Guest Juice When to FERC, When Not to FERC By Gordon Erspamer & Brian Orion

By Published On: January 20, 2006

An oft-neglected area of utility legal planning is deciding which forum, regulatory or judicial, should hear a contested matter. Often, courts and agencies share concurrent jurisdiction over particular areas. For most utilities, the decision typically involves a complex set of judgments – ranging from business considerations to legal issues. Forum selection should be given considerable attention because it can have significant and long-lasting ramifications. Recent events involving the Sacramento Municipal Utility District (SMUD) and its loss of secure transmission rights illustrate this point. Back in 1967, SMUD imported electricity from outside its control area in order to meet customer demand. To ensure adequate transmission capacity to deliver the power, SMUD entered into long-term contracts with investor-owned utilities for the right to transmit the power along utility-owned power lines. The applicable tariffs filed with FERC included a provision guaranteeing SMUD the right to renew the terms of the contracts when the old ones expired. The muni’s expectations were subsequently threatened by FERC’s new era of regulation that promotes open access. The new system requires utilities to provide access to their transmission lines to competing suppliers. Thus, to protect the rights of existing contract holders in an open-access system, such as SMUD, FERC first proposed that utilities include tariff provisions that would guarantee the right to renew transmission contracts upon termination of existing ones. The creation of the California Independent System Operator in 1996 ultimately caused FERC to change this approach. At that time, the grid operator proposed a new model for allocating transmission rights. Instead of a system where parties secured transmission rights via long-term contracts, transmission capacity is allocated in real-time transactions. In addition, CAISO’s tariff filed with FERC did not include a provision recognizing SMUD’s right to renew its contracts with the investor-owned utilities. FERC approved the grid operator’s tariff without the inclusion of a provision guaranteeing existing contract rights. As a result, the contracts remained valid but customers would have to take service under the CAISO tariff. (Pacific Gas & Elec. Co., 81 FERC ¶ 61,122, at 61,463-65 (1997)). The proposed provision of the investor-owned utilities’ tariffs that granted SMUD the right to renew its contracts was inconsistent with this new system. FERC struck it from the tariffs. Years later, when SMUD sought to renew its transmission contracts, the investor-owned utilities balked. They asserted that FERC had freed them from their obligation by eliminating the right of renewal from the tariffs. SMUD appealed to the commission and the federal courts, but lost each time. See Sacramento Municipal Utility District v. Pacific Gas & Elec. Co., 105 FERC ¶ 61,358 (2003); Sacramento Municipal Utility District v. FERC, No. 04-1171, 2005 WL 2848964 (D.C. Cir. Nov. 1, 2005). It became apparent that SMUD had essentially been defeated when FERC failed to require the utilities to include tariff provisions securing preexisting renewal rights. Neither FERC nor the courts would revisit the issue. Thus, SMUD’s seemingly secure transmission contracts suddenly became a vestige of the past. The muni was left to ponder whether there would have been a different outcome if it had not acquiesced in a regulatory forum but taken early legal action in the courts to protect its contract rights. This was an unfortunate outcome for SMUD. It is also one that might have been avoided if it had evaluated whether FERC was the best forum in which to raise its contract claims. The right to renew an agreement is a valuable contract right because it brings certainty and predictability to the holder. For SMUD, it meant having a simple, certain, familiar process for acquiring or extending transmission rights. Nothing in this world is free, and it is likely that SMUD ultimately was denied renewal rights for which it had paid. One can agree with open access as a policy matter and believe that valid economic expectations should be respected. Changing the rules of the game, however, should require compensating those whose rights are diminished in the process. Early on, SMUD faced a strategic choice: It could raise its claim in agency proceedings or go straight to court (or both). It may come as a surprise that its decision to litigate in agency proceedings ultimately influenced whether or not SMUD’s rights were vindicated. This is because the district was swimming against a great tide pushing for open access to transmission lines. And one immense source of the push was the agencies that would be deciding the issue of reconciling preexisting contract rights. FERC, the California Public Utilities Commission, and CAISO all sponsored or favored the new regime for allocating transmission rights. It was never very likely that these same agencies would recognize discrete transmission rights that contravened the new policy. The concept of long-term contracts lost meaning in a world where transmission was allocated in real time. In the end, SMUD’s position ran counter to defined policies in the agencies. In such a case, when an entity finds itself on the outside arguing for an unpopular position, its best refuge often may be a court. The judicial system is an institution designed to protect private rights, even unpopular ones. If SMUD had gone to court immediately, it might have been able to hold on to its rights, or at least been compensated for them. This underscores an important aspect of judicial review of agency decisions. An entity that goes before an agency and loses likely will wind up in a worse position than when it began. Not only will it have wasted time and money, but it will be poorly positioned in a challenge to the agency decision. That is because courts are required to give deference to the agency’s expert decision. When SMUD finally took its case to court, it had an uphill battle to overcome the impact of this deference. In reality, it never really had a fighting chance. There are drawbacks to litigation as well, including increased expense. A matter that may be decided in an agency for $50,000 to $100,000 may cost upwards of $1 million to litigate in court. This may be too expensive for some entities and with respect to many issues. However, the stakes are often high in the energy industry with respect to fundamental issues such as transmission. When the stakes are high and the agency inertia is opposed, it will often pay to litigate. At a minimum, it makes sense to think realistically about the likelihood of success in any given forum beforehand – and to do so early while it still makes a difference. – Gordon Erspamer is partner and co-chair of Morrison & Foerster’s Inter-Disciplinary Energy Group; Brian Orion is an attorney.

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