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Pacific Northwest Generating Cooperative v. Dep't of Energy

December 17, 2008; see amended opinion filed August 5, 2009

PACIFIC NORTHWEST GENERATING COOPERATIVE; BLACHY-LANE COUNTY COOPERATIVE ELECTRIC ASSOCIATION; CENTRAL ELECTRIC COOPERATIVE INC.; CLEARWATER POWER CO.; CONSUMERS POWER, INC., COOS-CURRY ELECTRIC COOPERATIVE, INC.; DOUGLAS ELECTRIC COOPERATIVE; FALL RIVER RURAL ELECTRIC COOPERATIVE, INC.; LANE ELECTRIC COOPERATIVE; LOST RIVER ELECTRIC COOPERATIVE, INC.; NORTHERN LIGHTS, INC.; OKANOGAN COUNTY ELECTRIC COOPERATIVE, INC.; RAFT RIVER RURAL ELECTRIC COOPERATIVE, INC.; SALMON RIVER ELECTRIC COOPERATIVE, INC.; UMATILLA ELECTRIC COOPERATIVE ASSOCIATION; AND WEST OREGON ELECTRIC COOPERATIVE, INC., PETITIONERS,
v.
DEPT. OF ENERGY; BONNEVILLE POWER ADMINISTRATION, RESPONDENTS.
ALCOA, INC., PETITIONER, PUBLIC POWER COUNCIL, INTERVENOR,
v.
BONNEVILLE POWER ADMINISTRATION, RESPONDENT.
ALCOA, INC., PETITIONER, COLUMBIA FALLS ALUMINUM COMPANY; INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES; PUBLIC POWER COUNCIL, INTERVENORS,
v.
BONNEVILLE POWER ADMINISTRATION; DEP'T OF ENERGY, RESPONDENTS.
PACIFIC NORTHWEST GENERATING COOPERATIVE; BLACHY-LANE COUNTY COOPERATIVE ELECTRIC ASSOCIATION; CENTRAL ELECTRIC COOPERATIVE INC.; CLEARWATER POWER COMPANY; CONSUMERS POWER INC.; COOS-CURRY ELECTRIC COOP., INC.; DOUGLAS ELECTRIC COOPERATIVE; FALL RIVER RURAL ELECTRIC COOPERATIVE, INC.; LANE ELECTRIC COOPERATIVE INC.; LOST RIVER ELECTRIC COOPERATIVE, INC.; NORTHERN LIGHTS INC.; OKANOGAN COUNTY ELECTRIC COOPERATIVE INC.; RAFT RIVER RURAL ELECTRIC COOPERATIVE, INC.; SALMON RIVER ELECTRIC COOPERATIVE INC.; UMATILLA ELECTRIC; WEST OREGON ELECTRIC COOPERATIVE, INC., PETITIONERS,
v.
BONNEVILLE POWER ADMINISTRATION, RESPONDENT.
PACIFIC NORTHWEST GENERATING COOPERATIVE; BLACHY-LANE COUNTY COOPERATIVE ELECTRIC ASSOCIATION; CENTRAL ELECTRIC ASSOCIATION INC.; CLEARWATER POWER COMPANY; CONSUMERS POWER INC.; COOS-CURRY ELECTRIC COOP., INC.; DOUGLAS ELECTRIC COOPERATIVE; FALL RIVER RURAL ELECTRIC COOPERATIVE; LANE ELECTRIC COOPERATIVE INC.; LOST RIVER ELECTRIC COOPERATIVE, INC.; NORTHERN LIGHTS INC.; OKANOGAN COUNTY ELECTRIC COOPERATIVE INC.; RAFT RIVER RURAL ELECTRIC COOPERATIVE INC.; SALMON RIVER ELECTRIC COOPERATIVE INC.; UMATILLA ELECTRIC; WEST OREGON ELECTRIC COOPERATIVE, INC., PETITIONERS,
v.
BONNEVILLE POWER ADMINISTRATION, RESPONDENT.
ALCOA, INC., PETITIONER,
v.
BONNEVILLE POWER ADMINISTRATION, RESPONDENT.
INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES, PETITIONERS,
v.
BONNEVILLE POWER ADMINISTRATION, RESPONDENTS.



