Turlock Irrigation District v. Ferc

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

TURLOCK IRRIGATION DISTRICT; No. 16-71380

MODESTO IRRIGATION DISTRICT,

Petitioners, FERC No.

EL15-55-001

TRANSMISSION AGENCY OF

NORTHERN CALIFORNIA; THE M-S-R

PUBLIC POWER AGENCY; THE CITY OPINION

OF REDDING, CALIFORNIA;

SACRAMENTO MUNICIPAL UTILITY

DISTRICT,

Intervenors,

v.

FEDERAL ENERGY REGULATORY

COMMISSION,

Respondent,

PACIFIC GAS AND ELECTRIC

COMPANY; CALIFORNIA

DEPARTMENT OF WATER

RESOURCES,

Intervenors.

On Petition for Review of an Order of the

Federal Energy Regulatory Commission

2 TURLOCK IRRIGATION DIST. V. FERC

Argued and Submitted May 14, 2018

San Francisco, California

Filed September 6, 2018

Before: Sidney R. Thomas, Chief Judge, Michelle T.

Friedland, Circuit Judge, and Thomas S. Zilly, * District

Judge.

Opinion by Chief Judge Thomas

SUMMARY **

Federal Energy Regulatory Commission

The panel granted a petition for review brought by the

Turlock and Modesto Irrigation Districts, and held that the

Federal Energy Regulatory Commission (“FERC”)’s orders

denying the Districts’ complaint and denying rehearing were

arbitrary and capricious.

To supply power to their service areas, the Districts use

transmission and generation facilities both within and

outside of their individual electric systems. In order to

import and export power into and out of their systems, the

Districts use the California-Oregon Transmission Project,

*

The Honorable Thomas S. Zilly, Senior District Judge for the U.S.

District Court for the Western District of Washington, sitting by

designation.

**

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

TURLOCK IRRIGATION DIST. V. FERC 3

which was constructed by the Transmission Agency of

Northern California with a group of public and private

utilities, including Pacific Gas & Electric Company

(“PG&E”) and federal agencies.

PG&E entered Interconnection Agreements with the

Districts, providing the terms under which the

interconnected utility systems owned by the respective

parties coordinated their operations. The complaint alleged

that PG&E breached the notice and study provisions of these

agreements.

The California Department of Water Resources entered

into a State Water Contract with PG&E in 1982 to provide

interconnection services of the Department’s plants and

facilities in PG&E’s service area. The Department agreed to

participate in the Remedial Action Scheme, which was an

automatic protection system designed to detect abnormal or

predetermined system conditions on a transmission grid and

take corrective actions to maintain the reliability of the

system. The State Water Contract expired on December 31,

2014, and in the Spring of 2014 the Districts raised concerns

about the impact to their systems. When PG&E determined

there was not a reasonable likelihood of any Adverse Impact

to the service territories of the Districts, the Districts filed

their complaint, which FERC denied.

The panel held that FERC misinterpreted the definition

of Adverse Impact, and thus improperly disposed of the

Districts’ complaints without determining whether changes

to the Remedial Action Scheme may result in reductions in

transmission over the California-Oregon Transmission

Project. The panel further held that FERC applied the wrong

standard for initiating a study when making its factual

findings.

4 TURLOCK IRRIGATION DIST. V. FERC

On remand, the panel directed FERC to apply the

broader definition of Adverse Impact that included

reductions in import capability over the California-Oregon

Transmission Project and the proper standard for requesting

a study in determining whether PG&E breached the

Interconnection Agreements.

COUNSEL

Jon R. Stickman (argued) and Kenneth Holmboe, Duncan &

Allen, Washington, D.C.; Sean M. Neal, Duncan Weinberg

Genzer & Pembroke P.C., Sacramento, California; for

Petitioners.

Carol J. Banta (argued), Ross R. Fulton and Susan Y. Chu,

Attorneys; Robert H. Solomon, Solicitor; James P. Danly,

General Counsel; Federal Energy Regulatory Commission,

Washington, D.C.; for Respondent.

Alyssa Koo (argued), Pacific Gas and Electric Company,

San Francisco, California, for Intervenor Pacific Gas and

Electric Company.

Lisa S. Gast and Peter J. Scanlon, Duncan Weinberg Genzer

& Pembroke P.C., Washington, D.C.; Michael R. Postar,

Matthew R. Rudolphi, and Tyler E. Mansholt, Duncan

Weinberg Genzer & Pembroke P.C., Washington, D.C.;

Harvey L. Reiter, Stinson Leonard Street LLP, Washington,

D.C.; for Intervenors Transmission Agency of Northern

California; The M-S-R Public Power Agency; The City of

Redding, California; and Sacramento Municipal Utility

District.

