Washington, DC Tel Fax steptoe.com. August 26, 2011

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1 Richard L. Roberts 1330 Connecticut Avenue, NW Washington, DC Tel Fax steptoe.com VIA HAND DELIVERY The Honorable Jon Wellinghoff Chairman and Motions Commissioner Federal Energy Regulatory Commission 888 First Street, NE Washington, DC August 26, 2011 Re: San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services, Docket No. EL Answer to August 24, 2011 Appeal of the Presiding Officer s Ruling Dear Chairman Wellinghoff, I am enclosing, pursuant to 18 C.F.R. 715(c) (2011), a copy of the California Parties answer to the August 24, 2011 appeal of the Bonneville Power Administration and the Western Area Power Authority (together, BPA/WAPA) of the Presiding Officer s denial of BPA/WAPA s motion to permit an interlocutory appeal. The California Parties electronically filed this answer with the Commission s Secretary today. The California Parties are the People of the State of California ex rel. Kamala D. Harris, Attorney General, the Public Utilities Commission of the State of California, Pacific Gas and Electric Company, and Southern California Edison Company. Thank you for your assistance. Sincerely, Enclosure Richard L. Roberts Attorney for Southern California Edison Company on behalf of the California Parties

2 Richard L. Roberts 1330 Connecticut Avenue, NW Washington, DC Tel Fax steptoe.com VIA HAND DELIVERY Michael A. Bardee, Esq. General Counsel Federal Energy Regulatory Commission 888 First Street, NE Washington, DC August 26, 2011 Re: San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services, Docket No. EL Answer to August 24, 2011 Appeal of the Presiding Officer s Ruling Dear Mr. Bardee, I am enclosing, pursuant to 18 C.F.R. 715(c) (2011), a copy of the California Parties answer to the August 24, 2011 appeal of the Bonneville Power Administration and the Western Area Power Authority (together, BPA/WAPA) of the Presiding Officer s denial of BPA/WAPA s motion to permit an interlocutory appeal. The California Parties electronically filed this answer with the Commission s Secretary today. The California Parties are the People of the State of California ex rel. Kamala D. Harris, Attorney General, the Public Utilities Commission of the State of California, Pacific Gas and Electric Company, and Southern California Edison Company. Thank you for your assistance. Sincerely, Enclosure Richard L. Roberts Attorney for Southern California Edison Company on behalf of the California Parties

3 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION San Diego Gas & Electric Company, Complainant, v. Sellers of Energy and Ancillary Services Into Markets Operated by the California Independent System Operator Corporation and the California Power Exchange, Respondents. ) ) ) ) ) ) ) ) ) ) Docket No. EL CALIFORNIA PARTIES ANSWER TO APPEAL OF AUGUST 17, 2011 ORDER BY THE PRESIDING OFFICER DENYING MOTION OF BONNEVILLE POWER ADMINISTRATION AND WESTERN AREA POWER ADMINISTRATION SEEKING INTERLOCUTORY APPEAL TO: THE HONORABLE JON WELLINGHOFF, CHAIRMAN AND MOTIONS COMMISSIONER The California Parties 1 hereby request that the Motions Commissioner deny Bonneville Power Administration s and Western Area Power Administration s (collectively, BPA) motion to permit an appeal of the presiding judge s denial of BPA s 1 The California Parties are the People of the State of California ex rel. Kamala D. Harris, Attorney General, the Public Utilities Commission of the State of California, Pacific Gas and Electric Company, and Southern California Edison Company.

4 interlocutory appeal. 2 As demonstrated herein, BPA s appeal is without merit and does not even begin to satisfy the standards necessary to permit the Motions Commissioner to authorize an interlocutory appeal. I. INTRODUCTION BPA seeks, via challenge to a procedural order issued in an evidentiary hearing, to reverse well-established Commission and court precedent. The Commission has previously rejected BPA s arguments on multiple occasions. The Motions Commissioner should do so now. In response to the California Energy Crisis of , the Commission establish[ed] a revised method for calculating the just and reasonable clearing prices to be applied in the [California Independent System Operator Corporation (ISO) and the California Power Exchange Corporation (PX)] markets for the period beginning October 2, It explained that [o]ur action thus revises the market-clearing prices that all market participants previously agreed to accept for their sales. 4 Neither BPA nor any other party sought rehearing of that determination. In addition to resetting marketclearing prices pursuant to this methodology, however, the Commission also ordered governmental market participants, such as BPA, to refund their overcharges. 5 BPA and See 18 C.F.R (c)(4) (2011). San Diego Gas & Elec. Co., 96 FERC 61,120 at 61,512 (2001) (July 25, 2001 Order). Id. Id

5 others did, in fact, challenge that second determination, ultimately seeking review by the United States Court of Appeals for the Ninth Circuit (Ninth Circuit). The Ninth Circuit held that the Commission did not have the authority to order governmental market participants to refund their overcharges. 6 The court s holding was limited to the Commission s own refund authority. The court held that the Commission erred because [its] order does more than simply reset the market-clearing price for power in the FERC-jurisdictional ISO and []PX markets. FERC specifically ordered governmental [market participants] to pay refunds, an action that lies outside Congress s clearly-expressed intent that FERC s 206 refund authority apply only to public utilities. 7 The Ninth Circuit further explained that although FERC had no authority to order [governmental market participants] to pay refunds, a contract action brought by the parties... could result in the equivalent refund relief. 8 Noting that the sales at issue were made pursuant to jurisdictional tariffs of the ISO and PX, with which the governmental market participants had contracted to abide, 9 the Ninth Circuit explained that regardless of whether FERC has regulatory authority over [the governmental market See Bonneville Power Admin. v. FERC, 422 F.3d 908 (9th Cir. 2005) (Bonneville). Id. at (emphasis added). Id. at (discussing Alliant Energy, Inc. v. Neb. Pub. Power Dist., Civ. No ADM/FLN, 2001 U.S. Dist. LEXIS (D. Minn. Oct. 18, 2001), aff d, 347 F.3d 1046 (8th Cir. 2003) (emphasis added)). Such contract actions are referred to as Alliant-type contract actions. 9 See Bonneville, 422 F.3d at

