Fate of Subsidy Warrants Explanation, Court Says

(CN) - The Bonneville Power Administration must explain in detail why it decided not to seek repayment of a court-invalidated, $32 million subsidy it gave to an aluminum manufacturer, the 9th Circuit ruled Thursday.

The ruling is the latest in a long-running consolidated case pitting a dozen small energy utilities and cooperatives in the Pacific Northwest against the federal agency's subsidy contracts with its industrial customers.

Though the 9th Circuit in two previous decisions found the subsidies inconsistent with the Bonneville Power Administration's (BPA) general mandate to operate in a "businesslike manner," it left it to BPA to decide if it should or could seek refunds.

Specifically, the utilities and co-ops objected to a 2006 contract in which BPA had agreed to pay three aluminum manufacturers a total of $59 million per year for five years, instead of providing them with electrical power. The aluminum companies were then free to use the cash to buy power from another source, and BPA could meet its growing demand for energy from public utilities and co-ops, which the agency must by law treat as first-priority customers.

Small utilities claimed that this arrangement caused their own rates to go up. They also challenged a one-time "interim fix" subsidy of $32 million to Alcoa, which was also one of the three companies that benefited from the 2006 contracts. BPA said this so-called "Alcoa amendment" was necessary to avoid interruption of Alcoa's smelter operations.

After BPA decided in 2011 not to seek refunds from the aluminum companies, the plaintiff power companies and co-ops appealed again, alleging that the decision violated the Appropriations Clause and BPA's governing statutes.

The 9th Circuit found 2-1 Thursday that BPA made the right call on all the subsidies save one - the Alcoa amendment.

Alcoa told the court that, because of market fluctuations, it had actually ended up paying $218 million - $26 million during the amendment period - more for power than it would have without the subsidy agreements, giving it a possible claim against the agency for underpayment.

Since BPA took into account Alcoa's threat of a counterclaim in deciding not to pursue repayment of the subsidies, the agency must "provide some analysis of whether Alcoa's claim of net underpayment has any fair chance of success," the panel ruled, remanding the issue back to Oregon.

The agency must also "analyze alternative plans for recovery of any overpayment to Alcoa," and "either ... adopt one of those plans or to explain why, with respect to each of them, the costs and downside risks justify abandonment of the opportunity to recover any overpayment."

The majority denied review of the other challenged subsidies based largely on waiver provisions in the original contacts.

Judge Stephen Reinhardt argued in partial dissent that BPA should be required to seek recovery of "$100 to $200 million in funds" it paid out under the 2006 contracts with the aluminum companies.

"The majority's contrary answer allows BPA to violate its statutory limitations at will and to shield itself against taking any measure to remedy its unlawful actions," Reinhardt wrote.

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