Cpuc v. Ferc

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CALIFORNIA PUBLIC UTILITIES No. 16-70481
COMMISSION,
Petitioner,
OPINION
CALIFORNIA DEPARTMENT OF
WATER RESOURCES STATE WATER
PROJECT; SACRAMENTO MUNICIPAL
UTILITY DISTRICT; TRANSMISSION
AGENCY OF NORTHERN CALIFORNIA,
Petitioners-Intervenors,

v.

FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent,

PACIFIC GAS & ELECTRIC COMPANY,
Respondent-Intervenor.

On Petition for Review of an Order of the
Federal Energy Regulatory Commission

Argued and Submitted October 13, 2017
San Francisco, California

Filed January 8, 2018
2 CPUC V. FERC

Before: Sidney R. Thomas, Chief Judge, and Stephen
Reinhardt and Stephen S. Trott, Circuit Judges.

Opinion by Chief Judge Thomas

SUMMARY*

Federal Energy Regulatory Commission

The panel granted the California Public Utilities
Commission’s (“CPUC”) petition for review and held that the
Federal Energy Regulatory Commission (“FERC”) arbitrarily
and capriciously determined that Pacific Gas & Electric was
eligible for an incentive adder for remaining a member of the
California Independent System Operator Corporation when
state law prevented PG&E’s departure without authorization.

Section 219(c) of the Federal Power Act required FERC
to provide incentives to induce utilities to join regional
transmission organizations. Accordingly, FERC adopted
Order 679 which established upward adjustments, or
“incentive adders,” to the rate of return on equity of utilities
that participate in transmission organizations. In 1998, the
CPUC approved PG&E’s transfer of operational control of
certain transmission assets to a newly-created California
Independent System Operator Corporation.

The panel held that FERC did not reasonably interpret
Order 679 as justifying summary grants of adders for

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 CPUC V. FERC 3

remaining in a transmission organization. The panel also held
that FERC’s interpretation was neither entitled to Auer v.
Robbins, 519 U.S. 452 (1997), deference nor persuasive in
its own right. The panel further held that because its
interpretation was unreasonable, FERC’s grants of adders to
PG&E were an unexplained departure from longstanding
policy, which provided that incentives should only be
awarded to induce future voluntary behavior. In addition, the
panel held that FERC created a generic adder in violation of
Order 679’s requirement of case-by-case review of adders.

The panel held that the CPUC’s petition was not an
impermissible collateral attack on Order 679.

COUNSEL

Traci L. Bone (argued), Harvey Y. Morris, and Arocles
Aguilar, San Francisco, California, as and for Petitioner.

Harvey L. Reiter (argued), Stinson Leonard Street LLP,
Washington, D.C.; Michael R. Postar, Duncan Weinberg
Genzer & Pembroke, Washington, D.C.; Katharine M.
Mapes, Spiegel & McDiarmid LLP, Washington, D.C.; for
Petitioners-Intervenors.

Mark Patrizio (argued), San Francisco, California, for
Respondent-Intervenor.

Anand Viswanathan (argued), Attorney; Robert H. Solomon,
Solicitor; Max Minzner, General Counsel; Washington, D.C.;
as and for Respondent.
4 CPUC V. FERC

OPINION

THOMAS, Chief Circuit Judge:

In this petition for review, we consider whether the
Federal Energy Regulatory Commission (“FERC” or
“Commission”) arbitrarily and capriciously determined that
Pacific Gas & Electric Company (“PG&E”) was eligible for
an incentive adder for remaining a member of the California
Independent System Operator Corporation (“Cal-ISO”) when
state law prevented PG&E’s departure without authorization.
We conclude that it did, and we grant the petition.

I

Section 201 of the Federal Power Act (“FPA”) gives
FERC jurisdiction over the rates, terms, and conditions of
service for the transmission and sale at wholesale of electric
energy in interstate commerce. 16 U.S.C. §§ 824(a)-(b).
Section 219 of the FPA, added in 2005, directed FERC to
promulgate a rule providing incentive-based rates for electric
transmission for the purpose of benefitting consumers
through increased reliability and lower costs of power.
16 U.S.C. § 824s(a). As relevant here, section 219(c)
required FERC to provide incentives to induce utilities to join
regional transmission organizations. 16 U.S.C. § 824s(c).
FERC did so in 2006 through the adoption of Order 679 and
the rehearing orders that followed. Promoting Transmission
Investment Through Pricing Reform, Order No. 679, 116
FERC ¶ 61,057 (“Order 679”), order on reh’g, Order No.
679-A, 117 FERC ¶ 61,345 (2006) (“Order 679-A”), order on
reh’g, Order No. 679-B, 119 FERC ¶ 61,062 (2007) (“Order
679-B”).
 CPUC V. FERC 5

