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Court Sides With California Utilities in FERC Cost Recovery Case

FERC made the wrong call in disallowing tariff provisions proposed by Southern California Edison, Pacific Gas & Electric (PG&E) and San Diego Gas & Electric (SDG&E), the U.S. Court of Appeals for the District of Columbia Circuit ruled last Tuesday. The utilities had offered a rate designed to recover from two classes of customers cost differentials from additional expenses arising out of the formation and maintenance of the California Independent system Operator (CAISO).

"Because the order by FERC contravenes the explicit language of the FERC-approved ISO tariff schedule to which the tariffs must conform, we find the order to have been arbitrary and capricious and grant the petitions for review," the court said in its July 12 decision.

The three California utilities had proposed a tariff term passing costs through both to customers under existing contracts and to new customers, but FERC disallowed the pass-through for the new customers.

Both the three utilities and municipal customers (customers under pre-existing contracts) petitioned the D.C. Circuit Court for review, challenging the FERC decision as arbitrary and capricious in violation of section 706 of the Administrative Procedure Act (APA). Specifically, Edison, PG&E and SDG&E, along with the municipal petitioners, asked the court to review FERC Orders 458 and 458-A.

For their part, the three California utilities said FERC's ruling violated the APA insofar as it ignored or misconstrued the "plain language" of parts of the ISO tariff, and relied instead on a Commission administrative law judge's (ALJ) "irrelevant" assertion that to allow otherwise would shift costs from the existing contract holders to the transmission owner (TO) tariff customers.

In its ruling, the court said that the language of the ISO tariff at issue in this case "is clear." Specifically, the court said that a section of the ISO tariff "is permissive, allowing for the recovery of cost differentials through the TO tariffs, as well as through bilateral negotiations to reform existing contracts."

The provision for the collection of a transmission revenue credit as part of the access charge "in section 7.1, combined with the definition of transmission revenue credit, creates an explicit accounting mechanism for the ISO to recover the cost differentials through the TO tariff on the TOs' behalf," the court added. "Thus, utility petitioners are correct that the ISO tariff allows them to recover the cost differentials associated with the formation of the ISO through their individual TO tariffs."

According to the court, FERC had argued that despite the plain text of the ISO tariff, the "cost causation principle" dictated shifting the burden entirely over to existing contract holders.

"Because FERC has already approved the mechanism in the ISO tariff for collecting the cost differentials from the tariff customers, and cannot retroactively reverse that determination in considering individual TO tariff filings, no argument concerning cost causation, regardless of how compelling, would permit the Commission to disregard the approved ISO tariff," the court said.

"Should the Commission upon further reflection consider that mechanism to violate the cost causation principle, perhaps it may initiate proceedings to change the ISO tariff prospectively, but that is not the case before us."

The court ruled that FERC "acted arbitrarily and capriciously" in upholding the ALJ's initial decision "that disregarded the plain language" of certain sections of the ISO tariff, "and the definition of transmission revenue credit contained therein." Opinions 458 and 458-A "are vacated, and the case remanded for further proceedings consistent with the ISO tariff."

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