On Petition for Review of an Order of the Bonneville Power Administration.

The opinion of the court was delivered by: Berzon, Circuit Judge

FOR PUBLICATION

Argued and Submitted November 7, 2007 -- Portland, Oregon

Before: Raymond C. Fisher, Marsha S. Berzon, Circuit Judges, and Barry Ted Moskowitz,*fn1 District Judge.

Opinion by Judge Berzon

OPINION

A. Introduction

At their origins during the New Deal, the Bonneville Project's hydroelectric operations in the Pacific Northwest, administered by the Bonneville Power Administration ("BPA"), were promoted as spreading the benefits of affordable federal power widely, to "the farmer and the factory, and all of you and me."*fn2 At the same time, the Project gave a vital boost to the aluminum industry of the Pacific Northwest. Indeed, in the early days of the Project, what was good for BPA was good for the aluminum industry, and what was good for the aluminum industry was good for BPA. Aluminum manufacturers received low-cost federal hydroelectric power to operate energy-intensive smelting operations in the Pacific Northwest, and BPA gained a reliable market for a supply of electric power that otherwise greatly exceeded demand in a region where rural electrification was still a work in progress. See H.R. Rep. No. 96-976, pt. 2, at 27 (1980), as reprinted in 1980 U.S.C.C.A.N. 6023.

BPA's synergistic relations with the aluminum industry during this early period were widely seen as a public good. The aluminum manufacturers and the region's nascent aviation industry, which they supplied, not only brought many high-wage jobs to the Pacific Northwest, but also served as a vital strategic asset for the United States during World War II and the Cold War decades that followed.*fn3

Times have changed. Public utilities and electrical cooperatives serve a larger regional population with greater needs for electrical power, see id., to which they are statutorily guaranteed preferential access. See 16 U.S.C. § 832c(a).*fn4 Rising energy prices have made the relatively inexpensive federal power generated by BPA more attractive than ever, not only to BPA's regional " 'preference' customers," Aluminum Co. of America v. Central Lincoln Peoples' Util. Dist. ("Alcoa"), 467 U.S. 380, 384 (1984), but also to utilities outside the Pacific Northwest.*fn5

At the same time, due to a variety of factors - among them higher energy costs - the region's aluminum industry has fallen on hard times. The smelting operations of the major aluminum manufacturers, which traditionally ran on electric power purchased directly from BPA, are generally being operated at reduced capacity, and in some cases, have shut down entirely. This case centers on how much BPA can or must do, under the authority and mandate conferred upon it by Congress, to aid its longtime, but now ailing, customers.

The assistance largely at issue here consists of three three-party contracts BPA executed in June 2006, each with a local public utility company and one of the aluminum companies that are "direct service industrial" customers ("DSIs") of BPA. In the contracts, BPA committed itself to make payments to the aluminum company DSIs ("aluminum DSIs") totaling a maximum of $59 million per year for five years in lieu of supplying them with actual electrical power, while retaining the option to sell them physical power instead in the final two years. In addition, in September 2006, BPA arranged for the sale of physical power to Port Townsend Paper Company ("Port Townsend"), the sole existing DSI that is not an aluminum manufacturer, via a contract between BPA and a local utility company, Public Utility District Number 1 of Clallam County ("Clallam"), for the sale of physical power, which Clallam would then supply to Port Townsend. Challenges to these four contracts by aluminum DSI Alcoa; the Pacific Northwest Generating Cooperative, an organization of electrical cooperatives that are preference customers of BPA (collectively, "Cooperative"); and Industrial Customers of Northwest Utilities, an organization of firms which purchase electricity from utility companies, rather than directly from BPA (collectively, "Industrial Customers"), form the basis of the seven petitions that have been consolidated in this case. Both Port Townsend and the Public Power Council, an association of consumer-owned utilities, have intervened as interested parties.

