CALIFORNIA PUBLIC UTILITIES COMMISSION, PETITIONER V. FEDERAL ENERGY REGULATORY COMMISSION AND BONNEVILLE POWER ADMINISTRATION No. 90-505 In The Supreme Court Of The United States October Term, 1990 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit Brief For The Respondents In Opposition TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statement Argument Conclusion OPINIONS BELOW The opinion of the court of appeals (Pet. App. A1-A34) is reported at 903 F.2d 585. The orders of the Federal Energy Regulatory Commission (Pet. App. C1-C41, D1-D9) are reported at 36 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 61,335 and 39 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 61,033. JURISDICTION The judgment of the court of appeals was entered on December 11, 1989. Petitions for rehearing were denied on June 21, 1990. Pet. App. B1-B2. The petition for a writ of certiorari was filed on September 19, 1990. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). QUESTIONS PRESENTED 1. Whether the Federal Energy Regulatory Commission (FERC) is authorized by Section 7(k) of the Pacific Northwest Electric Power Planning and Conservation Act to hold an evidentiary hearing for the purposes of supplementing the record in connection with its review of nonfirm rates established by the Bonneville Power Administration (BPA). 2. Whether FERC's orders approving nonfirm rates set by BPA were supported by substantial evidence. STATEMENT 1. The Bonneville Power Administration (BPA) is a self-financing agency within the United States Department of Energy. BPA markets power from thirty federal hydroelectric projects and two nuclear power plants known collectively as the Federal Columbia River Power System. BPA also purchases power and carries out energy conservation programs. The Columbia River System includes a network of dams and reservoirs capable of storing approximately 40% of the average annual streamflow of the Columbia River. Despite this large storage capacity, BPA lacks sufficient water to operate its hydroelectric generating facilities at full capacity throughout the year. BPA plans to meet its "firm power" loads on the assumption that streamflows will equal the lowest flows on record. United States Dep't of Energy -- Bonneville Power Admin., 29 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 63,039, at 65,123 (1984). /1/ As a result of this conservative assumption, the Columbia River System produces very large amounts of nonfirm energy in four out of every five years. Ibid. BPA operates the system so as to maximize the production of useful energy. Pet. App. C6-C7. BPA's reservoirs integrate its hydroelectric and thermal generating capacity. By operating its thermal generators (or by purchasing power from other sources), BPA is able to accumulate water in its reservoirs that can be used to generate electricity at a later time. Consequently, energy produced by water released from a reservoir of the Columbia River System may result from the expenditure of thermal resources, streamflows, or a combination of the two. Because the system relies heavily on hydroelectric generation, and because it stores large amounts of potential energy by expending thermal and purchased resources (as well as through conservation programs), it is not feasible for BPA to attribute an increment of nonfirm energy to the resource that produced it. Consequently, it is not feasible for BPA to ascertain the incremental cost of a unit of energy. BPA can, however, determine the total cost of producing a quantity of energy over time and derive an average cost per unit from this figure. Pet. App. C7-C8. 2. In 1964 Congress enacted the Pacific Northwest Consumer Power Preference Act, 16 U.S.C. 837 et seq., which prohibits the sale of electric energy from federal hydroelectric facilities in the Columbia River System to customers outside the Pacific Northwest region unless there is no market for the power in the Pacific Northwest at the established rate. In 1980, Congress enacted the Pacific Northwest Electric Power Planning and Conservation Act (the Regional Act), which among other things authorizes the Administrator of BPA to sell surplus firm and nonfirm power pursuant to the preference provisions of the 1964 Act, 16 U.S.C. 839c(f), 839f(c), and requires BPA to establish rates sufficient to cover BPA's costs. /2/ Section 7(k) of the Regional Act authorizes FERC to review BPA's nonfirm rates applicable to customers outside the Pacific Northwest region to determine whether the rates comply with the standards of the Federal Columbia River Transmission System Act, 16 U.S.C. 838g-h, the Flood Control Act of 1944, 16 U.S.C. 825s, and the Bonneville Project Act of 1937, 16 U.S.C. 832e-f. /3/ 3. This case involves two nonfirm rates, known as NF-1 and NF-2, established by the Administrator of BPA under Section 7(k) of the Regional Act for sales of nonfirm energy from July 1981 through October 1983. Pet. App. A9. The NF-1 and NF-2 