Transmission Agency v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 14, 2007 Decided July 20, 2007

No. 05-1402

TRANSMISSION AGENCY OF NORTHERN CALIFORNIA, ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

SOUTHERN CALIFORNIA EDISON COMPANY, ET AL.,

INTERVENORS

Consolidated with

06-1246

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Dennis M.P. Ehling argued the cause for petitioners. With

him on the briefs were Roger D. Stark, Wallace L. Duncan,

James D. Pembroke, Michael Postar, Peter J. Scanlon, Sean M.

Neal, and Kristen Connolly McCullough.

Wallace F. Tillman, Lisa G. Dowden, Daniel I. Davidson,

Robert C. McDiarmid, Susan N. Kelly, Jonathan D. Schneider,

2

Harvey L. Reiter, and Linda M. Nagel were on the briefs for

intervenor and amici curiae in support of petitioner. Eugene

Tillman entered an appearance.

Samuel Soopper, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on the

brief were John S. Moot, General Counsel, and Robert H.

Solomon, Solicitor.

Stuart K. Gardiner argued the cause for intervenors in

support of respondent. With him on the brief were Anna J.

Valdberg, Jennifer L. Key, Michael E. Ward, Anthony J.

Ivancovich, Daniel J. Shonkwiler, Erik N. Saltmarsh, and Jeffrey

A. Diamond. Victoria S. Kolakowski entered an appearance.

Before: GINSBURG, Chief Judge, and HENDERSON and

GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge: Petitioners challenge three orders1

of the Federal Energy Regulatory Commission (“FERC”) that

require the City of Vernon, California (“Vernon”) to issue

refunds to the California Independent System Operator

Corporation (“CAISO”) for overcollection of its transmission

revenue requirement (“TRR”).2 Any opinion whose opening

1

City of Vernon, Cal., 111 FERC ¶ 61,092 (2005) (Opinion

No. 479); City of Vernon, Cal., 112 FERC ¶ 61,207 (2005) (Opinion

No. 479-A); City of Vernon, Cal., 115 FERC ¶ 61,297 (2006)

(Opinion No. 479-B).

2

A TRR “consists of the costs and rate of return to which the

utilities are entitled as participating transmission owners.” Pacific

Gas & Elec. Co. v. FERC, 306 F.3d 1112, 1114 (D.C. Cir. 2002). The

3

sentence includes three acronyms, one footnote that refers to

three FERC orders and another that requires a definition of an

accounting procedure is likely to be about a matter of some

complexity. Fortunately, the legal issue that resolves the

controversy before us is not so complex as the dispute itself, and

because this case is a continuation of the litigation that resulted

in our decision in Pacific Gas & Electricity Company v. FERC,

306 F.3d 1112 (D.C. Cir. 2002) (“PG&E”), we have some prior

familiarity with the events and disputes out of which it arose.

In PG&E, we were asked to review a challenge brought by

some existing PTOs of CAISO to a FERC order that approved

the TRR Vernon filed when it sought to become a PTO as well.

We concluded that FERC had failed to demonstrate that

CAISO’s rates (also referred to as the “transmission access

charge” or “TAC”) would be just and reasonable if Vernon were

to participate under the proposed TRR. On remand, FERC

issued three orders directing Vernon to pay refunds to CAISO

so as to restore CAISO’s just and reasonable rate. Vernon now

petitions for review of these orders and asks us to consider

whether FERC has authority (1) to review Vernon’s TRR under

the just and reasonable standard and (2) to order Vernon to

refund any overcollection of its TRR.

Joining Vernon are the Transmission Agency of Northern

California (“TANC”), the City of Santa Clara, California, the

City of Redding, California, and M-S-R Public Power Agency

parties in this case use this term, as do we, to refer both to the detailed

revenue requirement a utility would submit to CAISO and FERC in

order to become a participating transmission owner (“PTO”) of

CAISO and to the monetary compensation a PTO would collect from

CAISO.

4

(collectively, the “TANC Parties”).3 Together, they argue that

because Vernon, as a municipality, is exempted from the Federal

Power Act when it provides transmission services, see E. Ky.

Power Coop., Inc. v. FERC, No. 06-1003, slip op. at 10-11 (D.C.

Cir., June 15, 2007) (citing United States v. Pub. Util. Comm’n

of Cal., 345 U.S. 295, 315 (1953)), FERC has no authority to

order Vernon to pay refunds. For the reasons set forth below,

we hold that although FERC has sufficiently demonstrated its

authority to review Vernon’s TRR under the just and reasonable

standard, FERC lacks jurisdiction to order Vernon to pay

refunds to CAISO. Accordingly, we vacate the portions of the

orders requiring refunds by Vernon and remand for further

proceedings.

I.

The Federal Power Act (“FPA”) grants FERC authority “to

provide effective federal regulation of the expanding business of

transmitting and selling electric power in interstate commerce.”

New York v. FERC, 535 U.S. 1, 6 (2002) (citing Gulf States Util.

