In an Order issued November 20, 2007, the Federal Energy Regulatory Commission (“FERC”) reversed its previous position regarding the classification of the constraint on the South of Lugo Transformer Path (“South of Lugo”) for purposes of allocating costs under the California Independent System Operator’s (“CAISO”) “must-offer” requirement for electric generators serving California (the “2007 Order”). In September 2011, FERC issued an Order denying the petition for rehearing filed by several Southern California cities (the “Cities”) affected by FERC’s change of position in the 2007 Order (the “2011 Order”). In November 2011, the Cities filed a petition with the Circuit Court of Appeals for the District of Columbia seeking review of the 2007 and 2011 Orders. And on November 5, 2013, the D.C. Circuit denied the Cities’ petition for review in an unpublished opinion, City of Anaheim, et. al. v. FERC, No. 11-1442 (D.C. Cir. Nov. 5, 2013). The D.C. Circuit upheld the FERC orders and found that FERC had adequately explained its reasoning for its change of position and “did not act inappropriately by allocating costs according to the well-established cost causation principle or by modifying the [allocation] criteria in the [2007 Order].” A brief background on the case that has been more than six years in the making is provided below.
The CAISO “Must-Offer” Requirement. Under the CAISO “must-offer” requirement, the majority of electric generators in the California markets must “offer all of their capacity in real time during all hours if it is available and not already scheduled to run through bilateral agreements.” The purpose of the requirement, which was put into place in 2001 as part of a plan to respond to the California energy crisis, is “to prevent withholding and thereby to ensure that the CAISO will be able to call upon available resources in the real-time market to the extent that energy is needed.” Generators receive minimum load costs compensation (“MLCC”) costs if they must operate at minimum load to ensure that they meet the must-offer obligation to be available to CAISO, and those MLCC costs are allocated to market participants by CAISO.
MLCC Cost Allocation Method. At the center of the dispute in this matter is the tariff revision Amendment No. 60, filed by CAISO in May 2004, which modified some payment terms and the MLCC cost allocation to incorporate principles of cost causation “by establishing a ‘bucket’ rate design” under which MLCC costs would be allocated “to one of three buckets depending on whether CAISO has committed must-offer generation primarily to satisfy local, zonal, or system reliability requirements.” The guidelines proposed for classifying must-offer units into the three buckets was included in Attachment E to Amendment No. 60.
FERC’s Classification of South of Lugo as Local vs. Zonal. An administrative law judge upheld CAISO’s proposed MLCC cost allocation method, for the most part, and found that the South of Lugo constraint qualified as a local constraint rather than a zonal constraint under the proposed method. FERC originally affirmed the judge’s finding regarding South of Lugo’s classification as a local constraint using the Attachment E guidelines. Under the local constraint classification, all MLCC costs for South of Lugo would be allocated to Southern California Edison Company (“SoCalEdison”), the local load serving entity. SoCalEdison sought rehearing of FERC’s Opinion upholding the judge’s local constraint classification, arguing “that the failure to classify South of Lugo as a zonal constraint would lead to an unjust and unreasonable result, because all CAISO grid users in southern California cause South of Lugo’s costs, and all such users benefit from CAlSO’ s must-offer calls that relieve the constraint.”
In the 2007 Order, FERC reconsidered the South of Lugo classification and reversed its position, ultimately holding that South of Lugo actually qualified as a zonal constraint, despite its failure to meet the criteria in Attachment E:
Although South of Lugo does not satisfy the interzonal interface definition in Attachment E, we find that it should be categorized as a zonal constraint because, like Miguel, its actual operational characteristics indicate that it provides regional reliability benefits that are more consistent with a zonal constraint.
Under the zonal constraint classification, the MLCC costs for South of Lugo would be allocated to several load serving entities in the applicable zone – SP-15, affecting the Cities (Anaheim, Azusa, Banning, Colton, and Riverside, California).
The Cities sought rehearing of the 2007 Order on three grounds: “(1) the November 2007 Order did not provide a reasoned explanation for the Commission’s reversal of its prior determination that South of Lugo should be classified as a local constraint; (2) the November 2007 Order erred in adopting a classification of the South of Lugo constraint that is inconsistent with the Attachment E criteria; and (3) the November 2007 Order ignored evidence that supported the classification of the South of Lugo constraint as a local constraint.” However, in the 2011 Order, FERC denied rehearing and affirmed its decision to classify the South of Lugo constraint as zonal, finding that the 2007 Order did provide a “reasoned explanation” for reversing its findings and that decision was supported by the record evidence.
The D.C. Circuit Denies the Cities’ Petition for Review. Two years after the petition for review was filed with the appellate court (and six years after the 2007 Order was issued), the D.C. Circuit issued a two-paged, unpublished opinion upholding FERC’s 2007 and 2011 Orders under the arbitrary and capricious standard set forth in Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). The court found that FERC “did not act inappropriately by allocating costs according to the well-established cost causation principle or by modifying the Attachment E criteria in the Order on Rehearing,” and that FERC provided an adequate explanation for reversing its classification. The court also concluded that “[t]he cities’ primary argument, namely, that the Commission ‘disregarded’ the Attachment E criteria that it had adopted, is transparently wrong in light of the Commission’s instruction, in its Order on Rehearing, that those criteria be modified, and in light of its accompanying explanation of why they should be modified.”
You can access the full D.C. Circuit Opinion, FERC Orders, and the Statement of Issues presented to the D.C. Circuit in the Cities’ petition for review. There is a possibility that that the Cities will seek rehearing en banc in the matter. We will keep you posted.