206 of the Federal Power Act requires FERC to
entertain complaints regarding unjust or unreasonable
wholesale electricity rates. After finding a rate unreasonable,
FERC “shall determine the just and reasonable rate . . . to be
thereafter observed and in force,” and FERC “shall fix” that
rate by order. 16 U.S.C. § 824e(a) (emphasis added).1

1
The initial sentence of § 206(a) reads in full: “Whenever the
Commission, after a hearing held upon its own motion or upon
complaint, shall find that any rate, charge, or classification,
demanded, observed, charged, or collected by any public utility for
any transmission or sale subject to the jurisdiction of the
Commission, or that any rule, regulation, practice, or contract
affecting such rate, charge, or classification is unjust, unreasonable,
unduly discriminatory or preferential, the Commission shall
determine the just and reasonable rate, charge, classification, rule,
 5

In its Order of February 13, 2007, FERC determined that
the RCST rates were just and reasonable – at which point it
made those rates effective retroactively to June 1, 2006.
FERC cannot square its action with the plain text of § 206(a).
On its face, § 206(a) prohibits retroactive adjustment of rates.
And not surprisingly, the Supreme Court and this Court have
read this language to mean what it says.

In interpreting parallel language in § 5 of the Natural Gas
Act, for example, the Supreme Court explained that “the
Commission itself has no power to alter a rate retroactively.
When the Commission finds a rate unreasonable, it ‘shall
determine the just and reasonable rate . . . to be thereafter
observed and in force.’ This rule bars the Commission’s
retroactive substitution of an unreasonably high or low rate
with a just and reasonable rate.” Ark. La. Gas Co. v. Hall,
453 U.S. 571, 578 (1981) (footnote, citations, and internal
quotation marks omitted) (emphasis in original).2

Our own precedents reinforce the point. In Electrical
District No. 1 v. FERC, we focused on § 206(a)’s requirement
that FERC “fix” new rates, and we held that FERC does not
“fix” a rate until the rate is numerically “specified.” 774 F.2d
490, 492 (D.C. Cir. 1985). Emphasizing the statutory phrase
“to be thereafter observed and in force,” we further stated that
§ 206(a)’s procedures are “not at all ambiguous” and
explained that the “moment of required and authorized

regulation, practice, or contract to be thereafter observed and in
force, and shall fix the same by order.” 16 U.S.C. § 824e(a).
2
We follow here “the familiar practice of applying
interchangeably judicial interpretations of provisions from the
Natural Gas Act to their substantially identical counterparts in the
Federal Power Act.” NSTAR Elec. & Gas Corp. v. FERC, 481 F.3d
794, 800 (D.C. Cir. 2007) (internal quotation marks omitted).
 6
Commission action in the present case is to be determined not
on the basis of an abstract principle . . . but rather on the basis
of the procedures that the statute establishes for adjusting
unlawful rates.” Id.3

In Transwestern Pipeline Co. v. FERC, 897 F.2d 570
(D.C. Cir. 1990), we elaborated on Electrical District and
held that FERC can “fix” rates within the meaning of Natural
Gas Act § 5 through the announcement of a “rate formula,” so
long as purchasers can supply their own inputs to the formula
and thereby know the numerical rates. Id. at 578 (internal
quotation marks omitted). In arriving at that conclusion, we
carefully heeded Electrical District’s analysis of FERC’s
retroactive ratemaking powers. In particular, we stated that
FERC may not “simply announce some formula and later
reveal that the formula was to govern from the date of
announcement (as it had done in Electrical District).” Id.
(emphasis in original).

Finally, in Towns of Concord, Norwood & Wellesley,
Massachusetts v. FERC, we explained that § 206(a) “allows
the Commission to fix rates and charges, but only
prospectively.” 955 F.2d 67, 72 (D.C. Cir. 1992). We
proceeded to note that in prior cases, including Transwestern,
the Commission had “violated the explicit commands of
section 5(a) of the Natural Gas Act, which requires rate
changes to be made prospectively only.” Id. at 75 (citation
omitted).

3
Electrical District post-dates Chevron’s formulation of the
Executive Branch’s duty to adhere to unambiguous textual
provisions. Chevron USA, Inc. v. NRDC, 467 U.S. 837 (1984).
Even though the decision did not cite Chevron, Electrical District
stated that § 206’s procedures “are not at all ambiguous.” 774 F.2d
at 492. Therefore, we construe Electrical District as a binding
holding at Chevron step one.
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B

FERC posits a number of different theories to overcome
the text of § 206(a).