6 participant] itself, a court (as opposed to the Commission) could nonetheless make the governmental market participant refund its overcharges. 10 On remand, the Commission complied with the Ninth Circuit s instructions and, in an October 19, 2007 Order, vacated its prior orders to the extent that they required governmental market participants to pay refunds. 11 However, the Commission inadvertently mischaracterized its prior orders and misstated what the Ninth Circuit had found in Bonneville, saying that it disagree[d] that it had reset prices market-wide, and that the court found that the Commission had ordered refunds rather than amending the []ISO/PX tariffs to reset the market clearing price during the refund period. 12 The California Parties asked the Commission to correct this error and the Commission did so. In a November 19, 2007 Order, the Commission agreed with the California Parties that the Commission inadvertently mischaracterized both its prior orders and the Ninth Circuit s decision in Bonneville. 13 The Commission reaffirmed its July 25, 2001 finding that it had revised the market clearing prices that all market participants previously agreed to accept for their sales Id. at 926 (emphasis added). See San Diego Gas & Elec. Co., 121 FERC 61,067 at P 36 (2007) (October 19, 2007 Order) Id. (emphasis added). San Diego Gas & Elec. Co., 121 FERC 61,188 at P 10 (2007) (November 19, 2007 Order). 14 Id. (quoting from the July 25, 2001 Order, 96 FERC at 61,152)

7 BPA and others sought rehearing, arguing, as BPA does here, that: (1) the Commission lacks authority to amend pricing formulations under the []ISO/PX tariffs for non-jurisdictional sellers, 15 and (2) Bonneville s rejection of the Commission s exercise of refund authority over [governmental market participants] makes it impossible for the Commission to argue that the [July 25, 2001 Order] revises the market clearing prices applicable to all market participants. 16 In a May 29, 2009 Order, the Commission rejected BPA s arguments. The Commission held that the Ninth Circuit did not invalidate the Commission s findings that all transactions in the []ISO/PX markets during the refund period should be revised using the MMCP methodology. 17 The Commission stated that: While the Ninth Circuit held that the Commission lacks the authority to order refunds from [governmental market participants], the Ninth Circuit did not disapprove of the Commission s resetting of all prices under the []ISO/PX tariffs. Indeed, the Ninth Circuit implicitly ruled on the issue before us here by suggesting that a remedy may exist for parties who wished to pursue claims against [governmental market participants] in the form of a contract action. 18 The Commission also explained that: Regardless of the limits... placed on the Commission with respect to the ordering of refunds from governmental [market participants], the Commission has the authority to determine San Diego Gas & Elec. Co., 127 FERC 61,191 at P 31 (2009) (May 29, 2009 Order). Id. at P 10. Id. at P 29 (emphasis in original). The MMCP methodology is the formula that the Commission developed to determine what a lawful price would have been in the ISO and PX markets, had sellers such as BPA not manipulated prices. See generally, July 25, 2001 Order. 18 May 29, 2009 Order, 127 FERC at P 29 (emphasis added)

8 the just and reasonable rates that may be charged pursuant to a Commission-jurisdictional tariff such as the ISO/PX tariffs.... [E]ven in a market that includes both jurisdictional public utilities as well as governmental [market participants] selling power pursuant to a Commission- jurisdictional tariff, the Commission has the authority and duty to determine the just and reasonable rates that may be charged under that tariff. The Ninth Circuit did not rule to the contrary; instead, it drew an analogy between the facts in the [Alliant contract] case and Bonneville. For these reasons, we reject BPA[ s] argument that Bonneville undermines the Commission s position that the [July 25, 2001] Order revises market clearing prices applicable to all market participants. 19 Finally, the Commission s May 29, 2009 Order emphasized that the Ninth Circuit only held that the Commission lacked the authority to also order governmental [market participants] to pay the refunds resulting from those reset prices. 20 BPA appealed to the Ninth Circuit, and that appeal is pending. However, an appeal does not stay the effectiveness of a Commission order. 21 The Commission s November 19, 2007 and May 29, 2009 Orders are the law of this case unless and until they are overturned by the court. Additionally, once the Commission transferred the record of the case to the court, the court s jurisdiction to modify, or set aside such order[s] in whole or in part, became exclusive. 22 Moreover, at the Ninth Circuit, the Commission strongly defended its position that it must be able to establish the lawful market-clearing price that all market Id. at PP 31, 32 (emphasis added). Id. at P 44 (emphasis in original). See 16 U.S.C. 825l(c) (2006). See 16 U.S.C. 825l(b)

