Home » Case Summaries » 1997 » Association of Public Agency Customers v. Bonneville Power Administration

 
 

Association of Public Agency Customers v. Bonneville Power Administration

 

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Various industrial and environmental groups petitioned for review of decisions by Bonneville Power Administration to adopt a market driven business plan, execute power sale contracts with direct service industrial customers (DSIs), and extend transmission agreements to those customers. DSIs are industrial companies who purchase power directly from BPA for their own power intensive operations. In order to respond to changes in the electricity market, BPA developed a new strategy that required profound changes in its business relationship with DSIs. The Ninth Circuit considered a consolidated appeal involving challenges to the administrative decisions relating to BPA’s new strategy.

For most of its history, BPA has had a significant price advantage over its competitors in the power market; its low cost power and control of most of the transmission lines in the region made it the top power supplier in the Pacific Northwest. Due to changes in federal law, BPA began to lose its price advantage in the early 1990s. With the Energy Policy Act of 1992,[1] Congress sought to promote competition in the wholesale power market. It did this in part by giving power producers who lack their own transmission system the ability to request that the Federal Energy Regulatory Council (FERC) order transmission line owners to transmit power for them. Transmitting power produced by other generators is known as “wheeling.” At the same time that wheeling was creating new competition in the wholesale power market, BPA’s power costs were rising because of increases in the cost of its fish and wildlife programs.

BPA took several steps in response to these changes in the market, including the actions challenged by the plaintiffs. For instance, BPA adopted a market-driven approach to power management in their 1995 Business Plan Final Environmental Impact Statement Record of Decision (Business Plan ROD) after preparing an environmental impact statement. Subsequently, BPA fashioned sales contracts tiered off of the Business Plan. In September, 1995 BPA issued the Direct Service Industrial Customer Requirements Power Sales Contract Record of Decision (Block Sale ROD). The Block Sale ROD involved contracts with the DSIs for purchase of power on a “take-or-pay basis,” which required the customer to pay for the power for which she contracted even if she did not take delivery. The Block Sale ROD also provided stranded cost protection. Previously, BPA’s contracts with the DSIs contained stranded cost provisions allowing BPA to recover costs from a DSI that were incurred when the DSI terminated its contract. The new agreement guaranteed that there would be no stranded costs, because BPA would secure enough revenue to meet all of its operating costs and compete successfully so that investments never became stranded.

In April of 1995, BPA began entering into five-year contracts in which BPA would sell “unbundled” transmission service to DSIs. The service was termed “unbundled” because previously BPA had only transmitted power which it produced, and traditionally this power was “bundled” with transmission service. The new contracts were the mechanism for BPA to wheel power to DSIs. In August of 1995, BPA and the DSIs agreed to extend the terms of the Initial Transmission Agreements arranged under the Block Sale ROD. BPA issued the Long-Term Extension Record of Decision (Long-Term Extension ROD), extending the term of the Initial Transmission Agreement by fifteen years, for a total of twenty years. Three entities then filed petitions of review challenging that decision.

The Association of Public Agency Customers (APAC), representing companies that purchased large amounts of electric power from BPA’s public agency customers, filed a petition for review of the Business Plan ROD, the Block Sale ROD, and the Long-Term Extension ROD. The Utility Reform Project, a nonprofit environmental and energy policy advocacy organization representing Oregon and Washington residents whose power comes from BPA, and the Public Power Council, also filed petitions for review of the Long-Term Extension ROD. A group of DSIs, the State of Oregon, and the Northwest Conservation Act Coalition (NCAC), a consortium of over seventy ratepayer and environmental groups, public and private utilities, and individuals, were allowed to intervene. The Utility Reform Project and Kevin Bell, a member of the Utility Reform Project, also filed for review of the Block Sale ROD, and some DSIs, NCAC, and Public Utility District No. 1 of Clark County, Washington were allowed to intervene.

The petitioners argued the following: (1) BPA did not have the statutory authority to wheel nonfederal power, (2) BPA failed to comply with NEPA, (3) BPA was arbitrary and capricious in granting stranded cost protection to the DSIs in the Block Sale Contracts, (4) BPA was arbitrary and capricious in granting the Long-Term Extension Agreements, (5) BPA violated the ratemaking procedures mandated by statute, and (6) the Long-Term Extension Agreements interfered with the state’s regulation of retail power sales.