B. The Statutory Context

To set out the complex statutory landscape against which we consider these challenges, we briefly review the enactments in which Congress over the past seven decades has established and regulated BPA's authority to sell the output of the Federal Columbia River Power System, as the regional energy generation operations which began with the Bonneville Project are known. See Golden Nw. Aluminum, 501 F.3d at 1041.

The Bonneville Project Act of 1937 ("Project Act"), 16 U.S.C. § 832-832j, created BPA as the authority responsible for the "sale and disposition" of the electric energy generated by the federal hydroelectric projects in the Pacific Northwest. See § 832a. The Project Act directed that "in disposing of electric energy generated at [the Bonneville] project, [BPA shall at all times] give preference and priority to public bodies and cooperatives." § 832c(a). At the same time, the Project Act also authorized BPA, subject to this preference and priority restriction, to enter into contracts for the "sale at wholesale of electric energy . . . to private agencies and persons." § 832d(a). Historically, there have been two types of private entities that purchase electric power directly from BPA: investor-owned utility companies ("IOUs") and DSIs. See Ass'n of Pub. Agency Customers, Inc. v. BPA, 126 F.3d 1158, 1164 (9th Cir. 1997).

Over the following decades, Congress responded to increasing demand for BPA's low-cost federal power within and outside the Pacific Northwest with four additional pieces of legislation relevant to this case:

First, in 1964, Congress passed the Regional Preference Act, 16 U.S.C. §§ 837-837h ("RPA"), which provides that the sale of electric energy from "Federal hydroelectric plants in the Pacific Northwest" to customers outside the region must be limited to "surplus energy," § 837a, defined as "energy . . . which would otherwise be wasted because of the lack of a market therefor in the Pacific Northwest at any established rate." § 837(c).*fn6

Second, the Transmission Act, 16 U.S.C. §§ 838-838h, enacted in 1974, established the basic principles that rates for BPA power must be fixed and established (1) with a view to encouraging the widest possible diversified use of electric power at the lowest possible rates to consumers consistent with sound business principles, (2) having regard to the recovery . . . of the cost of producing and transmitting such electric power, . . . and (3) at levels to produce such additional revenues as may be required, in the aggregate with all other revenues of the Administrator, to pay when due [expenses related to] . . . all bonds issued and outstanding pursuant to this chapter . . . . § 838g.

Third, the Northwest Power Act, 16 U.S.C. §§ 839-839h ("NWPA"), signed into law in 1980, was triggered by Congress's recognition that demand within the Pacific Northwest for low-cost federal power threatened to outstrip supply, and that BPA's dams were having a significant impact on the region's fish and wildlife. See Ass'n of Pub. Agency Customers, 126 F.3d at 1165. The NWPA contains several provisions central to this litigation.

Initially, the NWPA directs that "[w]henever requested," by either a "public body and cooperative entitled to preference under the [Project Act]" or an "investor-owned utility," BPA "shall offer to sell . . . electric power to meet the [requesting entity's] firm power load."*fn7 § 839c(b)(1). In the same section of the Act, Congress also states that BPA is "authorized to sell in accordance with this subsection electric power to existing [DSI] customers." § 839c(d)(1)(A). The statute then instructs BPA to offer "an initial long term contract" for the sale of electric power to each of its existing DSI customers, § 839c(d)(1)(B), and, under a separate subsection, to its public utility and cooperative customers and IOUs. § 839c(g). The NWPA also authorizes BPA, in § 839c(f), to "sell, or otherwise dispose of, electric power, including power acquired pursuant to this and other Acts, that is surplus to [BPA's] obligations incurred pursuant to subsections (b), (c), and (d) of this section[,] in accordance with this and other Acts applicable to [BPA] . . . ."

