On Petition for Review of an Order of the Bonneville Power Administration BPA No. 10PB-12175
The opinion of the court was delivered by: Ikuta, Circuit Judge:
Argued and Submitted May 5, 2011-Portland, Oregon
Before: A. Wallace Tashima, Carlos T. Bea, and Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Ikuta; Concurrence by Judge Tashima; Partial Concurrence and Partial Dissent by Judge Bea
These consolidated petitions for review challenge a contract between the Bonneville Power Administration (BPA) and one of its long-time customers, Alcoa Inc. BPA's preference customers, as well as other entities and organizations in the Pacific Northwest, filed this petition for review, requesting that we hold that the contract is unlawful because it is inconsistent with the agency's statutory mandate to act in accordance with sound business principles. They claim that instead of entering into a contract to sell power to Alcoa at the statutorily required Industrial Firm power (IP) rate (a cost-based rate prescribed by 16 U.S.C. § 839e(c)(1) for sales of power to customers such as Alcoa), BPA should sell to other buyers at the market rate. BPA's decision not to do so, petitioners allege, forgoes revenue that could otherwise be used to lower the rates charged to its preference customers. They further argue that BPA relied on flawed data in determining it would make a modest profit by selling surplus power to Alcoa. Alcoa also petitions for review, asking the court to hold that the Equivalent Benefits standard*fn1 is contrary to BPA's governing statutes, Alcoa makes this request because such a judicial determination is a condition precedent for the commencement of a five-year period (the "Second Period" of the Alcoa Contract) during which time BPA would continue to sell power to Alcoa at the contracted rate. In May 2012, the Alcoa Contract was amended to remove all references to the Second Period. We dismiss the petitioners' and Alcoa's challenge in part as moot, and otherwise reject their claims.*fn2
A. Categories of Customers BPA Serves
BPA is a federal agency within the Department of Energy which "has marketing authority over nearly all the electric power generated by federal facilities in the Pacific Northwest." Ass'n of Pub. Agency Customers, Inc. v. BPA (APAC), 126 F.3d 1158, 1163 (9th Cir. 1997). We have previously detailed the "complex statutory landscape" under which BPA operates at length. See Pac. Nw. Generating Coop. v. Dep't of Energy (PNGC I), 580 F.3d 792, 799 (9th Cir. 2009). For present purposes, we focus on BPA's statutory obligations to three different types of customers.
First, "in disposing of electric energy generated" at BPA projects, BPA is required to "give preference and priority" to "public bodies*fn3 and cooperatives" that purchase power from BPA for resale to their consumers. 16 U.S.C. § 832c(a). These entities are "preference" customers, and BPA is required to give priority to their applications for power when competing applications from nonpreference customers are received. See id. § 832c(b).
Second, BPA is authorized to sell power to private, investor-owned utilities (IOUs), which, like the preference customers, buy power for resale to ultimate consumers. See id. § 832d(a); APAC, 126 F.3d at 1164.
Third, BPA may sell to a limited group of "direct service industrial customers" (DSIs), which are large industrial companies with a high demand for electricity. 16 U.S.C. § 839c(d). Unlike BPA's other customers, DSIs purchase power directly from BPA for their own consumption, not for resale. Id. § 839a(8); APAC, 126 F.3d at 1164. Alcoa, the power purchaser in the contract at issue here, is one of BPA's DSI customers, and runs an aluminum smelting operation at its Intalco plant in Ferndale, Washington.
B. BPA's Rate Structure and "Sound Business Principles"
BPA's statutory framework also sets out the specific criteria by which BPA determines the rates it may charge for power to these different customers. Regardless of the type of customer, BPA must charge a rate that, at a minimum, recoups BPA's own costs of generating or acquiring the electricity. See 16 U.S.C. § 839e(a)(1).
