20080403IPUC Legal Memo.pdf

UNITED STATES OF AMERICA
S. DEPARTMENT OF ENERGY
BEFORE THE
BONNEVILLE POWER ADMINISTRATION
2007 SUPPLEMENTAL WHOLESALE
POWER RATE ADJUSTMENT PROCEEDING ) BP A DOCKET WP-07 SUPP
LEGAL MEMORANDUM OF THE
IDAHO PUBLIC UTILITIES COMMISSION
The Bonneville Power Administration (BP A) has no express legal authority to engage
in retroactive ratemaking or provide retroactive relief in this proceeding. Consistent with its
authority in Section 7 of the Northwest Power Act, BP A should only set rates prospectively. The
successful petitioners in the two circuit appeals failed to avail themselves of established stay
procedures and thus should only be accorded prospective relief.In addition, the deemer
accounting mechanism is not authorized by the Northwest Power Act and deemer balances
should not be included in the "Lookback" mechanism. Consequently, the Administrator should
reject the Lookback mechanism as unlawful, arbitrary, and not in conformance with sound
ratemaking principles.
BACKGROUND
A. The Ninth Circuit Opinions
On May 3, 2007, the United States Court of Appeals for the Ninth Circuit issued two
OpIniOnS in consolidated appeals challenging BPA's Residential Exchange Program (REP)
Settlement Agreements and certain rates in BPA's WP-02 Wholesale Rate proceeding. In
Portland General Electric Co. v. Bonneville Power Admin.501 F.3d 1009 (9th Cir. 2007)
PGE'
),
the Court held that BPA's REP Settlement Agreements with the six regional investor-
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
owned utilities (IOUs) were contrary to the Northwest Power Act, 16 U.C. 99 839-839h. The
Court also held that BP improperly included these "settlement costs" in the rates paid by
preference customers in violation of Section 7(b)(2) and (3) of the Northwest Power Act, 16
US.C. 9 83ge(b)(2) and (3). PGE 501 F.3d at 1036. The Court held "that BPA was bound by
the power exchange requirements of the (NP A), and that BP A exercised its settlement authority
contrary to those requirements.Id. at 1013. It granted the petitions for review.
In the companion appeal Golden Northwest Aluminum, Inc. v. Bonneville Power
Admin.SO I F .3d 1037 (9th Cir. 2007) Golden Northwest"
),
three groups of petitioners also
challenged BPA's WP-02 preference power rates. Two groups argued that the established
preference rates were too high.More specifically, the first group asserted that BP
inappropriately allocated the costs of supplying power to the DSIs to the preference rates. The
second group insisted that BP A erroneously allocated REP settlement costs to the preference
rates. The Ninth Circuit held against the first group but held for the second group. Golden
Northwest 501 F.3d at 1040-41. In granting the petition of the second group, the Court stated
that the holding in PGE was dispositive in this case: BP A improperly allocated the costs of the
REP settlement agreements in the rate paid by preference customers. Id.at 1048.
The third group of petitioners argued the preference rates were too low for BP A to
meet its fish and wildlife obligations. The Court agreed. !d.at 1052-53. The Court "therefore
remand(ed) to BPA to set rates in accordance with this opinion Id. at 1053 (emphasis added).
On October 5, 2007, the Court denied petitions seeking rehearing and en banc on the two
OpIniOns.
I Several of the IOU parties in the two appeals have filed a joint Petition for Certiorari with the United States
Supreme Court. - U.L.W. - (U.S. Feb. 7, 2008) (No. 07-1007).
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
B. Remand to BPA
Following the two Circuit opinions, BPA suspended REP payments to the IOUs
effective June 2007. BP A later acknowledged "the Ninth Circuit provided little guidance to
BP A in its (two J decisions regarding the subsequent actions BP A should take in response to
those opinions.BPA Response to APAC's Motion to Strike , WP-07-BPA-77 at
Settlement negotiations were unsuccessful and BP A subsequently issued its Federal Register
Notice re-opening this WP-07 case. 73 Fed.Reg. 7 539 (Feb. 8 2008). Because BPA's WP-
proceeding used the same methodology that the Court overturned in the WP-02 proceeding,
BP A's response to the opinions2 is to "correct both the WP-02 rates and the WP-07 rates and
response to the Court's rulings." WP-07-BPA-, p. 2, line 14.
ARGUMENT
A. BPA Cannot Correct the WP-O2 Rates
Despite BP A's intent to correct the WP-02 rates , these rates have been superseded.
