The People of the State of Ca v. Ferc , 784 F.3d 1267 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
THE PEOPLE OF THE STATE OF No. 12-71958
CALIFORNIA, ex rel. Kamala D.
Harris, Attorney General; PUBLIC FERC No.
UTILITIES COMMISSION OF THE EL02-71-036
STATE OF CALIFORNIA; PACIFIC GAS
& ELECTRIC COMPANY; SOUTHERN
CALIFORNIA EDISON; OPINION
Petitioners,
v.
FEDERAL ENERGY REGULATORY
COMMISSION,
Respondent,
SHELL ENERGY NORTH AMERICA
(US), L.P.; TRANSCANADA ENERGY
LTD.; MPS MERCHANT SERVICES,
INC.; MIECO, INC.; HAFSLUND
ENERGY TRADING LLC; MERRILL
LYNCH CAPITAL SERVICES, INC.;
KOCH ENERGY TRADING, INC.;
ILLINOVA CORPORATION;
COMMERCE ENERGY INC.;
ALLEGHENY ENERGY SUPPLY
COMPANY LLC;
Respondents-Intervenors.
2 STATE OF CALIFORNIA V. FERC
On Petition for Review of an Order of the
Federal Energy Regulatory Commission
Argued and Submitted
February 11, 2015—San Francisco, California
Filed April 29, 2015
Before: Sidney R. Thomas, Chief Judge and M. Margaret
McKeown and Richard R. Clifton, Circuit Judges.
Opinion by Chief Judge Thomas
SUMMARY*
Federal Energy Regulatory Commission
The panel granted a petition for review brought by the
people of the state of California and related parties
challenging a series of orders issued by the Federal Energy
Regulatory Commission on remand following the panel’s
decision in California ex rel. Lockyer v. FERC, 383 F.3d
1006 (9th Cir. 2004), concerning market-based energy tariffs.
In Lockyer, the panel held that FERC could authorize
market-based energy tariffs, so long as that regulatory
framework incorporated both an ex ante marker power
analysis and enforceable post-approval transaction reporting.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
STATE OF CALIFORNIA V. FERC 3
The panel remanded because FERC had not appropriately
implemented the market-based tariff.
The panel held that FERC structured the remand
proceedings in a manner contrary to the terms of the Lockyer
decision. The panel further held that FERC omitted a
necessary component of the market-based tariff approved in
Lockyer by insisting on proof of market concentration under
its hub-and-spoke test as a precondition to any relief for
reporting deficiencies. The panel held that reliance on the
hub-and-spoke market share measure alone immunized sellers
from any consequence for failure to report market
transactions and ignored the agency’s statutory charge under
§ 205 of the Federal Power Act: to determine whether sellers
charged a “just and reasonable” rate. The panel remanded for
further proceedings.
COUNSEL
Kevin J. McKeon (argued), Judith D. Cassel, and Whitney E.
Snyder, Hawke McKeon & Sniscak LLP, Harrisburg,
Pennsylvania; Kamala D. Harris, Attorney General of
California, Mark Breckler, Chief Assistant Attorney General,
and Martin Goyette, Senior Assistant Attorney General, San
Francisco, California; David M. Gustafson, Deputy Attorney
General, Oakland, California, for Petitioner.
Frank R. Lindh, Sarah R. Thomas, Christopher E. Clay,
Candace J. Morey, and Charlyn A. Hook, Public Utilities
Commission of the State of California, San Francisco,
California, for Petitioner Public Utilities Commission of the
State of California.
4 STATE OF CALIFORNIA V. FERC
Richard L. Roberts and Catherine M. Giovannoni, Steptoe &
Johnson LLP, Washington, D.C.; Russell C. Swartz, J. Eric
Isken, and Russell Archer, Southern California Edison Co.,
Rosemead, California, for Petitioner Southern California
Edison Company.
Stan Berman, Eric Todderud, and Heather Curlee, Sidley
Austin LLP, Seattle, Washington; Mark D. Patrizio and
Joshua Levenberg, Pacific Gas and Electric Co., San
Francisco, California, for Petitioner Pacific Gas and Electric
Company.