TURLOCK IRRIGATION DIST. V. FERC 5

Lisa G. Dowden and Katharine M. Mapes, Spiegel &

McDiarmid LLP, Washington, D.C., for Intervenor

California Department of Water Resources.

OPINION

THOMAS, Chief Judge:

In this petition for review, we consider whether the

Federal Energy Regulatory Commission (“FERC”) acted

arbitrarily and capriciously in denying a complaint brought

by the Turlock and Modesto Irrigation Districts

(collectively, the “Districts”). The complaint alleged that

Pacific Gas & Electric Company (“PG&E”) breached

agreements between the Districts and PG&E. We conclude

that FERC’s orders denying the complaint and denying

rehearing were arbitrary and capricious, and we grant the

Districts’ petition.

I

A

PG&E provides wholesale and retail electric service in

northern and central California. PG&E owns an extensive

electric transmission system within that area, which was

turned over to the operational control of the California

Independent System Operator (“Cal-ISO”) in 1998. Cal-

ISO provides transmission service over PG&E’s system.

The Districts generate, transmit, and distribute electric

power within their service areas. Each District retains

operational control of its own transmission system. The

Districts jointly own Westley Substation and three 230 kV

transmission lines, the Westley-Parker, Westley-Walnut,

6 TURLOCK IRRIGATION DIST. V. FERC

and Parker-Walnut lines. These lines move power from the

Westley Substation to the Districts’ service areas. Westley

Junction is the point of interconnection between PG&E’s

system and each District’s system. In addition, the Districts

jointly own the Westley-Tracy Transmission Project, which

interconnects with the Western Area Power Administration

(“Western”) system at Tracy Substation.

To supply power to their service areas, the Districts use

transmission and generation facilities both within and

outside of their individual electric systems. In order to

import and export power into and out of their systems, the

Districts use the California-Oregon Transmission Project

(“California-Oregon Project”). The California-Oregon

Project is a 500 kV line that extends approximately

340 miles from the Captain Jack Substation in southern

Oregon to the Olinda Substation in northern California and

then on to its terminus near PG&E’s Tesla Substation in

central California. The California-Oregon Project was

constructed by the Transmission Agency of Northern

California (“Transmission Agency”) with a group of public

and private utilities, including PG&E and federal agencies.

Neither of the Districts has an ownership share in the

California-Oregon Project. However, each District is a

member of the Transmission Agency, and their interests in

the California-Oregon Project arise through their

membership in the Transmission Agency. This membership

gives each District the right to use a share of the California-

Oregon Project’s transmission capacity. The California-

Oregon Project provides the District with access to power

generators in Oregon and Washington. The Districts rely on

power imported from Oregon and Washington to reliably run

their electric systems.

TURLOCK IRRIGATION DIST. V. FERC 7

B

PG&E has entered into an Interconnection Agreement

with Modesto and another with Turlock. The

Interconnection Agreements provide the terms under which

the interconnected utility systems owned by the respective

parties coordinate their operations. The two agreements

contain nearly identical terms, and we refer to them

collectively. 1

At issue in this case are the notice and study provisions

in Section 9.11 of the Agreements. Section 9.11.1(a)

requires a “Primary Party” to notify a “Coordinating Party”

if the Primary Party intends to make a “Modification, New

Facility Addition, or Long-Term Change to Operations” that

“may reasonably result in an Adverse Impact to the System

of the Coordinating Party.” A “Primary Party” is a party that

proposes to enact the Modification, New Facility Addition,

or Long-Term Change to Operations; here, that party is

PG&E. The “Coordinating Party” is the party whose System

may be subject to an Adverse Impact from the change; here,

those parties are the Districts.

A “Modification” is the “removal of, or physical change

to, any element of either Party’s then currently existing

System”; this includes changes to any “electric transmission

facility.” A “Long-Term Change to Operations” is an action

taken by a party that “materially alters, on a long-term basis,

the configuration or other operational characteristics of its

System.” One action that may qualify as a Long-Term

1

Following the practice of the parties, we capitalize terms that are

defined in the Interconnection Agreements.

8 TURLOCK IRRIGATION DIST. V. FERC

Change to Operations is “materially modifying a Remedial

Action Scheme.” 2

An “Adverse Impact” is an effect on the Coordinating

Party’s “System” that either “materially degrades reliability”

or “materially reduces” the ability of the Coordinating Party

to “physically transfer power into, out of, or within” its

System. A party’s “System” consists of all properties and

assets “which are leased to, licensed to, owned (or jointly-

owned) by, or controlled” by that party.

