What's Happening in California
[Sept. 2005]

The United States Court of Appeals for the Ninth Circuit (“Ninth Circuit” or the “Court”) ruled in a September 6 decision that the Federal Energy Regulatory Commission (“FERC”) lacks the authority to require government-owned entities to provide refunds for their wholesale electric energy sales, even if the sales were made at allegedly unjust and unreasonable rates. The Bonneville Power Administration (“BPA”) and a variety of cities, utility districts, cooperatives, irrigation districts, and state agencies and entities within California and Arizona (collectively, “Government-owned Utilities”) had challenged a series of FERC orders concluding that FERC could compel the Government-owned Utilities to issue refunds pursuant to their participation as power sellers in the California Independent System Operator (“Cal ISO”) and California Power Exchange (“CalPX”) spot markets. The Ninth Circuit concluded that the Federal Power Act (“FPA”) was “clear and unambiguous” in exempting the Government-owned Utilities from FERC refund authority. This decision means that FERC lacks the authority to enable the State of California to seek to recover alleged overcharges - estimated by California Attorney General Bill Lockyer to be approximately $1 billion – from the wholesale power sales of the Government-owned Utilities during the California Energy Crisis in 2000-2001.

In 2000, FERC began investigating the California energy markets with respect to the development of purportedly unjust and unreasonable prices. FERC concluded in a July 2001 order that the universe of wholesale power sales transactions that should be subject to refunds included those sales by privately-owned utilities and publicly-owned utilities into the Cal ISO and CalPX spot markets between October 2000 and June 2001. Thereafter, the Government-owned Utilities sought rehearing of the July 2001 FERC refund order and, ultimately, filed an appeal with the Ninth Circuit.

The key question before the Court was whether FERC’s authority to order refunds is determined by the status of the seller, or by the nature of the transaction. Section 201(f) of the FPA exempts government and other publicly-owned entities from FERC jurisdiction. FERC argued that it has the authority to order refunds paid by the Government-owned Utilities pursuant to its general jurisdiction over wholesale electric sales in interstate commerce pursuant to section 201(b)(1) of the FPA and its ratemaking and refund authority contained in sections 205 and 206 of the FPA, respectively. FERC argued that this general authority trumps the specific exemption terms of section 201(f) of the FPA.

The Ninth Circuit concluded that the clear language of section 201(f) exempts the Government-owned Utilities from FERC’s refund authority:

The sweep of this [section 201(f)] exemption is huge. Nothing in subchapter II [of the FPA] applies to the United States or any state, including any political subdivision, unless the statute makes specific reference to any of these entities. By way of shorthand, this exemption is generally viewed as applicable to “governmental entities.”

The Court also concluded that FERC’s rate jurisdiction under section 205 and refund jurisdiction under section 206 only applies to “public utilities” – and the FPA definition of such does not include governmental entities.¹

The Court left open the possibility that the Government-owned Utilities may still be liable for overcharges pursuant to an appropriate contracts claim, rather than through a refund action. The Court concluded that the agreements between the Government-owned Utilities and the Cal ISO and the CalPX do not change the fact that FERC cannot order refunds to be issued by the Government-owned Utilities, the Court also noted that the agreements serve “to demonstrate that the remedy, if any, may rest in a contract claim, not a refund action.” Ultimately, however, the Court refused to pass judgment on remedies available beyond the FPA.

Footnote:

1 Interestingly, the Court referred to the recently passed Energy Policy Act of 2005 as further evidence of the effect of section 201(f) exemptions. The Energy Policy Act expressly extends FERC’s refund authority to government-owned utilities and other entities involved in voluntary, short-term sales through organized markets that are in violation of FERC’s rules and tariffs. Specifically, the Court noted: “This amendment suggests that because existing law did not permit FERC to order refunds from governmental entities, Congress felt the need to create an exemption to section 201(f) and limited that exemption to governmental entities selling large quantities of power.”

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