Beth G. Pacella (argued), Senior Attorney, David L.
Morenoff, Acting General Counsel, and Robert H. Solomon,
Solicitor, Federal Energy Regulatory Commission,
Washington, D.C., for Respondent.
David C. Frederick (argued), Scott H. Angstreich, and
Brendan J. Crimmins, Kellogg, Huber, Hansen, Todd, Evans
& Figel, P.L.L.C., Washington, D.C., for Respondents-
Intervenors Shell Energy North America (US), L.P.,
TransCanada Energy Ltd., MPS Merchant Services, Inc.,
MIECO, Inc., Hafslund Energy Trading LLC, Merrill Lynch
Capital Services, Inc., Koch Energy Trading, Inc., Illinova
Corporation, Commerce Energy Inc., and Allegheny Energy
Supply Company LLC.
Jeffrey D. Watkiss, McDermott Will & Emery LLP,
Washington, D.C., for Respondent-Intervenor Shell Energy
North America (US), L.P.
Kenneth L. Wiseman, Mark F. Sundback, William M.
Rappolt, and Allison E. Hellreich, Andrews Kurth LLP,
STATE OF CALIFORNIA V. FERC 5
Washington, D.C., for Respondent-Intervenor TransCanada
Energy Ltd.
John N. Estes III and Karis Anne Gong, Skadden, Arps, Slate,
Meagher & Flom LLP, Washington, D.C., for Respondents-
Intervenors MPS Merchant Services, Inc. and Illinova
Corporation.
Steven A. Weiler and Robert C. Fallon, Stinson Leonard
Street LLP, Washington, D.C., for Respondent-Intervenor
MIECO, Inc.
Stephen Angle and Damien R. Lyster, Vinson & Elkins
L.L.P., Washington, D.C., for Respondent-Intervenor
Hafslund Energy Trading LLC.
Catherine M. Krupka and Alexandra D. Konieczny,
Sutherland Asbill & Brennan LLP, Washington, D.C., for
Respondents-Intervenors Merrill Lynch Capital Services, Inc.
and Commerce Energy Inc.
William E. Schroeder and Aliya M. McLendon, Sullivan &
Cromwell, LLP, New York, New York, for Respondent-
Intervenor Koch Energy Trading, Inc.
Gordon A. Coffee and Steffen N. Johnson, Winston & Strawn
LLP, Washington, D.C., for Respondent-Intervenor
Allegheny Energy Supply Company LLC.
6 STATE OF CALIFORNIA V. FERC
OPINION
THOMAS, Chief Judge:
Petitioners, the people of the state of California through
their Attorney General Kamala D. Harris, the California
Public Utilities Commission, Pacific Gas & Electric
Company, and Southern California Edison (“the California
Parties”), seek review of a series of orders issued by the
Federal Energy Regulatory Commission (“FERC” or “the
Commission”) on remand following our decision in
California ex rel. Lockyer v. FERC (“Lockyer”), 383 F.3d
1006 (9th Cir. 2004). There, we held that FERC may
authorize market-based energy tariffs, so long as that
regulatory framework incorporates both an ex ante market
power analysis and enforceable post-approval transaction
reporting. Id. at 1014. We remanded the case because FERC
had not appropriately implemented the market-based tariff.
Id. at 1015.
In this case, the California Parties petition for review of
FERC’s actions after our remand, claiming that FERC failed
to follow Lockyer and violated the Federal Power Act
(“FPA”) by requiring proof of excessive market share as a
necessary condition for relief for transaction reporting
violations.