Order 679 established upward adjustments, or “incentive
adders,” to the rate of return on equity of utilities that
participate in transmission organizations. Order 679 set forth
the terms on which FERC would grant the incentive adders.
FERC determined that it would “not grant outright any
incentives,” but that it would grant such incentives “when
justified” in the context of individual declaratory orders or
section 205 filings.1 Order 679 at PP 1, 326. FERC would
evaluate adder requests on a “case-by-case basis.” Id. at P
326.

Order 679 provided that adders would be available for
utilities that “have already joined, and that remain members
of,” transmission organizations in “recognition of the benefits
that flow from membership” and the fact that “continuing
membership is generally voluntary.” Order 679 at P 331.
The order stated that a utility “will be presumed to be eligible
for the incentive” if it can demonstrate that it has joined a
transmission organization and that its membership is ongoing.
Id. at P 327.

FERC declined to create a “generic adder” for
membership in a transmission organization. Order 679 at P
326. Commenters had urged FERC to make a “generic
finding” that any entity that joins a transmission organization
“automatically qualif[ies]” for an incentive adder, with at
least one commenter specifically proposing a 50 basis-point
incentive adder. Id. at P 318. FERC declined to adopt this

1
“Section 205” refers to FPA § 205, codified at 16 U.S.C. § 824d.
Investor-owned utilities like PG&E make transmission owner rate case
filings with FERC pursuant to section 205 in order to recover their costs
of transmission service.
6 CPUC V. FERC

proposal, electing to consider “on a case-by-case basis” what
incentive (if any) is appropriate for a utility. Id. at P 326.

In 1995, as part of its restructuring of California’s electric
power industry, the California Public Utilities Commission
(“CPUC”) ordered the state’s three largest investor-owned
utilities, including PG&E, to submit to FERC a proposal to
establish an independent system operator (“ISO”) and to
transfer operational control of their facilities to that ISO.2
Order Instituting Rulemaking on Commission’s Proposed
Policies Governing Restructuring California’s Electric
Service Industry and Reforming Regulation, 64 CPUC 2d 1,
p. 95, 1995 WL 792086 at *99 (Dec. 20, 1995) (“CPUC
Decision 95-12-063”). In the same decision, CPUC retained
authority under California state law to review any transfer of
control of transmission facilities to the ISO. CPUC Decision
95-12-063, p. 31, 1995 WL 792086 at *15 (citing Cal. Pub.
Util. Code § 851). CPUC’s determinations were largely
affirmed in state law. See Cal. Pub. Util. Code §§ 330, 365.

In 1997, California’s three largest investor-owned
utilities, including PG&E, sought CPUC authorization to turn
over operational control of certain transmission assets to the
newly-created Cal-ISO. CPUC approved this transfer of
control. In its decision approving the transfer, CPUC stated
that any further transfers of control, such as transfers of
control from the Cal-ISO back to the utilities, would also
require CPUC authorization under state law. Joint
Application of Pac. Gas & Elec. Co., San Diego Gas & Elec.
Co., and S. Cal. Edison Co., 78 CPUC 2d 307, p. 313, 1998

2
An ISO is a form of regional transmission organization, and an
ISO’s members are eligible for incentive adders under section 219(c) and
Order 679.
 CPUC V. FERC 7

WL 242747 at *7 (Jan. 21, 1998) (citing Cal. Pub. Util. Code
§ 851).

Since it joined the Cal-ISO in 1997, PG&E has submitted
an annual “transmission owner” tariff filing to FERC
pursuant to section 205 of the FPA. See Pac. Gas. & Elec.
Co., 148 FERC ¶ 61,245 at P 1 n.2 (2014). Each filing
establishes PG&E’s transmission revenue requirement, which
includes the rate of return to which it is entitled as a
participating transmission owner. Id. Since 2007, PG&E has
regularly invoked Order 679 in its tariff filings to request
50 basis-point incentive adders for its ongoing participation
in the Cal-ISO, and FERC has summarily granted those
requests.3 Various parties, including CPUC, protested
PG&E’s earlier requests, but those cases settled without final
resolution of the objections raised.

