California Public Utilities Commission v. Federal Energy Regulatory Commission

OPINION THOMAS, Chief Judge: This petition for review returns to us as part of a long series of administrative cases arising out of the California energy crisis in 2000 and 2001, the background of which we have described in detail in earlier opinions. 1 This petition requires us to determine whether the Federal Energy Regulatory Commission (“FERC” or “Commission”) acted arbitrarily or capriciously in calculating certain refunds. We review FERC decisions to determine whether they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Pac. Gas & Elec. Co. v. FERC, 373 F.3d 1315, 1319 (D.C. Cir. 2004) (citing 5 U.S.C. § 706 (2)(A); Sithe/Indep. Power Partners v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999)). “FERC must be able to demonstrate that it has made a reasoned decision based upon substantial evidence in the record.” Id. (quoting N. States Power Co. v. FERC, 30 F.3d 177 , 180 (D.C. Cir. 1994)). The Court also must ensure that FERC “artieulate[s] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Id. (alteration in original) (quoting Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Ins. Co., 463 U.S. 29, 43 , 103 S.Ct. 2856 , 77 L.Ed.2d 4 43 (1983)). We grant the petition in part and deny it in part. I After we concluded in Bonneville Power Administration v. FERC that FERC had acted outside its jurisdiction when ordering governmental entities/non-public utilities to pay refunds, 422 F.3d 908 , 926 (9th Cir. 2005), the Commission vacated each of its orders in the California refund proceeding to the extent that they ordered governmental entities/non-public utilities to pay refunds. San Diego Gas & Elec. Co. v. Sellers of Energy & Ancillary Servs. (“2007 Order on Remand”), 121 FERC ¶ 61,067 , 61,352-53, 2007 WL 3047581 , at *9 (2007). 2 The Commission directed the California Power Exchange Corporation (“Cal-PX”) and the California Independent System Operator Corporation (“Cal-ISO”) to complete refund calculations with all entities that participated in the Cal-PX and Cal-ISO markets and not to redo the refund calculations to remove the governmental entities/non-public utilities. Id. FERC agreed with the California parties (“California”) 3 that energy sales and purchases should be netted before calculating each party’s refund. amount, but it found that netting these sales and purchases over the entire refund period could *1147 have the indirect effect of requiring governmental entities and other non-public utilities to pay refunds. 2008 Order on Rehearing and Motions for Clarification and Accounting, 125 FERC ¶ 61,214 , 62,-112-13, 2008 WL 4962565 , at *4-5 (2008). FERC instead found that in order to calculate the total refund shortfall resulting from Bonneville, Cal-ISO should net sales and purchases over hourly intervals. Id. The Commission noted that under the Cal-ISO Tariff, a settlement period was defined in terms of hourly intervals, and therefore, it directed Cal-ISO to net over hourly intervals to ensure consistency with its tariff requirements. Id. In a later order, FERC applied the same rationale to CalPX, whose tariff also specified hourly settlement intervals, and directed Cal-PX to perform its final refund calculations netting purchases and sales over hourly intervals to reflect the period during which the obligation was incurred. 2011 Order Accepting Compliance Filings and Providing Guidance, 136 FERC ¶ 61 ,-036, 2011 WL 2750775 , at *11 (2011). California argues that the applicable tariffs unambiguously require Cal-ISO and Cal-PX to net for the entire refund period, not over hourly intervals. Although California makes a plausible case for its interpretation, we cannot conclude that FERC acted arbitrarily or capriciously in its interpretation of the tariffs. Though the tariffs provide for netting in certain situations over an interval shorter than an hour or for netting charges over an hour and later summing the charges over the day and over the entire month to generate monthly invoices, nothing suggests that the netting interval should span the entire refund period, which lasted nine months. Similarly, FERC’s interpretation of the tariff amendments was likewise reasonable. Cal-ISO Amendment No. 51 and Cal-PX Amendment No. 23 segregated transactions during the refund period. The amendments did not address calculating the total net refunds; they related only to performing settlement reruns and invoice adjustments (prerequisites to calculating final refunds). FERC reasonably interpreted the amendments as inapplicable. California also argues that FERC’s decision to net governmental entity sales on an hourly basis departed from its prior orders without explanation. However, the prior orders cited do not address how the refunds should be netted; they address cost offset allocations. California also suggests that the result is unduly discriminatory because hourly netting improperly permits governmental entities and non-public utilities to receive unlawfully excessive rates charged for sales made in one hour (without having to repay sellers for the excessive rates), while collecting refunds if that same entity bought power in another hour or in a different market in that same hour. The data do suggest some disparity. However, that is a natural consequence of our jurisdictional decision