rates applied to nonfirm customers in the Pacific Northwest region as well as to customers located outside that region. The rates were challenged by a group of Pacific Northwest customers, who contended that they were too low, and also by a group of California customers and regulators, who contended that the rates were too high. 4. Before FERC, BPA and other parties took the position that Section 7(k) requires FERC to base its review solely on the administrative record compiled by BPA. Pet. App. A21-A22 & n.9. FERC nevertheless instructed an administrative law judge to conduct an evidentiary hearing to supplement the record compiled by BPA. In November 1984, following a hearing, the ALJ issued an initial decision concluding that the NF-1 and NF-2 rates resulted in undercharges to California customers and disapproving the rates. United States Dept. of Energy -- Bonneville Power Admin., 29 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 63,039 (1984). In September 1986, FERC issued an opinion rejecting the ALJ's conclusions and approving the rates as filed by BPA. Pet. App. C1-C41. FERC found that the NF-1 and NF-2 rates met the standards established by the statutes enumerated in Section 7(k) of the Regional Act. /4/ Pet. App. C33-C36. As to the contention of the Pacific Northwest customers that BPA's rates for sales to California were too low because they resulted in below-cost sales, FERC explained that "(i)f the market for energy does not ultimately turn out to be what BPA had expected at the time it was storing energy in its reservoirs, it may be necessary for BPA to lower its price below what it cost to produce the stored energy * * * rather than to have it be wasted through spill." Pet. App. C36. FERC also rejected arguments by the California parties that the rates for sales to California were too high. The California parties contended that BPA's nonfirm rate should have been derived from BPA's incremental cost (i.e., the cost of producing an additional unit of energy) rather than from an unweighted proportionate share of BPA's full costs. FERC found that there was no feasible way for BPA to design the rates to reflect incremental cost. Because BPA's power is produced from a mix of hydroelectric and thermal sources, the incremental cost of production cannot be determined. Pet. App. C7-C8. FERC reaffirmed its conclusions in an opinion denying petitions for rehearing. Pet. App. D1-D9. 5. On appeal, the court of appeals concluded that FERC lacked authority to hold an evidentiary hearing to supplement the record, but affirmed FERC's decision on the merits. The court rejected FERC's contention that the agency is authorized under Section 7(k) of the Regional Act to conduct an evidentiary hearing if it determines that the record compiled by BPA is inadequate. The court concluded that FERC's position is inconsistent with other provisions of the Regional Act that require BPA to develop "a full and complete record" (16 U.S.C. 839e (i)(2)) and to come to a final decision based on that record (16 U.S.C. 839e(i)(5)); that require FERC to base its review and approval on the record compiled by BPA (16 U.S.C. 839e(k)); and that require the court of appeals to base its review on the record compiled by BPA (16 U.S.C. 839f(e)(2)). Pet. App. A19, A22-A23. The court noted that it was deciding "only that FERC may not hold an evidentiary hearing to supplement a record it thinks is inadequate." It expressly left open the possibility that "other circumstances" might permit FERC to hold an evidentiary hearing. Id. at A23. The court of appeals then held that FERC's confirmation of the NF-1 and NF-2 rates was supported by substantial evidence in the record compiled before BPA. The court upheld FERC's finding that it is not feasible to determine the incremental cost of nonfirm energy produced by the Columbia River System. Pet. App. A24-A25. Accordingly, the court rejected the California parties' contention that the nonfirm rates should have been designed on an incremental basis rather than on an unweighted proportional basis. The court also rejected the Northwest parties' contention that the rates were too low since they did not fully recover BPA's costs. The court agreed with FERC that BPA's decision to cap the rates at cost, while allowing sales below cost in circumstances where the energy might otherwise be wasted, satisfied the statutory requirement that BPA encourage widespread use of BPA power at the lowest possible rates consistent with sound business principles. Pet. App. A30-A33. The court emphasized that the Regional Act does not require BPA to design rates in any particular way, and concluded that the NF-1 and NF-2 rates met the standards of Section 7(k). Pet. App. A30-A33. ARGUMENT The court of appeals reasonably concluded that FERC lacks authority under Section 7(k) of the Regional Act to conduct an evidentiary hearing for the purpose of supplementing the record compiled before BPA. Because FERC has now