Indeed, the WP-02 rate period ended September 30, 2006. In fact, on September 21 , 2006 the
Federal Energy Regulatory Commission (FERC) granted interim approval ofBPA's new WP-
rates effective October 1 , 2006 (subject to refund). Order Approving Rates on an Interim Basis
and Providing Opportunity for Additional Comments Docket No. EF06-2011-000, 116 F.
Rec. ~ 61 264 (Sept. 21 , 2006). The WP-07 rates currently remain in effect pending completion
of this supplement proceeding and final FERC approval. On March 4, 2008, BP A moved FERC
to continue the previously granted Stay of the WP-07 rates through September 4 2008.
As the chronology above clearly demonstrates, the WP-02 rates no longer exist
because they have been superseded by the interim WP-07 rates as of October 1 , 2006. The only
2 In October 2007, the Ninth Circuit also issued a third opinion addressing the 2004 amendments to the REP
Settlement Agreements. Public Utility Dist. No.1 ofSnohomish Cty, Wash. v. Bonneville Power Admin.506 F.3d
1145 (9th Cir. 2007).
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
retroactive" relief that the consumer-owned utilities (COUs) may be entitled to is the "refund
with interest" of the interim WP-07 rates if these interim rates are determined to be too high.
R. 9 300.20(c); see also 18 C.R. 9 300.21(g) ("if a rate collected by any power marketing
administration on an interim basis exceeds the rate which is confirmed and approved by (FERCJ
as a final rate, the Administrator. . . must refund with interest any rate collected during the
interim period which exceeds the final rate.). Thus, BP A cannot correct the WP-02 rates.
B. The Court Did Not Order BPA to Provide Retroactive Relief
There is nothing in the Ninth Circuit's two decisions that requires BP A to provide
retroactive relief to the prevailing parties in the PGE and Golden Northwest cases. In Golden
Northwest the Court "remand ( edJ to BP A to set rates in accordance with this opinion." SO 1 F .
at 1053. BP A has re-opened the WP-07 proceeding with its interim rates still in effect. Because
BP A has requested an extension of the existing stay of the WP-07 interim rates, BP A should
simply proceed to set lawful rates.
In neither case did the Ninth Circuit vacate the BP A rates. Indeed, given the Court'
findings in Golden Northwest that the rates were both too high and too low, the Court remanded
the matter back to BP A "to set rates in accordance with this opinion.Id. This is consistent with
the well-established rule that Courts do not set rates - they are empowered to set aside agency
action. 5 US.c. 9 706(2). It is BP A that is vested with the authority to "establish, and
periodically review and revise, rates for the sale and disposition of electric energy and capacity
. . ..
Section 7(a)(l), 16 U.c. 9 83ge(a)(l). Moreover, it is for BPA to first establish rates
and then submit those rates for "confirmation and approval by" FERC. Section 7(a)(2), 16
US.C. 9 83ge(a)(2).
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
C. BPA has no Statutory Authority to Engage in
Retroactive Ratemaking or Provide Retroactive Relief
The law is clear: a federal agency must have express statutory authority before it can
engage in retroactive ratemaking or provide a retroactive remedy such as reparations or refunds.
In Bowen v. Georgetown University Hospital 488 u.S. 204, 109 S.Ct 468, 102 LEd.2d 493
(1988), the United States Supreme Court declared that "(rJetroactivity is not favored in the law.
Thus, congressional enactments and administrative rules will not be construed to have retroactive
effect unless their language requires this result." 488 U.S. at 208 , 109 S.Ct at 471. Indeed
because it is not a sound business practice to retroactively increase rates, the Court requires that
Congress expressly permits such a practice in no uncertain terms. Bowen 488 u.S. at 208, 109
Ct. at 472. "The power to require re-adjustments for the past is drastic. It... ought not to be
extended so as to permit umeasonably harsh action without very plain words.Id., quoting
Brimstone R. Co. v. United States 276 u.S. 104, 122 48 S.Ct. 282, 287, 72 LEd. 487 (1928).
IOU customers are not a fungible mass where future customers may be substituted for past
customers to make up for past rate deficiencies. Utah Power Light Co. v. Idaho Public
Utilities Commission 685 P.2d 276, 285 (Idaho 1984).
There is no authority in Section 7 of the Northwest Power Act which expressly
permits BP A to engage in retroactive ratemaking. On the contrary, the ratemaking scheme
embodied in Section 7 contemplates that rates will be set prospectively. In particular, the
Administrator shall establish rates and such rates shall be "revised to recover, in accordance with
sound business principles the costs associated with the acquisition, conservation, and
transmission of electric power. . . ." Section 7(a)(1), 16 U.C. 9 83ge(a)(1) (emphasis added).