We conclude that FERC structured the remand
proceedings in a manner contrary to the terms of our Lockyer
decision. Enforceable transaction reporting is a necessary
ingredient of a lawful market-based tariff. Id. By insisting
on proof of market concentration under its hub-and-spoke test
as a precondition to any relief for reporting deficiencies,
FERC omitted a necessary component of the market-based
STATE OF CALIFORNIA V. FERC 7
tariff approved in Lockyer. Reliance on the hub-and-spoke
market share measure alone immunizes sellers from any
consequence for failure to report market transactions and
ignores the agency’s statutory charge under § 205 of the FPA:
to determine whether sellers charged a “just and reasonable”
rate. 16 U.S.C. § 824d(a). We therefore grant the petition for
judicial review and remand to the agency for further
proceedings.
I
The essence of the California Parties’ complaint is
presented in some detail at the outset of our Lockyer decision.
See 383 F.3d at 1008–11. A summary of our Lockyer
decision and an exposition of events that transpired before
FERC on remand follows.
A
In Lockyer, we denied the California Parties’ facial
challenge to market-based ratemaking. Id. at 1013. We held
that the agency’s segmented approach, which requires an ex
ante finding of an absence of market power coupled with
regular transaction reports, does not per se violate the FPA.
Id. at 1012–13. However, we granted the California Parties’
as-applied challenge, holding that FERC’s enforcement and
review of market-based rates during the 2000–01 California
energy crisis was unlawful. Id. at 1014. We held that FERC
abdicated its regulatory responsibility by summarily
dismissing electricity wholesalers’ failure to comply with
reporting requirements. Id. at 1014–15. “[B]ecause the
reporting requirements [are] an integral part of a market-
based tariff that . . . pass[es] legal muster, FERC cannot
dismiss the requirements as mere punctilio.” Id. at 1015. We
8 STATE OF CALIFORNIA V. FERC
remanded to FERC to reconsider the California Parties’ claim
for a refund of the amount sellers charged in excess of just
and reasonable rates during the crisis. Id. at 1018.
B
On remand, FERC ordered
a trial-type hearing before an ALJ to make
findings of fact regarding whether, based on
the facts and circumstances associated with
each individual seller, that seller’s improper
or untimely filing of its quarterly transaction
reports masked an accumulation of market
power such that the market rates were unjust
and unreasonable, during the relevant period
....
California ex rel. Lockyer v. B.C. Power Exch. Corp.1 (“Mar.
21, 2008 Order”), 122 FERC ¶ 61,260, 62,504–05 (Mar. 21,
2008). FERC defined the threshold issue for the ALJ
proceeding as whether sellers accumulated market power and
set parameters for the ALJ to use in conducting that inquiry.
Id. at 62,505–06. Specifically, FERC limited the market
power assessment to whether a seller, under the hub-and-
spoke test, “did or did not gain an increased generation
market share sufficient to give it the ability to exercise market
power and cause market-based rates to be unjust and
1
Because all remand proceedings are captioned thusly before the
agency, to avoid confusion, hereinafter each is denominated by reference
to the date and title of the document.
STATE OF CALIFORNIA V. FERC 9
unreasonable as a result.”2 Id. at 62,505. Other claims of
tariff violations, such as gaming and anomalous bidding
behavior, were off the table. Id. at 62,505 n.65. The
Commission reserved determination of the remedy for
violations by each particular seller, if any. Id. at 62,505.
The California Parties urged FERC to reconsider its
definition of the objective of the ALJ proceeding, claiming
that the Commission’s decision to focus on identifying
sellers’ market power based on market share levels stood
contrary to the FPA, our remand instructions in Lockyer, and
agency precedent. See Oct. 6, 2008 Order, 125 FERC
¶ 61,016, 61,040. The state claimed that FERC’s initial order
on remand unjustifiably collapsed the two-tiered approach
approved in Lockyer by conflating the ex ante market power
determination and the ex post reporting requirement. Id. It
identified FERC decisions holding that the purpose of
market-based rate quarterly transaction reporting is to meet
the filed rate requirements of the FPA, evaluate the
reasonableness of rates, and monitor sellers’ market power on
an ongoing basis. Id. Furthermore, the California Parties
argued that the hub-and-spoke test prescribed by the agency
was an inadequate screen for market power. Id.