In addition, the NWPA directs BPA to "establish, and periodically review and revise, rates for the sale and disposition of electric energy," § 839e(a)(1), which are subject to "confirmation and approval by the Federal Energy Regulatory Commission [("FERC")] upon a finding by the Commission" that, among other things, "such rates . . . are based upon [BPA]'s total system costs." § 839e(a)(2)(B). Rates for preference customers are mandated, accordingly, to be sufficient to "recover the costs of that portion of the Federal base system resources needed to supply such loads," § 839e(b)(1), with "Federal base system resources" defined as

(A) the Federal Columbia River Power System hydroelectric projects;

(B) resources acquired by [BPA] in longterm contracts . . . ; and

(C) resources acquired by [BPA] in an amount necessary to replace reductions in capability of the resources referred to in subparagraphs (A) and (B) of this paragraph.

§ 839a(10). Congress also instructed that "rates applicable to direct service industrial customers shall be established," § 839e(c)(1), at a level that is "based upon [BPA's] applicable wholesale rates to [preference] customers and the typical margins included by such [preference] customers in their retail industrial rates [plus other considerations] . . . ." § 839e(c)(2).

C. The Present Litigation

The events that immediately gave rise to this litigation began in June 2005, when BPA initiated the process that resulted in the execution of the contracts challenged here. On June 30, 2005, BPA issued a Record of Decision on Service to Direct Service Industrial (DSI) Customers for Fiscal Years 2007-2011 ("DSI Service ROD"), in which it announced its intention to enter into the three-way contracts with the aluminum DSIs and the local utility companies. The proposed contracts would provide "service benefits," with the default form of delivery of the benefits being "financial payment[s]" by BPA to the DSIs. BPA retained a one-way option, however, in the fourth and fifth years of each of the contracts to discontinue a portion of the payments to a particular DSI and supply that DSI with physical power instead, although the DSI could then elect to refuse service and terminate the agreement. BPA specified that before exercising that option, the agency would conduct a "public process" to consider and explain its decision.

The amount of the payments to the DSIs was determined according to a formula based on the difference between the market price of power and BPA's standard rate for power sold to its preference customers ("PF rate"). Under the default mode, monetary payments to each DSI would be made in an amount equal to this price differential multiplied by the amount of physical power the DSI purchased from the local utility partner, thus tying the value of the benefit to the DSI's electricity use and, therefore, to its level of operations and employment.*fn8

Crucially, BPA placed three limitations on the amount of the payments it would make to the DSIs each year. First, BPA obligated itself to make the payments only on the first 560 average megawatts ("aMW")*fn9 of capacity consumed by the DSIs each year.*fn10 Second, BPA capped the price differential it was willing to pay the DSIs for the power they purchased on the open market at no more than $24/MWh. Third, BPA limited the total annual benefit the DSIs could receive to $59 million.*fn11

BPA acknowledged in the DSI Service ROD that "service to the DSIs will come at the expense of higher rates paid by . . . preference customers." While BPA stated that it would "not revisit[ ] its . . . decision to serve some amount of DSI load at a known and capped cost," it also indicated - in apparent contradiction - that both the decision to contract with the DSIs and the level of service benefits that it would provide were possibly subject to change. Alcoa and the Cooperative both filed in this Court timely petitions for review of the DSI Service ROD.

On May 31, 2006, BPA issued a Supplement to the DSI Service ROD ("Supplemental ROD"), which announced certain revisions in the agency's plan to contract with the DSIs. In particular, BPA decided to provide "slightly more operating flexibility" to the aluminum DSIs by reducing the minimum level of energy usage required for eligibility to receive the monetary benefit payments.*fn12 The plan's main provisions, including the service benefit levels and the method of delivery, remained unchanged. Alcoa and the Cooperative again both filed in this Court timely petitions, this time for review of the Supplemental ROD.