Note also that the rates established by BP A are subject to FERC approval. Section
7(a)(2), 16 U.C. 9 83ge(a)(2). The Ninth Circuit has declared that "One of the fundamental
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
tenets in FERC jurisprudence is the rule against retroactive ratemaking.Public Utilities
Comm n ofCal. v. FERC 456 F.3d 1025 , 1061 (9th Cir. 2000) citing Arkansas Louisiana Gas
Co. v. Hall 453 U.S. 571 , 578 101 S.Ct. 2925,2930-69 LEd.2d 856 (1981).
In addition to the prohibition of retroactive ratemaking, Bowen also forbids
retroactive rulemaking. 488 u.S. at 208 , 109 S.Ct. at 471. In Bowen the Secretary of Health
and Human Services promulgated a rule that had a retroactive application. On appeal, the
Circuit of Appeals for the District of Columbia held as a general matter that the Administrative
Procedures Act S U.C. 99 551 , 553 et seq.forbids retroactive ratemaking. Georgetown
University Hospital v. Bowen 821 F.2d 750, 757 (D.C. Cir. 1987) (the AP A is clear and
equitable considerations are irrelevant to the determination of whether the Secretary s rule may
be applied retroactively ). The Supreme Court affirmed. Bowen 488 U.S. at 208, 109 S.Ct. at
471. The Supreme Court held that "a statutory grant of legislative rulemaking authority will not
as a general matter, be understood to encompass the power to promulgate retroactive rules unless
that power is conveyed by Congress in express terms.Bowen 488 U.S. at 208, 109 S.Ct. at
472. "Even where some substantial justification for retroactive rulemaking is presented, courts
should be reluctant to find such authority absent an express statutory grant." Id. at 209, 109 S.Ct.
at 472. BP A has no authority empowering it to provide reparation, refunds or any similar
retroactive remedy.
D. The Prevailing Parties in PGE and Golden Northwest Failed to
Exercise Measures that would have Protected Their Interests
Even though BP A has no power to grant a retroactive remedy , the prevailing parties
in PGE and Golden Northwest could have preserved the fruits of their appeal by obtaining a stay
3 As noted previously, the Administrator must issue refunds if the final FERC-approved WP-07 rates are less than
the interim WP-07 rates. 18 C.R. 9 300.21 (g).
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
ofBPA's WP-02 Order from BPA or the Court. Judicial review of final BPA actions under the
APA expressly provides for such a procedure. 5 U.c. 9 705 (an agency "may postpone the
effective date of action taken by it, pending judicial review.
Likewise, Rule 18 of the Federal Rules of Appellate Practice provides for a stay
pending appellate review. Under Rule 18 , a petitioner must ordinarily first move BP A for a stay
pending review of its decision or final order. FRAP 18(a)(1). In addition, this rule provides that
a motion for stay may be made to the Ninth Circuit or one of its judges. FRAP 18(a)(2). As
indicated in Attachment 1 to WP-07-ID-, no parties to the underlying appeal sought a stay
from BP A, FERC or the Ninth Circuit.
Because BPA's WP-02 rates were not stayed, they remain lawful and valid through
the judicial review process consistent with "the well-established rule that an appeal will not
affect the validity of a judgment or order during the pendency of an appeal , absence a stay or
supersedeas.Combine Metals Reduction Co. v. Gemmill 557 F.2d 179, 190 (9th Cir. 1977). By
failing to stay the effects of the WP-02 rate order, the petitioners put themselves at risk of losing
the fruits of their appeal. "(Thus a party who chooses to appeal but fails to obtain a stay
injunction pending appeal risks losing its ability to realize the benefits of a successful appeal."
Holloway v. United States 799 F.2d 1372, 1374 (9th Cir. 1986) (emphasis added and citations
omitted), quoting Matter of Combined Metals Reduction Co.557 F .2d 179, 188 (9th Cir. 1977);
United States v. Peterson 19 F.3d 1442, 1444 (9th Cir. 1994) (unpublished disposition). That
risk has now materialized.
4 Section 705 further provides: "On such conditions as may be required and to the extent necessary to prevent
irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on
application for a certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to
postpone the effective date of an agency action or preserve status or rights pending conclusion of the review
proceedings." 5 U.c. 9705.