In 2014 and 2015, PG&E filed its sixteenth and
seventeenth transmission owner tariff filings, respectively
(“TO 16” and “TO 17”). In each of those filings, PG&E
requested a 50 basis-point incentive adder. CPUC filed
timely protests to both of the filings. CPUC’s protests
claimed that because PG&E’s continued participation in the
Cal-ISO is mandated by CPUC order, granting it incentive
adders would reward PG&E for doing something it was
already required to do.

3
See Pac. Gas & Elec. Co., 120 FERC ¶ 61,296 at P 15 (2007); Pac.
Gas & Elec. Co., 124 FERC ¶ 61,305 at P 20 (2008); Pac. Gas & Elec.
Co. 128 FERC ¶ 61,288 at P 19 (2009); Pac. Gas & Elec. Co., 132 FERC
¶ 61,272 at P 23 (2010); Pac. Gas & Elec. Co., 141 FERC ¶ 61,168 at P
25 (2012); Pac. Gas & Elec. Co., 144 FERC ¶ 61,227 at P 20 (2013); Pac.
Gas & Elec. Co., 148 FERC ¶ 61,245 at P 30 (2014); Pac. Gas & Elec.
Co., 152 FERC ¶ 61,252 at P 23 (2015).
8 CPUC V. FERC

FERC issued orders in both proceedings summarily
granting PG&E’s requested adders. Pac. Gas & Elec. Co.,
148 FERC ¶ 61,245 at P 30 (2014) (“TO 16 Initial Order”);
Pac. Gas & Elec. Co., 152 FERC ¶ 61,252 at P 23 (2015)
(“TO 17 Initial Order”). The TO 16 Initial Order responded
to CPUC’s arguments by stating:

“[C]onsistent with previous Commissions
[sic] orders, we summarily accept PG&E’s
request for a 50 basis point incentive ROE
adder for its continued participation in [Cal-
ISO] . . . Parties opposing PG&E’s request
. . . have presented no new evidence or
circumstances to warrant reexamining
whether the adder is appropriate in this
proceeding.”

TO 16 Initial Order at P 30 (footnotes omitted). The TO 17
Initial Order held similarly:

“[C]onsistent with previous Commission
orders, we accept PG&E’s request for a 50
basis point incentive ROE adder for its
continued participation in [Cal-ISO] . . .
PG&E is a member of [Cal-ISO] . . . and its
membership is ongoing; therefore, PG&E is
presumed to be eligible for this incentive
adder in accordance with Order No. 679.”

TO 17 Initial Order at P 23 (footnotes omitted). FERC
rejected CPUC’s argument that the incentive adder was not
justified because it did not “induce” PG&E’s continuing
membership in the Cal-ISO: “Notwithstanding CPUC’s
argument asserting that PG&E’s participation is not voluntary
 CPUC V. FERC 9

because it is mandated by state law, it is within the
Commission’s authority to grant incentive adders as
described in Order No. 679.” Id. at P 24. FERC also rejected
CPUC’s argument that it had created a generic adder, stating
that PG&E had demonstrated that it was a Cal-ISO member
and “thus satisfied the criteria set forth in Order No. 679.” Id.
at P 25.

CPUC sought rehearing of both FERC orders. CPUC
explained that FERC erred by granting PG&E an incentive
adder even though it was not free to leave the Cal-ISO;
failing to respond to CPUC’s arguments about PG&E’s
involuntary membership in the Cal-ISO; and granting a
generic adder inconsistent with Order 679. FERC denied
CPUC’s rehearing requests. Pac. Gas & Elec. Co.,
154 FERC ¶ 61,119 at P 10 (2016) (“TO 16 Reh’g Order”);
Pac. Gas & Elec. Co., 154 FERC ¶ 61,118 at P 9 (2016) (“TO
17 Reh’g Order”). In response to CPUC’s claims that PG&E
was not free to leave the Cal-ISO, FERC stated that Order
679 “is clear that the Commission may grant incentive adders
for public utilities that join and/or continue to remain in”
transmission organizations and that the order does not
“require that the Commission discontinue such adders in the
face of arguments like those that CPUC has made here.” TO
16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9.

In response to CPUC’s claims that FERC had adopted a
generic adder, FERC stated that utilities with ongoing
membership in transmission organizations are “presumed
eligible” for the adder and that CPUC “concedes” that PG&E
had an ongoing membership in the Cal-ISO. TO 16 Reh’g
Order at P 11; TO 17 Reh’g Order at P 11. FERC added that
because PG&E’s membership in the Cal-ISO helps the Cal-
ISO to “fulfill its duties,” FERC found the incentive adders
10 CPUC V. FERC

“to be justified.” TO 16 Reh’g Order at P 12; TO 17 Reh’g
Order at P 10.