The Ninth Circuit first considered challenges to the Long-Term Extension Agreements. The court held that BPA did have the statutory authority to transmit nonfederal power. BPA argued that it was reasonable to interpret its governing statutes as a grant of authority to transmit nonfederal power. The agency supported its interpretation with the argument that four organic statutes granted BPA broad discretion over the Northwest’s federal transmission system, did not limit BPA’s ability to provide transmission services to DSIs, and conferred broad authority to contract in BPA’s best interest.[2] The Ninth Circuit held that where Congress has not spoken on an issue, the court should defer to the agency’s construction of its governing statute, so long as its construction is reasonable.[3] The Ninth Circuit discussed each of BPA’s four organic statutes, including the Project Act, the Preference Act, the Transmission Act, and the Northwest Power Act, and concluded that the agency’s interpretation was reasonable.

APAC and the Public Power Council argued that because the Transmission Act prohibited discrimination among retail power consumers,[4] BPA was precluded from wheeling non-federal power to the DSIs without also offering the same to APAC’s members. The Ninth Circuit disagreed, concluding that the antidiscrimination language in the statute applied only to discrimination among utilities. The court also dismissed a discrimination argument based on the Federal Power Act,[5] which prohibited BPA’s rates for transmission services from being “unjust, unreasonable, or unduly discriminatory or preferential.”[6] In order to successfully advance a discrimination claim under the Federal Power Act, the Ninth Circuit held that APAC had to show that its members were similarly situated to the DSIs and that there was disparate treatment for the same service. The court found that APAC’s members and the DSIs were not similarly situated. While the DSIs contracted directly with BPA and could cancel their agreements with one year of notice, APAC’s members contracted with utilities that purchase power from BPA under contracts requiring seven years of notice for cancellation. Because of this distinction, BPA had to act to keep the DSIs from canceling their contracts, but this was not unlawful discrimination.

APAC argued that BPA failed to consider the impact of its decisions on competition, as required by the Project Act.[7] The Ninth Circuit found that the whole thrust of BPA’s planning process over the past few years had been to focus on market competition. Therefore, the court found that the Long-Term Extension Agreements furthered, rather than frustrated, the purpose of antitrust laws.

The State of Oregon argued that the Long-Term Extension Agreements interfered with the state’s regulatory authority. The Ninth Circuit held that while the power to regulate retail sales of power is generally left to the states, the states do not have the authority, absent clear congressional direction, to regulate transmission lines owned by a federal agency such as BPA.[8] The court also dismissed Oregon’s concerns about load-shifting, concluding that these matters were not germane to its review because interstate transmission is clearly a federal matter.

The Ninth Circuit then considered claims that the transmission agreements did not comply with 42 U.S.C. § 4332(2)(E), a provision of the National Environmental Policy Act (NEPA) that requires federal agencies to “study, develop, and describe appropriate alternatives to recommended courses of action in any proposal which involves unresolved conflicts concerning alternative uses of available resources.”[9] This requirement is separate and independent of the requirement to prepare an EIS and applies to a wider range of federal actions.[10] The court held that BPA had complied with this provision by considering several alternatives to long-term wheeling for DSIs.

APAC argued that BPA’s decision to grant the long-term transmission contracts was an arbitrary and capricious departure from established precedent, and the decision was not supported by the record. The court reviewed the record and found that BPA’s decision was amply supported. The court emphasized that BPA’s objective was providing stability reserves for its entire system, and was not persuaded by arguments challenging the soundness of BPA’s business strategy. The Public Power Council argued that BPA had contractually diminished the utilities’ statutory rights to BPA’s excess transmission capacity as guaranteed by the Transmission Act.[11] The court found that if this claim were valid, the aggrieved party would have a remedy. The potential for such future litigation did not sufficiently convince the court that BPA acted arbitrarily or capriciously.