If a Coordinating Party has a “reasonable belief” that a

Primary Party did not provide the notice required by Section

9.11.1(a) and proceeded with a Modification, New Facility

Addition, or Long-Term Change to Operations that “may

result or may have resulted in an Adverse on the System of

the Coordinating Party,” then the Coordinating Party may

demand that the Primary Party conduct a study pursuant to

Section 9.11.1(b). Moreover, pursuant to Section 9.11.2,

any party can request a joint study of any proposed

Modification, New Facility Addition, or Long-Term Change

to Operations of its System that “may reasonably be

expected to result in an Adverse Impact.”

C

The California Department of Water Resources (“the

Department”) entered into a contract with PG&E in 1982

(the “State Water Contract”). Under the State Water

Contract, PG&E provided the Department with

interconnection services of the Department’s plants and

facilities in PG&E’s service area and firm physical electric

2

No party contends that a “New Facility Addition” is at issue in this

petition.

TURLOCK IRRIGATION DIST. V. FERC 9

transmission service. In order to address the Department’s

needs to transmit large amounts of electric power, the

Department agreed to participate in a Remedial Action

Scheme.

A Remedial Action Scheme is an automatic protection

system designed to detect abnormal or predetermined system

conditions on a transmission grid and take corrective actions

to maintain the reliability of the system. A Remedial Action

Scheme typically consists of controllers or advanced

microprocessor devices that monitor the system and that

issue digital signals to initiate the operation of transmission

devices. The Department’s participation in the Remedial

Action Scheme entailed interrupting the Department’s

pumping loads and generation. Its participation had the

effect of increasing the transfer capability of the California-

Oregon Intertie 3 to the benefit of all users.

Under its own terms, the State Water Contract would

expire on December 31, 2014. Before the termination, the

Department notified PG&E that it would not continue

participating in the Remedial Action Scheme upon the

expiration of the State Water Contract. Though the

Department would stop participating, the physical Remedial

Action Scheme infrastructure would remain in place. PG&E

would not modify or remove any of the physical assets of the

Remedial Action Scheme system when the State Water

Contract terminated. PG&E would only re-program the

3

The California-Oregon Intertie is the northern part of a three-line

system that transfers electricity between the Pacific Northwest and

central California. The California-Oregon Project is one of the three lines

that is part of the California-Oregon Intertie.

10 TURLOCK IRRIGATION DIST. V. FERC

controllers’ logic so that system conditions would no longer

initiate actions that cut off the Department’s facilities.

In spring 2014, the Districts approached Cal-ISO and

PG&E to raise concerns regarding the potential impact to

their Systems from losing The Department’s participation in

the Remedial Action Scheme upon the termination of the

State Water Contract. The subsequent discussions among

the Districts and PG&E focused on two areas where the

Districts were concerned that Adverse Impacts might occur:

(1) in the service territories of each District (including the

jointly-owned Westley substation and 230 kV transmission

lines), and (2) at the California-Oregon Intertie, including

the California-Oregon Project.

PG&E determined there was not a reasonable likelihood

of any Adverse Impact to the service territories of the

Districts due to the termination of the Department’s

participation in the Remedial Action Scheme. Based on the

design of the Remedial Action Scheme, PG&E determined

that the expiration of the State Water Contract would not

impact the transmission lines that interconnected to the

Districts’ Systems. In addition, while there could be

minimal impacts to the grid south of the Districts’ Systems,

PG&E determined that Cal-ISO would manage the grid

through congestion management without affecting the

Districts’ Systems. PG&E concluded that losing the

Department’s participation in the Remedial Action Schemes

was not likely to impact the reliability of either District’s

service territory or reduce either District’s ability to

physically transfer power into, out of, or within either its

service territory.

Nonetheless, the Districts maintained concerns about the

potential impact on the California-Oregon Project and, in

turn, their ability to transfer power into their Systems.

TURLOCK IRRIGATION DIST. V. FERC 11

PG&E responded that the California-Oregon Project was not

a part of the Districts’ Systems and therefore not covered by

the Interconnection Agreements. PG&E also noted that the

majority owner of the California-Oregon Project, the

Transmission Agency of Northern California (of which the

Districts are members), was studying impacts to the

California-Oregon Project. PG&E felt it was unnecessary to

perform additional studies with the Districts to assess the

potential loss of The Department of Water Resources’s

participation in the Remedial Action Scheme on the

California-Oregon Project. PG&E refused to participate in

the studies requested by the Districts.