Finally, FERC asserted that CPUC’s objection amounted
to a “collateral attack” on Order 679 and Order 679-A that it
did not need to address. TO 16 Reh’g Order at P 13; TO 17
Reh’g Order at P 12. CPUC timely petitioned for review.

II

FERC has jurisdiction over the two transmission owner
rate filings (TO 16 and TO 17) that initiated the instant
proceedings pursuant to section 205 of the FPA. See
16 U.S.C. § 824d. We have jurisdiction to review “order[s]
issued by the Commission” under section 313(b) of the FPA.
See 16 U.S.C. § 825l(b). All parties to this petition for review
agree that the incentive adder issue was definitively resolved
by FERC in the orders under review.

We review a decision by FERC to determine whether its
action was “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” 5 U.S.C. § 706(2),
see also Fall River Rural Elec. Coop., Inc. v. FERC, 543 F.3d
519, 525 (9th Cir. 2008). “A court is not to ask whether a
regulatory decision is the best one possible or even whether
it is better than the alternatives.” FERC v. Elec. Power
Supply Ass’n, 136 S. Ct. 760, 782 (2016). Rather, the court
must uphold a decision if the agency has “examined the
relevant considerations and articulated a satisfactory
explanation for its action, including a rational connection
between the facts found and the choice made.” Id. (quoting
Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) (alterations
normalized). Our review “is limited to . . . the administrative
 CPUC V. FERC 11

record,” Envtl. Coal. of Ojai v. Brown, 72 F.3d 1411, 1414
(9th Cir. 1995), and to those “grounds upon which . . . the
record discloses that [the agency’s] action was based.” SEC
v. Chenery Corp., 318 U.S. 80, 87 (1943).

III

FERC’s determination that PG&E was entitled to
incentive adders for remaining in the Cal-ISO was arbitrary
and capricious. FERC did not reasonably interpret Order 679
as justifying summary grants of adders for remaining in a
transmission organization. Because its interpretation was
unreasonable, FERC’s grants of adders to PG&E were an
unexplained departure from longstanding policy. Moreover,
FERC created a generic adder in violation of the order.

A

FERC’s interpretation of Order 679 as justifying
summary grants of incentive adders to utilities that remain in
transmission organizations was not reasonable.

Under Auer v. Robbins, 519 U.S. 452 (1997), we defer to
an agency’s interpretation of its own ambiguous regulation
unless that interpretation is “plainly erroneous or inconsistent
with the regulation, or there is reason to suspect that the
interpretation does not reflect the agency’s fair and
considered judgment on the matter in question.” W. Radio
Servs. Co. v. Qwest Corp., 678 F.3d 970, 984–85 (9th Cir.
2012) (internal citation omitted).

FERC interprets Order 679 as conferring on it “the
authority. . . to continue to grant incentive adders for electric
utilities . . . that remain members of regional transmission
12 CPUC V. FERC

organizations” without further inquiry into the voluntariness
of their membership. Brief of Respondent at 20. FERC notes
that Order 679 makes an entity presumptively eligible to
receive an adder if it demonstrates continuing membership in
a transmission organization. See Order 679 at P 327. FERC
appears to interpret the “presumed to be eligible” language as
absolving it of an obligation to consider whether the
presumption should apply to utilities that are prohibited from
withdrawing from transmission organizations without the
consent of a higher authority. Under this interpretation,
ongoing membership itself is the sole criterion for receipt of
an incentive adder.

1

FERC’s interpretation of Order 679 is plainly erroneous
and inconsistent with the regulation. Order 679 provides that
a utility demonstrating that it has remained in a transmission
organization is “presumed to be eligible” for an incentive
adder. Order 679 at P 327. However, language throughout
Orders 679 and 679-A suggests that the presumption of
eligibility may be rebutted by the arguments CPUC has made
and that ongoing membership is not sufficient for an
incentive adder.

The orders commit FERC to case-by-case review of
incentive adders even for utilities that have demonstrated
ongoing membership in transmission organizations. Order
679 states that FERC “will approve, when justified, requests
for ROE-based incentives for public utilities that join and/or
continue to be a member of” transmission organizations.
Order 679 at P 326 (emphasis added). If all utilities that
continued to be members of transmission organizations
automatically qualified for incentive adders, the “when
 CPUC V. FERC 13

justified” language would be surplusage. In the same
paragraph, FERC declines proposals to “create a generic
adder for such membership” and states that it will “consider
specific incentives on a case-by-case basis.” Id. If FERC’s
interpretation were correct, case-by-case review would be
meaningless.