FERC denied rehearing. Id. The Commission declared
the state’s claims an impermissible collateral attack on the
market power analysis FERC used at the time of the
transactions and explained that the purpose of market-based
2
The hub-and-spoke test considers a seller’s market share of installed
and uncommitted generation capacity in its control area market and each
control area market to which it is directly interconnected and finds the
potential for market power where the seller holds a market share of 20
percent or more in each relevant market. Id. at 62,505 n.70.
10 STATE OF CALIFORNIA V. FERC
quarterly reports “is not to re-run the Commission’s market
power screens, but rather . . . to monitor and evaluate market
concentration on an ongoing basis.” Id. at 61,040–41. FERC
rejected the state’s suggestion that the hub-and-spoke test was
an inappropriate screen for market power, claiming that it
must use only those standards in effect at the time of the
reviewed transactions. Id. at 61,041–42.
The California Parties also argued that FERC erred in its
March 21, 2008 Order by excluding evidence of other tariff
violations and market manipulation from the ALJ proceeding.
Id. at 61,042. The California Parties sought to introduce
evidence of alternative analyses of market power and market
function, based on information presented in sellers’ reports,
to show a nexus between deficient reporting, market function,
and market power. Id. FERC denied rehearing on this issue
because other potential seller misconduct, such as gaming and
anomalous bidding, was the subject of another proceeding
before the agency, which it determined should remain distinct
and separate. Id.
Shortly thereafter, the California Parties again requested
rehearing regarding the evidentiary basis for its reporting
allegations. Dec. 28, 2009 Order, 129 FERC ¶ 61,276,
62,530. The California Parties again sought to introduce
evidence of market manipulation and tariff violations,
explaining that these concerns were not adequately addressed
by other proceedings before FERC. Id. FERC denied the
request as an impermissible request for rehearing of an order
denying rehearing. Id. The Commission also reasoned that
the California Parties’ argument about the scope of evidence
in the remand proceeding was incongruous with evidence of
deficient reporting presented in the original complaint. Id. at
62,531. The Commission definitively limited the allegations
STATE OF CALIFORNIA V. FERC 11
to be considered in the ALJ proceedings to the California
Parties’ reporting and hub-and-spoke market power claims,
not allegations of market manipulation or other measures of
market power. Id.
C
After briefing and submission of written testimony, but
without hearing argument, the ALJ granted sellers’ motions
for summary disposition in an Initial Decision issued March
18, 2010. 130 FERC ¶ 63,017, 66,159–62. After crediting
the California Parties’ evidence of reporting violations, the
ALJ ruled in the sellers’ favor because the state did not
demonstrate that sellers accumulated market power under the
hub-and-spoke test. Id. at 66,162. The ALJ reasoned that
“[a]bsent a showing by the California Parties in their direct
testimony that each [seller] possessed generation market
power under the Commission’s hub-and-spoke test, no
material factual issues remain for hearing on the central issue
in this proceeding.” Id. at 66,195. The ALJ set aside the
California Parties’ seller misconduct and alternative market
power analyses as outside the scope of the proceeding and
contrary to sellers’ due process right to notice. Id. at 66,194.
In a May 4, 2011 Order, the Commission affirmed the
ALJ decision. 135 FERC ¶ 61,113. The Commission rested
on its previous rulings on the California Parties’ exceptions
and objections. Id. at 61,655–56. FERC reasoned, “[g]iven
that the issue of whether suppliers accumulated market power
was the threshold issue in this proceeding, and given the
California Parties’ failure to offer any evidence to
demonstrate the accumulation of market power under the
hub-and-spoke standard, summary disposition was
appropriate.” Id. at 61,655. The Commission later denied the
12 STATE OF CALIFORNIA V. FERC
California Parties’ request for rehearing. June 13, 2012
Order, 139 FERC ¶ 61,211. This petition followed shortly
thereafter.
II
We have jurisdiction to hear this petition for judicial
review pursuant to § 313(b) of the FPA. 16 U.S.C. § 825l(b).
