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End of a Litigation Era? Ninth Circuit Upholds Bonneville Power's Residential Exchange Settlement by Staff Energy & Natural Resource Blog, October 29, 2013

The U.S. Court of Appeals for the Ninth Circuit on Monday approved a Bonneville Power Administration settlement of the "Residential Exchange" litigation, which may finally bring a few years of peace to a decades-long legal war over the distribution of benefits from the low-cost resources of the federally-owned hydroelectric dams on the Columbia River system. The Ninth Circuit's opinion rejects a number of challenges to the settlement under the Northwest Power Act, putting to rest most questions about the Residential Exchange for the settlement's duration, through 2028. (Association of Public Agency Customers v. Bonneville Power Administration, No. 11-73178 (issued Oct. 28, 2013)).

The Residential Exchange is the result of a "grand bargain" between Bonneville's public agency customers and the region's investor-owned utilities ("IOUs"), which was encapsulated in Sections 5(c) and 7(b) of the Northwest Power Act of 1980. The Residential Exchange was intended to allow the IOUs a share of the benefits of low-cost power from the federal hydroelectric system. The language of the Act is quite turgid, but at base, the Exchange provides the residential and small farm customers of the IOUs with a cash subsidies from Bonneville. But those benefits are subject to a "ceiling," set forth in Section 7(b)(2). The 7(b)(2) rate ceiling is the keystone of the "grand bargain," and is intended to protect Bonneville's public customers, who pay for most costs of the Residential Exchange as an element of their wholesale power rates, by ensuring that their rates are no higher than they would have been had the Residential Exchange not been enacted. Rather than a direct sale of power, the Exchange is a paper transaction in which the IOUs "exchange" power with Bonneville, and receive a cash payment from Bonneville which is calculated as the difference between the IOU's average power cost ("Average System Cost" in Bonneville-speak) and Bonneville's wholesale rate, as adjusted in accordance with the rate cap and other requirements of Section 7 (the "PF Exchange Rate"). The IOUs are then obligated to pass this cash payment through to their residential and small farm customers through rate reductions for these customer classes.

The Residential Exchange was, as the Ninth Circuit observed, a source of "almost continuous litigation," beginning in the 1980s. In the 1990s, Bonneville offered settlements to the IOUs that would resolve their Residential Exchange entitlements for the period from 2002 through 2011. Bonneville's public agency customers strongly opposed these settlements, which provided the IOUs with payments hundreds of millions of dollars above what would have been paid had Bonneville observed the Section 7(b)(2) rate cap. Bonneville nonetheless approved the settlements, spawning another round of litigation in the Ninth Circuit, and rare loss for Bonneville on rate-related matters.

In a pair of decisions issued in 2007, the Ninth Circuit rejected Bonneville's contention that it has extremely broad settlement authority, instead concluding that Bonneville settlements, like other Bonneville actions, must comply with the Northwest Power Act. Because the settlements exceeded what otherwise would be allowed under the Section 7(b)(2) rate cap, the settlements exceeded Bonneville's authority and Bonneville violated the Act by passing through the costs of the settlements to its public agency customers. Portland General Electric Co. v. BPA, 501 F.3d 1009 (9th Cir. 2007); Golden Northwest Aluminum, Inc. v. BPA, 501 F.3d 1037 (9th Cir. 2007). The Court therefore vacated the settlements and remanded the proceeding to Bonneville.

Facing yet more litigation in the remand proceeding, a settlement was devised that eventually received the support of 94% of Bonneville's public agency customers and all of the region's IOUs. Its key elements are: (1) to provide a defined series of Residential Exchange payments to the IOUs over the settlement period, ranging from $182.1 million in FY 2012 to $286.1 million in FY 2028, although the total payment stream is estimated to be about $1 billion less than the public customers might have paid without the settlement; and, (2) a mechanism to allow the public agency customers to recover overcharges of more than $600 million that were imposed under the settlement that was vacated by the Ninth Circuit in 2007.

A group of industrial interests served by several of Bonneville's public agency customers refused to endorse the settlement and challenged it in the Ninth Circuit. Monday's decision rejects a litany of challenges brought by these industrial customers, upholding the settlement in its entirety. Read together with the Court's 2007 decisions, the fundamental lesson appears to be that Bonneville has broad authority to enter into settlements as long as the settlements are within the outer bounds of what otherwise would be required under its governing statutes.

If you have questions about the Ninth Circuit decision discussed in this post, the Bonneville Power Administration, the Northwest Power Act, or other questions related to energy, environmental or natural resource issues, please contact a member of GTH's Energy, Telecommunications, and Utilities, Environment & Natural Resources, or Appellate practice groups. We are proud that our partner Jim Waldo was recently named Lawyer of the Year for Energy and Natural Resources Law. In addition, along with Jim, practice group members Don Cohen, Bill Lynn, Sal Mungia, and Brad Jones were all recently named among America's Best Lawyers for 2014.