The justification for incentive adders as articulated in
Order 679 also belies FERC interpretation of the order. The
order states that the “basis for the incentive is a recognition
of the benefits that flow from membership in [transmission]
organizations and the fact that continuing membership is
generally voluntary.” Order 679 at P 331 (emphasis added).
When membership is not voluntary, the incentive is
presumably not justified. Challenges to the presumption of
eligibility for the incentive on such grounds would not be
precluded by the order and would need to be addressed by
FERC if raised in tariff filing proceedings.

Order 679-A, citing section 219’s purpose of ensuring
reliability and reducing the cost of power, describes incentive
adders as “an inducement for utilities to join, and remain in,
Transmission Organizations.” Order 679-A at P 86
(emphasis added). An incentive cannot “induce” behavior
that is already legally mandated. Thus, the voluntariness of
a utility’s membership in a transmission organization is
logically relevant to whether it is eligible for an adder. The
same paragraph acknowledges that granting incentives only
for joining transmission organizations “offers no inducement
to stay in these organizations for members with the option to
withdraw.” Id. (emphasis added). Order 679-A thus
distinguishes between utilities that have the option to
withdraw from transmission organizations and those without
14 CPUC V. FERC

the option, and it necessarily implies that incentives are
justified only for the former.

Finally, Order 679-A states that with respect to incentives
under section 219, “[a] prior contractual commitment or
statute may have a bearing on our nexus evaluation of
individual applications.” Order 679-A at P 122. This also
necessarily implies that ongoing membership in a
transmission organization is not dispositive as to incentive
adder eligibility.

FERC argues that Orders 679 and 679-A considered and
rejected the argument that the voluntariness of a utility’s
membership in a transmission organization should bear on its
eligibility for an incentive adder. Order 679 did decline to
adopt proposals making utilities ineligible for incentives if
they were ordered to join transmission organizations by
statute. Order 679 at P 316; Order 679-A at P 83. However,
this does not support FERC’s interpretation, which holds that
utilities that remain in transmission organizations qualify for
adders even when their continued participation is compelled
by statute. No party to the Order 679 proceedings raised the
issue of whether a utility could qualify for an incentive for its
involuntary continued participation in a transmission
organization.

The text of Orders 679 and 679-A makes it clear that
FERC’s interpretation of those orders is plainly erroneous and
inconsistent with the regulations. The orders did not make
ongoing membership in a transmission organization the sole
criterion for an incentive adder, and the orders did not
preclude challenges based on the voluntariness of a utility’s
membership in a transmission organization. We decline to
defer to FERC’s interpretation of the orders.
 CPUC V. FERC 15

2

Even if not plainly erroneous, an agency’s interpretation
is not owed deference if “there is reason to suspect that the
interpretation does not reflect the agency’s fair and
considered judgment on the matter in question.” W. Radio
Servs. Co., 678 F.3d at 985. “Indicia of inadequate
consideration include . . . signs that the agency’s
interpretation amounts to no more than a convenient litigating
position; or an appearance that the agency’s interpretation is
no more than a post hoc rationalization advanced by an
agency seeking to defend past agency action against attack.”
Price v. Stevedoring Servs. of Am., Inc., 697 F.3d 820,
829–30 n.4 (9th Cir. 2012) (en banc) (internal quotation
marks and citations omitted).

FERC’s interpretation of Order 679 is a post hoc
rationalization of its actions. FERC never before explicitly
articulated the interpretation it relies on, even though, as the
author of Order 679, it could have easily incorporated the
interpretation into the order. Order 679 provides that utilities
that demonstrate ongoing membership in transmission
organizations will be “presumed to be eligible” for incentive
adders, but it is silent as to whether that presumption can be
rebutted for utilities that cannot voluntarily leave their
organizations. Order 679 at P 327. Nowhere does Order 679
state that the voluntariness of a utility’s membership is
irrelevant to its eligibility for an incentive adder, even though
this would have been a reasonably foreseeable challenge to
future adders. By observing that transmission organization
membership was “generally voluntary,” FERC indicated that
it knew that some utilities could not voluntarily leave. Order
679 at P 331 (emphasis added). FERC could have foreseen
a challenge like CPUC’s challenge here.
16 CPUC V. FERC

Nor did FERC clearly articulate its interpretation in the
two orders currently on review. In denying CPUC’s
rehearing requests for the TO 16 and TO 17 orders, FERC
merely stated that “it is within the Commission’s authority to
grant incentive adders as described in Order No. 679,” that
Order 679 “is clear that the Commission may grant incentive
adders for public utilities that join and/or continue to remain
in” transmission organizations, and that Order 679 does not
“require that the Commission discontinue such adders in the
face of arguments like those that the CPUC has made here.”
TO 16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9.
These statements do not reflect a fair and considered
judgment on the meaning of Order 679.