acquiesced in the court of appeals' narrow resolution of this issue, further review is not warranted. In addition, the court of appeals' fact-bound decision affirming the NF-1 and NF-2 rates does not merit review by this Court. /5/ 1. Petitioner contends (Pet. 9-13) that FERC is authorized under Section 7(k) of the Regional Act to hold an evidentiary hearing as part of its review of rates set by BPA. This contention does not warrant further review -- especially in light of the fact that FERC ruled against petitioner on the basis of the record as supplemented by the evidentiary hearing FERC in fact held. In any event, following the decision of the court of appeals in this case, FERC decided to acquiesce in the court's resolution of this issue. In a recent decision, FERC stated that In Aluminum Company of America v. Bonneville Power Administration, 903 F.2d 585, 591-94 (9th Cir. 1990), the Ninth Circuit held that the Commission may not hold an evidentiary hearing under section 7(k) to supplement a record we think is inadequate. The court did not completely foreclose the possibility that an evidentiary hearing could be held under other circumstances. Id. at 594. However, since the Commission agrees with the Ninth Circuit's decision, we do not anticipate evidentiary hearings in future section 7(k) proceedings. United States Department of Energy -- Bonneville Power Administration, Docket No. 87-2011-005 (Nov. 14, 1990) slip op. 10 n.28. /6/ Thus, FERC and BPA now agree with the regional court of appeals -- which has exclusive jurisdiction to review questions arising under Section 7(k), 16 U.S.C. 839f(e)(5) -- that FERC is not authorized to hold an evidentiary hearing for the purpose of supplementing the record under Section 7(k). Because the issue is unlikely to arise in future cases, it does not merit the attention of this Court. Petitioner contends that the court of appeals failed to accord sufficient deference to FERC's (former) interpretation of Section 7(k). But BPA -- the agency that drafted the Regional Act -- consistently has taken the position that FERC is not authorized to conduct an evidentiary hearing to supplement BPA's record. This Court has recognized that "the (BPA) Administrator's interpretation of the Regional Act is to be given great weight." Aluminum Co. of America v. Central Lincoln Peoples' Utility District, 467 U.S. 380, 389 (1984). It is true that FERC's recent decision to adopt BPA's view, to the extent that it conflicts with its earlier interpretation, may be entitled to less deference than a consistently held agency view. See INS v. Cardoza-Fonseca, 480 U.S. 421, 446-447 n.30 (1987) (quoting Watt v. Alaska, 451 U.S. 259, 273 (1981)). But FERC's change of position is not as dramatic as it might appear to be. Before this case reached the court of appeals, FERC recognized that "(t)here may be merit to BPA's argument that * * * an additional hearing need not be an evidentiary hearing and that the mandate of (Section 7(k)) may be fulfilled, instead, by providing the parties with the opportunity to file briefs or written comments." 23 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 61,469, at 62,024. The court of appeals' resolution of this issue is both reasonable and narrowly limited to the situation presented in this case. It is true that the last sentence of Section 7(k) affords the parties an opportunity for "an additional hearing in accordance with the procedures established for ratemaking by the Commission pursuant to the Federal Power Act." But as the court of appeals observed (Pet. App. A19), Section 7(k) also requires FERC to review BPA's rates "based upon the record of proceedings established under subsection (i) (codified at 16 U.S.C. 839e(i)) of this section." And the court of appeals is required to determine whether FERC's decisions are "supported by substantial evidence in the rulemaking record required by section 839e(i) of this title considered as a whole." 16 U.S.C. 839f(e)(2). The record required by Section 839e(i) is the record compiled at an evidentiary hearing before BPA. /7/ Moreover, as this Court noted in construing analogous provisions of Section 5 of the Flood Control Act of 1944, 16 U.S.C. 825s, FERC views its role in reviewing hydroelectric rates established by federally-owned projects as "'in the nature of an appellate body.' * * * In exercising that appellate function, FERC relies on the record before it, remanding for supplementation if necessary." United States v. City of Fulton, 475 U.S. 657, 663 (1986) (quoting 45 Fed. Reg. 79,545, 79,547 (1980)). /8/ In view of the other provisions of the statute and the appellate nature of FERC's review, the court of appeals reasonably concluded that the additional hearing before FERC afforded by Section 7(k) may not be an evidentiary hearing for the purpose of supplementing the record. Finally, this is the first case to come before FERC (and, consequently, the court of appeals) under Section 7(k). See