D

In March 2015, the Districts filed a complaint against

PG&E. The Complaint argued that: (1) PG&E breached the

notice requirement of Section 9.11.1(a) by failing to provide

reasonable and timely notice of its actions; (2) PG&E

breached the study requirements of Sections 9.11.1(b) and

9.11.2 by refusing to participate in the requested study; and

(3) PG&E anticipatorily breached the mitigation and

compensation requirements of Section 9.11.3 by refusing to

mitigate any Adverse Impacts that the requested study might

identify.

In July 2015, FERC issued the Complaint Order denying

the Complaint. Modesto Irrigation Dist. and Turlock

Irrigation Dist. v. Pac. Gas & Elec. Co., 152 FERC ¶ 61,016

(2015) (“Complaint Order”). FERC held that because the

California-Oregon Project is not a facility within the

Districts’ Systems, any reductions on transfer capability

caused by reprogramming of the Remedial Action Scheme

would not qualify as Adverse Impacts on the Districts’

Systems. FERC also found that the record did not reflect

any “likely” downstream Adverse Impacts on the Districts’

12 TURLOCK IRRIGATION DIST. V. FERC

Systems from reprogramming of the Remedial Action

Scheme. FERC adopted findings of the Cal-ISO

Transmission Planning Process studies and PG&E’s own

analyses that reprogramming of the Remedial Action

Scheme “was not likely” to impact the Districts’ Systems or

their ability to transfer power into, out of, or within those

Systems. In August 2015, the Districts requested rehearing

of FERC’s Complaint Order. In March 2016, FERC denied

rehearing and affirmed its ruling from the Complaint Order.

Modesto Irrigation Dist. and Turlock Irrigation Dist. v. Pac.

Gas & Elec. Co., 154 FERC ¶ 61,215 (2016) (the “Rehearing

Order”). The Districts timely petitioned for review of

FERC’s two orders.

II

We have jurisdiction over this petition pursuant to

16 U.S.C. § 825l. We review FERC’s orders determine

whether its action was “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law.”

5 U.S.C. § 706(2)(A); 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. (alteration brackets omitted) (quoting Motor

Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mut.

Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Our review “is

limited to . . . the administrative 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

TURLOCK IRRIGATION DIST. V. FERC 13

agency’s] action was based.” SEC v. Chenery Corp.,

318 U.S. 80, 87 (1943).

We generally review FERC’s interpretations of contracts

de novo, but we defer to FERC’s interpretation when it relies

on FERC’s technical expertise. See Pac. Gas & Elec. Co. v.

FERC, 746 F.2d 1383, 1387 (9th Cir. 1984) (holding that

FERC’s interpretation was entitled to deference because it

was “clearly based upon the agency’s expertise in electricity

transmission regulation”); cf. Texas Gas Transmission Corp.

v. Shell Oil Co., 363 U.S. 263, 268–70 (1960) (affirming the

de novo standard of review applied by the appellate court to

an agency’s interpretation of a non-technical contract

clause); Nicor Expl. Co. v. FERC, 50 F.3d 1341, 1347 (5th

Cir. 1995) (in natural gas context, noting that “we generally

do not defer to the Commission’s interpretation of gas

supply contracts unless the Commission relied on its factual

or technical expertise in reaching its conclusions.”).

III

FERC’s orders were based on its interpretation of the

term “Adverse Impact” in the Interconnection Agreements.

FERC concluded that PG&E had not breached its obligations

under the study requirements, because the California-

Oregon Project was not part of the Districts’ Systems and

thus any transmission constraints on the Project would not

be Adverse Impacts. This conclusion depended on FERC’s

overly narrow interpretation of an Adverse Impact., and we

thus hold that FERC’s orders were arbitrary and capricious.

A

Section 4.2 of the Interconnection Agreements defines

an Adverse Impact as:

14 TURLOCK IRRIGATION DIST. V. FERC

An effect on a Coordinating Party’s System

resulting from a Modification, New Facility

Addition, or Long-Term Change to

Operations to the Primary Party’s System

that: (1) materially degrades reliability of the

Coordinating Party’s System or

(2) materially reduces the ability of the

Coordinating Party’s System to physically

transfer power into, out of, or within said

System as compared to the transmission

system and generation facilities that are

agreed by the Parties to be in service before

implementation of the proposed

Modification, New Facility Addition, or

Long-Term Change to Operations . . . .

