August 28, 2009; see amended opinion filed March 2, 2010
On Petition for Review of an Order of the Bonneville Power Administration BPA No. 06-PB-11744.
The opinion of the court was delivered by: Berzon, Circuit Judge
Argued and Submitted July 7, 2009 -- Seattle, Washington
Before: Raymond C. Fisher and Marsha S. Berzon, Circuit Judges, and Barry Ted Moskowitz,*fn1 District Judge.
In Pacific Northwest Generating Coop. v. Dep't of Energy ("PNGC"), 550 F.3d 846 (9th Cir. 2008), amended on denial of reh'g, No. 05-75638, 2009 WL 2386294 (9th Cir. Aug. 5, 2009), this court held invalid a central provision of a five-year contract between the Bonneville Power Administration ("BPA") and the aluminum company Alcoa, Inc. ("Alcoa"). Less than a month after we issued the PNGC opinion, BPA announced that it and Alcoa had agreed to an amended version of the invalidated provision that would govern the nine-month period ending September 30, 2009 (the original five-year contract would have expired in September 2011). Petitioners Pacific Northwest Generating Cooperative ("PNGC"), Public Power Council ("PPC"), and Industrial Customers of Northwest Utilities ("ICNU") challenge BPA's decision to execute the amended contract.
We agree with the petitioners' challenge and therefore grant their petitions for review. Although under no obligation to contract with Alcoa, BPA agreed voluntarily to make a nearly $32 million cash "benefit" payment to the aluminum company, so that the company could purchase power from one of BPA's competitors. BPA's justifications for this unusual transaction, under which the agency received nothing directly in exchange for its $32 million, do not demonstrate that the transaction was "consistent with sound business prin- ciples," as required by BPA's governing statutes. We therefore hold that BPA exceeded its statutory authority when it agreed to the Alcoa contract amendment.
In PNGC, we invalidated a central provision of a five-year contract (the "2007 Contract") between the Bonneville Power Administration and Alcoa, one of BPA's Direct Service Industrial ("DSI") customers. Under the invalidated provision, BPA had agreed to "sell" power to Alcoa at a mutually agreed-upon rate, below both the market rate and the statutorily authorized Industrial Firm Power (IP) rate. See PNGC, 550 F.3d at 854-58. The provision at issue did not, however, require BPA to sell physical power to Alcoa. Rather, BPA had agreed to "monetize" the power sale by making cash "benefit" payments to Alcoa in an amount approximately equal to the difference between the higher wholesale market rate for power and the lower contract rate multiplied by the amount of power consumed by Alcoa each month.*fn2 See id. at 854-55. The idea was that Alcoa could use the monetary benefit payments to subsidize its purchase of power on the wholesale market, such that the aluminum company's net power costs would be approximately equal to the agreed-upon contract rate (assuming that various caps on the monetary benefit were not triggered). See id.
We held this monetization provision invalid on the ground that "[t]he decision to monetize embodied in the agreements violated [BPA's] statutory obligation[ ]... to provide 'the lowest possible rates to consumers consistent with sound business principles.' § 838g." Id. at 875. We explained:
In essence, BPA has voluntarily agreed to forgo revenues by charging the DSIs a rate below what is authorized by statute (i.e., the IP rate) and below what is available on the open market. These foregone revenues result in higher rates for all other customers. This outcome is in apparent and direct conflict with BPA's statutory mandate, see § 838g, and renders BPA's decision to "monetize" the DSI contracts in an amount reflective of those underlying rate decisions - albeit a capped amount - highly suspect.
We then considered and rejected as "flawed" BPA's three proffered justifications for this decision. Id. at 875-78. In so doing, we noted that "[b]y subsidizing the DSIs' smelter operations beyond what it is obligated to do, BPA is simply giving away money," id. at 877, and that such an act was "not reflective of a 'business-oriented philosophy,' " id. at 878 (quoting Ass'n of Pub. Agency Customers, Inc. v. BPA ("APAC"), 126 F.3d 1158, 1171 (9th Cir. 1997)). We also explained that "BPA's authority to sell power to the DSIs does not mean that BPA may simply give money to the DSIs by calling the agreement a 'power sale' with 'monetized service benefits.' " PNGC, 550 F.3d at 878 (emphasis in original).
We concluded our discussion of the validity of the monetary benefit provision of the 2007 Contract with the following summary:
In sum, BPA has not advanced a "reasonable interpretation[ ] of its governing statutes" that supports its actions. Golden Nw. Aluminum [Inc. v. BPA, 501 F.3d 1037, 1045 (9th Cir. 2007)]. Nor has the agency shown how offering the DSIs rates below the market rate and below what it is statutorily authorized to offer "further[s] BPA's business interests consistent with its public mission." Ass'n of Pub. Agency Customers, 126 F.3d at 1171. We conclude that BPA's decision to offer the subsidized rates to the DSIs and then monetize those rates is inconsistent with BPA's statutory authority under the NWPA, and therefore hold that the monetization provisions of the aluminum contracts are invalid.