Co. v. FPC, 411 U.S. 747, 758 (1973)). Section 205 of

subchapter II under the FPA permits FERC to ensure that “all

rates and charges made, demanded, or received by any public

utility for or in connection with the transmission or sale of

electric energy” subject to its jurisdiction are “just and

reasonable.” FPA § 205, 16 U.S.C. § 824d(a).

In the past, the monopoly control of vertically-integrated

utilities presented a major structural problem in the electricity

industry because consumers were forced to pay a single price for

“bundled” generation, transmission, and distribution services.

See, e.g., Midwest ISO Transmission Owners v. FERC, 373 F.3d

3

Of these petitioners, only Vernon has thus far sought to join

CAISO.

5

1361, 1363 (D.C. Cir. 2004) (“Midwest ISO”); Pub. Util. Dist.

No. 1 of Snohomish Co. v. FERC, 272 F.3d 607, 610 (D.C. Cir.

2001) (“Snohomish”). In an attempt to correct this problem,

FERC implemented several policies to minimize anticompetitive

behavior among transmission-owning public utilities. FERC

began by requiring “utilities that owned transmission facilities

to guarantee all market participants non-discriminatory access

to those facilities,” Midwest ISO, 373 F.3d at 1363 (citing

Promoting Wholesale Competition Through Open Access Non-

Discriminatory Transmission Services by Public Utilities, 61

Fed. Reg. 21,540, 21,550-52 (1996) (“Order No. 888”)). Next,

FERC encouraged, but did not require, the development of

umbrella entities called independent system operators (“ISOs”)

and regional transmission organizations (“RTOs”). See id. at

1364. FERC encouraged public utilities to participate in these

organizations, which would manage the transmission facilities

of each of its members and return to them the revenues set forth

in the TRRs. By assuming operational control but not

ownership of the transmission facilities, ISOs (which manage

RTOs) would separate “operation of the transmission grid and

access to it from economic interests in generation[,]” Order No.

888, 61 Fed. Reg. at 21,551, and promote efficiency by taking

advantage of economies of scale in segmentation and control of

facilities, see Midwest ISO, 373 F.3d at 1364. Finally, FERC

encouraged “all transmission-owning entities in the Nation,

including non-public entities [e.g., governmental entities],”4

4

The term “non-public entity,” or its equivalent “non-public

utility,” can be confusing even to the careful reader. The FPA defines

a “public utility” as “any person who owns or operates facilities

subject to the jurisdiction of [FERC.]” FPA § 201(e), 16 U.S.C.

§ 824(e). FERC refers to utilities wholly-owned by governmental

entities as “non-public utilities” or “non-public entities” because

governmental entities are exempt from the FPA and therefore exempt

from FERC’s jurisdiction when they provide transmission services.

6

Regional Transmission Organizations, Order No. 2000, 65 Fed.

Reg. 810, 811 (1996) (emphasis added); see also Order No. 888,

61 Fed. Reg. at 31,780-81, to voluntarily place their

transmission facilities under the control of RTOs, see Order No.

2000, 54 Fed. Reg. at 811, some of which would be managed in

turn by ISOs, id.; see also Order No. 888, 61 Fed. Reg. at

21,595-96.

This last step created a complication from which this case

arises. Because governmental entities are exempt from the FPA,

see FPA § 201(f), 16 U.S.C. § 824(f), FERC cannot regulate

them even when they join regulated ISOs. See PG&E, 306 F.3d

at 1114. It is settled, however, that “FERC may analyze and

consider the rates of non-jurisdictional utilities to the extent that

those rates affect jurisdictional transactions.” Id. (citations

omitted). In other words, FERC may consider the rates of a

municipal utility PTO to the extent that they affect the rates of

the ISO, which is subject to the FPA.

Established in 1997 by the State of California, CAISO is an

ISO subject to the FPA. Initially, it had three PTOs, each

subject to FERC’s jurisdiction—Pacific Gas & Electric

Company, Southern California Edison Company, and San Diego

Gas & Electric Company. Under § 205, FERC had authority to

examine these PTOs’ TRRs to ensure that they were just and

reasonable. On March 31, 2000, CAISO proposed to amend its

tariff to allow non-jurisdictional utilities, including

governmental entities, to become PTOs. See Cal. Indep. Sys.

Operator Corp., 91 FERC ¶ 61,205, 61,720 (2000). Although

the aim of the proposal was consistent with FERC’s effort to

encourage non-jurisdictional entities to become PTOs, FERC

nonetheless determined that this particular proposal was at odds

with FERC’s regulatory responsibility because it barred any

FERC review of the TRRs of non-jurisdictional entities. See id.

at 61,724. Careful to disavow any intention “to broaden the

7

applicability of Section 205 to non-public utilities,” id. (internal

quotation and citation omitted), FERC accepted a revised

CAISO proposal only when it required non-jurisdictional PTOs

to submit their TRRs to either an ISO panel subject to FERC

review or directly to FERC. See Cal. Indep. Sys. Operator

Corp., 93 FERC ¶ 61,104, 61,287-89 (2000).