9 participants, including governmental market participants, agree to accept for their sales through single-auction markets such as those administered by the ISO and PX. As the Commission explained, a ruling to the effect that the Commission was not authorized to reset prices, could hamper the development and maintenance of robust markets for the wholesale sale of electric energy. 23 Noting that such markets play a central role in encouraging investment in new generation and high-voltage transmission lines, 24 the Commission explained that, absent Commission authority to revise market-wide rates: FERC jurisdictional entities would be faced with the possibility of having to pay refunds to their own customers, without being able to secure refunds for their own purchases made at unjust and unreasonable rates. This could cause them to exit auction markets entirely, since there is no way to ensure that they transact only with FERC-jurisdictional entities. 25 This was so, the Commission explained, because unless it resets rates applicable to all sellers, market participants would be unable to use Alliant-type contract actions to enforce uniform market rules. 26 Finally, the Commission stated that a ruling that it cannot reset such rates: could potentially impact the Commission s recently-granted refund authority with respect to sales made by the Bonneville Power Administration, one of the Petitioners here. Section 206(e)(4) of the Federal Power Act, added by the Energy 23 Supp. Br. of FERC at 3, filed in Modesto Irrig. Dist. v. FERC, Nos , et al. (Jan. 4, 2011) (attached hereto as Attachment 1) (Supp. Br. of FERC) Id. Id. at 4-5. Id. at 5-7. The Commission also explained that, absent such authority, it would lack the needed flexibility to fashion appropriate remedies for public utilities unlawful rates. Id. at

10 Policy Act of 2005, authorizes refunds for short term sales made by Bonneville at rates that are higher than the highest just and reasonable rate charged by any other entity, for comparable sales. 16 U.S.C. 824e(e)(4)(B). If the Commission could not retroactively reset rates in cases like this where all sales were found to have taken place at unjust and unreasonable rates, questions could arise as to the scope of Bonneville s refund liability e.g., how should it be calculated when there is no just and reasonable rate for comparable sales during the refund period. 27 Following remand from a related Ninth Circuit opinion, CPUC v. FERC, 28 the Commission established the hearing at issue. 29 On August 19, 2010, the Chief Administrative Law Judge suspended the hearing pending Commission clarification concerning the scope of the hearing. 30 In a May 26, 2011 Order, 31 the Commission clarified the scope of the proceeding and Presiding Judge Young then issued a scheduling order, establishing dates for testimony and a hearing. 32 On July 13, 2011, BPA filed an Emergency Request for Clarification, in which it re-argued many of the same points that the Commission had previously rejected Id. at F.3d 1027 (9th Cir. 2006) (CPUC). San Diego Gas & Elec. Co., 129 FERC 61,147 (2009). See Order of Chief Judge Temporarily Suspending Modified Track II Procedures, Docket No. EL (Aug. 19, 2010) San Diego Gas & Elec. Co., 135 FERC 61,183 (2011). Order Estab. Procedural Sched., Docket No. EL (June 22, 2011)

11 in the May 29, 2009 Order. 33 On August 1, 2011, Judge Young correctly rejected BPA s Emergency Motion. He explained that, The circumstance that no refund liability may be imposed on [BPA] in the context of this proceeding does not prohibit the Commission from investigating the alleged unjustness/unreasonableness of rates [that BPA] charged under the Commission-jurisdictional []ISO and PX tariffs at issue here. 34 He found that nothing in the May 26, 2011 [Order] suggests that [BPA] should be dismissed from participating in the investigation here. 35 On August 15, 2011, BPA filed a motion asking Judge Young to grant an interlocutory appeal of his August 1, 2011 determinations. 36 Judge Young denied that motion on August 17, On August 24, 2011, BPA appealed See Emergency Request for Clarification by the Bonneville Power Admin. and W. Area Power Admin., Docket No. EL (July 13, 2011) (BPA Emergency Motion). 34 Determinations on Mot. for Emergency Clarification at 2-3, Docket No. EL (Aug. 1, 2011) (explaining that this was particularly true since [BPA s] transactions allegedly impacted the market clearing price(s) on which market-wide overcharges and non-governmental entities indicated refund liabilities may be calculated in this proceeding ) Id. at 3. Mot. of the Bonneville Power Admin. and W. Area Power Admin. for Interlocutory Appeal of Aug. 1, 2011 Order, Docket No. EL (Aug. 15, 2011) (BPA Motion for Interlocutory Appeal) Order on Mot. To Permit Interlocking Appeal, Docket No. EL (Aug. 17, 2011). Appeal of Aug. 17, 2011 Order by the Presiding Officer Denying Mot. of Bonneville Power Admin. and W. Power Admin. Mot. [sic] Seeking Interlocutory Appeal, Docket No. EL (Aug. 24, 2011) (BPA Appeal)

12 II. THE MOTIONS COMMISSIONER SHOULD DENY BPA S REQUEST FOR PERMISSION TO SEEK INTERLOCUTORY RELIEF FROM THE COMMISSION A. BPA Does Not Satisfy the Stringent Standards Necessary for Allowing an Interlocutory Appeal to Proceed Interlocutory relief is strongly disfavored. 39 It leads to piecemeal litigation and can slow down the progress of an evidentiary hearing. 40 Thus, the Commission s regulations provide that the Motions Commissioner may permit an interlocutory appeal to go forward only upon a finding of extraordinary circumstances which make prompt Commission review of the contested ruling necessary to prevent detriment to the public interest or to prevent irreparable harm to a person. 41 BPA completely fails to show that any detriment to the public interest or irreparable harm will occur absent extraordinary relief. For this reason alone, the Motions Commissioner must deny the BPA Appeal. Rather than make the showing required by Rule 715, BPA argues that, absent the relief it seeks, it will be put to the expense and trouble of participating in the Commission-ordered hearing. 42 It is black-letter law that neither the cost nor the effort of 39 See Pac. Gas & Elec. Co., 12 FERC 61,226 at 61,553 (1980) ( [I]nterlocutory appeals are disfavored. Primary control of hearing proceedings must remain with the administrative law judge ). 40 See, e.g., S. Natural Gas Co., 37 FERC 61,211 at 61,526 (1986) ( [I]nterlocutory appeals disrupt and delay ongoing proceedings and result in piecemeal review of adjudicated matters ) C.F.R (c)(5) (2011) (These are the same standards that the presiding judge applies under Rule 715(a)). 42 See, e.g., BPA Appeal at 3,