The PNGC opinion was filed on December 17, 2008. Two weeks later, on December 31, 2008, BPA sent a letter to its regional customers and stakeholders, including Petitioners. In the letter, BPA informed its customers that, in light of the PNGC opinion, the agency would cease making monetary benefit payments to Alcoa.
The agency also announced a proposed amendment to the 2007 Contract "so that service thereunder will conform to the [PNGC] Opinion." The critical change that BPA proposed was that the parties would begin using the IP rate as the basis for the monetary benefit calculation, rather than the previous contract rate (which, as noted, was below the IP rate). BPA also informed its customers that the amendment would only govern "sales" to Alcoa from January 1, 2009 through September 30, 2009.
BPA concluded its letter by providing a web address where interested parties could view the proposed amended contract. The agency also stated that it would accept public comments about the amendment until January 6, 2009, less than a week later. Although it recognized that it was providing only "a limited time to comment on the proposed amendment," the agency stated that it "believe[d] that it is important to implement this amendment in a timely manner to avoid, if possible, any unnecessary interruption of smelter operations, especially given the difficult economic times and potential loss of additional jobs in the region."
On January 9, 2009, BPA signed the amended contract. Like the 2007 Contract, the amended contract did not require BPA to deliver physical power to Alcoa. Instead, BPA once again agreed to provide a "monetary benefit" to Alcoa, which Alcoa could then use to offset the cost of purchasing physical power on the open market.
Unlike under the previous contract, however, the monetary benefit in the amended contract is calculated using the IP rate as the base rate, rather than an agreed-upon rate lower than the IP rate. More specifically, BPA agreed in the amended contract to pay Alcoa the difference between a forecasted market rate for power of $48.05/MWh and the IP rate of $32.70/MWh - that is, $15.35/MWh - for every megawatt hour of power purchased by Alcoa on the open market between January 1, 2009 and September 30, 2009, up to a total of $31.9 million.*fn3
BPA announced the execution of the amended contract in a letter to its customers dated January 13, 2009. In the letter, BPA explained the reasons for its decision to enter into the amended agreement:
BPA decided it was necessary to move quickly to implement the amendment and avoid, if possible, any unnecessary interruption of smelter operations, especially given the difficult economic times and potential loss of additional jobs. Alcoa's announcement of substantial worldwide layoffs and [Columbia Falls Aluminum Company's] announcement of a likely plant closure reinforced our view that it was important to act quickly. As a consequence, a limited amount of time was available for public comment. While we would have preferred to afford customers more time to comment on the proposed amendment, BPA believed it had to move quickly due to the circumstances.
This amendment is an interim action that applies to payments through FY 2009 only. We now have time to address the FY 2010-11 period under the 2007 Block Contract, and will use that time to more thoroughly engage with the public on the terms for any amendment or replacement agreement for the FY 2010-11 period.
BPA understands that it must address the look-back issue associated with payments made under the 2007 Block Contract during the FY 2007-2008 period, and intends to engage the region once we have an opportunity to consider all these arrangements more thoroughly.
Two months later, on March 3, 2009, BPA announced that it had executed a nearly identical amendment to its contract with a second aluminum DSI, Columbia Falls Aluminum Company (CFAC). The validity of the amended CFAC contract is not part of this appeal. The announcement of the CFAC deal is relevant, however, because in that announcement, BPA provided more detailed explanations of its reasons for entering into the Alcoa contract amendment. Those reasons included the fact that "DSI loads have historically benefitted BPA by taking power in relatively flat blocks that require little or no shaping; they have taken power from BPA at light load hours, when power has historically been difficult to market; and they have provided the Administrator with additional power reserves." The agency also averred that "changing technologies in the aluminum and power industries may permit DSI smelters to provide value to BPA in ways that have not yet been imagined." Thus, the agency concluded, it would be "unwise and imprudent... to refuse to provide service to customers that may provide future value to BPA as they have done in the past." BPA also expressed concern about the short-term impact of a refusal to execute the amended agreement, stating that the "DSIs currently have no viable alternative for its power needs and a decision not to sell power to DSIs would almost surely have the immediate consequence of the plants shutting down and perhaps never resuming production."
Finally, the agency acknowledged that the monetary benefits offered to Alcoa and CFAC would result in an increase in rates for its other customers. It nonetheless concluded that the contracts were reasonable because the agency did "not believe that the proposed amendment, which covers only a nine month period at a relatively modest cost, causes unreasonable upward pressure on rates."
Petitioners PNGC, PPC, and ICNU filed petitions challenging the validity of the amended contracts on January 22, 2009, January 23, 2009, and April 6, 2009, respectively. The petitions were consolidated on ...