It is apparent that FERC’s interpretation of Order 679 is
merely a convenient litigating position and a post hoc
rationalization of the orders on review. We decline to defer
to the interpretation.

3

“[W]hen Auer deference is not warranted, an agency’s
interpretation of an ambiguous regulation should be evaluated
under the principle articulated in Skidmore v. Swift & Co.,
323 U.S. 134 (1944).” Indep. Training & Apprenticeship
Program v. Cal. Dep’t of Indus. Relations, 730 F.3d 1024,
1035 (9th Cir. 2013). Under this standard, this court gives an
agency’s interpretation “a measure of deference proportional
to the thoroughness evident in its consideration, the validity
of its reasoning, its consistency with earlier and later
pronouncements, and all those factors which give it the power
to persuade.” Id. at 1036 (quoting Christopher v. SmithKline
Beecham Corp., 567 U.S. 142, 159 (2012)) (internal quotation
marks omitted).
 CPUC V. FERC 17

FERC’s interpretation does not reflect thorough
consideration, nor is it persuasive in its own right. FERC
does not develop or justify its interpretation in either the
orders on review or in its briefing before this court; the
interpretation is found only in FERC’s post-hoc reasoning.4
We do not owe deference to such a “nominal” interpretation.
Barboza v. Cal. Ass’n of Prof’l Firefighters, 799 F.3d 1257,
1267 (9th Cir. 2015). Moreover, as explained above, FERC’s
interpretation is inconsistent with the text of Order 679 and
Order 679-A and the evident purposes of those regulations.

In light of our conclusion that FERC’s interpretation is
neither entitled to Auer deference nor persuasive in its own
right, we employ traditional tools of interpretation to
determine whether Order 679 permits challenges to the
presumption of eligibility of the sort CPUC has lodged here.
Christopher v. SmithKline Beecham Corp., 567 U.S. at 161.
The order’s plain language and purpose show that it does. A
utility that joins a regional transmission organization is
“presumed to be eligible” for incentive adders under Order
679, but this presumption is rebuttable. Order 679 at P 327.
Given the order’s evident purpose of inducing utilities to
voluntarily remain in transmission organizations, and given
its language specifying that incentives will be awarded “when
justified” and on a “case-by-case basis,” it permits challenges
to incentives on the grounds that they will not induce
continuing participation in transmission organizations. Id. at

4
In a proceeding subsequent to the orders on review here, FERC
offered for the first time an explicit interpretation of the “presumption”
provision in Order 679, in line with the implicit interpretation at issue
here. See Pac. Gas & Elec. Co., 160 FERC ¶ 61,090 at P 13 (Sept. 20,
2017). Because this interpretation was not advanced in the two orders on
review here, it could not sustain those orders even if we were to consider
it.
18 CPUC V. FERC

P 326. Challenges such as that mounted by CPUC are not
precluded and must be answered by FERC.

B

Given that its interpretation of Order 679 is not
controlling, FERC failed to provide a reasoned explanation
for its actions in the orders under review. An agency must
“articulate a satisfactory explanation for its action.” Motor
Vehicle Mfrs. Ass’n, 463 U.S. at 43. When an agency
changes policy, the requirement that it provide a reasoned
explanation for its action demands, at a minimum, that the
agency “display awareness that it is changing position.” FCC
v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009).
“An agency may not, for example, depart from a prior policy
sub silentio or simply disregard rules that are still on the
books.” Id.

FERC had a longstanding policy that incentives should
only be awarded to induce future behavior. FERC departed
from this policy without acknowledgment or explanation.
This departure was arbitrary and capricious.

1

FERC has a longstanding policy that rate incentives must
be prospective and that there must be a connection between
the incentive and the conduct meant to be induced. This
policy is incorporated in Order 679. The policy prohibits
FERC from rewarding utilities for past conduct or for conduct
which they are otherwise obligated to undertake.