FERC never offers an explicit interpretation of this

provision. However, we can discern FERC’s interpretation

from the conclusions in its orders and from its assertions at

oral argument. As FERC interprets the provision, an

Adverse Impact must be a direct, physical effect on a line or

component inside a District’s System. It cannot be a

physical effect on a line or component outside of a District’s

System that makes it more difficult for a District to transfer

power into its System. For example, a Long-Term Change

to Operations that causes constraints on the California-

Oregon Project and reduces the Districts’ ability to transfer

power over from the Pacific Northwest into their Systems

would not be an Adverse Impact. This implicit interpretation

can be found in FERC’s Rehearing Order, where it states that

it “found it dispositive that the California-Oregon

Transmission Project was not part of the Districts’ Systems.”

Rehearing Order at P 26. FERC concluded that the Districts

had not shown that PG&E had breached the Interconnection

Agreements “because the Districts failed to establish that an

TURLOCK IRRIGATION DIST. V. FERC 15

Adverse Impact to their Systems might result in the first

instance.” Rehearing Order at P 27.

This interpretation is grounded in a distinction between

“reliability impacts” and reductions in import capability. By

“reliability impacts,” FERC seems to mean the degradation

of physical components of the Districts’ own Systems. By

reductions in import capability (sometimes referred to as

“operational” impacts), FERC seems to mean transmission

constraints on the broader power grid that make it difficult

for the Districts to access the power from where they want,

when they want, within their contractual rights. 4 For

example, FERC’s Rehearing Order states:

Moreover, while there may be capacity

reductions on the California-Oregon

Transmission Project, the Districts’

allocation of transmission capacity on that

facility is governed by the Districts’

membership in TANC and TANC’s rights

and obligations under the Operation

Agreement. Those rights are not considered

4

As FERC notes, this distinction has appeared in prior orders. See

Transmission Agency of N. Cal. v. Pac. Gas & Elec. Co., 148 FERC

¶ 61,150, 61,782 (2014) (distinguishing system reliability concerns from

“concerns regarding a potential reduction in import capability that could

follow the discontinuation of the . . . remedial action schemes”);

Transmission Agency of N. Cal. v. Pac. Gas & Elec. Co., 150 FERC

¶ 61,133, 61,948 (2015) (“While operational flexibility is related to

reliability in a general sense, the concepts are not interchangeable. We

reemphasize that there is a difference between impacts to reliability and

impacts to operational flexibility stemming from potential reductions in

import capability.” (footnotes omitted)).

16 TURLOCK IRRIGATION DIST. V. FERC

part of the Districts’ Systems as defined in the

Interconnection Agreements.

Rehearing Order at P 27. FERC later stated that it

“recognize[s] the significance of import capability over [the

California-Oregon Transmission Project] and the associated

benefits of accessing economy capacity and energy and

coordinating actions; however, these operational aspects are

separate from reliability impacts.” Rehearing Order at P 34.

Under FERC’s interpretation, only reliability impacts can

qualify as Adverse Impacts.

FERC’s orders thus distinguished between impacts to the

internal reliability of the Districts’ Systems and impacts to

the Districts’ ability to import power into their Systems.

Under FERC’s interpretation, only the former can qualify as

Adverse Impacts.

B

As noted above, we may defer to FERC’s interpretation

of a contract when that interpretation reflects the agency’s

expertise. Pac. Gas & Elec. Co., 746 F.2d at 1387. Here,

FERC’s specialized knowledge of interconnected electrical

systems may very well have informed its understanding of

what qualifies as an “Adverse Impact” and, specifically, as a

“reliability impact.” But FERC forfeited any deference it

might otherwise have been owed by failing to demonstrate

how its interpretations reflect its expertise in this area, or are

typical of how those terms are used in the industry—or,

indeed, by failing to even explain clearly how it interprets

the terms at all. 5 There in fact is a statutory definition of the

5

Because, as we explain below, FERC’s apparent understanding of

“reliability impacts” necessarily informs the understanding of the

TURLOCK IRRIGATION DIST. V. FERC 17

term “reliable operation,” Federal Power Act, 16 U.S.C.

§ 824o, that arguably supports FERC’s understanding of

“reliability impacts,” but it was not mentioned in FERC’s

orders or in its briefs. See Orr v. Plumb, 884 F.3d 923, 932

(9th Cir. 2018) (“The usual rule is that arguments raised for

the first time on appeal or omitted from the opening brief are

deemed forfeited.”). Because FERC’s interpretations are

therefore not “clearly based upon the agency’s expertise in

electricity transmission regulation,” our review is de novo.

See Pac. Gas & Elec. Co., 746 F.2d at 1387.