13 participating in a proceeding constitutes irreparable harm. 43 This is particularly true in this case. Here, BPA intervened and has actively participated in every phase of this decade-long proceeding. 44 BPA intends to collect refunds for the sales made to it above the lawful rates, but refuses to refund the overcharges for its sales. BPA s primary objective appears to be to obtain a tactical advantage in the pending contract action rather than to avoid the expense of participating in the evidentiary hearing. BPA s tactical considerations do not constitute extraordinary circumstances. While BPA complains that the California Parties have brought an Allianttype contract action to recover BPA s overcharges, 45 that action relates to BPA s contractual obligation to abide by rates established through the ISO and PX Tariffs and is not before the Commission. 46 Moreover, Judge Young s task is to make findings of fact; the Commission has reserved for itself the determination of which further steps to take 43 See, e.g., Va. Petroleum Jobbers Assoc. v. FPC, 259 F.2d 921, 925 (D.C. Cir. 1958) ( Mere injuries, however substantial in terms of money, time and energy necessarily expendable in the absence of a stay, are not enough to show irreparable injury); see also Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1 (1974) (mere litigation expense does not constitute irreparable injury); Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41 (1938) (expense of hearing claimed to be outside agency s jurisdiction is not irreparable harm); Cities of Anaheim and Riverside, Cal., 692 F.2d 773 (1982) (litigation expenses do not constitute irreparable harm). 44 See Mot. to Intervene and Comments of the Bonneville Power Admin., Docket Nos. EL , et al. (Nov. 22, 2000); Mot. to Intervene by the W. Area Power Admin., Docket Nos. EL , et al. (Oct. 24, 2000) See, e.g., BPA Appeal at 6. The California Parties have settled with seventeen governmental market participants. BPA could avoid further litigation expense and bother by settling its claims. BPA chooses not to

14 once those findings are made. 47 Judge Young reasonably decided not to exclude information concerning relevant parties. This will allow Judge Young and the Commission to make fully-informed decisions based upon substantial evidence. Similarly, BPA fails to demonstrate any detriment to the public interest. To the contrary, the Commission determinations that it seeks through the interlocutory appeal would be detrimental to the public interest. BPA s public interest argument consists of nothing more than BPA s displeasure with the fact that the holdings of the July 25, 2001 Order, Bonneville, the November 19, 2007 Order, the May 29, 2009 Order, and Judge Young s August 1, 2011 Order all demonstrate that the Commission has the authority and duty 48 to reset rates for all sellers in single-price markets such as the ISO and PX. Although BPA attempts to characterize this as the Commission asserting jurisdiction over BPA or setting BPA s rates, 49 the courts and the Commission have already rejected that attempt at legal legerdemain. 50 Rather, once the Commission resets the price that all parties agreed to accept, it is a court that has jurisdiction over BPA s contractual obligation to abide by those rates. A system that seeks to enforce BPA s contractual obligations cannot harm the public interest. Further, requiring BPA to follow the procedures established in the Federal Power Act (FPA), which provide for See, e.g., May 26, 2011 Order, 135 FERC at P 3. May 29, 2009 Order, 127 FERC at P 32. See, e.g., BPA Appeal at See, e.g., Bonneville, 422 F.3d at 926; May 29, 2009 Order 127 FERC at PP

15 comprehensive and orderly review of the presiding judge s and the Commission s orders, can only advance the public interest. 51 In fact, the public interest would be seriously damaged if BPA were to obtain the relief it seeks. This is so for at least two reasons. First, BPA has raised and lost these same arguments, multiple times. At some point, no matter how much a litigant dislikes a ruling, the public interest is best served by finality. 52 Second, as the Commission this year explained in its brief to the Ninth Circuit, the public interest as served by large, regional markets that encourage investment in generation and transmission would be harmed by a determination that the Commission cannot revise the rates that all sellers agreed to accept. The Commission cannot order most governmental market participants to refund overcharges, 53 and, absent a Commission order that revises rates applicable to all market participants, public utility 51 See 16 U.S.C. 825l(b); see also Tenn. Gas Pipeline Co., 37 FERC 61,072 at 61,174 (1986) (denying interlocutory appeal and explaining that the interest of all parties will be better served by leaving the proceedings in the hands of the presiding... judge.... Our action does not deprive any party of its rights. Parties will retain the right to raise these discovery issues if, and when, they except to the initial decision ). See also Rule 715(d) which provides that the ruling of the presiding officer will be reviewed in the ordinary course of the proceeding as if the appeal had not been made ). 18 C.F.R (d). 52 See, e.g., Entergy Nuclear Operations, Inc., 112 FERC 61,117 at P 12 (2005) (explaining that collateral attacks on final orders and relitigation of applicable precedent by parties that were active in the earlier cases thwart the finality and repose that are essential to administrative efficiency, and that, as a result, such attacks are strongly discouraged ) (citations omitted). 53 In 2005, Congress gave the Commission authority to order refunds from the Bonneville Power Administration and from a very small class of governmental market participants. See 16 U.S.C. 206(e)