In June 2006, less than a month after the issuance of the Supplemental ROD, BPA executed contracts with the three aluminum DSIs - Alcoa, Columbia Falls Aluminum Co. and Golden Northwest Aluminum Holding Co. - under the terms described in the Supplemental ROD. Alcoa and the Cooperative petitioned this Court for review of those contracts as well.

In the DSI Service ROD and the Supplemental ROD, BPA also announced that it would provide Port Townsend with its full requirements for power, seventeen aMW, to be supplied through Clallam. Under the final proposal, the rate for power sold by BPA to Clallam would be set at a level equal to the agency's rate for power sold to local utilities (the PF rate) plus the margin typically charged by the latter to their industrial customers. BPA, Clallam, and Port Townsend then executed contracts providing for power service to Port Townsend through Clallam. Industrial Customers timely filed a petition for review of the contracts.

D. BPA's Rate Schedules

Because a central dispute among the parties in this case concerns which of BPA's various power rate schedules should apply to the contracts at issue, a brief overview of the possible rate categories is in order.

BPA is required by its governing statutes to "establish" a number of energy rate schedules for the sale of power to different customer groups. See § 839e(a)(1). BPA calculates these rate schedules according to detailed statutory guidelines, see § 839e(a)-(h), and promulgates them through a formal ratemaking procedure that includes publication of proposed rates in the Federal Register, public hearings, and FERC approval. See § 839e(i). Four of BPA's rate schedules are at issue in this case: the PF rate, the Industrial Firm Power ("IP") rate, the New Resources ("NR") rate, and the Firm Power Products and Services ("FPS") rate.

(a) PF Rate

The PF rate is a cost-based rate at which BPA sells firm power to its preference customers, whose requirements for firm power the agency is required to fulfill. See §§ 839c(b), 839e(b). It is calculated pursuant to guidelines specified in § 839(e)(b), and is BPA's lowest published rate. For the year ending September 30, 2007, the average PF rate was $27.33/ MWh.

(b) IP Rate

The IP rate is "applicable to [firm power sales] made to direct service industrial customers" and is "established" pursuant to the requirements of § 839(e)(c). Like the PF rate, it is a cost-based rate. See § 839(e)(c). For the year ending September 30, 2007, the average IP rate was $45.08/MWh.

(c) NR Rate

The NR rate applies to power sales to utilities that are used by those utilities to serve "new large single load[s]." See § 839a(13); the NR rate is intended to penalize DSI customers who attempt to lower their energy costs by purchasing power at lower rates from one of the public utilities that BPA serves instead of purchasing the power directly from BPA at the IP rate. See H.R. Rep. No. 96-976, pt. 1, at 25, 51 (describing purpose of NR rate as a deterrent). For the fiscal year ending September 30, 2007, the average NR rate was $77.03/MWh.

(d) FPS Rate

The FPS rate is perhaps the most confounding of BPA's rate schedules, but, because all four of the contracts at issue utilize it, also the most important for this case.

As it does for the PF, IP, and NR rates, BPA establishes an FPS rate schedule pursuant to the ratemaking requirements of § 839e(i), which it then publishes. See BONNEVILLE POWER ADMINISTRATION, 2007 WHOLESALE POWER RATE SCHEDULES 55- 59 (November 2006) (hereinafter "Wholesale Power Rate Schedule"), available at http://www.bpa.gov/power/PFR/ rates/2007-09_Power_Rates.pdf. Unlike the other rate schedules, however, the FPS rate schedule includes a provision, entitled "Flexible Rate," which states that energy rates "may be specified at a higher or lower average rate [than the published rate] as mutually agreed by BPA and the Purchaser." See id. at 57. In other words, although BPA publishes an FPS rate schedule, BPA and the contracting customer are free to deviate from this published rate by mutual agreement. See Supplemental ROD ("Power is sold under the FPS schedules at rates mutually agreed to by BPA and the purchaser."). Thus, a sale made pursuant to the FPS rate schedule could, in theory, be made at any price. As such, the FPS rate schedule is, in effect, no rate schedule at all.*fn13