On August 30, 2000, Vernon, seeking to become a PTO of

CAISO, filed its TRR. See City of Vernon, Cal., 93 FERC

¶ 61,103, 61,283 (2000). FERC accepted Vernon’s proposal

subject to certain modifications (of no significance here), see

Cal. Indep. Sys. Operator, 94 FERC ¶ 61,148 (2001), which

Vernon made. See City of Vernon, Cal., 94 FERC ¶ 61,344

(2001). Two of CAISO’s PTOs appealed FERC’s decision to

accept Vernon’s proposal on the ground that Vernon’s TRR did

not meet § 205’s “just and reasonable” standard and that FERC

had failed to adequately consider how Vernon’s participation

and its TRR would affect CAISO’s overall rates. See PG&E,

306 F.3d at 1114.

It should not be surprising that these PTOs were troubled by

FERC’s approval of Vernon’s TRR. Because CAISO’s rates are

based on the TRRs of each of the PTOs, a Vernon TRR that is

not just and reasonable could frustrate FERC’s effort to ensure

that CAISO’s rates are. Observing this, in PG&E we held that

“FERC never clarified or developed either the approach or the

standard that it applied” to review Vernon’s TRR, id. at 1118,

and remanded the case “so that FERC can articulate with clarity

what approach and standard are governing its review and how

both ensure CAISO’s rates are just and reasonable under § 205,”

id. at 1119.

On remand, FERC held a hearing and collected comments

from interested parties, including Vernon, the TANC Parties,

and the other PTOs of CAISO. In the Initial Decision, the

8

Administrative Law Judge (“ALJ”) “concluded that Vernon’s

TRR should be subject to a Section 205 like review, in order to

ensure that its inclusion in the [CAISO rate] results in just and

reasonable [CAISO] rates.” City of Vernon, Cal., 109 FERC

¶ 63,057, 65,131 (2004) (emphasis added). Reflecting the

tension between Vernon’s exemption from the FPA and FERC’s

duty to ensure that CAISO’s rates are just and reasonable, the

ALJ left the standard of review vague, providing only that “each

element of Vernon’s TRR must be closely scrutinized using a

method approximating a Section 205 review.” Id. at 65,135

(emphasis added). The ALJ made no determination whether

FERC has authority to order a non-jurisdictional entity to pay

refunds to an ISO, because it believed that Vernon’s

overcollection could eventually “be netted out in the ISO’s

balancing account.” Id. at 65,141 n.41.

In Opinion No. 479, FERC affirmed much of the ALJ’s

Initial Decision but clarified that Vernon’s TRR should be

reviewed under § 205’s “just and reasonable” standard. 111

FERC ¶ 61,092, 61,428 (2005). “Vernon having voluntarily

made its TRR part of a jurisdictional rate, the TRR is subject to

our § 205 jurisdiction and both can and must be reviewed

thereunder.” Id. at 61,429. Vernon sought a rehearing of

Opinion No. 479 on the ground, inter alia, that FERC

overstepped its authority in subjecting Vernon to a full-scale

§ 205 review.

In Opinion No. 479-A, FERC denied rehearing of Opinion

No. 479 and emphasized that it read PG&E as “fully endorsing”

FERC’s § 205 review of Vernon’s TRR. 112 FERC ¶ 61,207,

2005 WL 2030491, at *5 (2005). Throughout the PG&E

remand litigation, Vernon had argued that FERC was without

authority to order Vernon to pay refunds, see, e.g., id. at *15, but

FERC only finally addressed this question in Opinion No. 479-

A. FERC determined that the refund issue was governed by

9

section 16.2 of CAISO’s Transmission Control Agreement with

Vernon (“Agreement”), which obligated Vernon to pay refunds

for any overcollection it received from CAISO.5 See id. at *17.

FERC concluded that “the ISO had proposed section 16.2

specifically to remedy the situation in which a

‘non-jurisdictional Participating Transmission Owner, such as

Vernon, will not be obligated to adjust rates or make refunds in

accordance with the ISO Tariff,’” id. at *16 (citation omitted),

and accordingly directed Vernon to pay refunds to CAISO, id.

at *16-18. In response to Vernon’s argument that the disputed

order constituted an unlawful exercise of jurisdiction over

Vernon’s non-jurisdictional activity (i.e., the ratemaking activity

of a governmental entity), FERC viewed the order as an

appropriate exercise of its “jurisdiction over the ISO’s TAC rate,

of which Vernon’s TRR is a component.” Id. at *5. Vernon

5

Section 16.2 provides:

Each Participating [Transmission Owner] whether or

not it is subject to the rate jurisdiction of FERC

under section 205 and section 206 of the Federal

Power Act shall make all refunds, adjustments to its

Transmission Revenue Requirement, and adjustments

to its [Transmission Owner] Tariff, and do all other

things required of a Participating [Transmission

Owner] to implement any FERC order related to the

ISO Tariff, including any FERC order that requires

the ISO to make payment adjustments or pay refunds

to, or receive prior period overpayments from, any

Participating [Transmission Owner]. All such

refunds and adjustments shall be made, and all other

actions taken, in accordance with the ISO Tariff,

unless the applicable FERC order requires otherwise.

Opinion No. 479-A, 2005 WL 2030491, at *16 (citing Ex. S-3 in

Docket No. ER00-2019 et al.) (emphasis added).