This longstanding policy is evinced in a series of FERC
decisions and statements. In 2001, FERC denied a committee
 CPUC V. FERC 19

of utilities an incentive for a maintenance/construction pilot
project. FERC reasoned that awarding the incentive would
“unjustly reward” the committee “for doing what it is
supposed to do, i.e., to adequately maintain its facilities in a
prudent, cost-effective manner.” New England Power Pool,
97 FERC ¶ 61,093 at 61,477 (2001), order on reh’g,
98 FERC ¶ 61,249 (2002). In a 2001 case, FERC found that
retroactive incentives are ineffective, since the utilities that
would receive the incentives “would have already made their
decisions.” ISO New England, 96 FERC ¶ 61,359 at 62,355
(2001), aff’d Sithe New England Holdings, LLC v. FERC,
308 F.3d 71, 78 (1st Cir. 2002). A 1992 FERC policy
statement makes its position clear: “Consideration of past
performance would violate the standard that incentive
ratemaking must be prospective. . . . Incentive regulation can
produce superior results over traditional regulation only if it
is prospective.” Incentive Ratemaking for Interstate Nat. Gas
Pipelines, Oil Pipelines, & Elec. Utilities, 61 FERC ¶ 61,168
at 61,599 (1992). In 2006, prior to the adoption of Order 679,
FERC denied Southern California Edision Company (“SCE”)
an incentive for joining the Cal-ISO because SCE was
already a member. FERC stated that SCE “need[ed] no
inducement” to join the Cal-ISO, because it was already a
member. S. Cal. Edison Co., 114 FERC ¶ 61,018 at P 15
(2006).

FERC argues that this longstanding policy predates, and
is implicitly superseded by, Order 679. Order 679 did
explicitly reverse the holding in S. Cal. Edison, in which
FERC had denied SCE an incentive for joining the Cal-ISO
because SCE was already a Cal-ISO member. In Order 679-
A, FERC stated that its decision in S. Cal. Edison “failed to
recognize that incentives are equally important in inducing
utilities to join and remain in Transmission Organizations.”
20 CPUC V. FERC

Order 679-A at P 86 n.142. However, this statement did not
overrule FERC’s policy of awarding incentives to induce
future voluntary conduct. FERC overruled its policy barring
incentives to utilities for remaining in transmission
organizations, but it still treated such incentives as
prospective: they were premised on the fact that membership
in transmission organizations was “generally voluntary,” and
thus that utilities may need incentives to choose to remain in
such organizations. Order 679 at P 331. FERC’s policy of
only providing incentives to induce future voluntary conduct
was still in place as of the TO 16 and TO 17 orders.

2

Awarding PG&E incentive adders was a departure from
FERC’s longstanding policy that incentives should only be
awarded to induce voluntary conduct. This unacknowledged
and unexplained departure from policy was arbitrary and
capricious.

In the initial orders and on rehearing, FERC did not
acknowledge its longstanding policy, nor did it provide an
explanation for its departure from that policy. It merely
asserted that it had the authority to grant incentive adders to
PG&E and that CPUC’s voluntariness arguments were
irrelevant to adder eligibility. FERC’s statements would only
explain its actions if its interpretation of Order 679 were
correct. Because that interpretation is erroneous, the orders
on review were a departure from Order 679’s terms and the
longstanding policy it incorporates. Without any
 CPUC V. FERC 21

acknowledgment or explanation of that departure, the orders
were arbitrary and capricious.5

C

FERC also acted arbitrarily and capriciously by creating
a generic adder in contravention of Order 679’s requirement
of case-by-case review of adders.

Order 679 provides that FERC will approve incentive
adder requests “when justified” and will evaluate such
requests “on a case-by-case basis.” Order 679 at P 326.
Order 679 explicitly rejected a proposal to adopt a generic 50-
basis-point incentive adder for ongoing transmission
organization membership. Id.

In its challenges to PG&E’s tariff filings, CPUC argued
that incentive adders could not induce PG&E to remain in the
Cal-ISO since its membership was involuntary. FERC
ignored this argument and “summarily accept[ed]” PG&E’s

5
FERC and PG&E each argue that PG&E’s participation in the Cal-
ISO is, in fact, voluntary. FERC argues that even if PG&E is not free to
leave the Cal-ISO without CPUC’s consent, “that still does not
demonstrate that [PG&E] is forbidden from seeking to leave the [Cal-
ISO],” and that PG&E “could take steps, with California’s approval, to
voluntarily leave the [Cal-ISO].” Brief of Respondent at 23–24. PG&E
goes a step further and argues that its withdrawal from membership in the
Cal-ISO is not subject to CPUC approval. Brief of PG&E as Respondent-
Intervenor at 22–25. These arguments, even if correct, could not sustain
the orders on review, as they do not appear anywhere in those orders. We
can only uphold agency action on grounds articulated by the agency in its
orders; we “may not accept appellate counsel’s post hoc rationalizations
for agency action.” Or. Nat. Desert Ass’n v. Bureau of Land Mgmt.,
531 F.3d 1114, 1141 (9th Cir. 2008) (quoting Motor Vehicle Mfrs. Ass’n,
463 U.S. at 50).
22 CPUC V. FERC

