United States: Ninth Circuit Upholds FERC's Hourly Netting Refund Methodology, But Overturns FERC's Treatment Of $5 Million Refund Deficit Related To California Energy Crisis

On April 21, 2017, the United States Court of Appeals for the Ninth Circuit ("Ninth Circuit") held that: (1) FERC did not act arbitrarily or capriciously in ordering the California Independent System Operator Corporation ("CAISO") and California Power Exchange Corporation ("Cal-PX") to net sales and purchases over hourly intervals when calculating refunds to entities that participated in the CAISO and Cal-PX markets during the California energy crisis of 2000-2001; and (2) that FERC did act arbitrarily and capriciously in allocating a $5 million refund shortfall only to net buyers instead of all market participants.  The Ninth Circuit opinion is the latest adjudicatory decision in a series of administrative hearings and judicial appeals arising out of the California energy crisis.

In a 2005 case, Bonneville Power Administration v. FERC ("BPA v. FERC"), the Ninth Circuit concluded that FERC had acted outside of its jurisdiction when ordering governmental entities and non-public utilities to pay refunds related to the California energy crisis.  FERC responded by issuing an order to CAISO and a later order to Cal-PX requiring each to perform new refund calculations by netting purchases and sales over hourly intervals.  FERC explained that netting purchases and sales over hourly intervals was preferable to netting purchases and sales over the entire refund period, which FERC claimed could have the indirect effect of requiring governmental entities and non-public utilities to pay refunds in direct contravention of the Ninth Circuit's BPA v. FERC decision.  A group of CAISO and Cal-PX stakeholders ("California Stakeholders") petitioned the Ninth Circuit for review of FERC's prescribed methodology for calculating refunds.

The California Stakeholders argued that the applicable tariffs unambiguously require CAISO and Cal-PX to net over the entire refund period, not over hourly intervals.  The Ninth Circuit rejected the California Stakeholders' argument while noting that "though the tariffs provide for . . . netting charges over an hour and later summing the charges over the day and over the entire month to generate monthly invoices, nothing suggests that the netting interval should span the entire refund period, which lasted nine months."  The Ninth Circuit could not conclude that FERC acted arbitrarily or capriciously in construing the refund provisions of the tariffs.

Separately, the California Stakeholders prevailed on their argument that FERC erred in allocating a $5 million deficit in Cal-PX's settlement account to net buyers instead of all market participants.  FERC had argued that the $5 million deficit, which stemmed from an erroneous transfer of funds from Cal-PX's settlement account to its operating account in March 2001, should be treated like a refund shortfall and allocated to all net refund recipients in proportion to their final refund positions.  The Ninth Circuit noted that the erroneously transferred $5 million had been used for operating expenses, thus all market participants benefited.  Therefore, according to the Ninth Circuit, the shortfall must be allocated among all market participants.

The Ninth Circuit opinion is available here.

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