II. Jurisdiction

The NWPA gives this Court, as the "court of appeals for the region," jurisdiction to hear any suit challenging "final actions and decisions taken pursuant to this chapter [of the NWPA] by [BPA]" or to "the implementation of such final actions, whether brought pursuant to this chapter, the [Project] Act, the [Regional Preference Act], or the [Transmission] Act." § 839f(e)(5). The NWPA lists certain BPA actions as representing "final actions subject to judicial review" under the Administrative Procedure Act, 5 U.S.C. §§ 701-06. See § 839f(e)(1)(A)-(H).*fn14 Among the listed actions are "sales . . . of electric power under section 839c of this title." § 839f(e)(1)(B).

All four of the contracts at issue either involve sales of electric power made pursuant to BPA's authority under § 839c or are, at least, "other final" agency actions under § 839f(e)(3), and so are reviewable by this court.*fn15 Thus, we have jurisdiction to review the validity of the contracts, including (1) whether BPA is authorized and/or obligated to sell power to the DSIs under § 839c; (2) whether BPA is permitted to offer the DSIs monetary benefits in lieu of delivering physical power; (3) whether BPA may offer contract terms to Port Townsend that differ from those offered to the aluminum DSIs; and (4) whether BPA must treat Port Townsend as a "new large single load" for the purposes of its contract with Clallam.*fn16

Alcoa and the Cooperative also challenge the actual rates incorporated by BPA into the aluminum DSI contracts. Alcoa argues that it is entitled to purchase power from BPA at a cost-based rate, and that, under the monetary benefit provisions of its contract with BPA - which utilize a mutually agreed upon FPS rate as a baseline - it is, as a practical matter, subject to a market-based rate.*fn17 The Cooperative, on the other hand, argues that the rate assumptions that determine the monetary benefit BPA pays to the aluminum DSIs are impermissibly low and thereby result in an unlawful subsidy.

This issue is ripe for review. While this Court ordinarily is not permitted to review rate-making decisions until those decisions are final and have been approved by FERC, see Ass'n of Public Agency Customers, 126 F.3d at 1177, 1179, BPA affirmatively stated in the Supplemental ROD that "[a] formal rate proceeding is not legally required for BPA to negotiate a rate within [the FPS] rate schedule . . . and[,] in this case in particular, would add little or nothing to the record already developed . . . ." BPA, in other words, has indicated that it does not plan to seek approval from FERC of the rate assumptions underlying the monetary payments or use the formal rate-making procedures outlined in § 839e(i) with respect to those payments. Because the parties do not challenge BPA's assertion that no formal rate-making procedure, including FERC approval, is required here, we assume, without deciding, that BPA is correct. As BPA plans to take no further action with respect to the amount of monetary benefits specified in the DSI contracts or the method by which they are calculated, the benefit mechanism represents the "consummation of the agency's decisionmaking process" by which BPA's "obligations . . . [were] determined," see Bennett v. Spear, 520 U.S. 154, 178 (1997) (internal quotation marks and citations omitted), and thus qualifies as a final agency action subject to our review under the catch-all review category.

For similar reasons, Industrial Customers' challenge to the rate applicable to the sale of power to Clallam is also ripe for review. Industrial Customers argues that the BPA/Clallam contract rate is impermissibly low because it is "not the DSI rate, the NR rate for new large single loads, or the market price of electricity." Like the rate used to calculate the level of the aluminum DSIs' monetary benefit, the BPA/Clallam contract rate is a negotiated rate made pursuant to the FPS rate schedule. As noted, BPA asserts that it is not legally required to seek FERC approval of a rate negotiated under the FPS rate schedule.*fn18 Because the agency provides no indication that it nonetheless plans to seek FERC approval of the Clallam contract rates,*fn19 we can only assume that it does not plan to do so. A review of BPA's notice of ...


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