The California Parties timely filed this petition on June 20,
2012. See id. “Upon the filing of such petition such court
shall have jurisdiction, which upon the filing of the record
with it shall be exclusive, to affirm, modify, or set aside such
order in whole or in part.” Id.
We review FERC decisions to determine whether they are
“arbitrary, capricious, an abuse of discretion, unsupported by
substantial evidence, or not in accordance with the law.” Cal.
Dep’t of Water Res. v. FERC, 341 F.3d 906, 910 (9th Cir.
2003). “The finding of the Commission as to the facts, if
supported by substantial evidence, shall be conclusive.”
16 U.S.C. § 825l(b). Questions of law are subject to de novo
review. Am. Rivers v. FERC, 201 F.3d 1186, 1194 (9th Cir.
1999). FERC’s interpretation of the FPA is reviewed under
the deferential framework in Chevron U.S.A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).
Port of Seattle, Wash. v. FERC, 499 F.3d 1016, 1026 (9th Cir.
2007). However, “Chevron does not require blind deference;
the Supreme Court has articulated a more thorough and
nuanced approach.” Lockyer, 383 F.3d at 1016. When
considering “whether Congress has directly spoken to the
precise question at issue,” Chevron, 467 U.S. at 842, this
court is guided by statutory context and “common sense as to
the manner in which Congress is likely to delegate a policy
STATE OF CALIFORNIA V. FERC 13
decision.” Lockyer, 383 F.3d at 1016–17 (citation and
internal quotation marks omitted).
III
Adjudication of the petition turns on interpretation of
§ 205 of the FPA, which commands that “any . . . rate or
charge that is not just and reasonable is hereby declared to be
unlawful.” 16 U.S.C. § 824d(a). Although “[o]ur role in
determining whether rates are just and reasonable is limited,”
Mont. Consumer Counsel v. FERC, 659 F.3d 910, 918 (9th
Cir. 2011), in Lockyer, we held that § 205 authorizes FERC
to order retroactive refunds for seller reporting failures, based
on the “integral nature” of reporting requirements to a lawful,
i.e., “just and reasonable,” market-based tariff, 383 F.3d at
1014–16. The structure of the remand proceedings is not
square with this conclusion. We remanded the matter to
FERC “to reconsider its remedial options in the first
instance,” id. at 1018, observing that “FERC may elect not to
exercise its remedial discretion by requiring refunds, but it
unquestionably has the power to do so,” id. at 1016. FERC
abdicated its discretion by structuring the remand proceedings
in a manner that prevented any meaningful review of sellers’
failure to file transaction reports during the crisis.
FERC held that the California Parties’ “failure to offer
any evidence to demonstrate the accumulation of market
power under the hub-and-spoke standard” foreclosed relief.
May 4, 2011 Order, 135 FERC ¶ 61,113, 61,655. By granting
summary disposition to the sellers, the Commission denied
the California Parties’ claims that reporting deficiencies
violated the FPA and justified refunds of amounts sellers
charged in excess of the just and reasonable rates. By
structuring the remand proceedings in this manner,
14 STATE OF CALIFORNIA V. FERC
predicating the “just and reasonable” inquiry required under
§ 205 on accumulation of market power under the hub-and-
spoke test, FERC insulated sellers from liability for reporting
violations and thereby ran afoul of the FPA. FERC casts
market power identified solely through excessive market
share as a necessary condition to conclude that a seller’s rate
is unjust or unreasonable. This view undercuts the essential
importance of transaction reporting and the distinct purpose
of each prong of a viable market-based tariff system. In
Lockyer, when we deemed FERC’s market-based ratemaking
approach a viable extension of the agency’s authority under
the FPA, we went to great lengths to distinguish market-based
regulatory schemes rejected by the Supreme Court in MCI
Telecommunications Corp. v. AT&T, 512 U.S. 218 (1994),
and Maislin Industries U.S., Inc. v. Primary Steel, Inc.,
497 U.S. 116 (1990). See Lockyer, 383 F.3d at 1013. “The
structure of the tariff complied with the FPA, so long as it
was coupled with enforceable post-approval reporting that
would enable FERC to determine whether the rates were ‘just
and reasonable’ and whether market forces were truly
determining the price.” Id. at 1014. “[T]he crucial difference
between MCI/Maislin and the present circumstances is the
dual requirement of an ex ante finding of the absence of
market power and sufficient post-approval reporting
requirements.” Id. at 1013 (emphasis in original).