adder request “consistent with previous Commission orders.”
TO 16 Initial Order at P 30; TO 17 Initial Order at P 23. It
reiterated this position on rehearing. TO 16 Reh’g Order at
P 11; TO 17 Reh’g Order at P 11. FERC also asserted that an
adder is not “generic” simply because other utilities have
received the same adder. TO 16 Reh’g Order at P 13 & n.26
(citing Midcontinent Indep. Sys. Operator, Inc., 161 FERC ¶
62,269 at P 14 (2015)); TO 17 Reh’g Order, at P 11 & n.22
(same).

When Order 679 is read in accordance with its plain
language and evident purpose, it is clear that FERC has
created a generic adder in violation of its provisions. To
satisfy Order 679’s case-by-case analysis requirement and to
avoid creating a generic adder, FERC needed to inquire into
PG&E’s specific circumstances, i.e., whether it could
unilaterally leave the Cal-ISO and thus whether an incentive
adder could induce it to remain in the Cal-ISO. The fact that
the other utilities have received the same adder does not make
it generic; it is the fact that the adders were granted
summarily without any case-specific inquiry into the
circumstances of PG&E’s membership that made them
generic. FERC’s summary grants are an unacknowledged
and unexplained departure from Order 679. The orders on
review are arbitrary and capricious. Fox, 556 U.S. at 515.

IV

CPUC’s petition is not an impermissible collateral attack
on Order 679. Under the FPA, this court’s “jurisdiction . . .
is limited to review of new orders,” and the court does not
have jurisdiction over a petition for review “that collaterally
attacks a prior FERC order.” Pac. Gas & Elec. Co. v. FERC,
464 F.3d 861, 868 (9th Cir. 2006). A petition for review
 CPUC V. FERC 23

under the FPA is a collateral attack on a prior FERC order if
the order upon which the petition is based is a “clarification,”
as opposed to a “modification,” of the prior order. Id. To
differentiate between a clarification and a modification, the
court asks “whether a reasonable party in the petitioner’s
position would have perceived a very substantial risk that the
original order meant what the Commission now says it
meant.” Id. at 868–69 (citation and alterations omitted).

For the same reasons that FERC’s interpretation of Order
679 is inconsistent with the regulation, a reasonable party in
CPUC’s position would not have perceived a very substantial
risk that FERC would interpret Order 679 as precluding its
challenges. To the extent that FERC now interprets Order
679 as precluding such challenges, this interpretation
constitutes a modification, and CPUC’s challenge is not an
impermissible collateral attack on the original order.

FERC makes two additional arguments in support of its
collateral attack claim. First, FERC argues that CPUC’s
petition is a collateral attack on Order 679 because CPUC is
advancing the same argument that FERC considered and
rejected in 2006: that utilities legally mandated to join
transmission organizations should not be eligible to receive
incentive adders. However, this is not the challenge CPUC
is making. CPUC challenges incentive adders for remaining
in a transmission organization when a utility is not free to
leave. No party to the Order 679 proceeding raised the issue
of whether a utility could qualify for an incentive adder for
continued participation in a transmission organization when
such participation was not voluntary. CPUC was not
precluded from making such a challenge to the orders on
review.
24 CPUC V. FERC

Second, FERC argues that CPUC had sufficient notice
that PG&E was eligible for an incentive adder because it has
been a party to each of the annual proceedings since 2007 in
which FERC approved PG&E’s requests for incentive adders.
This argument is also unpersuasive. CPUC settled the
proceedings granting PG&E’s first incentive adder in 2007,
as well as every other proceeding that followed. Each one of
those orders stated that FERC’s approval of the settlement did
not constitute precedent regarding any issue or principle
raised in the proceeding. FERC cannot now cite these
settlement approvals as putting CPUC on notice that it was
precluded from challenging future incentive adders.

Neither Order 679 nor the settlement approval orders that
followed gave CPUC sufficient notice that Order 679
precluded challenges to incentive adder eligibility on the
ground that a utility’s membership in a transmission
organization is involuntary. CPUC’s petition is thus not an
impermissible collateral attack on Order 679.

V

We grant CPUC’s petition for review and remand to
FERC for further proceedings consistent with this opinion.
We need not, and do not, reach any other issue urged by the
parties.

PETITION GRANTED.