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Public Utilities Commission of the State of California v. Federal Energy Regulatory Commission

May 14, 2004


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

Before: Sentelle, Randolph, and Rogers, Circuit Judges.

The opinion of the court was delivered by: Randolph, Circuit Judge

Argued February 26, 2004

Opinion for the Court filed by Circuit Judge RANDOLPH. Opinion concurring in part and dissenting in part filed by Circuit Judge ROGERS.

High voltage transmission lines, known as Path 15, extend from southern to northern California. Path 15 is the principal means of transmitting electricity between these two regions of the state and into the Pacific Northwest. Energy produced in Southern California comes mainly from natural gas-fired generators; in Northern California and the Pacific Northwest, hydroelectric generation predominates. In the winter, energy typically flows from south to north. Summer flows are in the opposite direction. The movement of power along Path 15 is often constrained because of its lack of capacity to handle the transmission of power in the summer and winter months.

The issue in this case is whether the Federal Energy Regulatory Commission properly approved, as part of a project to increase the capacity of Path 15, incentives for Pacific Gas and Electric Company (PG&E) to recover its costs in building or upgrading facilities.

The issue arose during Commission proceedings under § 205 of the Federal Power Act, 16 U.S.C. § 824d, in which the Western Area Power Administration (WAPA), on behalf of itself and PG&E and Trans-Elect, Inc., sought approval of a Letter Agreement setting forth the rights and obligations of the parties with respect to the Path 15 Project. WAPA, a component of the United States Department of Energy, markets and transmits electric power from hydroelectric projects in the West using Path 15. In May 2001 the National Energy Policy Report recommended to the President that WAPA be authorized to seek ways to alleviate the Path 15 bottleneck. In a public notice WAPA sought statements of interest from private parties willing to invest in the construction of Path 15 upgrades. 66 Fed. Reg. 31,909 (June 13, 2001). This resulted in WAPA's selection of PG&E and Trans-Elect as its partners in the building of a new 500 kV transmission line.

The terms of the partnership were memorialized in the Letter Agreement. Although the Letter Agreement dealt with many subjects, such as ownership rights, transmission system rights and responsibilities for raising capital to fund construction, the only questions brought to this court are the Commission's approval of a 200 basis point incentive on PG&E's return from the new Path 15 facilities it constructs or upgrades and PG&E's calculation of depreciation expense using a 10 year life for those facilities.

The Public Utilities Commission of the State of California (CPUC), the petitioner here, opposed the PG&E incentives in the original § 205 proceeding, Western Area Power Admin., 99 F.E.R.C. ¶ 61,306 (2002), and in a request for rehearing, Western Area Power Admin., 100 F.E.R.C. ¶ 61,331 (2002). It has several arguments. The first is that the Commission erred in not requiring PG&E to submit cost of service data and other information required by 18 C.F.R. § 35.13. The regulation, and the other authorities CPUC cites, apply when a utility proposes a rate change "to supersede, supplement or otherwise change the provisions of a rate schedule filed with the Commission." 18 C.F.R. § 35.13(a). On the face of it, the regulation is inapposite. PG&E did not seek to change any of its existing rate schedules. It sought Commission approval, in advance of construction, of incentives when it makes a rate filing in the future with respect to the new Path 15 facilities. At that point the Commission will still have to determine whether the proposed rate schedules are just and reasonable. The Commission made this clear enough. "As we do not have before us an agreement establishing rates, we take no position, but rather reserve judgment, on all rate issues ... not specifically delineated as rate principles" in the Letter Agreement. 99 F.E.R.C. at 62,277 n.2. And "[w]hile we are accepting the Letter Agreement for filing, [finding it just and reasonable,] we note, however, that it is only a preliminary step that allows the Path 15 participants to move forward and not the last opportunity for the Commission to review matters that are subject to its jurisdiction." Id. at 62,281.