10

sought a rehearing of Opinion No. 479-A, requesting a

determination that FERC had no authority to require a municipal

utility to pay refunds. The TANC Parties, who, as governmental

entities, would be affected by FERC’s conclusions in Opinions

No. 479 and No. 479-A, sought review of the two orders in this

Court.

In Opinion No. 479-B, FERC denied rehearing of Opinion

No. 479-A, see 115 FERC ¶ 61,297, 62,059 (2006), and held

that the Agreement, which had been accepted by FERC,

provided a basis for FERC’s authority to order compliance with

its refund terms. Because Vernon “bound itself contractually,”

FERC concluded that it could properly hold Vernon to its

commitment despite Vernon’s status as a municipal utility

exempt from FPA regulation. Id. at 62,064. Vernon’s timely

petition for review followed, and Vernon’s petition was

consolidated with the TANC Parties’ petition for review of

Opinions No. 479 and No. 479-A.

II.

We begin by determining whether we have jurisdiction to

review petitioners’ claims. Section 313(b) of the FPA provides

that a party seeking judicial review of a FERC order must be

“aggrieved” by that order. FPA § 313(b), 16 U.S.C. § 825l(b).

“A party is aggrieved within the meaning of § 313(b) if it can

establish both the constitutional and prudential requirements for

standing.” Snohomish, 272 F.3d at 613. To establish

constitutional standing, petitioners must show three elements:

(1) injury in fact, (2) causation, and (3) redressability. See, e.g.,

GrassRoots Recycling Network, Inc. v. EPA, 429 F.3d 1109,

1111-12 (D.C. Cir. 2005) (citing Lujan v. Defenders of Wildlife,

504 U.S. 555, 560-61 (1992)). To establish prudential standing,

petitioners must show that “the interest sought to be protected by

the complainant is arguably within the zone of interests to be

11

protected or regulated by the statute.” Ass’n of Data Processing

Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970).

We have no trouble finding jurisdiction to review claims

initially raised by Vernon under administrative review by FERC.

Vernon has constitutional standing. It has been injured in fact

because it was ordered to make payments out of its treasury, the

injury was caused by FERC’s orders, and this Court can redress

Vernon’s injury if FERC’s order is contrary to law. Vernon also

has prudential standing. Because Vernon sought to become a

PTO of CAISO, its relationship with CAISO falls within the

zone of interests protected by the FPA.

Were the consolidated petition before us to include only

arguments previously raised by Vernon in its administrative

hearing, we would not need to resolve whether the TANC

Parties also have standing. See, e.g., Ry. Labor Executives’

Ass’n v. United States, 987 F.2d 806, 810 (D.C. Cir. 1993) (“[I]f

one party has standing in an action, a court need not reach the

issue of the standing of other parties when it makes no

difference to the merits of the case.” (citing Doe v. Bolton, 410

U.S. 179, 189 (1973))). But the petition raises an additional

argument not previously raised by Vernon—namely, that FERC

should apply a “comparability standard” to review Vernon’s

TRR. See Petitioners’ Br. at 37. Because Vernon cannot raise

this argument for the first time before us, see Entergy Srvs., Inc.

v. FERC, 391 F.3d 1240, 1247 (D.C. Cir. 2004) (“Parties

seeking review of FERC orders must petition for rehearing of

those orders and must themselves raise in that petition all of the

objections urged on appeal.” (quoting Platte River Whooping

Crane v. FERC, 875 F.2d 109, 113 (D.C. Cir. 1989)) (emphasis

in original)), we must determine whether TANC, alone among

the TANC Parties to have raised this argument at the

administrative hearing, see Opinion No. 479-A, 111 FERC at

61,427, has standing.

12

For TANC to have standing, its injury-in-fact must be “(a)

concrete and particularized and (b) actual or imminent, not

conjectural or hypothetical.” Lujan, 504 U.S. at 560 (quotation

marks and citations omitted). The TANC Parties argue that they

each have standing “because they are governmental entities . . .

and FERC’s orders are an important factor in determining

whether ever becoming a PTO is advisable for these entities.”

Petitioners’ Br. at 20 (emphasis added). But none of the TANC

Parties has yet sought to participate in CAISO, nor has any

developed revenue requirements for such participation, or

submitted them to be reviewed by FERC, or been ordered by

FERC to pay refunds. Even if the resolution of Vernon’s

petition could affect the TANC Parties’ decision to join CAISO,

at the end of the day, participation in CAISO is not compulsory,

but is voluntary. Because their alleged injury is speculative at

best, the TANC Parties lack constitutional standing and

therefore none of them may bring this petition. Vernon alone

has standing to challenge these orders, and accordingly, we

address only the arguments raised by Vernon at the

administrative proceedings.

III.

We first consider whether FERC, in its effort to ensure that

CAISO’s rates are just and reasonable under § 205, may review

Vernon’s TRR under the same just and reasonable standard. We

begin by determining the appropriate standard of review for our

analysis of this question.

In general, “[w]e set aside a decision of the FERC only if it

is arbitrary and capricious or otherwise contrary to law.” Envtl.