16 market participants will be unable to bring Alliant-type contract actions to obtain the equivalent refund relief. 54 This is so because Alliant-type contract actions consist of two steps, the first of which would be impossible, absent reset rates. At Step 1, the court looks to see if the Commission revised the tariffed rates. At Step 2, the court determines whether, in fact, the governmental market participant is contractually bound to abide by the tariff, including the Commission s pricing revisions. BPA seeks to make Step 1 impossible. In sum, BPA cannot point to any irreparable harm that will occur if BPA cannot immediately appeal Judge Young s entirely reasonable procedural order. Nor can BPA demonstrate any detriment to the public interest. BPA has not met its burden 55 and is not entitled to the extraordinary relief that it seeks. It may seek normal review at the appropriate time. B. BPA Mischaracterizes the Facts and the Law In any event, the BPA Appeal is meritless and the Commission should reject it if, notwithstanding BPA s failure to meet the extraordinary circumstances standard, the Motions Commissioner were to permit it to proceed. 54 See Bonneville, 422 F.3d at ; Supp. Br. of FERC at 5-7 (attached hereto as Attachment 1). 55 See, e.g., S. Natural Gas Co., 37 FERC 61,211 at 61,257 n.5 (1986) ( as Rule 715 clearly states, the burden is on the applicant to show why it is harmed by leaving the case below at the status quo )

17 1. BPA mischaracterizes the Commission s Bonneville remand orders BPA argues that, on remand from Bonneville, the Commission vacat[ed] the prior orders as they pertain to governmental market participants. 56 In fact, the Commission was careful to limit vacatur to only those portions of its prior orders that required governmental market participants to pay refunds. 57 The Commission was emphatic that it has both the the authority and duty to determine the just and reasonable rates that all market participants agreed to accept. 58 Thus, BPA is simply wrong when it says that the implication of the Commission s orders is to excuse [governmental market participants] from further participation in these proceedings. 59 The Commission s Bonneville remand orders make clear that the Commission should and will determine the lawful rates that all parties agreed to accept for sales through the ISO and PX. 2. BPA mischaracterizes Bonneville BPA argues that Bonneville deprives the Commission of authority to determine the lawful rates that all market participants agreed to accept. 60 BPA is wrong and the Commission has already told BPA that it is wrong. Bonneville determined only See BPA Appeal at 7. See, e.g., October 19, 2007 Order, 121 FERC at P 36 ( we vacate each of the Commission s orders in the California refund proceeding to the extent that they order non-public utility entities to pay refunds ); November 19, 2007 Order, 121 FERC at P 3 (same) May 29, 2009 Order, 127 FERC at P 32. See BPA Appeal at 7. See id. at

18 that the Commission may not order a governmental market participant to actually repay overcharges. 61 The Commission has explained as much to BPA: The Bonneville court ultimately held that the Commission does not have authority to order refunds for wholesale electric energy sales made by governmental [market participants]. It did not find that the Commission did not or should not have revised pricing formulations under the []ISO/PX tariffs on a market-wide basis.... The Ninth Circuit only held that the Commission lacked authority to also order governmental [market participants] to pay the refunds resulting from those reset prices. 62 The D.C. Circuit s recent decision confirms the Commission s conclusion that Bonneville was limited to the Commission s refund authority. In Transmission Agency of Northern California v. FERC, the court reviewed the Commission s approval of an ISO plan to combine two governmental utility districts into a single balancing area for pricing purposes. 63 Governmental market participants relied upon Bonneville to argue that their transactions were beyond the Commission s reach. 64 The D.C. Circuit disagreed: Bonneville simply holds that the Commission may not order a nonjurisdictional entity to issue a refund BPA cites cases that hold that FPA Section 309 does not provide the Commission with authority withheld in other sections of the FPA. 66 Those cases are See, e.g., Bonneville, 422 F.3d at 919. May 29, 2009 Order, 127 FERC at P 44 (emphasis in original) (footnotes omitted). 628 F.3d 538, 540 (D.C. Cir. 2010). See id. Id. at 546. See BPA Appeal at

19 irrelevant to this proceeding where the Ninth Circuit, in CPUC, ordered the Commission to consider, pursuant to FPA Section 309, market-wide relief for the Summer Period. 67 Similarly, the Commission s authority to revise, for the Refund Period, the marketclearing price that all market participants agreed to accept springs not from Section 309, but from Section 206. As the Commission has explained, Section 206 requires the Commission to first determine the lawful rate so that it can order public utilities to refund overcharges. 68 Additionally, BPA mischaracterizes the tariffs at issue in this proceeding, arguing that Judge Young erred by suggesting that the hearing will examine the rates charged by BPA. 69 Contrary to BPA s assertion, it is the ISO and PX Tariffs, which prevent gaming and anomalous behaviors, that are at issue in this proceeding. BPA made relevant sales through the ISO and PX Tariffs. In support of its argument, BPA cites an overturned Commission order 70 in an unrelated proceeding and reiterates its argument, currently on appeal before the Ninth Circuit, 71 that the Commission cannot retroactively change the market-clearing prices set under the ISO and PX tariffs....the refund methodology imposed by the [July 25, 67 See CPUC, 462 F.3d at This was the same panel of judges that had previously decided Bonneville. If they had meant to exclude governmental market participants, they would not have ordered the Commission to consider market-wide relief See Supp. Br. of FERC at 2-3 (attached hereto as Attachment 1).. See BPA Appeal at See BPA Appeal at 11 n.37. The Commission lacks authority to revise its findings, even if it wanted to do so. See 16 U.S.C. 825l(b)

