Sacramento Muni Util v. FERC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 2005 Decided November 1, 2005

No. 04-1171

SACRAMENTO MUNICIPAL UTILITY DISTRICT,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

MODESTO IRRIGATION DISTRICT, ET AL.,
INTERVENORS

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

Harvey L. Reiter argued the cause for petitioner. With him
on the briefs were Glen L. Ortman, Adrienne E. Clair, John E.
McCaffrey, and Lucy Holmes Plovnick.

Bill Lockyer, Attorney General, Attorney General’s Office
of the State of California, Mary E. Hackenbracht, Senior
Assistant Attorney General, Peter C. Kissel, and Elisa J.
Grammer were on the brief for California Department of Water
Resources.

Robert H. Solomon, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent. With
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him on the brief were Cynthia A. Marlette, General Counsel,
Dennis Lane, Solicitor, and Judith A. Albert, Attorney.

Michael E. Ward, Anthony J. Ivancovich, Mark D. Patrizio,
Stuart K. Gardiner, E. Gregory Barnes, Michael D. Mackness,
and Ellen A. Berman were on the brief for intervenors California
Independent System Operator, et al. in support of respondent.
Jennifer L. Key and J. Phillip Jordan entered appearances.

Before: SENTELLE, RANDOLPH, and ROGERS, Circuit
Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge: The Sacramento Municipal
Utility District (“Sacramento”) sought an order from the Federal
Energy Regulatory Commission compelling the major California
utilities1 to continue providing it with long-term firm
transmission service. Sacramento asserted a right of first refusal
under the Commission’s “Order No. 888.”2 The Commission

1
Pacific Gas & Electric Co., San Diego Gas & Electric Co.,
Southern California Edison Co. (collectively “California
utilities”).
2
Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, F.E.R.C. Stats. & Regs. ¶ 31,036 (1996), 61 Fed. Reg.
21,540 (“Order No. 888”), order on reh’g, F.E.R.C. Stats. &
Regs. ¶ 31,048 (1997), 62 Fed. Reg. 12,274 (“Order No. 888-
A”), order on reh’g, 81 F.E.R.C. ¶ 61,248 (1997) (“Order No.
888-B”), order on reh’g, 82 F.E.R.C. ¶ 61,046 (1998) (“Order
No. 888-C”), aff’d, Transmission Access Policy Study Group v.
FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom. New York
 3

rejected Sacramento’s request in two orders: Sacramento
Municipal Utility District v. Pacific Gas & Electric Co., 105
F.E.R.C. ¶ 61,358 (2003) (“Initial Order”), reh’g denied,
Sacramento Municipal Utility District v. Pacific Gas & Electric
Co., 107 F.E.R.C. ¶ 61,237 (2004) (“Rehearing Order”). This
petition for judicial review followed.

Commercial relations between Sacramento and the
California utilities are governed by private contractual
arrangements made in accordance with public tariffs approved
by the Commission. Before 1996, vertically integrated utilities
provided bundled electricity generation, transmission, and
distribution services to both retail and wholesale customers. See
Transmission Access Policy Study Group v. FERC, 225 F.3d
667, 681 (D.C. Cir. 2000). Municipalities and other small
utilities often required more electricity to serve their customers
than they could generate. Such utilities secured additional
power through long-term contracts. In August 1967,
Sacramento entered into a power transmission agreement with
the California utilities. Like many contracts of its era, the
Sacramento agreement provided for long-term firm physical
transmission service. Sacramento could demand two hundred
megawatts of capacity along a specified transmission path at any
time throughout the duration of the contract.3 For municipal
governments with stringent quality-of-service obligations to

v. FERC, 535 U.S. 1 (2002).
3
In the Commission’s parlance, “firm” service is distinguished
from “non-firm” service by its certainty. Firm service is
contractually guaranteed; non-firm service is scheduled on an
“as available” basis and is subject to interruption. Compare
Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,931
(defining “firm” service), with id. at 31,932 (defining “non-
firm” service).
 4

their retail customers, these long-term contracts provided a
reliable mechanism to ensure “sufficient long-term firm
transmission capacity to import all of the long-term power
supplies [they had] under contract.” Brief of Petitioner at 4.

