In a recent case presenting "another piece of the California energy crisis puzzle," the Ninth Circuit, in an opinion authored by Judge Sydney Thomas, reaffirmed the Federal Energy Regulatory Commission’s ("FERC") "wide latitude in its enforcement decisions" under the Federal Power Act.  The Ninth Circuit concluded that it lacked subject matter jurisdiction over a petition by the California Independent System Operator ("Cal-ISO") that implicated FERC’s prosecutorial discretion, and a petition by PG&E because it was an impermissible collateral attack on a prior FERC order.  PG&E v. FERC, Case No. 04-70635, 2006 U.S. App. LEXIS 23706, *1 (9th Cir. Sept. 18, 2006). 

The case involved two petitions for review of a FERC decision which permitted the Cal-ISO to re-run certain Settlement Statements ordered in the SDG&E "Refund Proceeding."  Id. (citing SDG&E, 102 F.E.R.C. ¶61,345 (2003)).  Cal-ISO is responsible for managing California’s electricity transmission grid and balancing electrical supply and demand.  To perform these functions during the energy crisis, Cal-ISO purchased "two types of energy: (1) ‘uninstructed imbalance energy,’ which it used to balance the electrical grid, and (2) ‘operating reserves,’" for shortages or other emergencies.  Id. at *4. 

During the California energy crisis, "certain energy providers were alleged to have manipulated the California energy market through a variety of means, resulting in artificially inflated energy prices."  Id. at *6.  In August of 2000, several parties, including SDG&E, PG&E, and the State of California, requested that FERC impose a price cap on sales in the California energy markets.  Id. at *7.  FERC denied that relief, but opened an investigation into the justness and reasonableness of rates for all sales in the California Power Exchange (a wholesale power clearinghouse) and Cal-ISO markets.  Id. at *3, *7.  FERC ultimately ordered Cal-ISO, in the "Refund Proceeding," to recalculate certain invoices to reflect what the invoices would have been in a competitive market, in order to aid FERC in calculating refunds owed to California consumers.  Id. 

Since it was already recalculating its invoices, Cal-ISO requested that FERC allow it to remedy additional invoice errors.  Id. at *7-8.  Among other errors, Cal-ISO asked that it be allowed to correct for instances where certain entities had "double billed" Cal-ISO for energy they had delivered to the grid.  Id. at *3-5.  A Cal-ISO investigation had uncovered that "entities may have been selling single units of energy as both uninstructed imbalance energy and operating reserves," and that, "if true, those entities ‘double billed’ Cal-ISO . . . ."  Id. at 5. 

"To address the ‘double selling’ problem, Cal-ISO proposed to amend its operating Tariff to permit recision of double payments made between April 1, 1998 and September 9, 2000."  Id. at *8.  FERC rejected Cal-ISO’s request, reasoning that the double billing at issue was already set for hearing in a separate "show cause proceeding."  Id. at *9.  There, FERC had already "investigated and determined" which entities had double billed the Cal-ISO.  FERC held that Cal-ISO’s proposed Tariff amendment attempted to improperly expand the number of transactions and entities targeted for double billing in the show cause proceeding, and held that the show cause proceeding, not the separate order Cal-ISO sought allowing a Tariff amendment, was the proper forum to address any double billing.  Id.  Cal-ISO petitioned the Ninth Circuit to review this decision.

Before recalculating its invoices, Cal-ISO also requested that FERC allow it to correct a "Neutrality Adjustment Charge" which Cal-ISO imposed on all market participants.  This charge "spread the costs [Cal-ISO] incurred in balancing the electricity grid among all market participants, even if individual entities bore no responsibility for [] grid imbalances."  Id. at *6.  Cal-ISO proposed to recalculate its invoices using a different accounting method under which "only those parties who caused the energy imbalances would bear the expense of balancing the grid."  Id. at *9. "FERC approved of Cal-ISO’s proposal . . . despite the fact that the [recalculation] would have shifted between one and two hundred million dollars in settled charges . . . ."  Id. at *11.  PG&E, in turn, petitioned the Ninth Circuit to review this decision. 

