FERC v. CA Litigation over CAISO’s Board Selection

The conflict between federal energy regulators and California over the makeup of the California Independent System Operator’s board following the 2000-01 energy crisis was largely decided at the appellate court level.

On June 22, 2004, the U.S. District Court of Appeals for the D.C. Circuit ruled in California’s favor that its new board was indeed “independent.”

The court held in no uncertain terms that FERC cannot control CAISO’s board. “FERC has no authority to replace the selection method or membership of the governing board of an ISO, let alone to compel a corporation created by state law to employ a governing board chosen in violation of that law.”

The heart of the issue was state law, AB 1X, enacted in response to the energy debacle. It required board members to be nominated by the governor and confirmed by the state Senate to replace a far larger stakeholder board. Shortly after that, the governor appointed the Department of Water Resources to enter into billions of dollars of energy contracts to fill in the void left by the struggling private utilities following volatile wholesale energy prices.

FERC ruled that allowing the governor to both appoint CAISO board members and make DWR a big market player in the grid operator’s market violated the independence requirement under its Order 888.

Federal energy attorneys argued that FERC’s authority was based on an interpretation of “practices” that affect rates over which FERC has authority. Many thought the argument was a stretch, and the court agreed.

The appellate court held, “None of the words surrounding the word ‘practice’ in the statutory section suggest a congressional concern with corporate governance.” It concluded that FERC’s purported reach of authority was to an “’infinitude’ of practices.” The ruling added, “We are not biting.”

The court concluded, “If California stubbornly refused to make CAISO conform to FERC’s requirement for ISOs, the FERC can declare that CAISO is not a CAISO, or threaten to do so.”

FERC declined taking this nuclear option.

It wasn’t until July 2005 that California and federal energy regulators finally reached a deal on the makeup of the grid operator’s board membership. The proposal by CAISO’s directors to limit the governor’s nominations to a screened talent pool of individuals satisfied FERC’s requirements for board independence. — Elizabeth McCarthy

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FERC v. CA Litigation over CAISO’s Board Selection

William J. Kelly

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