By Hudson Sangree

Despite a rebuke from a federal appeals court, FERC last week reaffirmed its earlier decision that Pacific Gas and Electric participates voluntarily in CAISO and qualifies for hefty financial incentives to remain in the ISO (ER14-2529-005).

The decision came after the 9th U.S. Circuit Court of Appeals instructed FERC in January 2018 to reassess its longstanding practice of granting an annual 50-basis-point return on equity adder to encourage PG&E to be part of CAISO. The incentive earns the currently bankrupt utility about $30 million a year.

In response to the court’s ruling, FERC instructed PG&E, the California Public Utilities Commission and other interested parties to brief it on the issue of whether PG&E could leave CAISO if it chose. (See Can PG&E Quit CAISO? FERC Wants to Know.)

FERC had concluded in late 2017 that participation in the ISO was voluntary. The commission decided Thursday it had been right all along.

We “find that California law does not mandate PG&E’s participation in CAISO, and that the RTO participation incentive induces PG&E to continue its membership,” FERC wrote. “We therefore reaffirm the commission’s prior grant of PG&E’s request for the RTO participation incentive.”

Mandatory or Voluntary?

The controversy over whether PG&E and other utilities are entitled to the incentive payments has been going on for years.

In the Energy Policy Act of 2005, Congress amended the Federal Power Act to require FERC to provide financial incentives to induce utilities to join RTOs.

FERC responded in 2006 with Order 679, which provided ROE adders for utilities that participate in transmission organizations. The bonuses were meant to give utilities an extra reason to join or remain members of RTOs, which are generally voluntary.

For staying in CAISO, PG&E has requested and received adders under Order 679 since 2007.

The CPUC, however, argued that membership in CAISO is mandatory for the state’s three big investor-owned utilities: PG&E, Southern California Edison and San Diego Gas & Electric. It protested in years past and again in November 2017, saying the adder for PG&E was an “unjustified windfall” at the expense of California ratepayers. The Sacramento Municipal Utility District joined the protest.

FERC dismissed the objections, but on appeal, a three-judge panel of the 9th Circuit ruled FERC commissioners had abused their authority. The commission, the court said, did not reasonably interpret Order 679 as justifying adders for remaining in a transmission organization. Instead, the commission created a generic adder in violation of the order, the judges ruled.

“Order 679 says FERC ‘will approve, when justified, requests for ROE-based incentives for public utilities that join and/or continue to be a member of’ transmission organizations,” the court noted.

“If all utilities that continued to be members of transmission organizations automatically qualified for incentive adders, the ‘when justified’ language would be surplusage,” it said.

FERC Erred, CPUC Argues

On remand from the appeals court, FERC asked the parties to brief it on four issues, including whether California law requires PG&E to participate in CAISO and whether FERC must defer to the CPUC’s interpretation of state law.

PG&E, SCE and SDG&E responded in September and October 2018, supporting PG&E’s contention that participation in CAISO is voluntary and that the incentive adder is justified to encourage them to remain CAISO members.

In addition, PG&E’s participation in CAISO is governed by the Transmission Control Agreement (TCA) between the ISO and transmission owners, whose assets the ISO controls, SCE and SDG&E said in their joint brief. Only FERC has authority over the TCA, they argued.

“The TCA is a filed rate subject to the exclusive jurisdiction of [FERC] and explicitly allows PG&E to withdraw from the CAISO. California lacks jurisdiction to alter the terms of the TCA,” the utilities argued.

The CPUC, the Sacramento Municipal Utility District and the Transmission Agency of Northern California (the “California parties”) filed joint briefs. They argued FERC had misinterpreted the 9th Circuit’s decision, which they said directed FERC to correct its own errors, not to undertake further inquiries.

Moreover, state law governs the dispute, and FERC is obligated to show deference to the CPUC, they contended.

“The California parties respectfully request that the commission conclude that PG&E does not qualify for the transmission organization membership incentive … because the CPUC has demonstrated that PG&E’s continued CAISO membership is not voluntary because it is required by state law,” they wrote.

FERC Decides it was Right

FERC disagreed that the 9th Circuit had only wanted the commission to correct itself.

The “California parties erroneously assume that the 9th Circuit found that California law mandates PG&E’s ongoing participation in CAISO,” it said.

The commission also rejected contentions that state law alone governed the matter.

“As a creature of federal statute created by Congress, this commission’s subject matter jurisdiction over proceedings before it arises solely under the acts that the commission is required to administer,” it said. “Specifically, the issue here involves the transmission and sale at wholesale of electric energy in interstate commerce, over which the FPA provides exclusive jurisdiction to this commission.”

Finally, FERC said PG&E and was free to leave CAISO. No California law prevented it from doing so, FERC concluded, and PG&E could reclaim control of its transmission grid from the ISO without CPUC approval.

“As the commission explained in Order No. 679, the basis for the RTO participation incentive is a recognition of the benefits that flow from RTO/ISO membership and the fact continuing membership is generally voluntary,” FERC wrote.

“In light of the voluntary nature of RTO/ISO membership from the commission’s perspective and the lack of any relevant mandate under California law, we find that PG&E could unilaterally leave CAISO without obtaining CPUC authorization,” FERC said. “Consequently, we find that the RTO participation incentive induces PG&E to remain a participating member of CAISO … [and] we reaffirm the continuation of PG&E’s 50-basis-point ROE adder.”

The transmission trade group WIRES praised the ruling, saying it “clearly complies with the congressional mandate for FERC to provide incentives for public utilities for their participation in RTOs and ISOs.”