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California Independent System Operator Corporation v. Federal Energy Regulatory Commission

June 22, 2004


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

Before: Edwards, Sentelle and Rogers, Circuit Judges.

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

Argued May 17, 2004

California Independent System Operator Corporation ("CAISO"), a "public benefit corporation," along with two state agencies of California, petition this court for review of a final order of the Federal Energy Regulatory Commission ("FERC") purporting to replace the governing board of CAISO, chosen according to a method dictated by California statute, with a new board chosen through a method dictated by FERC. Because we agree with the petitioners that FERC has no authority to make or enforce such an order, we grant the petition and vacate the order under review.


Until very recently, vertically integrated electric utilities sold generation, transmission, and distribution services as a single bundled package. Changes in regulatory laws and technological advances have led to increased entry into the wholesale electric power generation markets. Because the transmission market has remained restricted and difficult to enter, utilities owning or controlling transmission facilities have enjoyed a natural monopoly which they could exploit to favor their own generation and exclude or burden their competitors. See Transmission Access Policy Study Group, et al. v. FERC, 225 F.3d 667, 683-84 (D.C. Cir. 2000) (per curiam) (" TAPS "), aff'd sub nom., New York v. FERC, 535 U.S. 1 (2002). In the orders under review in TAPS, FERC found that the vertically integrated utilities were using their monopoly control over interstate transmission facilities to disadvantage potential competitors and thus thwart competition, to the detriment of the public interest. In FERC Order No. 888,*fn1 FERC sought to remedy this market burden by requiring jurisdictional electric utilities to unbundle wholesale electric power services and to file open-access nondiscriminatory transmission tariffs. See TAPS, 225 F.3d at 683. As one means of compliance with FERC's remedial orders, public utilities could, and were, encouraged by FERC to participate in Independent System Operators ("ISOs"). An ISO conducts the transmission services and ancillary services for all users of such a system, replacing the conduct of such services by the system owners-that is, the integrated electric utilities whose market power FERC was attempting to control by encouraging the creation and operation of the ISOs. In order to accomplish that purpose, FERC deems it crucial that an ISO be independent of the market participants so that decisions of policy, operation, and dispute resolution be free of the discriminatory impetus inherent in the old system. Order No. 888 at 31,731.

CAISO is an entity created by the state of California pursuant to statutes of that state, AB 1890, Cal. Elec. Restructuring Law, Stats. 1996, ch. 854 § 1,345, and Senate Bill 96, Stats. 1999, ch. 510. The original 1996 legislation leading to the creation of CAISO created a California Electricity Oversight Board ("CEOB") and directed it to incorporate CAISO as a non-profit "public benefit corporation" to operate electric grid facilities in California for the purpose of "ensur[ing] efficient use and reliable operation of the transmission grid...." AB 1890. That statute directed the CEOB to put in place procedures for selecting a board of directors for the new public benefit corporation composed exclusively of California residents and including representatives of eleven "stakeholder" classes. AB 1890 § 337. The same legislation mandated the creation of a Power Exchange ("PX"). To implement this restructuring, in April of 1996 California's three largest investor-owned electric utilities filed a joint application with FERC to transfer control of transmission facilities to CAISO and to sell electricity to the PX. FERC conditionally granted the applications, including generally approving the proposed governance structure as consistent with the principles of ISOs under Order No. 888, but ruled that the proposed California residency requirement was unduly discriminatory. Pacific Gas & Electric Co., 77 FERC ¶ 61,204 (1996).*fn2

In the summer and fall of 2000, California underwent a period of much publicized turmoil in its electricity market. FERC, the legislature and governor of the state of California, and CAISO all concluded separately that a new board structure was needed for CAISO in light of that turmoil. On November 1, 2000, FERC "proposed" a new seven-member board selected from candidates identified by an independent search firm. 93 FERC ¶ 61,121, 61,362-64. On December 15, 2000, FERC ordered that if "no consensus is reached" as to an acceptable means of selecting new ISO board members, then the method "proposed" in the November 1 order would be carried out. On January 18, 2001, also in response to the electricity crisis, the California legislature passed a statute that replaced the current ISO board with a five-member board appointed by the governor. Pursuant to those procedures, a board was appointed. Also in January 2001, the governor authorized the California Department of Water Resources ("DWR") to purchase energy. Shortly thereafter, the DWR became a major market participant in the California wholesale energy markets.

Thereafter, in response to a FERC directive, CAISO filed a comprehensive market redesign proposal to improve the California energy markets. In an order issued July 17, 2002, FERC, in response to this filing, ordered that the procedures it had proposed in November and December 2000 to replace CAISO's board be implemented. See Order Concerning Governance of the California Independent System Operator, 100 FERC ¶ 61,059 (2002). FERC's primary concern with the board's composition was that having CAISO run by a stateappointed board conflicted with the principles, as expressed in Order No. 888 and in FERC's November and December 2000 orders, that ISOs should be independent of market participants. Because the California governor appointed the board and because California, through its DWR, had been a major market participant in the electricity market administered by CAISO, the composition of the board, FERC reasoned, violated those principles of independence. Id. at 61,227.

CAISO, the Public Utility Commission of the State of California, and the CEOB all seek review of FERC's order. Because FERC has no authority to replace the selection method or membership of the governing board of an ISO, let alone to compel a corporation created by state law to employ a governing board chosen in violation of that law, we grant the petitions.


First, lest there be any mistake, FERC has done nothing less than order a public utility subject to its regulation to replace its governing board. We offer no citation to any comparable order by FERC, or any other similar federal regulatory body, because to the best of our knowledge, there is none. FERC has claimed the authority of no such precedent, the petitioners have found none, nor has our independent research disclosed any. While the petitioners offer several grounds for setting aside that action, chief among those grounds is the argument by petitioners that FERC simply has no authority to do such a thing. Because we agree with petitioners on that basis, and because that basis alone is sufficient to set aside FERC's order, we need consider no other argument by petitioners.

In seeking to answer the question of FERC's authority, we start with a fundamental proposition of federal law. "As a federal agency, FERC is a `creature of statute,' having `no constitutional or common law existence or authority, but only those authorities conferred upon it by Congress.' " Atlantic City Elec. Co. v. FERC, 295 F.3d 1, 8 (D.C. Cir. 2002) (quoting Michigan v. EPA, 268 F.3d 1075, 1081 (D.C. Cir. 2001) (emphasis in Atlantic City Elec. Co. ). Therefore, "if there is no statute conferring authority, FERC has none." Id. As the Supreme Court has recognized, "an agency literally has no power to act ... unless and until Congress confers power upon it." La. Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 374 (1986). It is therefore incumbent upon FERC to demonstrate that some statute confers upon it the power it purported to exercise in its replacement of the governing board of the regulated utility. FERC's best, indeed only, answer, is that it possesses the authority under Federal Power Act sections 205 and 206, respectively codified as 16 U.S.C. § 824d and § 824e. Upon review of those sections, it is not immediately apparent that either has anything to do with the authority claimed by FERC to discharge and replace the governing board of a utility with governors chosen by a process of its own choice.

The title lines of the codified versions denominate section 205 as concerning "rates and charges; schedules; suspension of new rates; automatic adjustment clauses," and section 206 as "power of commission to fix rates and charges; determination of cost of production or transmission." We recognize that the section title of a statute is not dispositive of its meaning, but it is not too much to expect that it has something to do with the subject matter of the statute. In this case, review of the statutory text reveals that it has everything to do with the subject matter. Congress in those sections did precisely what the titles suggest it was doing. It set forth the power of the Commission with respect to rates and charges, and entered certain legislative directions concerning determination of cost of production or ...

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