Action, Inc. v. FERC, 939 F.2d 1057, 1061 (D.C. Cir. 1991)

(citation omitted); see also Administrative Procedure Act, 5

U.S.C. § 706(2). “In making this determination, ‘[we] must

consider whether the decision was based on a consideration of

13

the relevant factors and whether there has been a clear error of

judgment . . . . [We are] not empowered to substitute [our]

judgment for that of the agency.’” ExxonMobil Gas Mktg. Co.

v. FERC, 297 F.3d 1071, 1083 (D.C. Cir. 2002) (citations and

internal quotation marks omitted). “[W]here an agency departs

from established precedent without a reasoned explanation, its

decision will be vacated as arbitrary and capricious.” ANR

Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C. Cir.1995).

Petitioners argue that because Vernon is exempt from FPA

jurisdiction, FERC’s § 205 review of its TRR is beyond the

scope of FERC’s statutory authority. But once Vernon becomes

a PTO, its TRR becomes a component of the rate design under

which CAISO operates. And as we acknowledged in PG&E,

“FERC may analyze and consider the rates of non-jurisdictional

utilities to the extent that those rates affect jurisdictional

transactions.” PG&E, 306 F.3d at 1114 (citations omitted). The

new question for us involves the appropriate standard under

which FERC should review the rates of non-jurisdictional

utilities like Vernon when those rates affect jurisdictional

transactions. When FERC considered this question in Opinion

No. 479, it found itself constrained by several competing

factors: (i) its lack of statutory authority to regulate Vernon; (ii)

its duty to ensure that CAISO’s rates are just and reasonable;

(iii) the mandate of this Court in PG&E that FERC adequately

explain how Vernon’s participation in CAISO can ensure that

CAISO’s rates will remain just and reasonable; and (iv) the

economic reality that CAISO’s rates are affected by the rate

designs of each PTO. See Opinion No. 479, 111 FERC at

61,428. FERC held a hearing, received comments, and

considered briefs filed by numerous interested parties, including

jurisdictional PTOs and non-jurisdictional entities seeking to

become PTOs. FERC considered alternative standards of

review, including the “substantial evidence” standard suggested

14

by Vernon,6 see Opinion No. 479, 111 FERC at 61,427, the

“comparability standard” suggested by TANC,7 see id.; Opinion

No. 479-A, 2005 WL 2030491, at *8 (rejecting the

comparability standard because it applies only to non-

jurisdictional rates), and the “section 205-like” standard

suggested by the ALJ, see Opinion No. 479, 111 FERC at

61,429. Ultimately, however, FERC rejected these limited

standards and concluded that Vernon’s TRR would be subject to

§ 205’s “just and reasonable” standard. Because “Vernon has no

obligation to CAISO ratepayers who will foot the bill for the

TRR,” id., FERC reasoned, unless FERC reviews the individual

components of Vernon’s TRR under the “just and reasonable”

standard, “Vernon has every incentive to increase its TRR at the

expense of non-Vernon CAISO ratepayers, as their subsidy

grows with the TRR and inures to Vernon’s benefit,” id. FERC

6

Vernon proposed the following standard:

The proper standard of review for [FERC] to apply to

Vernon’s TRR, or any nonjurisdictional

[Participating Transmission Owner’s] TRR, is (1)

whether the Vernon City Council’s determinations

were arbitrary and capricious and not based upon

substantial evidence, and (2) whether substantial

evidence in fact demonstrates that the ISO’s rates will

be just and reasonable after the inclusion of Vernon’s

TRR.

Opinion No. 479, 111 FERC at 61,427 (citing Vernon’s Brief on

Exceptions at 13).

7

Under this standard, “‘[a]n open access tariff that is not

unduly discriminatory or anticompetitive should offer third parties

access on the same or comparable basis, and under the same or

comparable terms and conditions, as the transmission provider’s uses

of its [own] system.’” Alliant Energy Corp. v. FERC, 253 F.3d 748,

751 n.3 (D.C. Cir. 2001) (quoting Transmission Pricing Policy

Statement, 59 Fed. Reg. 55,031, 55,034 (1994)).

15

thus concluded, “the only way to ensure that CAISO’s rate is

just and reasonable is for FERC to examine each component of

Vernon’s TRR under the full review.” Id. at 61,428 (emphasis

in original). We find that FERC was neither arbitrary nor

capricious in its decision. FERC properly considered the

relevant factors, provided an adequate and reasoned explanation

for its holding, and committed no clear error.

Petitioners’ arguments to the contrary are unavailing. First,

petitioners argue that because the PG&E Court directed FERC

to ensure that CAISO’s rates (not Vernon’s TRR) were just and

reasonable, FERC should have subjected only CAISO’s rates to

the just and reasonable standard. But FERC has sufficiently

demonstrated that it is impossible to ensure that CAISO’s rates

are just and reasonable without reviewing Vernon’s TRR under

the same standard. See Opinion No. 479, 111 FERC at 61,428.