Pet. App. C2. Moreover, the Ninth Circuit's decision is narrowly confined to the circumstances of the case. In deciding that FERC "may not hold an evidentiary hearing to supplement a record it thinks is inadequate," the court expressly left open the possibility that an evidentiary hearing could be held "under other circumstances." Pet. App. A23. Because the hearing question may arise in a variety of factual and procedural contexts in future cases, further review in this case would be premature. /9/ 2. Contrary to petitioner's contentions (Pet. 13-18), the court of appeals correctly held that FERC's confirmation of the NF-1 and NF-2 rates is supported by substantial evidence in the record. None of the fact-specific issues raised by petitioner warrants review by this Court. /10/ Petitioner renews its argument (Pet. 14-15) that BPA may not charge its nonfirm customers more than the incremental cost of the energy they consume, and consequently is prohibited from designing rates that reflect nonfirm customers' unweighted proportional share of BPA's full costs. Petitioner disparages, as "fallac(ious)," (Pet. 14) the findings of FERC, upheld by the court of appeals, that BPA operates its system to maximize the production of useful energy and that BPA cannot feasibly determine the incremental cost of its output. But petitioner offers no persuasive reason for this Court to reexamine those fact-bound determinations. Contrary to petitioner's suggestion, the fact that BPA decides whether to invest in additional generating capacity on the basis of anticipated demand in the Pacific Northwest region does not imply that BPA operates existing facilities solely for the benefit of customers in that region. And while petitioner asserts the BPA is no less able to determine its incremental costs than other utilities, it does not dispute FERC's findings that the Columbia River System is unique because of its heavy reliance on hydropower and its substantial storage capacity. Pet. App. C6. Contrary to petitioner's assertion (Pet. 15), it is not "beside the point" that FERC found that BPA's California customers benefit from BPA's entire system. The fact that California customers benefit from BPA's entire system affords a basis for allocating a proportional share of the system's full costs to those customers. Pet. App. A25. Moreover, there is no basis for petitioner's assertion (Pet. 16-17) that FERC "ignored its responsibilities" by failing to determine whether BPA's rates encouraged the most widespread use of nonfirm energy at the lowest possible price. FERC expressly found that BPA's rates encouraged "widespread use" and the lowest possible rates consistent with sound business principles. Pet. App. C35-C36, D6-D7. The court of appeals concluded that the rates were consistent with the "widespread use" standard. Pet. App. A33. Petitioner errs in suggesting (Pet. 17-18) that the rates approved by FERC were inconsistent with sound business principles. The nonfirm energy revenues collected under the rates at issue here contributed to BPA's overall cost recovery. All BPA revenues are statutorily required to be used to pay BPA's costs and scheduled amortization. See 16 U.S.C. 839e (a)(1). It is thus incorrect for petitioner to suggest (Pet. 17) that revenues from nonfirm service serve only to reduce rates for firm service. FERC's administrative law judge correctly rejected this argument, recognizing that "the nonfirm customers should pay those costs which in essence have been allocated to them." 29 Fed. Energy Reg. Comm'n Rep. (CCH) Paragraph 63,039, at 65,083. Finally, there is no merit to petitioner's contention that BPA's costs associated with the Washington Public Power Supply System (WPPSS) nuclear plants should not have been charged to BPA's nonfirm customers. See Pet. 18. According to petitioner, the costs associated with these plants should not have been included in BPA's rates because the WPPSS plants did not produce energy during the period at issue here. But as the court of appeals observed (Pet. App. A28), if BPA were required to pay its WPPSS obligations but prevented from charging ratepayers for them until the WPPSS plants produced energy, funds to repay federal investment in the Columbia River System would have to be diverted, contrary to the purposes of Section 7(k). Thus, inclusion of WPPSS costs was permissible to meet BPA's contractual obligations to pay for purchased power on a current basis and to amortize federal investment within a reasonable time. Ibid. