On September 4, 2015, the U.S. Court of Appeals for the 9th Circuit issued an opinion remanding a series of Federal Energy Regulatory Commission (FERC) orders approving, with modifications, two settlements related to wholesale power sales made in the Pacific Northwest during the 2000-2001 California energy crisis. Stopping short of considering the merits of the required modifications, the court held that FERC abused its discretion and failed to follow its own precedent by treating the settlements as “uncontested” in spite of on-the-record opposition by other market participants. Invoking the words of the classic Eagles song “Hotel California”— “[y]ou can check out any time you like, but you can never leave”—the court remanded the long-running proceedings back to FERC for further consideration within 60 days of its mandate.

Background

The two settlements at issue— (1) one between the City of Tacoma (“Tacoma”) and Idaho Power Company and its subsidiary, IDACORP, Inc. (collectively, “IDACORP”), and (2) another between Powerex Corporation (“Powerex”) and IDACORP—sought to resolve refund claims against IDACORP stemming from sales made in the Pacific Northwest during the California energy crisis. 

Earlier in these proceedings, FERC had broadly denied refunds to wholesale electricity purchasers in the Pacific Northwest who bought at abnormally high prices in the short-term market during this time period. These wholesale buyers appealed FERC’s denial of refunds to the 9th Circuit, and, in 2007, in Port of Seattle v. FERC, the court remanded the case to FERC, holding, in part, that the agency should have considered newly submitted evidence of intentional market manipulation.1 The court stated there that FERC may “find it necessary to call for additional fact-finding” if the record is insufficient to inform a reasoned decision.2 In response, FERC established additional evidentiary hearings as the court suggested, but held them in abeyance to allow for potential settlement. The two settlements at issue were then filed. 

The Tacoma Settlement

Tacoma and IDACORP filed a proposed settlement that would have (1) resolved Tacoma’s claims against IDACORP, (2) reserved for later resolution claims by the City of Seattle (“Seattle”) against IDACORP; and (3) released IDACORP from claims made by all other parties. Powerex and the PPL Entities (themselves also purchasers of wholesale power during the time period in question) filed comments partially contesting the proposed Tacoma settlement, claiming that the provision releasing all other parties’ claims interfered with potential “ripple claims” by others (defined by FERC as “sequential claims against a succession of sellers in a chain of purchases that are triggered if the last wholesale purchaser in the chain is entitled to a refund”). Nonetheless, the settlement judge certified the proposed settlement to FERC as uncontested.

FERC considered the settlement under its usual procedures for reviewing uncontested settlements. It approved the portions of the settlement resolving Tacoma’s claims and preserving Seattle’s claims against IDACORP, but rejected the provisions that purported to release the claims of all other parties, and directed IDACORP to remove such provisions. FERC reasoned that the settlement could not “be used to extinguish potential claims of others” without violating FERC’s policy against settlements that impair the rights of nonparties. 

The Powerex Settlement

While the Tacoma petition was pending, IDACORP and Powerex filed a proposed settlement at FERC under which (1) Powerex would withdraw its comments opposing the Tacoma settlement and agree not to pursue any claims against IDACORP, and (2) the PPL Entities would be exempt from the release provisions that they had opposed in the Tacoma settlement. IDACORP argued that structuring the Powerex settlement to exempt the PPL Entities from the release provisions in the Tacoma settlement would address the concerns that FERC expressed when it required modification of the Tacoma settlement. FERC disagreed and, like it did with the Tacoma settlement, rejected the Powerex settlement’s release provisions.

9th Circuit Opinion

IDACORP sought review in the 9th Circuit of FERC’s decisions requiring modification of the settlements. The court did not reach the merits of FERC’s conclusion that the settlements must be modified to preserve potential claims by third parties, however. Instead, the court held that FERC abused its discretion when it called the Tacoma settlement “uncontested” despite on-the-record opposition from Powerex and the PPL Entities and its own recognition of the disputed issues surrounding the settlement.

Specifically, the court faulted the agency for failing to follow its own guidance for resolving contested settlements, set forth in Trailblazer Pipeline Co.,3 and for failing to conduct a merits analysis of the Tacoma settlement under its own regulations (18 C.F.R. § 385.602(h)).4 The court stated that “[e]ven affording FERC substantial latitude in interpreting and applying its own regulations, FERC’s recognition of disputed issues coupled with its lack of explanation for proceeding how it did makes it impossible for us to assess FERC’s reasoning for departing from its own rules and precedent.”  The court thus remanded the Tacoma settlement to FERC to either consider the proposed settlement under its usual standards or explain why a different approach is appropriate.

Noting the interdependency between the two settlements, the court also remanded the Powerex settlement for reconsideration, given that IDACORP filed that settlement in direct response to FERC’s treatment of the Tacoma settlement.

Finally, noting the “irony of prolonging the proceedings further” and FERC’s “representation at argument that reconsideration would not take long,” the court took the somewhat unusual step of ordering FERC to issue a decision in response to the remand within 60 days of the issuance of the mandate.

The court’s decision will have the immediate effect of further delaying, for at least a short time, resolution of these refund claims related to wholesale power sales made at high prices in the Pacific Northwest during the California energy crisis. In addition, the ruling could be read to signal that the 9th Circuit will not allow FERC to significantly deviate from its precedent and regulations in an effort to bring speedy resolution to energy crisis-related disputes that have been pending for more than a decade.

Under the applicable procedural rules, the court’s mandate will likely be issued sometime in late October or early November 2015 (unless the court directs that the mandate issue earlier or FERC takes the highly unusual step of seeking rehearing). As a result, a further FERC order on remand would likely be issued in early 2016.