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Pacific Gas and Electric Company v. Federal Energy Regulatory Commission

July 09, 2004


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

Before: Edwards, Sentelle and Tatel, Circuit Judges.

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

Argued April 12, 2004

Petitioner, the Pacific Gas & Electric Company ("PG&E"), seeks this Court's review of final orders issued by the Federal Energy Regulatory Commission ("FERC") that establish a procedure for funding the wind-up costs of the now-defunct California Power Exchange Corporation ("CalPX"). Those orders established a regime whereby former CalPX customers, like PG&E, were assessed a charge for CalPX's wind-up costs that correlated to the absolute value of any outstanding account balances the customers had with CalPX as of March 13, 2002. Because the cost-allocation methodology is both unreasonable and violates the filed-rate doctrine, we vacate the orders and remand the matter to FERC for further consideration.

I. Background

In 1996, California restructured its electric power industry to a market-based rate system. In doing so, it created CalPX, a non-profit entity that provided various auction markets for the trading of electricity under FERC-approved tariff and rate schedules. Under this system, CalPX determined the amounts to be paid by buyers purchasing power and how those amounts would be distributed to the sellers. CalPX recovered its administrative costs by assessing a FERC-approved charge to entities using its services.

In 2000, wholesale prices for electricity in California increased dramatically and resulted in the now-infamous California energy crisis. PG&E paid the higher prices, but owing to price freezes on retail rates, PG&E could not pass along the increased costs to its customers. Ultimately, PG&E could not meet its obligations to CalPX, its credit ratings were reduced, and it filed for Chapter 11 bankruptcy.

Shortly thereafter, FERC began an investigation into the California energy crisis. The many matters at issue in that investigation have been consolidated and are collectively referred to as "the Refund Proceedings." Those Refund Proceedings are massive in scope, but only a narrow segment is pertinent to this case, as detailed below.

FERC first determined that prospective relief was insufficient, and that refunds related to transactions in the electricity spot markets operated by the California Independent System Operator ("CAISO") and CalPX were appropriate. Refunds of approximately three billion dollars have been tentatively granted. San Diego Gas & Elec. v. Sellers of Energy and Ancillary Services into Markets Operated by the Cal. Indep. Sys. Operator and the California Power Exch., 102 FERC ¶ 61,317, order on reh'g, 105 FERC 61,066 (2003). These determinations are on appeal before the United States Court of Appeals for the Ninth Circuit. Cal. Pub. Util. Comm'n v. FERC, Nos. 01-71051, et al. (9th Cir.). In addition to the Refund Proceedings, the events surrounding the California energy crisis have spawned a variety of litigation, some of it criminal.

Also as a result of the California energy crisis, CalPX was suspended from operating its markets. In re Cal. Power Exch., 245 F.3d 1110, 1119 (9th Cir. 2001). In October 2001, sellers in the California market, acting through the "CalPX Creditors Committee," filed a proposal with FERC requesting a distribution of CalPX funds. FERC deferred the issue, pending resolution of the Refund Proceedings. San Diego Gas & Elec. v. Sellers of Energy and Ancillary Services into Markets Operated by the Cal. Indep. Sys. Operator and the California Power Exch., 97 FERC 61,301, 62,417 (2001).

FERC has also denied several other requests from individual sellers to release CalPX collateral and funds, again stating that the proper allocation cannot be made until the Refund Proceedings are resolved. FERC's denials of these requests are on appeal to this Circuit. Constellation Power Source, Inc. v. FERC, No. 02-1367 (consolidated with Powerex Corp. v. FERC, No. 03-1285).

With CalPX out of the energy business, its sole remaining function is "winding up" its business affairs. This includes several responsibilities, such as: (1) acting as custodian of certain financial rights owed by and to participants in its defunct markets; (2) acting as records custodian for transactions in California's markets; and (3) participating in ongoing Commission and judicial proceedings. In other words, CalPX is complying with the Refund Proceedings. Because it is no longer in the energy business, CalPX has no current funding source during the wind-up period. According to CalPX, without some source of revenue, it would have exhausted its reserve of operating funds by August of 2002. FERC's attempt to remedy this problem is the subject of this petition.

In order to recover its operating cost during the wind-up period, CalPX filed a new rate schedule under the Federal Power Act § 205, 16 U.S.C. § 824d, to "apportion the costs of CalPX's wind-up and ongoing operations equitably among the participants for whose benefit CalPX is continuing those operations." FERC agreed, and ultimately adopted a regime whereby CalPX's costs would be allocated among its participants in proportion to their relative exposure, as measured by the absolute value of their current payables and receivables, with CalPX. FERC stated that "[t]his is consistent with the fact that CalPX's ongoing activities are essentially centered around the appropriate and orderly disposition of these payables and receivables." Cal. Power Exch., 100 FERC 61,178, 61,637 (2002). Thus, any party that has a balance (positive or negative) outstanding with CalPX is required to pay a percentage of CalPX's wind-up costs equal to its percentage of the total outstanding account balances. Additionally, FERC found that CalPX was required to use "the most current account information," which was reflected in the March 13, 2002 Account summaries (the "Account Balances"). Id. Furthermore, recognizing that the outstanding balances would change pursuant to the ongoing Refund Proceedings, FERC required CalPX to modify the allocation in subsequent six-month rate filings to track any changes. Id. From that time until oral argument in this case, the March 13, 2002 Account Balances have been used for each six-month period. Finally, FERC also excluded CAISO's account balance, which is the largest outstanding balance amount in CalPX's account, from the cost allocation.

PG&E, among others, sought a rehearing of FERC's August 8, 2002 Order that adopted CalPX's wind-up charges. PG&E argued that FERC's Order violated the filed-rate doctrine by imposing new charges for past services. FERC disagreed, claiming that PG&E was confusing two distinct issues: rates previously charged for transactions in the CalPX market; and the responsibility for newly incurred wind-up costs. PG&E also challenged CalPX's reliance on March 13 Account Balances as the basis for allocating cost among participants. FERC denied rehearing on this claim as well, because it "believe[d] that the primary focus of CalPX's on-going activities is to support this Commission's efforts to calculate just and reasonable rates and associated refunds" for participants in CalPX's markets, including PG&E. Cal. Power Exch., 101 FERC 61,330, 62,370 (2002). According ...

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