Nothing in PG&E prohibits FERC from reviewing Vernon’s

TRR under the just and reasonable standard, and it is not within

our discretion to second-guess FERC’s determination after such

a meticulous process and analysis. See Motor Vehicle Mfrs.

Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S.

29, 43 (1983) (“The scope of review under the ‘arbitrary and

capricious’ standard is narrow and a court is not to substitute its

judgment for that of the agency.”).

Second, petitioners argue that FERC ignored its own

precedent, in which it has previously held that FERC “cannot

review [a non-jurisdictional transmission owner’s] rates under

the Section 205 just and reasonable standard . . . .” Petitioners’

Br. at 14 n.34 (quoting Cal. Indep. Sys. Operator Corp., 91

FERC ¶ 61,205, 61,724 (2000)). As we have previously noted,

“where an agency departs from established precedent without a

reasoned explanation, its decision will be vacated as arbitrary

and capricious.” ANR Pipeline Co., 71 F.3d at 901. In Opinion

No. 479-A, FERC explained its departure by reasoning that it

16

read PG&E as “fully endorsing” FERC’s § 205 review of

Vernon’s TRR. 2005 WL 2030491, at *5. Petitioners are

therefore correct that FERC has not in the past reviewed a non-

jurisdictional entity’s TRR under § 205’s just and reasonable

standard—indeed, before PG&E, FERC accepted Vernon’s TRR

without reviewing it under this standard. But in light of our

discussion and holding in PG&E, where we specifically

instructed FERC to “ensure that CAISO’s rates meet the just and

reasonable standard of § 205,” 306 F.3d at 1121, we find

FERC’s departure from precedent justified and in compliance

with our instructions. Under the circumstances, FERC was

neither arbitrary nor capricious in subjecting Vernon’s TRR to

the just and reasonable standard.8

8

In a related argument, Vernon specifically faults FERC for

not applying the “prudence” standard to judge the “pass-through”

costs of Vernon’s TRR. In PG&E, we held that it was “unclear under

what standard FERC reviewed Vernon’s TRR to ensure that a pass

through of its costs by the CAISO would be just and reasonable.” 306

F.3d at 1117. We also noted that although “[in] its brief, FERC

recognizes that it generally judges pass-through costs using this

prudence test . . . , this prudence standard is nowhere to be found in

the Orders at issue.” Id. The PG&E Court did not, however, require

FERC to apply the prudence standard on remand—nor do we think it

is appropriate in this case. The prudence standard

requires a complainant alleging that some aspect of a

utility’s rate or practice is unjust or unreasonable to

present evidence sufficient to raise serious doubt that

a reasonable utility manager, under the same

circumstances and acting in good faith, would not

have made the same decision and incurred the same

costs. If the petitioner clears this initial hurdle, the

utility has the burden of presenting evidence

sufficient to dispel those doubts. If it cannot, the

complainant wins.

Ind. Mun. Power Agency v. FERC, 56 F.3d 247, 253 (D.C. Cir. 1995)

17

IV.

Petitioners next argue that FERC, even if it may review

Vernon’s TRR, lacks authority to order Vernon to pay refunds.

On this point, we agree with petitioners because the structure of

the FPA clearly reflects Congress’s intent to exempt

governmental entities from FERC’s refund authority. Again, we

begin our analysis with our standard of review.

Because “FERC is a ‘creature of statute,’ and the agency has

‘only those authorities conferred upon it by Congress,’” Nat’l

Ass’n of Regulatory Util. Comm’n, 475 F.3d 1277, 1286 (D.C.

Cir. 2007) (“NARUC”), FERC exceeds its jurisdiction under the

APA if it regulates an entity that Congress has explicitly

exempted from the statute, see, e.g., Michigan v. EPA, 268 F.3d

1075, 1081 (D.C. Cir. 2001) (stating that in the absence of

statutory authorization for its act, an agency’s “action is plainly

contrary to law and cannot stand” (citations omitted)); Atlantic

City Elec. Co. v. FERC, 295 F.3d 1, 3 (D.C. Cir. 2002). In

determining whether FERC has acted beyond its jurisdiction, we

grant FERC Chevron deference. See NARUC, 475 F.3d at 1279

(“FERC’s interpretations of the jurisdictional provisions of the

Federal Power Act . . . enjoy Chevron deference.” (citation

omitted)). We therefore review petitioners’ jurisdictional

challenge to FERC’s orders by applying the two-step analysis of

Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837 (1984). Under this analysis, we first determine

“whether Congress has directly spoken to the precise question

(citations omitted). As such, the standard provides a mechanism by

which a complainant can challenge a utility’s rate under the just and

reasonable standard; it is an evidentiary tool designed to facilitate a

rate challenge. Once FERC reviews Vernon’s TRR under the just and

reasonable standard, however, it is no longer necessary for FERC to

consider this standard.