Interpreting the contract de novo, we conclude that the

contract’s use of the term Adverse Impact can include

reductions in import capability over the California-Oregon

Project.

1

As relevant here, Section 4.2 defines an Adverse Impact

as an effect on a District’s System from a Long-Term

Change to Operations that “(1) materially degrades

reliability of the [District’s] System or (2) materially reduces

the ability of the [District’s] System to physically transfer

power into, out of, or within said System . . .” (emphasis

added). The disjunctive “or” makes clear that reliability

degradation is only one type of Adverse Impact. A reduction

in the ability to transfer power into or out of a District’s

System is a second, and distinct, type of Adverse Impact.

FERC and PG&E urge us to read the second prong as

essentially a repetition of the first: that is, as only concerning

degradation of the physical components of a District’s

“ability to physically transfer” aspect of the definition of “Adverse

Impact,” the ambiguity in FERC’s order infects its interpretation of the

entire definition.

18 TURLOCK IRRIGATION DIST. V. FERC

System. However, the use of “or” makes clear that if

reliability impacts involve degradation of physical

components internal to the Districts’ Systems (as FERC

asserts), then reductions in transfer capability must involve

something different. We conclude that the plain meaning of

Section 4.2 includes impacts outside of the Districts’

Systems that reduce their ability to transfer power over the

California-Oregon Project and into their Systems. These

“operational” effects, although they do not directly impact

the physical components of the Districts’ Systems, are

effects on those Systems under Section 4.2, and they can

constitute Adverse Impacts.

2

The interaction between Section 4.2 and Appendix B of

the Interconnection Agreements bolsters this conclusion.

Section 4.2 of Modesto’s Interconnection Agreement

provides that “the Parties agree that the projects listed in

Appendix B shall not result in an Adverse Impact on either

Party’s System.” Section 4.2 of Turlock’s Interconnection

Agreement provides that certain commitments made

elsewhere “act to mitigate any Adverse Impacts caused by

the projects listed in Appendix B,” and thus that “Adverse

Impacts caused by projects under construction and listed in

Appendix B will not need to be further mitigated.” The clear

implication of these provisions is that the projects listed in

Appendix B are the kinds of projects that otherwise could

cause Adverse Impacts.

Significantly, Appendix B includes the Panoche Energy

Center (“Panoche”). The Districts submitted an affidavit

from Larry Gilbertson, Assistant General Manager for the

Turlock Irrigation District, who explained that the

interconnection of Panoche to PG&E’s System would not

cause any overloads on the Districts’ facilities within their

TURLOCK IRRIGATION DIST. V. FERC 19

service areas. Gilbertson Aff. at ¶¶ 30–31. However, the

interconnection of Panoche could have exacerbated loading

on PG&E’s System, which would in turn reduce the

Districts’ ability to transfer power into or out of their

Systems. Id. PG&E agreed to preempt such Adverse

Impacts by undertaking a project to rebuild one of its lines

to prevent constraints on power transfer. Id.

Thus, the parties included Panoche in Appendix B

because it was the kind of project that could have caused an

Adverse Impact, but which the parties agreed to exempt from

notice and study requirements of the Interconnection

Agreement. That the parties believed that Panoche could

cause an Adverse Impact even though it would have no

physical effect on components of the Districts’ Systems

suggests that the definition of an Adverse Impact

encompasses not merely physical effects within the

Districts’ Systems, but also effects outside the Districts’

Systems that constrain their ability to transfer power into or

out of their Systems.

3

Furthermore, FERC’s definition of an Adverse Impact

would render meaningless another provision of the

Interconnection Agreements. One of the events that can

trigger an Adverse Impact is a “Long-Term Change to

Operations.” The Interconnection Agreements provide a

non-exhaustive list of “examples of actions and events that

qualify as a Long-Term Change to Operations,” the first of

which is “disarming or materially modifying a Remedial

Action Scheme.” Turlock Interconnection Agreement,

§ 4.24; see also Modesto Interconnection Agreement,

§ 4.23. As FERC acknowledged in its Rehearing Order, the

purpose of the Remedial Action Scheme is to support daily

operating limits of north-to-south imports through the

20 TURLOCK IRRIGATION DIST. V. FERC

California-Oregon Intertie, which includes the California-

Oregon Project and two other PG&E lines. Rehearing Order

at P 2. All of these lines are external to the Districts’

Systems.

Under FERC’s interpretation of Adverse Impact,

overloads on the California-Oregon Project could never

qualify as Adverse Impacts, even if they limited the ability

of the districts to transfer power into or out of their Systems.