Our discussion of the California Parties’ as-applied
challenge in Lockyer underscores the independence and
import of each prong of the analysis. In testing FERC’s claim
that reporting violations were mere compliance issues, we
observed that each prong of the framework serves a different
purpose. Enforceable post-approval reporting is necessary to
enable FERC to determine whether sellers’ rates complied
with § 205 and to investigate whether market forces truly
STATE OF CALIFORNIA V. FERC 15
determined the rate charged. Id. at 1014. Without “active
ongoing review” brought about by an enforceable transaction
reporting requirement, “the only arguably serious regulatory
screening that exists is FERC’s initial determination with
respect to a seller’s market power—a determination that may
bear little or no relation to the realities of subsequent
circumstances.” Id. at 1017. We went on to observe that the
FPA remedial scheme comports only with a dual-track
regulatory framework because market-based ratemaking
premised solely on an initial analysis of market power would
eliminate retrospective refund relief under the Act. Id.
FERC erred by structuring the remand proceedings to
focus exclusively on market-share evidence of market power.
By doing so, FERC unlawfully administered the market-
based tariff. “If the ability to monitor the market, or gauge
the ‘just and reasonable’ nature of the rates is eliminated, then
effective federal regulation is removed altogether. Without
the required filings, neither FERC nor any affected party may
challenge the rate. Pragmatically, under such circumstances,
there is no filed tariff in place at all.” Id. at 1015–16.
In addition to ignoring our remand instructions, FERC’s
interpretation is at odds with the position it took in the initial
appeal. There, “FERC . . . affirmed . . . that it is not
contending that approval of a market-based tariff based on
market forces alone would comply with the FPA or the filed
rate doctrine.” Id. at 1013. FERC argued that the presence of
reporting requirements differentiated its market-based tariffs
from those rejected by the Court in MCI and Maislin, and this
court agreed. Id. In fact, even before Lockyer, in its initial
order on the complaint FERC stated that “[a]fter-the-fact
quarterly reports provide a means for spotting price trends,
discriminatory patterns, or other indicia of the exercise of
16 STATE OF CALIFORNIA V. FERC
market power.” May 31, 2002 Order, 99 FERC ¶ 61,247,
62,063. As we said once before, “FERC cannot have it both
ways.” Lockyer, 383 F.3d at 1016. “If the tariff is interpreted
as FERC urges here, then the tariff runs afoul of Maislin, the
filed rate doctrine, and the FPA.” Id.
FERC argues that the reasonableness of market-based
rates charged by sellers without market power, as measured
by market share, cannot be challenged. It therefore claims
that following an alleged reporting violation, analysis of a
seller’s market share alone is sufficient. For this proposition
the Commission cites a paragraph in Lockyer that describes
two D.C. Circuit decisions approving market-based
ratemaking in the market for natural gas and wholesale
electricity. See id. at 1012–13. However, FERC takes that
passage out of context. Those cases involve a traditional
bilateral transaction, that is, a bargained-for exchange
between an interested buyer and willing seller. Id. That is
not directly analogous to the factual circumstances here
involving clearinghouse sales during the energy crisis. See
id. at 1008–10.
FERC also cites Blumenthal v. FERC, 552 F.3d 875, 882
(D.C. Cir. 2009), but makes no effort to explain its relevance
to its claim that the rate charged by sellers without hub-and-
spoke market power is per se “just and reasonable.”