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. KENNETH W. STARR Solicitor General WILLIAM S. SCHERMAN General Counsel JOSEPH S. DAVIES Deputy Solicitor HANFORD O'HARA Attorney Federal Energy Regulatory Commission HARVARD P. SPIGAL General Counsel MARYBETH VAN BUREN Attorney MARYANN ARMBRUST Attorney Bonneville Power Administration DECEMBER 1990 /1/ "Firm power" is energy that BPA expects to produce under predictable streamflow conditions. "Nonfirm power" is energy in excess of firm power. Aluminum Co. of America v. Central Lincoln Peoples' Utility District, 467 U.S. 380, 383 (1984). /2/ Section 7(a) of the Regional Act provides in pertinent part that BPA's rates shall be established and, as appropriate, revised to recover, in accordance with sound business principles, the costs associated with the acquisition, conservation, and transmission of electric power, including the amortization of the Federal investment in the Federal Columbia River Power System * * * over a reasonable period of years and the other costs and expenses incurred by the Administrator pursuant to this chapter and other provisions of law. 16 U.S.C. 839e(a)(1). /3/ Section 7(k) of the Regional Act provides in pertinent part: Notwithstanding any other provision of this chapter, all rates or rate schedules for the sale of nonfirm electric power within the United States, but outside the region, shall be established * * * in accordance with the procedures of subsection (i) of this section. * * * (S)uch rates or rate schedules shall become effective after review by the Federal Energy Regulatory Commission for conformance with the requirements of such Acts and after approval thereof by the Commission. Such review shall be based on the record of proceedings established under subsection (i) of this section. The parties to such proceedings under subsection (i) of this section shall be afforded an opportunity by the Commission for an additional hearing in accordance with the procedures established for ratemaking by the Commission pursuant to the Federal Power Act. 16 U.S.C. 839e(k). /4/ As summarized by FERC, those statutes require BPA to design rates (1) "having regard to the recovery of the cost of generation and transmission of such electric energy"; (2) "so as to encourage the most widespread use of BPA power"; (3) "to provide the lowest possible rates to consumers consistent with sound business principles"; and (4) "in a manner which protects the interests of the United States in amortizing its investments in the projects within a reasonable period." Pet. App. C2-C3. /5/ There is no basis for petitioner's suggestion (Pet. 8) that the NF-1 and NF-2 rates made BPA an uneconomic source of supply for California customers. On the contrary, the court of appeals noted that California utilities saved some $1.5 billion by purchasing power from BPA at the NF-1 and NF-2 rates. Pet. App. A30 n.14. BPA, on the other hand, realized only $270 million in NF-1 and NF-2 revenues. During the period that the rates were in effect, moreover, BPA's revenue shortfalls exceeded $680 million. Ibid. /6/ FERC's decision is reprinted as an appendix to this brief. (See App., infra, 13a-14a). /7/ Petitioner contends (Pet. 10) that review "(b)ased on" the record does not mean review "limited to" the record. But it is difficult to see how a decision that relies on facts not in the BPA record could be "based on" that record. /8/ Because FERC may conduct a non-evidentiary hearing, and may also remand to BPA to supplement the record if necessary, there is no basis for petitioner's assertion (Pet. 12-13) that California customers will be denied the opportunity for an impartial hearing. /9/ Respondent California Energy Commission (CEC) contends that the court of appeals, having determined that FERC lacked authority to conduct an evidentiary hearing, was required to remand the case to FERC rather than affirming its decision. CEC Br. 9 (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)). Because this contention is not presented in the petition for certiorari, or fairly included in the questions presented, it should not be considered by this Court. See Supreme Court Rule 14.1(a). We note that respondent CEC has not filed a cross-petition for a writ of certiorari. See Supreme Court Rule 12.3. In any event, Chenery held that a court may not affirm the decision of an administrative agency on a ground not asserted by the agency. Here, the court of appeals did not affirm on a ground not asserted by FERC, but rather affirmed FERC's findings and conclusions on the basis of substantial evidence in the BPA record. See 16 U.S.C. 839f(e)(2). Even if the Chenery doctrine were applicable here, it would require a remand only if there were a significant possibility that, but for the error, the agency would in fact have reached a different result. NLRB v. Wyman-Gordon Co., 394 U.S. 759, 766 n.6 (1969) (plurality opinion). If FERC had determined at the outset that it could not hold an evidentiary hearing, it presumably would have directed BPA to receive additional evidence. There is no reason to think that additional evidence presented to BPA would have differed from the evidence presented to FERC, or that FERC would have reached a different decision on the merits. /10/ Respondent CEC focuses much of its attention on BPA's policy for allocating excess transmission capacity -- a policy that it concedes is "not before this Court." CEC. Br. 4. APPENDIX