NextEra Desert Center Blythe, LLLC v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 2, 2017 Decided April 4, 2017

No. 16-1003

NEXTERA DESERT CENTER BLYTHE, LLC,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION
AND SOUTHERN CALIFORNIA EDISON COMPANY,
INTERVENORS

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

John N. Estes III argued the cause for petitioner. With him
on the briefs were Gerard A. Clark and John Lee Shepherd, Jr.

Elizabeth E. Rylander, Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent. On
the brief were Robert H. Solomon, Solicitor, and Ross R.
Fulton, Attorney.

William H. Weaver argued the cause for intervenors
California Independent System Operator Corporation, et al.
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With him on the brief were Daniel J. Shonkwiler, Roger
Collanton, and Rebecca A. Furman.

Before: HENDERSON, TATEL and SRINIVASAN, Circuit
Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: In this petition for review, a major
producer of solar power challenges orders of the Federal
Energy Regulatory Commission denying its effort to obtain
financial instruments known as Congestion Revenue Rights.
Because FERC erroneously concluded that the relevant
contract and tariff provisions unambiguously foreclose
petitioner’s request, we remand to the Commission so that it
may “consider the question afresh in light of the ambiguity we
see.” Cajun Electric Power Cooperative, Inc. v. FERC, 924
F.2d 1132, 1136 (D.C. Cir. 1991).

I.
This case concerns two solar power plants in the California
desert—the Genesis solar plant in Desert Center and the
McCoy solar plant near Blythe—and a transmission project
that connects them with customers in Southern California.
Together, the facilities generate 500 megawatts of electricity,
enough to power approximately 180,000 homes every year. See
NEXTERA ENERGY RESOURCES PARTNERS, Genesis Solar
Energy Center, https://goo.gl/tdbXt4; NEXTERA ENERGY
RESOURCES PARTNERS, McCoy Solar Energy Center,
https://goo.gl/mo3KlR. Producing all that power from sunlight
requires an enormous scale: the Genesis plant alone occupies
some 1,900 acres. BUREAU OF LAND MANAGEMENT, Genesis
Solar Energy Project, https://goo.gl/8qdMRM.
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Prior to completion of the two facilities, Genesis and
McCoy entered into long-term agreements to sell their power
to electric utilities, including Southern California Edison
Company. Petitioner NextEra Desert Center Blythe, LLC was
then formed to connect Genesis and McCoy to the grid. In
August 2011, NextEra, Edison, and the California Independent
System Operator (CAISO)—the authority tasked with
operating transmission facilities in California—reached an
agreement to govern the interconnection of Genesis and
McCoy to the CAISO-controlled grid. Central to this case, that
agreement identified the need for high-voltage transmission
upgrades, known as the West of Devers Upgrades, in order to
safely and reliably deliver electricity from the two solar plants.

NextEra, however, soon grew concerned that the
permanent West of Devers Upgrades would not be completed
in time for it to meet its obligations to the electric utilities. In
response, CAISO and Edison identified a temporary fix, known
as the Interim Project, to meet NextEra’s needs in the
meantime. By subsequent letter agreement, NextEra and
Edison committed to the Interim Project, with Edison
responsible for construction and NextEra footing the bill. The
parties then amended their initial agreement to incorporate the
letter agreement. For simplicity’s sake, we will refer to the
amended agreement and letter agreement together as the
Interconnection Agreement.

In December 2014, CAISO informed NextEra that it
planned to release Congestion Revenue Rights (“CRRs”).
CRRs arise from CAISO’s method for setting wholesale
electricity prices, which builds the cost of congestion into the
price of energy. Sacramento Municipal Utility District v.
FERC, 616 F.3d 520, 524 (D.C. Cir. 2010) (explaining how
CAISO sets wholesale electricity prices). Put simply, energy
costs more in areas requiring the use of congested transmission
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lines and less in areas that do not. Id. at 524–25. CRRs are
financial instruments that are principally used to allow the
holder to avoid paying congestion costs. Id. at 527. Because the
holder of a CRR is entitled “to be paid the congestion costs
associated with transmitting a given quantity of electricity
between two specified points” a party that pays for
transmission and holds a corresponding CRR will receive back
from CAISO the amount it paid for congestion. Id. (citation
omitted).

According to NextEra, it was initially shocked to learn that
the Interim Project would result in the release of CRRs. Even
so, NextEra informed CAISO that, in its view, it is entitled to
receive CRRs associated with the Interim Project under section
36.11 of CAISO’s tariff, which provides for the allocation of
CRRs to “Project Sponsors of Merchant Transmission
Facilities.” CAISO and Edison disagreed. In response, and
initiating the controversy before us, NextEra filed a complaint
with FERC asking that the Commission direct CAISO to
allocate it CRRs.

