On September 8, 2016, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) upheld FERC’s determination that various marketers and generators of electricity (“Petitioners”) violated the California Independent System Operator Corporation (“CAISO”) tariff by scheduling electricity in advance for export and in real-time for import, overscheduling load by submitting exaggerated day-ahead demand schedules to CAISO, and submitting bids at prices that did not reflect marginal costs and/or market prices.
The Ninth Circuit’s order addresses another proceeding in a long line of cases relating to the California Energy Crisis of 2000–2001. In February 2013, after several years of proceedings, a FERC Administrative Law Judge (“ALJ”) found that numerous electricity marketers and generators had violated CAISO’s tariff. Specifically, the ALJ found that the companies had: (1) scheduled “False Exports,” where a marketer would purchase electricity from sources internal to California, schedule that electricity in advance for export, and also schedule that electricity in real-time for import, which the ALJ found allowed sellers to circumvent CAISO’s price caps; (2) engaged in “False Load Scheduling,” where sellers in CAISO’s day-ahead market would submit inflated demand schedules to CAISO, and CAISO would then direct the energy to shortages in the real-time market and compensate the sellers at the real-time market’s clearing price, which one of the Petitioners’ experts explained allowed sellers to earn the market-clearing price in the real-time market on power that was purchased at the day-ahead price; and (3) engaged in “Anomalous Bidding,” where sellers would either submit bids at prices above marginal cost “in combination with some other tariff violation,” or at prices so high above the market price that those bids would not likely be accepted and, as a result, were used “to effectuate supply withholding.”
In November 2014, FERC largely affirmed the ALJ’s findings, determining that the transactions violated CAISO tariff provisions that barred unusual activity regarding imports, required sellers to identify customers and their power demands, required sellers to submit balanced schedules, and prohibited unusual or anomalous trades and transactions. FERC further determined that the transactions influenced the market clearing price. While some companies settled, FERC determined that the Petitioners were liable for overcharges and the excess payments they received.
The Petitioners—which included MPS Merchant Services, Inc., Illinova Corporation, Shell Energy North America, LP, APX, Inc., and BP Energy Co.— filed a petition for review with the Ninth Circuit challenging FERC’s order largely upholding the ALJ’s decision. In its opinion, the Ninth Circuit held that FERC reasonably interpreted the plain text of CAISO’s tariff and noted that the courts defer to FERC’s reasonable interpretation of ambiguous tariff language. In addition, the Ninth Circuit held that FERC’s findings that Petitioners engaged in the transactions were supported by substantial evidence. The Ninth Circuit also held that FERC’s conclusion that Petitioners’ strategies forced utilities to rely on the real-time market and threatened the reliability of California’s electricity grid was reasonable. Thus, the Ninth Circuit upheld FERC’s interpretation of the CAISO tariff as reasonable and its determination that the Petitioners violated the CAISO tariff as not arbitrary, capricious, or an abuse of discretion. However, because FERC’s remedial order requiring refunds remains under consideration on rehearing, the Ninth Circuit stated that it could not review that order, as it was not a final agency action subject to the Ninth Circuit’s jurisdiction under the Federal Power Act.
A copy of the opinion is available here.