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Ninth Circuit Orders BPA To Reconsider Recovery of Improper Payments to DSIs

September 26, 2014 posted by Eric Christensen

Last week, the U.S. Court of Appeals for the Ninth Circuit ordered the Bonneville Power Administration to reconsider whether it should seek recovery of improper payments made to certain Direct-Service Industrial ("DSI") customers. The Court's decision (Industrial Customers of Northwest Utilities v. BPA, 9th Cir. Nos. 11-71368 et al (issued September 18, 2014)) is an important landmark on the long-running battle between Bonneville's competing customer groups over access to low-cost federal hydroelectric resources.

The DSIs are large, energy-intensive industries, primarily aluminum smelters, that receive power directly from Bonneville rather than from a local distribution utility. At one time, the DSIs consumed more than 3,000 average MW of power in the Pacific Northwest, but that load has declined precipitously in recent years, especially after the Enron Crisis of 2000-01 produced a surge in regional power prices. The Northwest Power & Conservation Council expects that the DSIs will consume only about 700 aMW for the foreseeable future. The dispute addressed by the Ninth Circuit arises from the growing economic pressures faced by the DSIs, Bonneville's attempts to ameliorate those pressures, and the resulting burdens on other Bonneville customers, especially Bonneville's preference customers (that is, public utility districts, municipally-owned utilities, rural electric cooperatives, and other publicly-owned utilities that have statutory preference rights to Bonneville power).

The Ninth Circuit's recent decision addresses three sets of DSI contracts that it previously invalidated. In the first, Bonneville agreed to provide a group of aluminum smelters with monetary benefits rather than power. The Court rejected these contracts, finding that while Bonneville has the discretion to provide monetary rather than power benefits to the DSIs, the Northwest Power Act requires Bonneville to charge the IP rate, and the invalidated contracts were improper because they were based on rates below the IP rate. The contracts, however, contained a clause disclaiming any right to restitution should the contract be invalidated by the Ninth Circuit. After the contract was invalidated, Bonneville relied on that provision in determining that it should not seek repayment of the improper monetary benefits.

In the second set of contracts, BPA agreed to make a $32 million cash "benefit payment" to Alcoa to preserve DSI operations and as an interim fix until the remand from the earlier Ninth Circuit decision invalidating the below-IP monetary payment was resolved. The Ninth Circuit invalidated this contract as well, finding that it was aimed at propping up Alcoa and preserving jobs in the region, and lacked a clear business rationale. The Court ruled the contract invalid because it violated Bonneville's statutory obligation to act "consistent with sound business principles." Again, after the contract was invalidated, Bonneville declined to seek recovery of any of the improper payments. The third contract involved Bonneville's sale of power to Port Townsend Paper Company, the sole remaining non-aluminum DSI. As with the aluminum DSIs, the Ninth Circuit invalidated the Port Townsend Paper contract on the ground that Bonneville acted inconsistently with sound business principles by selling power to Port Townsend at a rate below both the market and the IP rate. As with the other invalidated contracts, Bonneville declined to seek a refund of the improper payments.

In last week's decision, the Ninth Circuit addressed the validity of its decision to forego refunds for each of these three sets of contracts. The Court partially upheld and partially invalidated Bonneville's decisions. Initially, the Court rejected arguments proffered by Bonneville's preference customers asserting that Bonneville has a duty under the U.S. Constitution and federal statutes to recover improper payments to the DSIs. Hence, the Court concluded, Bonneville's election not to seek recovery is discretionary, and the remaining question is whether Bonneville's election not to seek refunds was arbitrary and capricious, the general standard for reviewing the discretionary actions of federal agencies. Weighing this standard, the Court concluded that Bonneville properly elected not to seek refunds for the contracts that contained a waiver of damages clause. The Court reasoned that Bonneville received significant value for the waiver because the clause relieved Bonneville from the threat of damages asserted by the DSIs. Similarly, the Court upheld Bonneville's decision not to seek recovery of the improper payments to Port Townsend Paper, finding that Bonneville's decision was justified by the difficulty of measuring the improper payment, by complications arising from Port Townsend Paper's recent bankruptcy, and from the structure of the contract.

But the Court rejected Bonneville's findings with regard to the second Alcoa contract, concluding that Bonneville's reasons for declining to seek a refund lacked credibility. Bonneville reasoned that Alcoa had valid defenses that might defeat a refund claim and that Alcoa might assert a counterclaim against Bonneville. The Court rejected Bonneville's reasoning as "so implausible that it could not be ascribed to a difference of view or the product of agency expertise." The Court remanded the case to Bonneville. Hence, it remains possible that Bonneville could develop a plausible rationale for refusing to seek refunds for the Alcoa contract, but further litigation is likely in any event.