On May 4, 2010, the United States Court of Appeals for the District of Columbia Circuit (the “DC Circuit”) vacated and remanded a decision by the Federal Energy Regulatory Commission (“FERC” or the “Commission”) requiring the California Independent System Operator (“CAISO”) to alter its open access transmission tariff to comply with FERC’s station-power netting requirements. The DC Circuit agreed with Southern California Edison Company’s (“SCE”) claim that FERC’s ruling exceeded its authority by encroaching on state jurisdiction over retail energy.
Station power is the electricity generators use to heat, cool, light, and power their on-site equipment. Previously, when utilities were vertically integrated, generators that provided their own station power would treat the electricity consumption as negative generation by netting any station power they had provided themselves against their generation. After Order No. 888 directed utilities to unbundle their services, several utilities sold their merchant generating facilities. As a result, when merchant generators now use station power, even if it is self-supplied, it is arguably considered a retail sale of energy, which falls under state jurisdiction.
Previously, FERC held in 2001 that generators could net their station power on an hourly basis. In the aftermath of FERC’s 2001 order, both the PJM Interconnection, LLC (“PJM”) and New York Independent System Operator (“NYISO”) eventually revised their tariffs to adopt one-month netting provisions. These actions allowed generators to possibly avoid any retail charges within a month and thus, lower their costs. In 2006, the DC Circuit affirmed that FERC had the authority to approve these netting provisions in Niagara Mohawk Power Corp. v. FERC.
Meanwhile, FERC ordered CAISO in 2004 to revise its tariff to implement a one-month netting time requirement, as opposed to an hourly netting of energy. FERC said that the requirement was necessary to be consistent with monthly netting used in PJM and NYISO. SCE, an investor-owned utility, contested FERC’s decision. SCE argued that states, and not FERC, have jurisdiction over retail energy sales. FERC concluded however, that if a generator netted electricity within a one-month period, no retail sale of power had occurred to give states rate authority. Eventually, the DC Circuit decided to hear SCE’s appeal of FERC’s decision.
In reaching its decision, the DC Circuit first noted that it could not rely on Niagara Mohawk. In Niagara Mohawk, FERC’s authority was already conceded by the time the case came to the DC Circuit; the only issue was whether a one-month netting period or a one-hour netting period should be required. The DC Circuit stated that SCE, on the other hand, has consistently disputed FERC’s authority. As such, the jurisdiction question was squarely before the DC Circuit. Second, the DC Circuit found FERC’s implicit reasoning that the length of the netting period determines whether a retail sale occurs to be arbitrary and unprincipled. Third, the DC Circuit did not understand how FERC could determine a retail sale had not occurred unless it concluded that the transaction was a wholesale sale or transmission. Finally, the DC Circuit did not see a conflict arising from using different netting periods for station power while still allowing FERC to maintain netting periods for transmission.
By vacating and remanding for further proceedings, the DC Circuit gives FERC a possible opportunity to justify its station-power netting policies on remand. The full DC Circuit opinion is available at http://pacer.cadc.uscourts.gov/common/opinions/201005/05-1327-1243067.pdf.