18

at issue.” Id. at 842. “If the intent of Congress is clear, that is

the end of the matter; for the court, as well as the agency, must

give effect to the unambiguously expressed intent of Congress,”

id. at 842-43; see also Am. Library Ass’n v. FCC, 406 F.3d 689,

699 (D.C. Cir. 2005) (an “agency’s interpretation of [a] statute

is not entitled to deference absent a delegation of authority from

Congress to regulate in the areas at issue” (emphasis in original)

(citation omitted)). “[I]f the statute is silent or ambiguous with

respect to the specific issue,” Chevron, 467 U.S. at 843, we

proceed on to the second step, in which we ask “whether the

agency’s answer is based on a permissible construction of the

statute,” id., and we uphold the agency’s interpretation as long

as it is reasonable. See Village of Bergen v. FERC, 33 F.3d

1385, 1389 (D.C. Cir. 1994).

In this case, we need go no further than step one of Chevron

to hold that FERC acted contrary to law when it ordered Vernon

to pay refunds to CAISO. Section 201(f) of the FPA

unequivocally exempts from subchapter II “any political

subdivision of a State . . . unless [included by] specific

reference . . . .” FPA § 201(f), 16 U.S.C. § 824(f). The

implication of this exemption is clear: subsections of subchapter

II do not apply to governmental entities (including

municipalities) unless a provision expressly provides FERC with

such authority. We find it significant that Congress has in fact

authorized FERC with limited refund authority in subchapter II

in order to ensure that its jurisdictional entities maintain just and

reasonable rates. Section 206(b) gives FERC authority to order

“[a] public utility to make refunds of any amounts paid . . . in

excess of those which would have been paid under the just and

reasonable rate.” FPA § 206(b), 16 U.S.C. 824e(b). This

subsection, however, does not apply to Vernon because a

municipality is not a public utility. See, e.g., Bonneville Power

Admin. v. FERC, 422 F.3d 908, 916-17 (9th Cir. 2005) (“BPA”)

(demonstrating the difference between municipalities and public

19

utilities under the FPA). Congress has therefore specifically

exempted governmental entities from subchapter II of the FPA

and has only provided FERC with refund authority over public

utilities without making any reference to governmental entities.

The intent of Congress is clear from the plain language of the

statute: FERC has no authority to order Vernon to pay refunds

to CAISO.

FERC’s alternative interpretation is impermissible. It

argues that “the agency here is legitimately employing its

section 205 authority to assure that a jurisdictional rate of a

jurisdictional utility . . . is just and reasonable.” Respondent’s

Br. at 36. But because nothing in the language of § 205

contravenes § 201(f)’s specific exemption of municipalities, the

plain language of Congress remains dispositive on this point. A

recent and similar case from the Ninth Circuit reflects this

conclusion. In BPA, the Ninth Circuit reviewed FERC orders

requiring both public and non-public utilities to make refunds to

California ratepayers for excess charges these utilities collected

in some spot market transactions. The central issue was

“whether FERC’s authority to order refunds is based on the

identities of the sellers subject to the refund order, i.e., public

versus non-public utilities, or on the nature of the transactions,

i.e., FERC’s broad regulatory authority over the sale of electric

energy for resale in interstate commerce.” Id. at 911 (emphases

added). Relying on the “clear and unambiguous” text of

§ 201(f) of the FPA, id., and refusing “to second guess

Congress’s judgment as to the breadth of FERC’s refund

authority” as provided by § 206(b), id., the Court held that

FERC’s authority is based on the identities of the sellers, rather

than the nature of the transactions. See id. at 916. The Court

thus “conclude[d] that FERC does not have refund authority

over wholesale electric energy sales made by governmental

entities and non-public utilities.” Id. at 911. The Court noted

that “FERC’s long-standing interpretation of §§ 205 and 206

20

confirms that governmental entities/non-public utilities lie

outside its rate-making and refund authority,” id. at 921, and

held that “FERC cannot expand its statutory authority to reach

governmental entities/non-public utilities through § 206(b)

simply because such entities voluntarily participated in markets

approved by FERC that involved FERC-jurisdictional wholesale

sales of electric energy in interstate commerce.” Id. at 924. We

agree with the BPA Court that FERC’s refund authority under

the FPA is ultimately determined by the “identities of the sellers

subject to the refund order,” 422 F.3d at 911, and see no

meaningful distinction between BPA and the case before us.9

9

In support of FERC’s refund authority under § 205,

intervenors cite NARUC and United Distribution Companies v. FERC,

88 F.3d 1105 (D.C. Cir. 1996) (“UDC”) to argue that non-

jurisdictional entities must comply with FERC’s regulation of

jurisdictional transactions. See Joint Br. of Intervenors in Support of

Respondent at 24-25. In NARUC, we held that FERC may require all

electrical transmission facilities—jurisdictional and non-

jurisdictional—to adopt a standard agreement for interconnecting with

generators, because FERC has jurisdiction over interstate

transmissions and wholesale sales. See 475 F.3d at 1279-81.

Similarly, in UDC, we held that when municipally-owned local gas

distribution companies (non-jurisdictional entities under the Natural

Gas Act) participate in transportation provided by interstate pipelines

(services over which FERC has jurisdiction) they must comply with

FERC rules governing these services. See 88 F.3d at 1153-54. In both

cases, however, FERC’s jurisdiction extended to non-jurisdictional

entities only insofar as FERC had authority to dictate the terms of their

participation in jurisdictional services or transactions. By analogy,

FERC, in complying with its duty to ensure that CAISO’s rates are

just and reasonable, may justifiably subject Vernon’s TRR to a § 205

review before approving Vernon’s participation in CAISO. This

authority does not, however, extend to FERC ordering Vernon to pay

refunds for any surplus revenue Vernon may have collected under the

TRR. Neither NARUC nor UDC can be read as supporting such broad

regulatory authority.