The Ninth Circuit next considered petitions for review of the Block Sale contracts. The Northwest Power Act created a process for establishing rates, [12] which the petitioners argued was violated by the Block Sale. Section 7(i) of the Northwest Power Act requires the Administrator of BPA to publish notice of a proposed rate change in the Federal Register and then conduct public hearings to develop a complete record on which to base the final rate.[13] Any final rate must be approved by FERC.[14]

At the time the Block Sale Contracts were issued, BPA was concerned that if it did not act quickly, the DSIs would cancel their contracts and purchase power from other generators in the market. Section 7(i) proceedings had been initiated, therefore the contracts were based on a rate target rather than an actual rate. This created a “rate test.” Once the 7(i) proceedings were complete, if the rate met the rate target, then the contracts would stand. If the rate exceeded the rate target, then the DSIs had several options, ranging from canceling their contracts outright to purchasing power at the approved rate. Petitioners argued that the term “rate” should be defined to include terms of any contract that affects the rate, and therefore the section 7(i) process should have been carried out for the Block Sale Contracts. BPA defined rate only as a monetary charge for the sale of electricity, and therefore the term did not include terms and conditions that did not establish such monetary charges. The court found that BPA’s definition of rate was reasonable. The court referred to its rejection of a similar attempt to expand the definition of rate in California Energy Resources Conservation & Development Commission v. Bonneville Power Administration.[15] In that case the plaintiff argued that a new Intertie access policy was a ratemaking requiring FERC approval. The court found that the policy was not a charge imposed on customers for the provision of electrical power, and therefore was not a rate. Furthermore, the court noted that every contract will have terms that materially affect the bargain, but the Northwest Power Act does not require the BPA to carry out section 7(i) proceedings whenever it enters into a contract.

The petitioners next argued that even if the terms and conditions of a contract are not by themselves subject to section 7(i) procedures, such contractual terms can sometimes be so closely tied to the rate as to require consideration when ratemaking.[16] The Ninth Circuit dismissed this claim, holding that while the plaintiffs’ general proposition might be true, in this case none of the terms of the contracts were sufficiently intertwined with the rate to modify the price paid for power.

Clark County argued that the rate test used in the Block Sale contracts in lieu of a rate constituted a ratemaking outside of a section 7(i) proceeding, or a “rate case.” Clark County argued that this rate test created a ceiling above which the Administrator would not go for fear of losing the DSI contracts. Therefore, Clark County argued, the rate test would improperly influence the outcome of the rate case. The Ninth Circuit held that this claim was not ripe and instructed Clark County to raise the claim either in the rate case when the rate was up for FERC approval, or in court after FERC granted approval.

The Ninth Circuit also dismissed the petitioners’ argument that the Block Sale Contracts violated the Transmission Act’s antidiscrimination provision. The court found that its holding with regard to the Long-Term Extension Agreements applied to the Block Sale Contracts as well.

The Ninth Circuit then gave a detailed account of the record and held that it did not support the argument that BPA acted arbitrarily and capriciously in granting the Block Sale Contracts. While the court did not endorse the BPA’s business strategy, it found that the likelihood of its success was beyond the court’s review.

The Ninth Circuit then turned to the challenges brought under NEPA. The court first considered the timeliness of APAC’s petition challenging the Business Plan. The Northwest Power Act requires that parties challenging a final BPA action file suit within ninety days of the time such action is final.[17] APAC filed its petition more than ninety days after the Business Plan was executed, but within ninety days of publication of the Business Plan in the Federal Register. The court found that the petition was untimely unless publication was required by the Northwest Power Act, which it is not. However, the court concluded that because APAC had insufficient warning that the time for the appeal began to run at the time the plan was executed, rather than published, its decision on the matter would be prospective only. The Ninth Circuit then proceeded to consider the merits of APAC’s petition.

Petitioners argued that BPA could not tier the ROD for specific contracts to the Business Plan EIS, but instead had to issue an individual EIS for each contract ROD. However, the court concluded that in many ways a programmatic EIS is superior to a contract-specific EIS because it considers an entire policy. Therefore, BPA did not err by issuing a single programmatic EIS.

The Ninth Circuit considered the petitioners’ claim that BPA had failed to consider the cumulative impacts of the Initial Transmission Agreements, Block Sale Contracts, and Long-Term Extension Agreements in the Business Plan EIS. The Business Plan included an analysis of a market-driven alternative, which was selected as the proposed action. The court found that this market approach adequately considered the cumulative impacts of the three arguments.