Because the purpose of the Remedial Action Scheme is only

to protect against such overloads, FERC’s interpretation

would render meaningless the inclusion of “modifying a

Remedial Action Scheme” in the definition of Long-Term

Change to Operations. We will not interpret a contract so as

to render one of its provisions meaningless. See, e.g.,

Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc.,

971 F.2d 272, 278–79 (9th Cir. 1992) (rejecting

interpretation of contract that “violates a fundamental rule of

contract interpretation because it would render other

portions of the contract meaningless” (citing Cal. Civ. Code

§ 1641)).

4

The plain text of Section 4.2, in conjunction with other

provisions of the Interconnection Agreements, make clear

that FERC’s interpretation of “Adverse Impact” is too

narrow. “Reliability” impacts may be limited to effects on

the physical functioning of components internal to the

Districts’ Systems, but reliability impacts are only one side

of the Adverse Impact coin. Impacts to the California-

Oregon Project that make it more difficult for the Districts

to transfer power into their Systems from their resources in

the Pacific Northwest can also constitute Adverse Impacts.

TURLOCK IRRIGATION DIST. V. FERC 21

C

Adverse Impacts can include changes that risk

overloading the California-Oregon Project and limiting the

Districts’ ability to transfer power into, out of, or within their

Systems. FERC’s orders denying the complaint and denying

rehearing relied on a contrary interpretation. See Rehearing

Order at P 26 (holding that it is “dispositive that the

California-Oregon Transmission Project was not part of the

Districts’ Systems”). Because these orders misinterpreted

the Interconnection Agreements that FERC was construing,

they were arbitrary and capricious.

IV

In making factual findings, FERC applied the wrong

standard for initiating a study under the Interconnection

Agreements. Aside from their misinterpretation of Adverse

Impact, the orders were thus arbitrary and capricious for this

additional reason.

A

In a series of provisions, the Interconnection Agreements

set low thresholds for requiring PG&E to provide notice of

a study or for the Districts to demand a study in the absence

of such notice. Section 9.11.1(a) provides that, if PG&E

intends to make a Long-Term Change to Operations “that

may reasonably result in an Adverse Impact” to a District’s

System, it must provide that District with written notice.

Section 9.11.1(b) provides that if PG&E does not provide

such notice, a District may demand a study if it has a

“reasonable belief” that the Long-Term Change to

Operations “may result or may have resulted in an Adverse

Impact” on its System. Finally, Section 9.11.2 provides that,

if requested by a District, PG&E must participate in a joint

22 TURLOCK IRRIGATION DIST. V. FERC

study of any proposed changes “that may reasonably be

expected to result in an Adverse Impact.” This joint study

requirement is meant to verify a party’s belief that an

Adverse Impact may occur as a result of a change. Section

9.11.2 further explains that a joint study will “determine the

potential for, and magnitude of, such Adverse Impact and

identify feasible avoidance or mitigation measures for the

impact.” Collectively, these provisions set low thresholds

for the showing a District must make to demand a study or

joint study. They plainly do not require a party requesting a

study to show that an Adverse Impact is likely before the

study has been conducted.

At certain points in its orders, FERC properly recited or

paraphrased the language from the Interconnection

Agreements setting out the low standard for demanding a

study. See Complaint Order at PP 12, 25; Rehearing Order

at n.7, PP 26, 36. However, when it made factual findings,

FERC held the Districts to a higher standard. In finding that

PG&E’s actions did not constitute a breach of Section 9.11,

FERC held that “while it is possible that transmission

constraints on facilities outside the Districts’ Systems could

present reliability concerns and require mitigation measures

. . . the record does not demonstrate that changes to the

remedial action scheme discussed herein will have such a

result.” Rehearing Order at P 28 (emphasis added). FERC

also stated that “‘the record reflects no supporting evidence

regarding the likely impact on [the Districts’] Systems’ due

to the remedial action scheme reprogramming.” Rehearing

Order at P 29 (emphasis added). FERC thus appears to have

required the Districts to meet a higher threshold than that

provided by the Interconnection Agreements (and recited

earlier in its orders). Rather than requiring the Districts to

show that they have a reasonable belief that ending the

Remedial Action Scheme “may result” or “may reasonably

TURLOCK IRRIGATION DIST. V. FERC 23

be expected to result in an Adverse Impact,” FERC appeared

to require that the Districts establish conclusively that an

Adverse Impact was likely without the benefit of a study

being conducted.