Blumenthal concerns a different factual circumstance:
Connecticut’s challenge to FERC’s approval of a “‘hybrid’
market, in which some electricity generators sell power at
regulated rates and others at market rates.” Id. at 878. Even
so, the D.C. Circuit relied on FERC’s requirement of
“quarterly and annual reports assessing the competitiveness
of the market based on transactional data reflecting the
behavior of each market participant.” Id. at 882. The court
STATE OF CALIFORNIA V. FERC 17
explained that its holding approving of the “hybrid” market
structure comports with Lockyer by requiring “[r]egular
reports based on ‘transaction-specific data[.]’” Id. “FERC
violates its oversight duty when it imposes no reporting
requirements on generators and instead resorts to ‘largely
undocumented reliance on market forces as the principal
means of rate regulation.’” Id. (quoting Farmers Union Cent.
Exch., Inc. v. FERC, 734 F.2d 1486, 1508 (D.C. Cir. 1984)
(footnote omitted)). Because it recognizes the necessity and
intrinsic value of transactional reporting, Blumenthal does not
support the proposition FERC presents.
The record on remand demonstrates that FERC did not
“examine the relevant data and articulate a satisfactory
explanation for its action” and thereby did not meet its burden
to engage in reasoned decisionmaking. Motor Vehicle Mfrs.
Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983). The manner in which FERC structured the
proceedings on remand is arbitrary, capricious, and otherwise
not in accordance with law. The agency collapsed a lawful
two-step market-based tariff to an impermissible one-step
inquiry focused solely on whether a seller controlled 20
percent of the generation market in its hub-and-spoke area.
FERC may not limit its review of the reporting deficiencies
to the hub-and-spoke market power screen. To fully consider
whether a reported rate was just and reasonable, the agency
must consider claims and evidence beyond the hub-and-spoke
analysis.
FERC attempts to justify its position by claiming that the
California Parties’ claims have been addressed in other
proceedings. For example, FERC stated that “this proceeding
focuses solely on violations of our quarterly transaction
reports as a basis for potential refund liability . . . this is not
18 STATE OF CALIFORNIA V. FERC
a proceeding to address other potential tariff violations (such
as gaming and anomalous bidding behavior), which is the
subject of the CPUC proceeding.”3 Oct. 6, 2008 Order, 125
FERC ¶ 61,016, 61,042; see also Mar. 18, 2010 Initial
Decision, 130 FERC ¶ 63,017, 66,194; Mar. 21, 2008 Order,
122 FERC ¶ 61,260, 62,505 n.65. The California Parties
counter that the agency is playing a shell game, artificially
limiting the scope of these proceedings and promising that
excluded claims will be addressed elsewhere. They argue
that this limitation excluded their evidence that sellers
exercised market power in ways not detected by the 20-
percent hub-and-spoke test. Specifically, the California
Parties argue that evidence of sellers’ actual market positions,
gaming, anomalous bidding behavior, and other market
manipulation is relevant to determining whether rates were
“just and reasonable” and whether “market forces were truly
determining the price.”