Petitioners also challenged the decisionmaking process, arguing that the closed door negotiations with the DSIs over the new contracts were not subject to proper public scrutiny or comment. The court held that the NEPA process did not have to precede the agency’s formulation of a proposal or selection of a preferred course of action. The court also dismissed the petitioners’ claim that the EIS should have included more alternatives to the stranded cost protection provision.

The Ninth Circuit next dismissed the petitioners’ claim that the EIS did not adequately consider the environmental consequences of the transmission agreements and stranded costs protection. The court found that BPA had considered such consequences to the market, power supply, and fish and wildlife. The petitioners argued that the Business Plan EIS failed to consider the social effects that could result from utilities being liable for higher stranded costs, which inevitably would be passed on to ratepayers. The court held that NEPA did not require BPA to consider the economic impact of its actions because the statute only required consideration of environmental factors. The court also rejected the argument that ratepayers, particularly those in low socio-economic strata, would be significantly effected by BPA’s actions. The court also dismissed claims that the EIS did not adequately address impacts on area aluminum smelters.

Petitioners argued that BPA failed to adequately address mitigation. The court disagreed, holding that the EIS had considered mitigation for each resource type. The petitioners also argued that the EIS failed to consider the long-term environmental effects of the action, focusing instead on a time period ending in 2002. The court held that NEPA did not require any particular analytical protocol and that BPA had reasonably concluded that because long-term calculations were difficult to accurately make, it was better to focus on short-term analysis and assume that short term relationships would provide valid indications of the long run.

The court then concluded that the “no action” alternative did not require analysis of the consequences resulting from not signing any contracts with the DSIs. The court held that the no action alternative could be considered in terms of continuing the status quo.

Finally, the Ninth Circuit considered the claim that the Business Plan EIS was not consistent with the Business Plan. While the EIS only considered wheeling to DSIs, the Business Plan recognized the trend towards wheeling to retail customers and indicated BPA’s willingness to shift in that direction. The court held that this potential inconsistency was not ripe because there was no injury. No contracts allowing retail wheeling had been issued, and the Business Plan did not actually commit the BPA to such a course of action. There was no harm to the environment from BPA indicating a willingness to grant transmission access to retail customers in the future.

The court concluded that widespread changes in the electricity market resulting from deregulation had transformed the wholesale power market. The court held that BPA’s response to these changes in the market was not arbitrary and capricious, and denied all petitions for review.


[1]42 U.S.C. §§ 13,201-13,556 (1994).

[2]Pacific Northwest Electric Power Planning and Conservation Act of 1980, 16 U.S.C. §§ 839-839h (1994); the Pacific Northwest Federal Transmission System Act of 1974 (Transmission Act), 16 U.S.C. §§ 838-838k (1994); the Pacific Northwest Consumer Power Preference Act of 1964 (Preference Act), 16 U.S.C. §§ 837-837h (1994); and the Bonneville Project Act of 1937 (Project Act), 16 U.S.C. §§ 832-832m (1994).

[3]Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984).

[4]16 U.S.C. § 838d (1994).

[5]Id. §§ 791a-828c (1994).

[6]Id. § 824k(i)(1)(ii) (1994).

[7]Id. § 832a(b) (1994).

[8]See Hancock v. Train, 426 U.S. 167, 179 (1976) (quoting Mayo v. United States, 319 U.S. 441, 448 (1943), “where Congress does not affirmatively declare its instrumentalities or property subject to regulation, the federal function must be free of regulation”).

[9]National Environmental Policy Act of 1969, 42 U.S.C. § 4332(2)(E) (1994).

[10]See Bob Marshall Alliance v. Hodel, 852 F.2d 1223, 1229 (9th Cir. 1988) (holding that “the consideration of alternatives requirement is both independent of, and broader than, the EIS requirement”).

[11]16 U.S.C. § 838d (1994).

[12]Id. § 839e(a)(1).

[13]Id. § 839e(i).

[14]Id.

[15]831 F.2d 1467, 1471 (9th Cir. 1987).

[16]See, e.g., Atlantic Richfield Co. v. Bonneville Power Admin., 818 F.2d 701, 705 (9th Cir. 1987) (a fixed customer charge unrelated to actual energy usage was a “rate for the sale or disposition of power”).

[17]16 U.S.C. § 839f(e)5 (1994).

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