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
E. The Deemer Mechanism is not Authorized by the Northwest Power Act
In PGE the Court explained the operation of the REP mechanism. "Section S(
permits IOUs to exchange power they have purchased or generated for lower-cost power
generated by BPA.501 F.3d 1009, 1015 (emphasis added). Under the program, IOUs sell
power to BPA at the IOUs' average system costs (ASCs) and then purchase and exchange an
equivalent amount of BP A power at a lower price. "The REP essentially acts as a cash rebate to
the IOUs where the IOUs' power costs exceed those of BPA.Id. (emphasis added). Section
S( c) of the Northwest Power Act requires that any exchange benefit be passed through to a
utility s residential and small farm customers. Id.16 U.C. 9 839c(c)(3).
Although the deemer balances were not mentioned in either of the Court's opinions
BP A proposes to recover the allegedly outstanding deemer balances. As BP A witnesses explain:
Deemer balances are a remnant of BPA's implementation of 1981 RPSAs
with exchanging utilities. In simple terms, in the event a utility s ASC was
lower than BPA's PF exchange rate, the utility would not pay cash to BPA but
would accumulate a negative balance that had to be paid off before the utility
could receive positive REP benefits.
WP-07-BPA-, p. 18 , II. 5-9. When the IOU's ASC was lower than BPA's PF rate, the
IOU's "separate account" would be debited but no actual cash payments or power exchange
would be made by the IOU to balance the account.The 1981 RSP A states that upon
termination of this agreement, any debit balance (i., negative balance) in such account shall
not be a cash obligation of the Utility. . . ." RPSA 9 10, p. 8. This 1981 "phantom" accounting
mechanism has real consequences in BPA's proposal today.
The deemer balances also accrued interest. WP-07-BPA-, p. 196, II. 15-26.
Given the passage of time, the deemer balances have substantially increased as interest has
accrued. For example, Idaho Power s deemer balance allegedly increased from $52.9 million in
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
1987 to $245.36 million as of October 2007 (WP-07-ID-, p. 18, II. 14-18) based solely on the
basis of compound interest. Not all IOUs suffered under compound interest.
There is no statutory authorization for BP A to engage in deemer accounting. As
construed by the Ninth Circuit, the Northwest Power Act contemplates that BP A and the IOUs
would exchange when an IOU's ASC was above BPA's cost. Section S(c), 16 U.C. 9839c(c).
In this fashion, IOUs would receive the benefits of the federal hydropower system. The deemer
mechanism is contrary to the plain reading of Section 5( c) of the Northwest Power Act, 16
C. 9839c(c).
As the Court stated in PGE whenever BP A engages in a purchase and exchange of
power - whether on a yearly basis, under an REP program , or pursuant to a settlement agreement
- BP A acts pursuant to its 9 5( c) authority, and is thus subject to the Congressionally imposed
limitations on that authority as expressed in 9 S(c) and 9 7(b). 501 F.3d at 1032. In attempting
to spread the benefits of cheap federal power as broadly as possible, BP A departed from the REP
mechanism contained in the Northwest Power Act.16 U.C. 9 839c(c). BPA's de emer
accounting mechanism is well outside the REP program that Congress created in the Northwest
Power Act.
CONCLUSION
The Administrator s obligation in response to PGE and Golden Northwest is to
implement the Court's holdings, assuming the opinions are not overturned on appeal by the U.
Supreme Court. The Ninth Circuit invalidated the REP Settlement Agreements, which in turn
affects the REP payments to the IOUs and the preferred rates of the COU customers. To remedy
the errors in the Residential Exchange Program, BP A should calculate new ASCs for the IOUs
using the 2008 ASCM being developed in a separate proceeding.
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-
Given that the WP-02 rates have expired, BP A is legally prohibited from retroactive
ratemaking and the fact that the petitioners did not seek a stay pending review, the
Administrator s duty is to set new rates prospectively. Because the WP-07 interim rates became
effective October 1 , 2006 and have not yet been approved as final rates by FERC, these interim
rates are subject to refund. Thus, the Administrator s duty and the petitioners ' remedy is to
establish prospective rates. In addition, BP A acted outside the bounds of its statutory authority
in Section 5 of the Northwest Power Act when it created the deemer accounting mechanism. For
these reasons, the Lookback mechanism is unnecessary and unlawful and must be discarded.
Respectfully submitted this day of April 2008.
FOR THE IDAHO PUBLIC UTILITIES COMMISSION
Jj
Donald L. Howell, II
Deputy Attorney General
PO Box 83720
472 W. Washington Street (83702-5918)
Boise, ID 83720-0074
Idaho State Bar No. 3366
Telephone No. [phone]
E-mail: don.howell~puc.idaho.gov
N:BPA- WPO7-Supp_dh2
IDAHO PUC LEGAL MEMORANDUM WP-07-ID-