in Bonneville. In sum, although the tariffs are not specific on these points, we cannot conclude that FERC acted arbitrarily or capriciously in its construction of the tariffs. II The second issue in the petition for review concerns a $5 million deficit in the Cal-PX settlement clearing account that resulted from a transfer of funds from the settlement clearing account to the operating, account in March 2001; the $5 million was used for operating expenses. The Commission determined that the deficit was attributable to an accounting error on the part of Cal-PX and found that, given the delay in discovering that the funds had erroneously been transferred, it appeared unlikely that Cal-PX would “be able to determine how, precisely, this $5 million *1148 was used, separate and apart from other funds in the operating account during the same period.” 2011 Order Accepting Compliance Filings and Providing Guidance, 136 FERC ¶ 61,067 , 2011 WL 2750775 , at *15. Therefore, the Commission determined that the most efficient and equitable solution was to treat the settlement account deficit “like a refund shortfall and allocate the shortfall among all net refund recipients in proportion to their final refund positions.” Id. The Commission denied rehearing of its decision, concluding that only net refund recipients (net buyers) would be financially affected by the reduction in the total amount of available funds and that this approach was consistent with its decisions about how to allocate other shortfalls. 2012 Order Denying Rehearing (II), 138 FERC ¶ 61,092 , 61,-398, 2012 WL 372854 , at *3 (2012). California argues that FERC should have allocated the $5 million deficit to both buyers and sellers, rather than just to net buyers. In this respect, we are guided by Pacific Gas & Electric, in which the D.C. Circuit concluded that FERC was required to allocate costs across the entire market. 373 F.3d at 1319-22 . Pacific Gas & Electric involved Cal-PX “winding up” its business affairs. Id. at 1317-18 . Because CalPX had no funding source during the wind-up period, FERC allocated the costs of Cal-PX’s wind-up and ongoing operations among its customers on the basis of their prior purchases. Id. at 1318, 1320 . However, the D.C. Circuit held that “FERC’s imposition of additional charges on Cal-PX’s customers allocated on the basis of their prior purchases without reflection of any new jurisdictional services directly violate[d] the filed-rate doctrine or the rule against retroactive rulemaking.” Id. at 1320 . Because Cal-PX’s former customers had already paid the filed rate for the past jurisdictional services, any imposition of new costs based on the previous transactions was prohibited. Id. The court also held that FERC’s cost allocation methodology was unreasonable because there was no connection between “the size of [a customer’s] account balance” and the “customer’s likely benefit from ... [Cal-Px’s] wind-up activities.” Id. at 1321 . Here, the allocation of the shortfall is not a new charge but is the result of Cal-PX’s accounting error. Nonetheless, the $5 million was used for operating expenses and, as noted in Pacific Gas & Electric, all market participants benefitted from the continued operation of Cal-PX. Id. at 1321 . Therefore, consistent with the treatment in Pacific Gas & Electric, the shortfall should be allocated among all market participants. See id. FERC argues that its decision was consistent with prior proceedings and, specifically, that the shortfall after Bonneville was allocated to refund recipients based on their final net refund positions. See 2007 Order on Remand, 121 FERC ¶ 61,067 , 61,352-53, 2007 WL 3047581 , at *9. However, allocation of the Bonneville shortfall is distinguishable because it was a shortfall in refunds. Because governmental entities could not be ordered to pay refunds, there was less money to be allocated to buyers. Here, on the other hand, the shortfall exists in the account from which refunds will be made, but is unrelated to the refund proceeding. In sum, we agree with the logic employed by the D.C. Circuit and conclude that FERC acted arbitrarily and capriciously in allocating the refund only to net buyers and not to all market participants. III In conclusion, we deny the petition as to the question whether refunds should be netted hourly or across the entire refund period. We grant the petition as to the allocation of the deficit in the Cal-PX set *1149 tlement clearing account. Each party shall bear its own fees and costs on appeal. PETITION GRANTED IN PART; DENIED IN PART. . See, e.g., MPS Merch. Servs., Inc. v. FERC, 836 F.3d 1155, 1160 (9th Cir. 2016); Cal. ex rel. Harris v. FERC, 809 F.3d 491, 496-98 (9th Cir. 2015); Pub. Utils. Comm’n of State of Cal. v. FERC, 462 F.3d 1027, 1036-45 (9th Cir. 2006); Bonneville Power Admin. v. FERC, 422 F.3d 908, 911-14 (9th Cir. 2005); Cal. ex rel. Lockyer v. FERC, 383 F.3d 1006, 1008-11 (9th Cir. 2004). . All proceedings below share this case name. Orders will be referred to by their year and title for the sake of brevity and to avoid confusion. . Petitioners the California Parties consist of the Public Utilities Commission of the State of California; the People of the State of California ex rel. Xavier Becerra, Attorney General; Pacific Gas aild Electric Company; and Southern California Edison Company.