Client Alert

Municipalities Not Subject to FERC Jurisdiction and Refund Orders

9/8/2005

On September 6, 2005, the Ninth Circuit issued its long-awaited decision in Bonneville Power Administration v. Federal Energy Regulatory Commission, No. 02-70262.  The Ninth Circuit held that FERC did not have the authority under the Federal Power Act to order governmental entities who participated as sellers in California’s spot energy markets during the State’s energy crisis to refund amounts charged in excess of maximum prices established by FERC.

On August 23, 2000, FERC initiated the "California Refund Proceedings," an investigation into whether prices being charged in California’s spot markets were unjust and unreasonable as a result of alleged market dysfunctions.  In a series of orders issued during the proceedings, FERC terminated the California Power Exchange’s wholesale rate schedule, and outlined a complex web of mitigation measures, including a limitation on California’s single-price auction system by refunding prices in excess of a "breakpoint" price.  Approximately thirty percent of all sales made in California’s spot markets during the relevant time were made by governmental entities.

Initially, FERC decided that it had no authority under the FPA to order these entities to make refunds, but on July 25, 2001, it reversed course.  FERC held in that order that while governmental entities "are not subject to our direct jurisdiction under [the] FPA," nonetheless it could order them to make refunds under the "specific circumstances presented."  FERC reasoned that governmental entities had agreed to "accept the same clearing price for any given sale" made in California’s organized spot markets, and were therefore "on notice that those clearing prices were subject to change if they were found to be unjust and unreasonable."  The governmental entities sought rehearing, which was denied, and then petitioned the Ninth Circuit for review of FERC’s orders.

Applying a straightforward statutory analysis, the Ninth Circuit wasted little time in finding that FERC did not have the authority under the FPA to order governmental entities to make refunds.  The Court first noted that the FPA specifically exempted governmental entities from the refund provisions of the FPA.  The Court further noted that FERC’s rate jurisdiction under § 205 and its refund jurisdiction under § 206 apply only to public utilities, and that the definition of "public utility" in the act did not include governmental entities.  Hence, the clear language of the FPA precluded FERC from ordering governmental entities to make refunds.

FERC’s primary argument on appeal was that, the specific provisions of the FPA notwithstanding, the FPA granted it the general authority over interstate sales of wholesale electricity.  FERC argued that it could order the governmental entities to make refunds based on its general authority over wholesale rates, and because the CAISO and CalPX, which operated California’s spot markets, were FERC-jurisdictional entities operating pursuant to FERC-approved tariffs.  The Court held that FERC’s arguments ignored the basic principle of statutory construction that the specific prevails over the general.

FERC and intervener CAISO also argued that FERC had simply using its §§ 205 and 206 authority to "reset" the prices of the single-price auction, and that the governmental entities’ refunds were simply a "byproduct of the resettlement of the ISO and CalPX markets."  The Court rejected this argument also.  The Court held that "[p]erceiving FERC’s orders as effecting a reset market clearing price for all spot market sales under the ISO and CalPX tariffs, rather than as an order for refunds under § 206(b), ignores the explicit language of FERC’s July 25, 2001 Order."  The Court held that it could "not conclude that FERC said ‘refund’ but meant resettlement of the market-clearing price."

In concluding that FERC had no authority under the FPA to order governmental entities to make refunds, the Court suggested that the remedy, if any, was a contract claim and not a refund action.  This suggestion was based on the Court’s observation that the governmental entities had entered into agreements with CAISO and CalPX that obligated them to abide by the ISO and CalPX tariffs.  Relying on a decision of the Eighth Circuit, the Court suggested that these separate agreements could be enforceable in judicial proceedings, resulting in the functional equivalent of refund relief.

The consequences of this very important decision remain to be seen.  At a minimum, however, proceedings before FERC respecting the proper scope of relief due as a result of the crisis will begin anew on remand.  To the extent the Ninth Circuit’s decision suggests that state law may control claims between seller-municipalities and their buyers, the decision may also trigger a new waive of litigation against municipalities in the ongoing struggle over the energy crisis.  If you have any questions about the impact of this important decision for your company, please contact a member of Morrison & Foerster’s Energy Group.

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