An agency errs when it “entirely fail[s] to consider an
important aspect of the problem.” Motor Vehicle Mfrs. Ass’n,
463 U.S. at 43. FERC framed the issue in this appeal as
whether deficient reporting masked an accumulation of
market power such that the market rates charged were unjust
and unreasonable. By requiring the California Parties to
demonstrate that a seller exercised market power solely by
reference to the hub-and-spoke test, FERC ignored other
important aspects of the problem of market power masked by
3
Pub. Utils. Comm’n of the State of Cal. v. FERC (“CPUC”), 462 F.3d
1027 (9th Cir. 2006). Before the agency, CPUC is denominated San
Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services Into
Markets Operated by the California Independent System Operator
Corporation and the California Power Exchange (“SDG&E”). SDG&E,
149 FERC ¶ 61,116, 2014 WL 5860025 (Nov. 10, 2014).
STATE OF CALIFORNIA V. FERC 19
deficient reporting. This is so regardless of the
Commission’s consideration of manipulation claims in
CPUC. FERC entered a final order authorizing refunds for
manipulative tariff violations in the CPUC remand
proceedings on November 10, 2014. SDG&E, 149 FERC
¶ 61,116. These proceedings did not concern the nexus
between manipulative conduct and reporting violations,
however. SDG&E, 135 FERC ¶ 61,183, 62,088 (May 26,
2011). The existence of widespread reporting violations and
market manipulation by sellers during the 2000–01 crisis has
been established. See Lockyer, 383 F.3d at 1014
(“[N]on-compliance with FERC’s reporting requirements was
rampant throughout California’s energy crisis. FERC itself
has acknowledged that during the height of the energy crisis
the quarterly reports of several major wholesalers failed to
include the transaction-specific data through which the
agency at least theoretically could have monitored the
California energy market[.]”); SDG&E, 149 FERC ¶ 61,116,
2014 WL 5860025 at *13 (finding “34,020 . . . transactions
that constituted tariff violations, more than 20,000 affected
the market clearing prices”). While the nexus of these
findings may be unclear at this juncture, the merits of that
issue are not now before the court. FERC granted summary
disposition without considering this argument or any
evidence in support. We therefore remand to the agency with
instructions to evaluate reporting deficiencies and related
market-based rates to determine whether they were unjust and
unreasonable in light of the California Parties’ nexus claims.
The California Parties’ manipulation claims are integral to
their allegation that reporting deficiencies fostered the subtle
accumulation of market power and resulted in an excessive
rate. This claim has not yet been tested by FERC and it is
most appropriate for the agency to resolve the question in the
20 STATE OF CALIFORNIA V. FERC
first instance. See SEC v. Chenery Corp., 318 U.S. 80, 88
(1943).4
Whether the California Parties’ claims have been resolved
in other proceedings is also a merits question that must be
resolved by the agency. The Commission has recognized its
capacity to “be cognizant of the factual scope of each
proceeding and the ramifications of [its] actions here on
other, related proceedings.” Oct. 6, 2008 Order, 125 FERC
¶ 61,016, 61,042. That awareness does not translate into
authority to sidestep due process and reasoned analysis for
claims the agency believes have been litigated and decided in
other proceedings. Obviously, parties are not entitled to
double recovery, but that is an analysis that the agency can
undertake on remand. This opinion does not address the
question of potential refunds from sellers who were not
themselves responsible for any manipulation that FERC may
determine occurred, but who may have benefitted from it.
This issue is appropriately within FERC’s province in the
first instance.
In summary, FERC’s response to Lockyer, that refunds
are unavailable because no seller exercised market power
under the hub-and-spoke test, falls short. When we approved
market-based ratemaking in Lockyer we repeatedly
emphasized the importance of “the dual requirement of an ex
ante finding of the absence of market power and sufficient
post-approval reporting requirements.” Lockyer, 383 F.3d at
4
We are aware of Respondents-Intervenors’ claim that Morgan Stanley
Capital Group Inc. v. Public Utility District No. 1 of Snohomish County,
554 U.S. 527 (2008), bars relief for reporting deficiencies in the context
of bilateral CERS transactions. This merits argument is also most
appropriately addressed by FERC in the first instance.
STATE OF CALIFORNIA V. FERC 21
1013. After FERC dismissed sellers’ widespread reporting
deficiencies as a mere compliance issue, we granted the
state’s petition for judicial review and remanded this case to
correct the oversight. On remand, FERC structured the
proceedings so as to again deny the intrinsic import of
transaction reporting.
We therefore remand to the agency once again for
adjudication of the complaint in a manner that respects the
Lockyer mandate and the FPA. To remedy reporting
violations, FERC must review the transaction reports to
determine whether a just and reasonable price was charged by
each seller, with specific attention to whether reporting
deficiencies masked manipulation or accumulation of market
power. If so, FERC may then elect to exercise its remedial
discretion as appropriate. “The FPA cannot be construed to
immunize those who overcharge and manipulate markets in
violation of the FPA.” Id. at 1017.
PETITION GRANTED; REMANDED.