20 2001 Order]... is not and cannot be viewed as constituting a retroactive revision to the tariffs of the ISO and the PX. 72 The Commission has already told BPA, and explained on brief to the Ninth Circuit, that BPA is wrong. 73 Judge Young correctly rejected BPA s demand for one more bite of the apple. 3. BPA mischaracterizes the May 29, 2009 Order BPA asserts that the May 29, 2009 Order is irrelevant to these proceedings. 74 BPA s own insistence that Bonneville limits the Commission s ability to determine the lawful rates for all market participants 75 underscores the relevance of the May 29, 2009 Order. There the Commission rejected that exact same argument by BPA. Commission: The CPUC court succinctly summarized the three issues remanded to the The net effect of our decision is to preserve the scope of the existing FERC refund proceedings, but to expand those refund proceedings to include: (1) tariff violations that occurred prior to October 2, 2000, (2) transactions in the []PX and []ISO markets that occurred outside the 24-hour period specified by FERC, and (3) energy exchange transactions in the []PX and []ISO markets See BPA Appeal at 13. See, e.g., May 29, 2009 Order, 127 FERC at PP 15-28; Br. of Respondent FERC at 30-41, filed in N. Cal. Power Agency v. FERC, Nos , et al. (May 17, 2010) See BPA Appeal at See, e.g., id. at CPUC, 462 F. 3d at

21 As further explained in CPUC, the California Parties had requested market-wide relief for the pre-october 2, 2000 period, and the Commission was required to consider that claim on the merits. 77 BPA made all three types of sales through the ISO and PX markets: Summer Period (May 1, 2000 through October 1, 2000) sales, Refund Period multi-day (greater than twenty-four hour) sales; and Refund Period energy exchanges. The Commission s determination that it has the authority and duty 78 to revise the rates that all market participants should have charged for spot sales during the Refund Period is equally applicable to a determination of market-wide refunds for the Summer Period and to refunds for energy exchanges and multi-day sales. The same reasoning that these sales were made through the ISO and PX Tariffs, that the Commission must determine the lawful rate applicable to all sales in order to calculate refunds from public utilities, and that markets will be harmed if public utilities cannot bring Alliant-type contract actions applies with equal force. The Commission could not reasonably find that it has the authority and duty to revise the rates for all sales on October 2 nd, but that it would ignore unlawful rates charged on October 1 st. And, there is nothing about a sale of energy for twenty-five hours (rather than for twenty-four hours) that would require the Commission to reach a different finding than it has already reached for sales of twentyfour hours See id. at May 29, 2009 Order, 127 FERC at P

22 BPA argues that, for the Summer Period, the Commission s task is not to revise tariff rates, but to enforce them. 79 That is true, but BPA s argument is irrelevant. During the Summer Period, as during the Refund Period, sellers, including governmental market participants, violated tariff rules against manipulating and gaming markets. 80 As during the Refund Period, this caused market-clearing prices (that all sellers received) well above the prices that would have been awarded had sellers complied with the tariffs. As during the Refund Period, the Commission s job is to determine what the rates would have been absent manipulation and gaming, reset the rates accordingly, and then order public utilities to refund their overcharges. And, just as for the Refund Period, if BPA will not honor the rates established by the Commission, then the California Parties may properly pursue the overcharges before the court with appropriate jurisdiction. BPA s retroactive ratemaking and filed rate arguments 81 are similarly irrelevant. As the Commission has explained to BPA, there is no prohibited retroactivity in revising rates when the Commission acts pursuant to FPA Section 206(b), 82 as the Commission has done for the Refund Period. BPA does not like the Commission s answer and has appealed it to the Ninth Circuit. That answer is, however, the law of the See, e.g., BPA Appeal at 11, 14. See, e.g., CPUC, 462 F.3d at See, e.g., BPA Appeal at See, e.g., May 29, 2009 Order, 127 FERC at PP

23 case 83 and BPA is not entitled to overturn it via interlocutory appeal of Judge Young s reasonable procedural determinations. 4. BPA mischaracterizes the role of the Commission and the courts Pointing to the Northwest Power Act and similar statutes, BPA complains that the Commission lacks jurisdiction to make determinations concerning BPA s rates. 84 The Commission has already rejected this argument. In the May 29, 2009 Order, the Commission said: We reject BPA and Western s argument that the Commission exceeded its authority to review BPA and Western s rates when it reset the market clearing price in the []ISO/PX markets for all participants.... Because we are not ordering BPA or Western to pay refunds, BPA and Western s rates are not impacted; therefore the Commission s ability to review BPA and Western s rates is not at issue here. [W]hile the Commission may have limited ability under the Northwest Power Act to review BPA and Western s previouslyapproved rates, this limitation is not relevant to the issue of whether the Commission may under FPA section 206 reset rates in tariffs of jurisdictional entities, the []ISO and PX. 85 BPA has appealed the Commission s determination to the Ninth Circuit. It is not entitled to review of this determination via an interlocutory appeal of Judge Young s procedural order See 16 U.S.C. 825l(c). See BPA Appeal at May 29, 2009 Order, 127 FERC PP

24 III. CONCLUSION Wherefore, the California Parties respectfully request that the Motions Commissioner reject BPA s demand for interlocutory review of Judge Young s determinations. Respectfully submitted, /s/ Catherine M. Giovannoni Richard L. Roberts Jane I. Ryan Catherine M. Giovannoni Steptoe & Johnson LLP 1330 Connecticut Avenue, NW Washington, DC Russell Swartz J. Eric Isken Russell Archer Southern California Edison Company 2244 Walnut Grove Avenue Rosemead, CA Attorneys for Southern California Edison Company /s/ Frank Lindh Frank Lindh Iryna Kwasny Public Utilities Commission of the State of California 505 Van Ness Ave., Room 4300 San Francisco, CA Attorneys for the Public Utilities Commission of the State of California /s/ Stan Berman Stan Berman Eric Todderud Sidley Austin LLP 701 Fifth Avenue, Suite 4200 Seattle, WA Mark D. Patrizio Joshua Levenberg Pacific Gas and Electric Company 77 Beale Street, B30A Post Office Box 7442 San Francisco, CA Attorneys for Pacific Gas and Electric Company /s/ David M. Gustafson Kamala D. Harris Attorney General of the State of California Michael Troncoso Acting Chief Deputy Attorney General Mark Breckler Chief Assistant Attorney General 1300 I Street, Suite 125 Sacramento, CA