In 1996, the Commission ordered the national deregulation
of electricity transmission services. Order No. 888 required
utilities to “unbundle” their electricity generation and
transmission services and to file new “open access” tariffs –
modeled on a pro forma tariff included in the rulemaking –
guaranteeing non-discriminatory access to their transmission
facilities by competing generators. See Order No. 888, F.E.R.C.
Stats. & Regs. ¶ 31,036 at 31,635-36. The Commission
recognized that the transition to an open access regime would
have significant implications for long-term contract-holders.
See id. at 31,662-63. Municipalities and other customers who
required the “certainty and continuity” of long-term firm
service, Transmission Access Policy Study Group, 225 F.3d at
735, could have found themselves at a disadvantage in a
competitive market. To address these concerns, the Commission
included in the pro forma tariff a provision granting all long-
term firm transmission customers a right of first refusal to
continue taking service upon expiration of their contracts.4
Section 2.2 of the tariff provides that “[e]xisting firm service
customers . . . have the right to continue to take transmission
service . . . when the contract expires. . . . If at the end of the
contract term, the [transmission system] cannot accommodate
all of the requests for transmission service the existing firm
service customer must agree to accept a contract term at least
4
The Commission also declined to abrogate existing contracts,
such as the 1967 Sacramento agreement, but noted that any new
service taken upon expiration – including service taken under
the right of first refusal – would be considered “new” service
and be governed by the relevant open access tariff. Order No.
888, F.E.R.C. Stats. & Regs. ¶ 31,036 at 31,665.
 5

equal to a competing request by any new [customer] and to pay
the current just and reasonable rate . . ..” Order No. 888-A,
F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,511. Although the
parties refer to Section 2.2 as a “right of first refusal,” it is more
properly understood as a reservation priority. “If there are
capacity limitations and both customers (existing and potential)
are willing to pay for firm transmission service of the same
duration, the right of first refusal provides a tie-breaking
mechanism that gives priority to existing customers so that they
may continue to receive transmission service.” Id. at 30,197;
see also Idaho Power Co. v. FERC, 312 F.3d 454, 457 (D.C. Cir.
2002). This right does not guarantee price or other terms; it is
simply a “mechanism for allocating transmission capacity” to
existing customers willing to match the terms of new customers.
Order No. 888-A, F.E.R.C. Stats. & Regs. ¶ 31,048 at 30,197.

Although the order required utilities to file tariffs that
contained the “non-rate terms and conditions set forth in the . . .
pro forma tariff,” Order No. 888, F.E.R.C. Stats. & Regs.
¶ 31,036 at 31,768; see also 18 C.F.R. § 35.28(c)(1), the
Commission also recognized that its order was likely not the end
of the road in an industry marked by transition. Order No. 888
allows future filings in which utilities may deviate from the
terms of the pro forma tariff, so long as such deviations are
“consistent with, or superior to” the terms in the pro forma
tariff. Order No. 888, F.E.R.C. Stats. & Regs. ¶ 31,036 at
31,770. The Commission specifically anticipated the
development of new market structures like independent service
operators (“ISOs”) – non-profit entities that administer the
transmission grids of multiple operators – and articulated a set
of principles to govern their operation. See id. at 31,730-32.

As the Commission was implementing Order No. 888, the
California legislature and the state’s Public Utility Commission
were radically restructuring California’s energy markets. A
 6

1996 law chartered the California Independent System Operator
(“California ISO”), an independent entity that would take over
transmission operations from the California utilities and file a
new tariff with the Commission. See Cal. Indep. Sys. Operator
Corp. v. FERC, 372 F.3d 395, 397 (D.C. Cir. 2004). The
California ISO operates under a service model quite different
from that envisioned in Order No. 888. Instead of relying on
long-term contracts, the California ISO allocates transmission
capacity in “real time,” based on hour-ahead and day-ahead
scheduling requests from customers. See Paul L. Joskow,
California’s Electricity Crisis, 17 OXFORD REV. ECON. POL’Y
365, 370-72 (2001). Instead of providing long-term reservation
of transmission capacity for a set price, the California ISO
charges all customers an access fee and then adjusts its
“congestion” pricing based on supply and demand. Any
customer can, in effect, receive service at any time so long as it
is willing to pay the necessary “congestion charges” to secure
priority during peak demand periods. See Pacific Gas & Elec.
Co., 80 F.E.R.C. ¶ 61,128, at 61,428-29 (1997) (“CAISO I”).