FERC suggests that Congress’s 1988 decision to add
what is now § 206(b) of the Act supersedes the 1985
Electrical District decision. But § 206(b) applies in cases
where the complainant is a purchaser alleging that the rates it
paid were too high. That provision permits FERC-ordered
refunds “of any amounts paid . . . in excess of those which
would have been paid under the just and reasonable rate.” 16
U.S.C. § 824e(b). By contrast, this case involves a
complainant seller alleging that the rates it received were too
low. In other words, the six cities were not making payments
before February 13, 2007, “in excess of . . . the just and
reasonable rate,” which is the statutory precondition for a
§ 206(b) refund. Id. (emphasis added). Rather, the six cities
were paying rates to energy generators below the just and
reasonable rate. And § 206(b) authorizes only retroactive
refunds (rate decreases), not retroactive rate increases like
those at issue here. Therefore, § 206(b) does not help FERC.

FERC also argues that it complied with the rule against
retroactive ratemaking that applies in cases arising out of a
separate section of the Federal Power Act – § 205. Section
205 creates a procedure for members of the public to file
complaints after public utilities file new proposed rate
schedules (as required by the filed rate doctrine). See 16
U.S.C. § 824d(d)-(e). Under § 205, the rule against
retroactive ratemaking has been interpreted to prohibit FERC
from setting rates retroactively before the date that purchasers
had sufficient notice of a possible change. The proceedings
here, however, began with a complaint filed under § 206.
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And § 206 involves an entirely different – and stricter – set of
procedures than § 205. The § 205 precedents therefore do not
justify FERC’s action in this case. See NSTAR, 481 F.3d at
800 (§ 205 case); Consol. Edison Co. of N.Y., Inc. v. FERC,
347 F.3d 964, 969 (D.C. Cir. 2004) (§ 205 case); City of
Piqua v. FERC, 610 F.2d 950, 954 (D.C. Cir. 1979) (§ 205
case); see also Canadian Ass’n of Petroleum Producers v.
FERC, 254 F.3d 289, 299 (D.C. Cir. 2001) (case involving
NGA § 4, which is analogous to FPA § 205); Columbia Gas
Transmission Corp. v. FERC, 895 F.2d 791, 795 (D.C. Cir.
1990) (also applying NGA § 4).

FERC further points to precedents recognizing FERC’s
power to remedy its own errors after being reversed in court.
See Exxon Co., USA v. FERC, 182 F.3d 30, 47 (D.C. Cir.
1999); Pub. Utils. Comm’n v. FERC, 988 F.2d 154, 162 (D.C.
Cir. 1993) (“This court has previously recognized FERC’s
authority to order retroactive rate adjustments when its earlier
order disallowing a rate is reversed on appeal.”); Natural Gas
Clearinghouse v. FERC, 965 F.2d 1066, 1074-75 (D.C. Cir.
1992). But those cases also are not on point: In this case,
FERC was not responding to a court decision when it imposed
retroactive surcharges.

C

Petitioners’ counsel nicely summarized this case at oral
argument: To uphold FERC’s action here, we would have to
find “that there’s no difference between the procedural
framework of § 205 and the procedural framework of § 206;
[] that ‘thereafter’ in § 206(a) really means any time after the
filing of a complaint; that the term ‘refund’ in § 206(b) really
means refund or increase; that ‘amounts in excess of’ under
§ 206(b) really means amounts in excess of or less than; [or]
that ‘prospective’ can mean a date many months earlier than
 9
the date of the Commission order fixing a rate.” Tr. of Oral
Arg. at 25-26.

We decline FERC’s invitation to mangle the statute in
those myriad ways. In the end, as in the beginning, the plain
language of § 206(a) controls. Cf. Arlington Cent. Sch. Dist.
Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006) (“We have
stated time and again that courts must presume that a
legislature says in a statute what it means and means in a
statute what it says there.”) (internal quotation marks
omitted); MCI Telecomm. Corp. v. AT&T Co., 512 U.S. 218,
229 (1994) (“an agency’s interpretation of a statute is not
entitled to deference when it goes beyond the meaning that
the statute can bear”).

***

Our analysis requires vacatur of the challenged FERC
orders to the extent they made the FERC rates retroactively
applicable to June 1, 2006. That disposition raises a
secondary issue on which the parties also disagree. The
question remains whether the rates were fixed (i) on February
13, 2007, when FERC said the modified RCST rates were just
and reasonable, or (ii) on June 11, 2007, when FERC
accepted the final compliance filing. It would not be proper
for us to resolve that debate in the first instance. Rather,
FERC must address this issue in remand proceedings, in
which it may consider and reasonably explain whether the
modified RCST rates were fixed by the Order of February 13,
2007, or not until the Order of June 11, 2007 (or perhaps on
some other date after February 13, 2007).

In sum, we grant the petitions and vacate the challenged
FERC Orders to the extent that they permitted RCST rates for
transactions occurring before February 13, 2007. We remand
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to FERC for further consideration regarding when the RCST
rates became legally fixed.

So ordered.