25 David M. Gustafson Deputy Attorney General 1515 Clay Street, 20 th Floor Oakland, CA /s/ Kevin J. McKeon Kevin J. McKeon Craig R. Burgraff Judith Cassel Hawke McKeon & Sniscak LLP 100 North Tenth Street, P.O. Box 1778 Harrisburg, PA Attorneys for the People of the State of California ex rel. Kamala D. Harris, Attorney General Dated: August 26,

26 ATTACHMENT I

27 Case: /04/2011 Page: 1 of 12 ID: DktEntry: 67 FEDERAL ENERGY REGULATORY COMMISSION WASHINGTON, D.C January 4, 2011 Via Electronic Filing Molly C. Dwyer, Clerk U.S. Court of Appeals for the Ninth Circuit 95 Seventh Street San Francisco, CA Re: Modesto Irrigation District, et al. v. FERC, Nos , et al. (Oral argument held September 23, 2010) Dear Ms. Dwyer: Respondent Federal Energy Regulatory Commission ( FERC or Commission ) hereby files this supplemental letter brief in response to the Court s order dated November 24, In that order, the Court directed the parties to address two questions: 1. What would be the practical effects of ruling that section 206(b) of the Federal Power Act, 16 U.S.C. 824e(b), does not vest FERC with authority to retroactively reset rates when it determines that refunds are appropriate? 2. Did any entity preserve a challenge to FERC s authority to retroactively reset rates when ordering refunds under section 206(b) of the Federal Power Act? WOULD THERE BE PRACTICAL EFFECTS FROM A RULING THAT FERC S REFUND AUTHORITY DOES NOT INCLUDE THE ABILITY TO RETROACTIVELY RESET RATES? Yes, considerable. Section 206(b) of the Federal Power Act authorizes the

28 Case: /04/2011 Page: 2 of 12 ID: DktEntry: 67 2 Commission (i) to establish a refund effective date, and (ii) after finding that a rate, charge, or classification is unjust, unreasonable, or unduly discriminatory, to determine the amounts which would have been paid under the just and reasonable rate, charge, classification, rule, regulation, practice or contract which the Commission orders to be thereafter observed U.S.C. 824e(b). There is no dispute that section 206(b) empowers the Commission to award refunds back to the refund effective date, and that those refunds must be calculated with reference to a Commission-determined just and reasonable rate. See, e.g., FERC Br. at 31. The only question is whether, in doing so, the Commission resets the rates previously charged during the refund period to a just and reasonable level. Id. Retroactively resetting rates found to be unjust and unreasonable is essential to [the Commission s] ability to exercise [its] statutory authority to order refunds. San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Servs., 127 F.E.R.C. 61,191, P 23 (2009), ER 5. If it were not permitted to reset rates during the refund period, the Commission would be unable to determine what amount would be in excess of a just and reasonable rate, and would thus be incapable of complying with [its] statutory obligations under FPA section 206(b). Id. at P 20, ER 5. See also FERC Br. at A number of additional practical consequences would follow if this Court were to hold that the Commission s refund authority under section 206(b) does not encompass the ability to

29 Case: /04/2011 Page: 3 of 12 ID: DktEntry: 67 3 retroactively revise rates found to be unjust and unreasonable, but instead is limited to a mathematical calculation of the amounts that would have been paid under a hypothetical just and reasonable rate for the refund period. First, such a ruling could hamper the development and maintenance of robust markets for the wholesale sale of electric energy. For more than a decade, the Commission has encouraged and guided the development of organized, competitive markets throughout the nation for the sale of electric energy and associated transmission and ancillary services. See, e.g., Public Utils. Comm n of California v. FERC, 462 F.3d 1027, (9th Cir. 2006) ( PUC of California ) (discussing Order No. 888 open access rulemaking and creation of competitive markets for wholesale electric power and transmission). See also Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County, 128 S.Ct. 2733, (2008) (discussing FERC market-based reforms designed to promote a free market in wholesale electricity ). These markets play a central role in encouraging investment in the new generation assets and highvoltage transmission lines needed to supply power in an economical and efficient manner. Entities subject to FERC s jurisdiction (e.g., public utilities) and those that are not (e.g., municipalities and other governmental entities, such as Petitioners here) are integrated co-participants in these markets. See Transmission Agency of No. California v. FERC, No , 2010 U.S. App.

30 Case: /04/2011 Page: 4 of 12 ID: DktEntry: 67 4 LEXIS 25251, at *13 (D.C. Cir. Dec. 10, 2010) ( the court has accepted that jurisdictional and non-jurisdictional entities are regularly integrated co-participants in modern power markets ). In order to ensure that a uniform set of rules is applied to these markets, all market participants agree by contract to abide by the terms and conditions of the FERC-jurisdictional tariffs and any related FERC rulings. See, e.g., Bonneville Power Administration v. FERC, 422 F.3d 908, 925 (9th Cir. 2005) (noting that it is true that governmental entities entered into agreements with [the Independent System Operator] and [California Power Exchange] that obligated them to abide by the ISO and CalPX tariffs ). If the Court were to rule that Commission refund orders do not retroactively modify those tariffs, then two sets of rules would apply in the market. Sales by non-jurisdictional market participants would only be subject to the terms of the relevant tariff regardless of whether those terms are found to be unjust and unreasonable while sales by FERC-jurisdictional entities would be subject to an additional set of regulations, untethered from the tariff itself, designed to ensure just and reasonable rates. FERC-jurisdictional entities would be faced with the possibility of having to pay refunds to their own customers, without being able to secure refunds for their own purchases made at unjust and unreasonable rates. This could cause them to exit auction markets entirely, since there is no way to ensure that they transact only