The Commission found the California ISO tariff consistent
with the broad non-discrimination goals of Order No. 888. See
Pacific Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122, at 61,435,
61,446 (1997) (“CAISO II”). To manage the transition to a new
regulatory regime and a completely new service model, the
Commission again declined to abrogate existing contracts and
ordered customers to take service under the California ISO tariff
upon contract expiration.5 Id. at 61,463-65. The California ISO
tariff does not contain a right of first refusal provision. The
Commission explicitly approved the absence of such a
5
The existing contracts are considered “encumbrances” on the
California ISO. CAISO II, 81 F.E.R.C. at 61,472. Because
providing service under old models is a significant
administrative burden, the tariff prohibits new or increased
service under open access tariffs. Id.
 7

provision, noting that “[t]he ISO’s proposal to schedule
transmission on a day-ahead and hour-ahead basis is not
compatible with the long-term reservation of discrete physical
transmission rights.” Id. at 61,472. To achieve consistency with
the California utilities’ Order No. 888 tariffs, which governed
service until the ISO commenced operations, the Commission
struck the Section 2.2 right of first refusal provision from the
California utilities’ tariffs, replacing it with a clause honoring
existing contracts only for the term of the contract. Id. at 61,472
n.196.

The Commission nevertheless found that the California ISO
tariff would not provide service “as good as or superior to” that
provided under Order No. 888 without some instrument for
hedging the risk of congestion charges. CAISO I, 80 F.E.R.C.
at 61,427. This was especially so for incumbent customers with
previously guaranteed service. Id. (“We are also concerned
about potential discrimination between new market participants
and participants with existing long-term transmission
contracts.”). The California ISO proposed a system of “firm
transmission rights” – tradeable financial instruments that
protect against significant fluctuations in congestion pricing.
See Cal. Indep. Sys. Operator Corp., 87 F.E.R.C. ¶ 61,143, at
61,570 (1999) (“CAISO III”). The Commission conditionally
approved the proposal, finding these financial instruments to be
a sufficient substitute for firm physical transmission rights. Id.
at 61,572; see also Cal. Indep. Sys. Operator Corp., 88 F.E.R.C.
¶ 61,156, at 61,525 (1999) (“CAISO IV”) (“We have determined
that [firm transmission rights] need not provide customers with
firm physical transmission rights in order for them to secure
transmission service that is as good as or superior to the service
under the Order No. 888 pro forma tariff.”). Although the
Commission had previously noted that a right of first refusal
mechanism might be appropriate in the context of a transmission
rights proposal, CAISO II, 81 F.E.R.C. at 61,473, the proposal
 8

approved in CAISO III did not contain such a provision. The
Commission did, however, order the California ISO to develop
and report on plans for longer-term financial rights, finding the
one-year term to be inadequate. CAISO III, 87 F.E.R.C. at
61,572; see also CAISO IV, 88 F.E.R.C. at 61,525. The
Commission took no further action on the transmission rights
proposal, choosing instead to fold it into a comprehensive
market redesign proceeding initiated in the aftermath of the
California energy crisis.

Shortly before its contract with the California utilities was
set to expire, Sacramento informed the companies that it wished
to extend the terms of the contract or invoke its right of first
refusal under Order No. 888. When the California utilities
demurred, Sacramento filed a complaint with the Commission.
The Commission declined to order the relief sought, noting that
“[Sacramento] would have to take service under the CAISO
tariff, the only relevant tariff since the California utilities have
turned over operational control of their transmission facilities to
the CAISO.” Initial Order, 105 F.E.R.C. at 62,615; see also
Rehearing Order, 107 F.E.R.C. at 62,010 (“[T]he Commission-
approved CAISO tariff is the relevant tariff here for
transmission service and that tariff supersedes the Order No. 888
pro forma tariff.”).