The Administrative Procedure Act requires that agencies

engaged in “reasoned decisionmaking.” State Farm, 463

U.S. at 52. The Supreme Court has held that it is a breach of

the requirement of reasoned decisionmaking to “apply[] . . .

a standard of proof which is in fact different from the . . .

standard formally announced.” Allentown Mack Sales &

Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998). By applying

a different standard of proof than the one provided in the

Interconnection Agreements and enunciated earlier in its

orders, FERC breached the requirement of reasoned

decisionmaking. Its orders were arbitrary and capricious.

B

FERC’s arguments to the contrary are not persuasive.

FERC first argues that we should defer to its interpretation

of what is needed to show that a change “may result” in an

Adverse Impact, because it applied its expertise in electricity

regulation in determining the meaning of that phrase.

However, as with its interpretation of an Adverse Impact,

FERC did not explicitly rely on any technical expertise in

interpreting the “may result” language. In the absence of

evidence that FERC’s interpretation was “clearly based” on

its technical expertise, we do not defer to that interpretation.

See Pac. Gas & Elec. Co., 746 F.2d at 1387.

FERC then argues that while it did not recite the “may

result” language throughout its orders, it did not purport to

alter that evidentiary requirement. We cannot conclude,

however, that FERC merely overstated its factual findings.

We can only judge FERC’s orders on the basis of the

24 TURLOCK IRRIGATION DIST. V. FERC

administrative record before us, Chenery, 318 U.S. at 87, and

that record does not show FERC assessing whether the

Districts met the lower “may result” threshold.

Moreover, were we to take FERC at its word and conduct

substantial-evidence review under the “may result” standard,

we would still conclude that FERC’s orders are arbitrary and

capricious. Given the low threshold for demanding a study,

the undisputed record indicates that Districts met their

burden. The Districts established that they had a reasonable

belief that PG&E’s reprogramming of the Remedial Action

Scheme would result in transmission constraints on the

California-Oregon Project. Turlock affiant Gilbertson stated

that if the reprogramming went unmitigated, it would “likely

cause significant reductions in” transmission capacity and

scheduling capacity in the California-Oregon Project.

Gilbertson Aff. at ¶ 75. Modesto affiant Gregory Salyer

stated that reprogramming would “provide a high likelihood

of significant, decreased transfer capability” over the

California-Oregon Project. Salyer Aff. at ¶ 26. In an

affidavit submitted to FERC, PG&E even conceded that

reprogramming the Remedial Action Scheme could cause

constraints on the California-Oregon Project. Affiant

Anupama Pandey stated that “the loss of [The Department

of Water Resources’s] participation in [the Remedial Action

Scheme] will have a limited impact on the” California-

Oregon Project, including a “curtailment” of the California-

Oregon Project in certain instances. Pandey Aff. at ¶ 33.

FERC’s own orders establish that the Districts met the

low threshold for requesting a study. Immediately before

concluding that there was no evidence that changes to the

Remedial Action Scheme “will” or are “likely” to have an

Adverse Impact, FERC stated that “it is possible that

transmission constraints on facilities outside of the Districts’

TURLOCK IRRIGATION DIST. V. FERC 25

Systems could present reliability concerns and require

mitigation measures.” Rehearing Order at P 28. This

finding of a “possible” Adverse Impact alone would likely

satisfy the low threshold for requesting a study under either

Section 9.11.1(b) or Section 9.11.2. FERC also observed

that “there may be capacity reductions on the California-

Oregon Transmission Project” as a result of Remedial

Action Scheme reprogramming, before dismissing such

effects as outside the scope of an Adverse Impact. 6

Rehearing Order at P 27. This finding, too, would likely

satisfy the low threshold for requesting a study.

C

FERC applied the wrong standard for initiating a study

under the Interconnection Agreements. Its orders rested on

a conclusion that the Districts had not met a higher standard

for initiating a study. Those orders were arbitrary and

capricious.

V

FERC misinterpreted the definition of Adverse Impact,

and thus improperly disposed of the Districts’ complaint

without determining whether changes to the Remedial

Action Scheme may result in reductions in transmission

capacity over the California-Oregon Project. FERC also

applied the wrong standard for initiating a study when

making its factual findings. Thus, we grant the petition and

remand to FERC for further proceedings. On remand, FERC

should apply the broader definition of Adverse Impact that

includes reductions in import capability over the California-

6

As discussed supra section III.B, this conclusion was based on a

misinterpretation of the definition of Adverse Impact.

26 TURLOCK IRRIGATION DIST. V. FERC

Oregon Project and the proper standard for requesting a

study in determining whether PG&E breached the

Interconnection Agreements.

PETITION GRANTED.