Before the Ninth Circuit, FERC asserted that the Court lacked jurisdiction over Cal-ISO’s and PG&E’s petitions for review.  FERC argued that Cal-ISO’s petition would require the Court to review a decision "not to prosecute or enforce" and that such decisions are "committed to an agency’s absolute discretion" under the Supreme Court’s decision in Heckler v. Chaney, 470 U.S. 821, 831-32 (1985) (interpreting the limits of judicial review of agency actions under the Administrative Procedures Act, 5 U.S.C. § 701(a)).  Id. at 11-12.  FERC also contended that PG&E’s petition for review sought to make an impermissible collateral attack on FERC’s Refund Proceeding decision, wherein FERC had initially ordered Cal-ISO to recalculate its invoices.  Id. at *11, 19-20. 

The Ninth Circuit agreed with FERC, holding that "Cal-ISO’s petition for review effectively complains that FERC acted arbitrarily and capriciously in limiting its prosecution of ‘double selling’ in the California energy market."  Thus, "[b]ecause FERC retains almost unfettered discretion to initiate investigations and prosecute violations of the FPA," the Court held that it lack[s] jurisdiction . . . and dismiss[ed] Cal-ISO’s petition for review."  Id. at *13 (emphasis in original). 

The Court also agreed with FERC that the Court lacked jurisdiction over PG&E’s petition for review, as it collaterally attacked FERC’s prior SDG&E Refund Proceeding.  Id. at *18-19.  The "collateral attack" rule requires "a party aggrieved by a FERC order [to] obtain review of that order by petitioning the court of appeals" rather than by attacking the order in a separate lawsuit.  Id. (quoting Public Util Dist No. 1 v. IDACORP, Inc., 379 F.3d 641, 652 n.12).  In determining whether PG&E’s petition for review presented a collateral attack on the Refund Proceeding, the Court examined "whether the order upon which [PG&E’s] petition [was] based was merely a ‘clarification’ of a prior order or a ‘modification’ of a prior order."  Id. (quotation omitted).  A petition seeking review of a modification of a prior order would be permitted, while a petition for review of an order that merely clarified a prior order would be barred by the collateral attack doctrine.  Id.  

Thus, to determine whether the collateral attack doctrine barred PG&E’s petition, the Court examined whether FERC’s decision to allow Cal-ISO to re-run its invoices to redistribute the cost of balancing the electricity grid only to parties causing imbalances modified or clarified FERC’s prior Refund Proceeding order which directed Cal-ISO to re-run its invoices in the first place.  The difference between a clarification and a modification of a prior order turns on "whether a reasonable party in the petitioner’s position would have perceived a very substantial risk that the original order meant what the Commission now says it meant."  Id. at *18 (quotation omitted). 

The Court held that FERC’s Refund Proceeding order made clear that FERC approved of the same accounting method Cal-ISO requested to apply to the re-runs of its Settlement Statements.  The Court then rejected PG&E’s argument that the order allowing Cal-ISO to reallocate costs to balance the grid was a modification, rather than a clarification, of the final Refund Proceeding order, because it "involved an actual reallocation of costs" whereas the prior order "had not given ‘the parties . . . a concrete proposal for how the proposed reallocation might impact the market or the parties.’"  Id. at *20-21.  The Court held that merely because the order PG&E sought to challenge "may be more detailed than the order in the Refund Proceeding does not change the fact that [the order] clarified – not modified – the Refund Proceeding Order and PG&E’s expectations."  Id. at *21.  Therefore, the Court found that in approving Cal-ISO’s proposal, FERC simply "clarified and implemented its previous order in the Refund Proceeding," and PG&E’s petition was barred.  Id. at *20.  The Court also rejected PG&E’s argument that the order allowing Cal-ISO’s Settlement Statement re-run methodology was not a collateral attack because it "concerns a rate change" and therefore presented "legal issues that were not present in the Refund Proceedings."  Id. at *23.  The Court held that the question of whether there was a rate change which violated the prohibition of retroactive ratemaking "clearly arose – and PG&E argued it – in the Refund Proceeding."  Id. at *23-24. 

This case, along with numerous others emanating from the California energy crisis, further demonstrates FERC’s broad jurisdictional authority over matters affecting wholesale electricity markets.