31 Case: /04/2011 Page: 5 of 12 ID: DktEntry: 67 5 with FERC-jurisdictional entities. For the same reasons, FERC-jurisdictional entities may refuse to enter into long-term power sales contracts with governmental entities. And as the Court has recognized, long-term forward contracts are prevalent in, and critical to the stability of, centralized power markets. See PUC of California, 462 F.3d at 1039 (noting that 80% of transactions are made through long term forward contracts, [which] lend[] stability to the markets ); Morgan Stanley, 128 S.Ct. at 2749 (noting the important role of contracts in the Federal Power Act, which are a key source of stability ). Second, a holding that FERC lacks authority to reset rates when ordering refunds could inhibit the use of contract actions to enforce uniform market rules. The use of contracts to ensure that one set of rules governs centralized power markets is not novel. Bonneville, 422 F.3d at 925. In the MAPP proceedings which involved a power pool that included both public utility and non-public utility transmission owners the Commission determined that portions of the power pool s tariff violated the Federal Power Act and ordered FERCjurisdictional entities to pay refunds, but found that it lacked authority to order refunds by governmental entities. Mid-Continent Area Power Pool, 89 F.E.R.C. 61,135, at 61,385 (1999). See also Bonneville, 422 F.3d at (discussing MAPP proceedings). Participants in the power pool subsequently brought a contract action against

32 Case: /04/2011 Page: 6 of 12 ID: DktEntry: 67 6 the Nebraska Public Power District ( Nebraska District ), a governmental market participant that refused to make any refunds. The district court noted that, although the Nebraska District was not subject to FERC regulation, it was, as a signatory to the market participation contract, bound by revisions to the contract ordered by FERC regulation. Alliant Energy, Inc. v. Neb. Pub. Power Dist., Civ. No , 2001 U.S. Dist. LEXIS 17802, at *10 (D. Minn. Oct. 18, 2001). The court found that the Commission s refund order nullified certain terms of the power pool s tariff, id. at *12 a nullification... [that] was retroactive to the date FERC accepted the tariff subject to refund. Id. at *13. The Eight Circuit affirmed, noting that the Nebraska District bound itself [by contract] to any FERC-ordered modification of the [contract] despite the fact that FERC normally would not be able to order [the Nebraska District] to do anything. Alliant Energy v. Neb. Pub. Power Dist., 347 F.3d 1046, 1050 (8th Cir. 2003). In requiring the Nebraska District to fulfill its contractual obligations, the court was not enforcing the FERC order, bur rather an agreement, which [the Nebraska District] freely entered. Id. See also Transmission Agency of N. Cal., 2010 U.S. App. LEXIS at *13, *17 (noting that the mere presence of a governmental entity [does not] defeat [FERC s] jurisdiction over a public utility, and upholding FERC orders that regulat[ed] only the []ISO s rates, even where such regulation had an incidental effect on governmental entities).

33 Case: /04/2011 Page: 7 of 12 ID: DktEntry: 67 7 A ruling by this Court that FERC s refund authority does not include the ability to retroactively revise tariff provisions found to be unjust and unreasonable would, in all likelihood, preclude contract actions against governmental market participants that have agreed to abide by FERC-jurisdictional tariffs. That would, of course, nullify the Court s suggestion in Bonneville that a contract claim may provide the remedy for unjust and unreasonable rates charged by governmental entities. 422 F.3d at 925. And such a result would put this Court at odds with the Eighth Circuit, which found that governmental entities are bound by market participation agreements, even when such contracts (or related tariffs) are retroactively revised by FERC orders. Third, such a ruling could limit the Commission s flexibility in fashioning appropriate remedies for unjust and unreasonable rates. In this case, the Commission established one rate methodology for prospective sales (i.e., those after June 2001), and a separate methodology applied retroactively to sales made during the October 2000-June 2001 refund period. See FERC Br. at (discussing refund orders); PUC of California, 462 F.3d at (discussing and affirming rate methodologies). If the Court were to adopt Petitioners position i.e., that FERC s refund authority is limited to calculating the difference between the prospective just and reasonable rate and that actually charged during the refund period this remedial flexibility could be diminished.

34 Case: /04/2011 Page: 8 of 12 ID: DktEntry: 67 8 Fourth, such a ruling could potentially impact the Commission s recentlygranted refund authority with respect to sales made by the Bonneville Power Administration, one of the Petitioners here. Section 206(e)(4) of the Federal Power Act, added by the Energy Policy Act of 2005, authorizes refunds for shortterm sales made by Bonneville at rates that are higher than the highest just and reasonable rate charged by any other entity for comparable sales. 16 U.S.C. 824e(e)(4)(B). If the Commission could not retroactively reset rates in cases like this where all sales were found to have taken place at unjust and unreasonable rates, questions could arise as to the scope of Bonneville s refund liability e.g., how should it be calculated when there is no just and reasonable rate for comparable sales during the refund period? Cf. San Diego Gas & Elec. Co., 127 F.E.R.C. at P 20 ( Absent our resetting of rates during the refund period, we would be unable to determine what amount would be in excess of a just and reasonable rate ), ER 5. DID ANY ENTITY PRESERVE A CHALLENGE TO THE COMMISSION S AUTHORITY TO RESET RATES WHEN ORDERING REFUNDS? No. In its July 2001 refund order, the Commission made clear that it was resetting the marketing clearing price when ordering refunds: Our action thus revises the market clearing prices that all market participants previously agreed to accept for their sales. San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Servs., 96 F.E.R.C. 61,120, 61,152 (2001), ER 151. See also FERC Br.