The information before the Commission indicated that Path 15 was "a uniquely critical path," that congestion had "serious impacts on the ability to move power," that the Path 15 Project would cost $306 million, and that congestion costs to California energy consumers amounted to $222 million in just the 16 months prior to December 2000. 100 F.E.R.C. at 62,539 & n.4. It was entirely proper for the Commission to make this cost comparison, even though - as CPUC points out - the costs of operating the upgrades will have to be added to the costs of constructing them. Of course, ratepayers will not have to pay the entire $306 million in one year; the cost will be spread out over the life of the facility. The Commission knew this and it knew as well that unless it approved the PG&E incentives, the project would likely not be built in the near future. The proposal embodied in the Letter Agreement was the only one that materialized in response to WAPA's public notice.

CPUC had argued that the Commission could not take into account the importance of a project in ratemaking proceedings and that it therefore acted improperly in considering the need for the Path 15 Project when it approved the PG&E incentives. In its reply, CPUC wisely disavowed this argument. A primary purpose of the Federal Power Act, and its counterpart, the Natural Gas Act, "was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices." NAACP v. FPC, 425 U.S. 662, 670 (1976). To carry out this purpose the Commission may consider non-cost factors as well as cost factors in setting rates. See Permian Basin Area Rate Cases, 390 U.S. 747, 791, 815 (1968). Citing these and other authorities, the Commission correctly argues that using pricing incentives to increase the supply of energy available to customers is a valid, non-cost consideration in setting rates. See Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1503 (D.C. Cir. 1983); Interstate Natural Gas Ass'n of Am. v. FERC, 285 F.3d 18, 33-34 (D.C. Cir. 2002). Our decision thirty years ago in Consumers Union v. FPC, 510 F.2d 656, 660 (D.C. Cir. 1974), held as much: "reliance on non-cost factors has been endorsed by the courts primarily in recognition of the need to stimulate new supplies...."

Although it was well-known that Path 15 was constrained and although this suggested a ready market if new transmission lines were built, no party stepped forward to construct upgrades. Only after WAPA issued its request for proposals did it find participants for the project, and then only if incentives were offered. As the Commission also points out, the incentives amounted to a small portion of total energy costs and are greatly outweighed by the benefits consumers will receive. See Brief for Respondent at 18, citing Removing Obstacles to Increased Electric Generation and Natural Gas Supply in the United States, 94 F.E.R.C. ¶ 61,272, reh'g denied, 95 F.E.R.C. ¶ 61,225, at 61,765, order on reh'g, 96 F.E.R.C. ¶ 61,155, order on reh'g, 97 F.E.R.C. ¶ 61,024 (2001).

Rather than dispute the Commission's judgment regarding the potential benefits of the Path 15 Project to energy customers, CPUC argues that the costs of the incentives could have been avoided because either the Commission or CPUC could have compelled PG&E to perform the upgrades. The Commission's failure to consider this alternative, CPUC argues, rendered its decision arbitrary and capricious under cases such as Farmers Union, 734 F.2d at 1511. This objection was not raised in CPUC's rehearing petition and we therefore lack jurisdiction to consider it. See 16 U.S.C. § 825 l (b); City of Orville v. FERC, 147 F.3d 979, 990 (D.C. Cir. 1998).

CPUC's only other argument worth mentioning is that the Commission unlawfully extended the deadline set in the Removing Obstacles Orders. "In light of the severe electric energy shortages facing California and other areas of the West in recent months ... the Commission ... has examined all of its rate and facility certification authorities in the areas of electric energy ... to determine how it can help increase electric energy supply." 94 F.E.R.C. at 61,967. The Commission sought to foster "the installation of critical transmission investment," id. at 61,969, by offering incentives to increase the supply of energy. Among these were the same 200 basis point and 10 year depreciable life incentives contained in the Letter Agreement for PG&E. Id. at 61,969-70. The Removing Obstacles Orders offered these ...

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