FERC Survives Challenge to Energy Crisis Orders

SAN FRANCISCO (CN) - The Federal Energy Regulatory Commission acted properly to help Californians during the energy crisis of 2000 and 2001, the 9th Circuit ruled.

With consumer energy costs in the Golden State greatly exceeding the national average, California deregulated its market in the mid-1990s. Lawmakers created two agencies: the California Power Exchange, which ran an electricity auction market, and the California Independent System Operator, which managed the flow of electricity on the state's transmission grid.

Unexpectedly, however, a prolonged drought decimated hydroelectric capacity, and two unusually hot summers caused demand to soar. The perfect storm got worse through the greed of energy companies like Enron, which created artificial energy shortages by taking plants offline during peak usage periods to spike the price of the auctioned-off energy by up to 20 times greater than normal.

California tried to curb the soaring price of retail electricity, but the cap bankrupted Pacific Gas & Electric, and Southern California Edison nearly met the same fate. The economic fallout led to the 2003 ouster of then-Gov. Gray Davis, who became second governor in U.S. history to be recalled.

After PG&E filed a complaint with the Federal Energy Regulatory Commission (FERC) in 2000, arguing that the auctioned rates on the California Power Exchange exceeded fair-market levels, the federal agency ordered both public and private power companies to retroactively refund consumers for the extortionate electricity rates.

After government-owned utilities appealed the refund order, the 9th Circuit ruled that FERC lacked jurisdiction over government power companies under the Federal Powers Act and could not order them to issue refunds.

In the same ruling, however, the court suggested that privately owned utilities that bought electricity from government-owned providers might be able to pursue breach-of-contract claims in lieu of a FERC-mandated refund.

Though regulators indicated that they disagreed with the appellate ruling in 2007, the agency said that it vacated the order for government-owned utilities to process refunds. FERC told the power companies, however, that it would retroactively set "just and reasonable prices" to properly order refunds from privately owned utilities.

The government-owned utilities - including the city of Redding, Arizona Electric Power Cooperative, Northern California Power Agency, Bonneville Power Administration and Western Area Power Administration - brought another appeal, but a divided three-judge panel sided with the commission Monday.

Though the federal appeals court said that the utilities had an "obvious" personal stake, it found that resetting electric rates charged during the energy crisis to just and reasonable levels was necessary to get consumer refunds from private entities.

"The primary focus of the orders was on the fair and reasonable clearing prices, not on which parties would be affected by the orders," Judge Richard Clifton wrote, joined by Judge Sidney Thomas. "On the latter subject, it may have taken FERC a few tries to clarify what it meant ... but in the May 2009 order FERC clearly acknowledged that it did not have authority to order refunds from the non-public utilities and explained that it was establishing just and reasonable rates in order to determine the appropriate refund amount for public entities."

Clifton added that "FERC's recalculation was not an empty exercise, because it had to determine just and reasonable market clearing prices in order to calculate the refunds to be ordered from sellers from which it could order refunds.

"What impact this calculation might have on the contract actions pending in other courts is not for us to say," the decision continues. "FERC has not treated those claims as an infringement upon FERC's regulatory authority, so we do not see need to treat them as such."

Judge M. Margaret McKeown slammed her colleagues, however, for what she called "a surprise twist ending." The nine-page dissent says FERC ran an end-run around the Federal Powers Act's delineation of the commission's authority. (27)

"Notwithstanding the plain language of the orders at issue and FERC's litigation position, the majority determines that FERC merely declared fair market clearing prices without actually attempting to 'retroactively alter' these prices," McKeown wrote, citing the majority opinion. "This semantic resolution is at odds with the record and basic principles of administrative law, and undermines the majority's standing analysis, endangering the utilities' claim to standing."

Under the Federal Powers Act, FERC may engage in three types of actions: the prospective and retroactive determination of a fair market price, prospective setting of market rates based on that price, and the retroactive ordering of refunds, the dissent states.

"Nowhere in [the Federal Powers Act] did Congress grant FERC the ability to retroactively reset market rates," McKeown wrote. "FERC's approach, which is to cherry pick a little from both subsections of the statute, creates an unprecedented and unauthorized option - retroactive resetting of rates."

"Resolution of this appeal requires no nuanced interpretation of the orders, just allegiance to plain English," she added. "Because the FERC orders clearly seek to go beyond its statutory authority - retroactively resetting rates for all market sales - I would grant the petition."

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