By order dated June 3, 2015, the Commission denied
NextEra’s complaint. NextEra Desert Center Blythe, LLC v.
CAISO, 151 FERC ¶ 61,198, 2015 WL 3536557. NextEra filed
a request for rehearing, which the Commission also denied.
NextEra Desert Center Blythe, LLC v. CAISO, 153 FERC
¶ 61,208, 2015 WL 7345798 (“NextEra Desert Center II”).
The two orders share a common rationale: according to the
Commission, the terms of the Interconnection Agreement
“clear[ly] and unambiguous[ly]” bar NextEra’s attempt to
receive CRRs under CAISO tariff section 36.11. Id. at *4.
Given this interpretation, FERC “declin[ed]” to address
whether NextEra would otherwise be “entitled to CRRs under
CAISO tariff section 36.11” because, in FERC’s view, that
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provision is “inapposite” and “does not apply” to the Interim
Project. Id. at *4–5.

Following the Commission’s denial of rehearing, NextEra
filed this petition for review. Both Edison and CAISO sought
leave to intervene, which we granted.

II.
Where, as here, we confront a challenge to FERC’s
reading of a tariff and related contracts, we review the
“[Commission]’s interpretation under the Administrative
Procedure Act’s arbitrary and capricious standard of review,
using a two-step, Chevron-like analysis.” Colorado Interstate
Gas Co. v. FERC, 599 F.3d 698, 701 (D.C. Cir. 2010) (citing 5
U.S.C. § 706(2)(A); Old Dominion Electric Cooperative, Inc.
v. FERC, 518 F.3d 43, 48 (D.C. Cir. 2008)). First, we “consider
de novo whether the [relevant language] unambiguously
addresses the matter at issue. If so, the language . . . controls
for we must give effect to the unambiguously expressed intent
of the parties.” Ameren Services Co. v. FERC, 330 F.3d 494,
498 (D.C. Cir. 2003) (citation and internal quotation marks
omitted). If, however, there is ambiguity, “we defer to the
Commission’s construction . . . so long as that construction is
reasonable.” Koch Gateway Pipeline Co. v. FERC, 136 F.3d
810, 814–15 (D.C. Cir. 1998). Importantly, if FERC’s decision
rests on “an erroneous assertion that the plain language of the
relevant wording is unambiguous[,] we must remand” to the
Commission so that it may “consider the question afresh in
light of the ambiguity we see.” Cajun, 924 F.2d at 1136.

Although this dispute implicates a tangle of provisions
within an intricate regulatory scheme, our resolution is
straightforward: we find ambiguity where FERC found none.
The Commission’s interpretation of the Interconnection
Agreement rests on a simple logical flaw.
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From the outset, NextEra has claimed that it is entitled to
CRRs for the Interim Project under section 36.11 of the CAISO
tariff, which affords CRRs to the “Project Sponsor” of a
“Merchant Transmission Facility.” According to FERC, three
provisions of the Interconnection Agreement, when read in
concert, plainly render NextEra ineligible. Its argument goes
like this:

1. Under the Interconnection Agreement, NextEra is
entitled to a refund for Network Upgrades. Interconnection
Agreement, Article 11.4.1.

2. The Interconnection Agreement provides that CRRs
under the tariff are available to NextEra only as an alternative
to a refund for Network Upgrades. Interconnection Agreement,
Article 11.4.

3. NextEra agreed that the Interim Project is not a
Network Upgrade (at least until the Interim Project becomes
permanent). Interconnection Agreement, Appendix A, Section
9(b).

4. Thus, NextEra is ineligible for CRRs in connection
with the Interim Project.

The flaw lies in step 2. The relevant provision, Article
11.4, states that NextEra may elect to “receive Congestion
Revenue Rights as defined in and as available under the CAISO
Tariff . . . , in lieu of a refund of the cost of Network Upgrades.”
Interconnection Agreement, Article 11.4 (emphasis added). As
FERC sees it, the critical language is “in lieu of a refund of the
cost of Network Upgrades,” which it takes to mean that
NextEra may receive CRRs only if it is eligible for a refund for
a Network Upgrade. But the only thing Article 11.4 clearly
forecloses is the receipt of both CRRs and a refund for Network
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Upgrades. The clause beginning with “in lieu of” does not
unambiguously mean that the lone avenue for receipt of CRRs
is by way of a Network Upgrade.

This is, of course, NextEra’s point: it thinks section 36.11
of the CAISO tariff offers another way to obtain CRRs for the
Interim Project. Instead of addressing NextEra’s argument,
however, the Commission expressly declined to consider
whether the company could avail itself of that section,
declaring the question “inapposite” and “not relevant.”
NextEra Desert Center II, 2015 WL 7345798, at *4. For our
purposes, whether NextEra actually qualifies under section
36.11 is beside the point, as the reason given by the
Commission for denying NextEra’s claim was its flawed
interpretation of the tariff and Interconnection Agreement—an
error that, under our cases, requires remand. Ameren, 330 F.3d
at 498–99.