In light of the developments described above, the
Commission’s actions can hardly be said to be “arbitrary” and
“capricious.” 5 U.S.C. § 706(2)(A); see Midwest ISO
Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir.
2004). The Commission engaged in a straightforward
application of the relevant tariffs and orders. Even before the
ISO commenced operations, the California utilities’ open access
tariffs had been stripped of their right of first refusal provisions.
CAISO II, 81 F.E.R.C. at 61,472 n.196. Now that the California
utilities have ceded their transmission operations to the
 9

California ISO, they no longer offer service under the open
access tariffs; requests for service upon expiration of existing
contracts are governed by the California ISO tariff. Id. at
61,472. As described above, that tariff does not contain a right
of first refusal provision. “Such concepts,” the Commission
said, “no longer have meaning in the context of the CAISO’s
day-ahead and hour-ahead transmission scheduling system.”
Initial Order, 105 F.E.R.C. at 62,615. Sacramento cannot assert
a right it no longer has and it cannot take service under a
business model that no longer exists.

There is nothing to Sacramento’s argument that the
Commission’s orders amount to a new rule promulgated without
notice and comment and improperly applied retroactively. For
reasons already mentioned, the Commission engaged only in the
application of an existing rule; it did not alter any aspect of
Order No. 888 or the California ISO orders.

Sacramento ultimately challenges the validity of the
California ISO tariff itself, arguing that its system of congestion
pricing and firm transmission rights – and the absence of an
Order No.888-style right of first refusal – fails to provide a
service that is as good as or superior to that under the Order No.
888 pro forma tariff. See, e.g., Brief of Petitioner at 28-30;
Reply Brief at 11-12. But the California ISO tariff is not before
us. Section 313(b) of the Federal Power Act, 16 U.S.C.
§ 825l(b), grants this court jurisdiction only over petitions for
review within sixty days following the Commission’s denial of
rehearing. The Commission proceedings approving the
California ISO tariff and the firm transmission rights proposal
took place in 1997 and 1999, respectively. Because the time for
seeking judicial review has long passed, Sacramento’s argument
amounts to an impermissible collateral attack on the previously
approved California ISO tariff. See, e.g., City of Nephi v. FERC,
147 F.3d 929, 934-35 (D.C. Cir. 1998); Ga. Indus. Group v.
 10

FERC, 137 F.3d 1358, 1363-64 (D.C. Cir. 1998); Transwestern
Pipeline Co. v. FERC, 988 F.2d 169, 174 (D.C. Cir. 1993).
While agency rules can at times be challenged on substantive
grounds when they are applied, even though the statutory period
for judicial review has expired, none of the typical conditions
for allowing this are present. Sacramento does not object to the
Commission’s constitutional or statutory authority, e.g., Indep.
Cmty. Bankers of Am. v. Bd. of Governors of the Fed. Reserve
Sys., 195 F.3d 28, 34-35 (D.C. Cir. 1999); the Commission,
through its orders in this case, has not effectively reopened the
California ISO orders, e.g., Pub. Citizen v. Nuclear Regulatory
Comm’n, 901 F.2d 147, 150-52 (D.C. Cir. 1990); and the orders
did not fail to place the parties on notice of what would be
required. E.g., S. Co. Servs., Inc. v. FERC, 416 F.3d 39, 44-45
(D.C. Cir. 2005) (citing Dominion Res., Inc. v. FERC, 286 F.3d
586, 590 (D.C. Cir. 2002)). As to the last consideration, the
order approving the California ISO tariff explicitly addressed
(and dismissed) concerns – raised by one of the intervenors in
this case, see CAISO II, 81 F.E.R.C. at 61,467 (California
Department of Water Resources) – about the absence of a right
of first refusal. Id. at 61,472-73. The Commission also
approved the firm transmission rights proposal in the face of an
objection that the proposal was inconsistent with Order No. 888.
CAISO III, 87 F.E.R.C. at 61,572. Sacramento participated in all
of those proceedings. See CAISO II, 81 F.E.R.C. at 61,591
(listing Sacramento as intervenor); CAISO III, 87 F.E.R.C. at
61,583 (same). A reasonable firm in Sacramento’s position
would have understood the Commission’s approvals to “mean[]
what the Commission now says [they] mean[].” Dominion Res.,
286 F.3d at 589-90 (internal quotation marks omitted).

We therefore deny Sacramento’s petition for review in part
and we dismiss it to the extent that it collaterally attacks the
Commission’s California ISO orders.
So ordered.