On October 16, 2012, the United States Court of Appeals for the Ninth Circuit issued an opinion deciding several consolidated petitions for review relating to a power contract between Bonneville Power Administration (“Bonneville”) and its long-time customer, Alcoa, Inc. (“Alcoa”).  The case reviewed three disputed aspects of the power contract: 1) Bonneville’s “preference” customers and other Pacific Northwest entities (“Preference Petitioners”) argued that the contract was unlawful because it was inconsistent with the agency’s statutory mandate to act in accordance with sound business principles; 2) Alcoa argued that Bonneville erred in adopting and applying the Equivalent Benefits standard to the Alcoa contract; and 3) certain petitioners (“NEPA Petitioners”) claimed that Bonneville violated the National Environmental Policy Act (“NEPA”) by declining to prepare an Environmental Impact Statement (“EIS”) when deciding to execute its contract with Alcoa.  The disputed power contract was originally structured into two separate time periods, however subsequent to the initiation of the petitions, the power contract had been amended by Bonneville and Alcoa and references to the second time period (“Second Period”) were removed.  The court addressed the issues as they related to the first time period (“Initial Period”) separately from the Second Period. 

Preference Petitioners argued that instead of agreeing to sell power to Alcoa at the Industrial Firm power rate – a statutorily prescribed rate for industrial customers such as Alcoa – Bonneville should have sold the power to other buyers on the market, where market rate prices for energy are generally higher than the Industrial Firm power rate.  Bonneville’s statutes require that when disposing of electric energy generated by the federal facilities, Bonneville “give preference and priority” to public bodies (which include states, public power districts, counties and municipalities) and cooperatives that purchase federal power for resale to their consumers.  Preference customers receive a cost-based rate called a priority firm (“PF”) rate.  The PF rate is directly benefited, and reduced by, the power sales that Bonneville makes from certain other rates.  Bonneville also has a duty to dispose of the federally generated electric power in a manner that encourages widespread and diversified use “at the lowest possible rates to consumers consistent with sound business principles.”  Preference Petitioners argued that this meant Bonneville had an affirmative duty to provide them power at the lowest possible rates, and that by choosing to sell the power at the lower Industrial Firm rate, Bonneville forwent an opportunity to make a greater profit.  Such forgone revenue effectively raised the PF rate, which, according to the argument by Preference Petitioners, is contrary to the requirement that Bonneville sell power at the lowest possible rates to consumers consistent with sound business principles.  Additionally, certain petitioners claim that Bonneville also erred in its methodology for determining that the power contract will make a small profit during the Initial Period, and that it erred in agreeing to a waiver-of-damages provision for the power contract.

The Court rejected Preference Petitioners’ arguments that Bonneville must maximize profits in order to ensure the lowest rates for preference customers, stating “as we have previously noted, BPA’s governing statutes ‘do not dictate that BPA always charge the lowest possible rates.’  Rather we are mindful that Congress has delegated to BPA the discretion to determine ‘how best to further BPA’s business interests consistent with its public mission,’ and we ‘may only set aside such an assessment if it is unreasonable, meaning that it is ‘contrary to clear congressional intent or that [it] frustrate[s] the policy Congress sought to implement.’”   The court also considered Bonneville’s analysis for the finding that the power contract will make a small profit during the Initial Period, and Bonneville’s determination that a waiver-of-damages provision for the power contract was appropriate.  In each instance the court found that Bonneville did not act in an arbitrary and capricious manner and did not violate its statutory mandates.  Based on these determinations, the court denied the petitions for review insofar as they pertained to the Initial Period.  The court dismissed the petitions as they related to the Second Period, because the removal of the Second Period from the contract precluded Preference Petitioners from having a ripe claim sufficient for standing.  Judge Carlos Bea filed a lengthy dissent, disagreeing with the panel’s decision to dismiss the Preference Petitioners’ claims as to the Second Period for lack of standing.  Judge Bea argued that the Preference Petitioners have standing to make the claims and that their claims are valid, insofar as they are related to Bonneville’s statutory requirement to charge Alcoa the Initial Period rate and no less.

With regard to the second issue, Alcoa disagreed with Bonneville’s inclusion of the Equivalent Benefits requirement in the power contract.  Bonneville developed the Equivalent Benefits standard in response to prior litigation relating to historical contracts with Alcoa.  The Equivalent Benefits standard was created to act as a measure that Bonneville used to ensure that it was satisfying the statutory requirement that it set rates in accordance with sound business principles when agreeing to specific rate terms.  The standard required an affirmative determination by Bonneville that it will derive benefits equivalent to the cost of providing the electric power service.  Bonneville found that the Equivalent Benefits standard had been met for the Initial Period.  Continuation of the power contract for the Second Period was dependent on the requirement that a Court holds that the Equivalent Benefits standard was not applicable to the power contract.  As such, Alcoa requested the judicial determination that the Equivalent Benefits standard was contrary to Bonneville’s governing statutes.  The court found that the terms of the power contract were within Bonneville’s discretion, and because Bonneville did not act in an arbitrary and capricious manner by entering into the terms for the Initial Period, the court need not make any specific decisions with regard to the Equivalent Benefits standard as applied to the Initial Period.  Due to the power contract being altered to remove references to the Second Period, the court dismissed Alcoa’s claim for the Second Period because without a pending contract containing the Equivalent Benefits standard, Alcoa lacked the requisite ripeness of a claim needed to have standing. 

Finally, NEPA Petitioners argued that Bonneville had violated NEPA by failing to prepare an EIS when deciding to execute the power contract with Alcoa.  An EIS is not required when agency determines the action does not have a significant effect, either as an individual action or as part of the commutative effect of many actions, on the human environment.  Bonneville considered the relevant factors, and the power contract did not involve adding any power generating resources, any alterations to existing power generating resources nor any physical changes in the transmission system.  The Department of Energy regulations provide that such actions do not require the preparation of an EIS.  The court held that Bonneville’s determination not to issue an EIS after considering the facts pertinent to the action of entering into the power contract was not arbitrary and capricious. 

The case, Alcoa, Inc., et al, v. Bonneville Power Admin., 9th U.S. Circuit Court of Appeals, Nos. 10-70211, 10-70707, 10-70743, 10-70782, 10-70813, and 10-70843, was initially argued and submitted on May 5, 2011, and the decision of the court was filed October 16, 2012.  The opinion was by Judge Ikuta, along with a concurrence by Judge Tashima and a partial concurrence and partial dissent by Judge Bea. The Ninth Circuit’s opinion is available here.