21

FERC’s reliance on the Agreement between CAISO and

Vernon is misplaced. In Order No. 479-A, FERC reasonably

read the Agreement as obligating Vernon to “make all

refunds . . . required of a [PTO] to implement any FERC order

related to the ISO Tariff.” 2005 WL 2030491, at *16. FERC

concluded that “[i]t is difficult to read [Section 16.2 of the

Agreement] as anything but an explicit agreement by a non-

jurisdictional [PTO] to make refunds arising from any [FERC]

order to the ISO, from which they would otherwise be immune

by statute.” Id. But even if FERC’s interpretation of the

Agreement were correct, FERC has cited no persuasive

authority to support its claim that the Agreement therefore

provides FERC with authority to order Vernon to issue refunds

to CAISO where Congress has not granted such authority.

We find FERC’s reference to Alliant Energy v. Nebraska

Public Power District, 347 F.3d 1046 (8th Cir. 2003)

unproductive. In Alliant Energy, the Nebraska Public Power

District (“NPPD”), a non-jurisdictional governmental utility,

signed a usage agreement with the members of the Mid-

Continent Area Power Pool (“MAPP”), a voluntary association

of energy companies. A section of the agreement allowed

MAPP members (a group that now included NPPD) to collect

tariffs for non-MAPP members’ use of their system. See id. at

1049. FERC issued an order requiring the MAPP to remove this

section and retroactively ordered the MAPP members to refund

the tariffs. See id. When the NPPD refused to comply with

FERC’s modification of the agreement on the ground that FERC

had no jurisdiction over the NPPD, the remaining MAPP

members sued the NPPD. The Eighth Circuit held that because

the enabling agreement provided that its terms are subject to

regulatory authorities, see id. at 1050, the NPPD bound itself to

any modification of the agreement ordered by FERC, and

therefore, was contractually required to refund appropriate

charges pursuant to FERC’s order, see id. But Alliant Energy

22

involved a judicial order of refunds, and not an agency order.

FERC had not ordered the NPPD to pay a refund, but stated only

that the NPPD was contractually required to do so.10 See id. at

1050-51. The Eighth Circuit clearly held that “we are not

enforcing the FERC order; instead, we are enforcing an

agreement, which NPPD freely entered.” Id.

FERC’s alternative theory—that it has authority to enforce

the Agreement because it was filed by CAISO, a jurisdictional

entity, and approved by FERC—still cannot overcome the plain

language of Congress. We have previously held that “as a

statutory entity, [FERC] cannot acquire jurisdiction merely by

agreement of the parties before it.” Columbia Gas Transmission

Corp. v. FERC, 404 F.3d 459, 463 (D.C. Cir. 2005) (quoting

Am. Mail Line Ltd. v. FMC, 503 F.2d 157, 170 (D.C. Cir. 1974))

(quotation marks omitted). Though FERC argues that “the FPA

obviously contemplates non-jurisdictional parties entering into

and being bound by jurisdictional contracts, and further

contemplates that FERC should enforce these contracts,”

Respondent’s Br. at 39, it fails to explain how the FPA, which

by its express terms exempts governmental entities from

FERC’s refund authority, can simultaneously be read to support

FERC’s refund authority over a governmental entity (i.e.,

Vernon, a municipality).

In conclusion, while we find FERC’s review of Vernon’s

TRR to have been based on a consideration of the relevant

10

In fact, FERC had previously defined the scope of its refund

order narrowly as to exclude any jurisdiction over the NPPD. See

Mid-West Continent, 89 FERC ¶ 61,135, 61,387 (1999) (“We note that

Nebraska District, as a utility owned and operated by the State of

Nebraska, is not a public utility under the FPA. Therefore, we cannot

assert jurisdiction over Nebraska District and the requirements in our

[refund] order apply only to the public utility members of MAPP[.]”).

23

factors and, therefore, neither arbitrary nor capricious, we

cannot reconcile the clear and unambiguous language of

§ 201(f) with FERC’s refund order. Accordingly, we vacate the

portions of FERC’s orders directing Vernon to refund CAISO.11

V.

For the foregoing reasons, we grant the petition for review

and remand the case for further proceedings.

So ordered.

11

Although Vernon also argues that FERC’s orders violate the

Tenth Amendment because those orders “supplant the authorized

rate-making decisions of the Vernon City Council” and “command

that Vernon make improper payments out of its treasury,” Petitioners’

Br. at 39, we need not address this argument because we grant the

petition for review on statutory grounds. See, e.g., Am. Dental Ass’n

v. Shalala, 3 F.3d 445, 448 (D.C. Cir. 1993) (declining to reach

appellant’s alternative arguments once the issue was decided in its

favor).