In contrast to FERC, Intervenors CAISO and Edison
address section 36.11 head-on. As they explain, NextEra is
patently unqualified for CRRs under that provision because it
“never applied for . . . status” as a Project Sponsor “in
accordance with Section 24” of the CAISO tariff. Intervenors’
Brief at 23–24. Whatever the merits of that argument, it is a
well-worn principle that “reviewing courts may affirm [an
agency order] based only on reasoning set forth by the agency
itself.” Philadelphia Gas Works v. FERC, 989 F.2d 1246, 1250
(D.C. Cir. 1993) (citing SEC v. Chenery Corp., 318 U.S. 80, 87
(1943)). Hardly a fussy insistence that the agency show its
work, this doctrine reflects the respect courts have for agency
expertise. “Congress explicitly delegated to FERC broad
powers over ratemaking, including the power to analyze the
relevant contracts, and because the Commission has greater
technical expertise in this field than does the Court, we accord
deference to the Commission’s interpretation[s].” Lomak
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Petroleum, Inc. v. FERC, 206 F.3d 1193, 1198 (D.C. Cir. 2000)
(citation and internal quotation marks omitted). As such, it is
altogether appropriate that we decline to reach issues of tariff
interpretation without first receiving the benefit of FERC’s
considered judgment.

The Commission acknowledges that our precedent
requires remand when its decision rests on the erroneous
conclusion that a tariff is unambiguous. It argues, however, that
we may nonetheless deny the petition based on an alternative
Chevron step 2 analysis that it claims lurks in its order denying
rehearing. In support, it cites Old Dominion, in which we
afforded “substantial deference to the Commission’s
interpretation” despite petitioners’ claim that the agency found
the relevant documents unambiguous, explaining that the
Commission “considered policy concerns and extrinsic
evidence . . . demonstrating it recognized [the documents] were
ambiguous and exercised its discretion to resolve the
ambiguities.” 518 F.3d at 48–49. FERC’s reliance on Old
Dominion is misplaced. In an especially mystifying portion of
its order, FERC observed that “even if the Commission found
it necessary to look outside the four corners” of the
Interconnection Agreement, its conclusion about the
inapplicability of section 36.11 would remain unchanged, in
light of “relevant portions of the CAISO tariff.” NextEra
Desert Center II, 2015 WL 7345798, at *6. Unlike in Old
Dominion, however, FERC’s cryptic discussion nowhere
indicated that it understood the ambiguity we have identified.
Rather, implicit in the Commission’s reasoning is a continued
reliance on its earlier, erroneous construction of the
Interconnection Agreement. See, e.g., id. (“[I]nterconnection
customers have the choice of direct payments or CRRs for
Network Upgrades. NextEra has agreed . . . that the Interim
Project is not a Network Upgrade.”). In other words, the
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Commission’s orders contain no apparent Chevron step 2
analysis to which we can defer.

Moreover, even if we were to consider FERC’s alternative
analysis, we would conclude that the Commission “fail[ed] to
provide an intelligible explanation” for its decision, which
“amounts to a failure to engage in reasoned decisionmaking.”
FPL Energy Marcus Hook, L.P. v. FERC, 430 F.3d 441, 448
(D.C. Cir. 2005). Specifically, the Commission leans heavily
on two provisions of the tariff: Appendix DD and Appendix Y.
The former provides, in relevant part, that “[f]or Network
Upgrades, for which the Interconnection Customer did not
receive repayment, the Interconnection Customer will be
eligible to receive [CRRs] in accordance with the CAISO
Tariff Section 36.11.” CAISO Tariff, Appendix DD § 14.3.2.1.
Appendix Y states that “[i]nstead of direct payments, the
Interconnection Customer may elect to receive [CRRs] in
accordance with the CAISO Tariff Section 36.11 associated
with the Network Upgrades.” CAISO Tariff, Appendix Y
§ 12.3.2.1. It follows, says FERC, that “interconnection
customers have the choice of direct payments or CRRs for
Network Upgrades.” NextEra Desert Center II, 2015 WL
7345798, at *6. But neither provision, at least not by any
reasoning spelled out in FERC’s orders, forecloses the
possibility that an entity in NextEra’s position may receive
CRRs under section 36.11 by some route other than a Network
Upgrade—precisely the theory animating NextEra’s claim.

III.
We emphasize the narrowness of our holding, i.e., that
FERC overlooked an ambiguity in the Interconnection
Agreement. Nothing in our opinion should be taken to prejudge
the conclusion that FERC may reach on remand.
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For the foregoing reasons, the petition for review is
granted, and FERC's orders are remanded for further
proceedings consistent with this opinion.
So ordered.