BPA charges preference customers a cost-based rate, referred to as the priority firm or "PF rate," that allows BPA to recover the costs of generating or obtaining the power required to meet the preference customers' needs. Id. §§ 839c(a), 839e(b);*fn4 see also PNGC I, 580 F.3d at 802. IOUs can elect to sell power to BPA "at the average system cost of the utility's resources," id. § 839c(c)(1), and then buy power back from BPA at the PF rate. Id. §§ 839c(c); 839e(b). This subsidy "enables the [IOU] to sell power to its residential customers at the priority rate given to residential consumers receiving BPA federal power." Central Elec. Coop., Inc. v. BPA, 835 F.2d 199, 201 (9th Cir. 1987) (quoting Pacificorp v. Fed. Energy Regulatory Comm'n, 795 F.2d 816, 818 (9th Cir. 1986)). DSI customers also pay a cost-based rate (the "IP rate"), which is prescribed by § 839e(c).*fn5 PNGC I, 580 F.3d at 812 ("[W]hen entering into contracts for the sale of firm power to a DSI, [BPA] must initially offer the IP rate.") The IP rate must be "equitable in relation to the retail rates charged" by BPA's preference customers to their own industrial consumers in the region, 16 U.S.C. § 839e(c)(1)(B), and is always higher than the PF rate, Golden Nw. Alum., Inc. v. BPA, 501 F.3d 1037, 1046-47 (9th Cir. 2007).
In addition to charging all customers at a rate that recoups BPA's costs of generating or acquiring electricity, 16 U.S.C. § 839e(a)(1), BPA is also responsible for setting rates in accordance with "sound business principles." Thus, § 838g prescribes general factors BPA must balance when setting rates for the sale and transmission of federal power:
Such rate schedules . . . shall be fixed and established (1) with a view to encouraging the widest possible diversified use of electric power at the lowest possible rates to consumers consistent with sound business principles, (2) having regard to the recovery (upon the basis of the application of such rate schedules to the capacity of the electric facilities of the projects) of the cost of producing and transmitting such electric power . . . and (3) at levels to produce such additional revenues as may be required, in the aggregate with all other revenues of the Administrator, to pay [all expenses associated with] bonds issued and outstanding pursuant to this chapter, and amounts required to establish and maintain reserve and other funds and accounts established in connection therewith.
Id. § 838g (emphasis added). Section 839e similarly sets guidelines for fixing "rates for the sale and disposition of electric energy and capacity and for the transmission of non-Federal power." Id. § 839e(a)(1). Specifically, those rates:
shall . . . recover, in accordance with sound business principles, the costs associated with the acquisition, conservation, and transmission of electric power, including the amortization of the Federal investment in the Federal Columbia River Power System . . . and the other costs and expenses incurred by the [BPA] pursuant to this chapter and other provisions of law.
Id. § 839e(a)(1) (emphasis added). Finally, BPA is charged with "assur[ing] the timely implementation of [16 U.S.C. §§ 839-839h] in a sound and businesslike manner." Id. § 839f(b) (emphasis added).
Before entering into the Alcoa Contract, BPA and Alcoa entered into two prior power sales contracts. In response to a challenge to these prior contracts by many of the same petitioners involved in this case, we struck down key provisions of these contracts. See Pac. Nw. Generating Coop. v. BPA (PNGC II), 596 F.3d 1065 (9th Cir. 2010). Because the details of those contracts are described at length in those opinions, we describe only the relevant points here. In each agreement, BPA entered a power sale contract with Alcoa, but the terms of the contract did not require BPA to provide power to Alcoa. PNGC II, 596 F.3d at 1069-70. Instead, the contract provided that BPA would make a cash payment to Alcoa that was approximately equal to the difference between the regional market price of electricity and either the PF rate (under the contract at issue in PNGC I) or the IP rate (under the contract in PNGC II), both of which are significantly below the regional market price for electricity. Id. at 1070; PNGC I, 580 F.3d at 800. The payments at issue were not trivial: The first contract provided that BPA would pay Alcoa up to $295 million over 5 years, PNGC I, 580 F.3d at 798, and the second provided that BPA would pay Alcoa nearly $32 million over the course of 9 months, PNGC II, 596 F.3d at 1070. In PNGC I, we held that BPA's decision to offer power to a DSI at the PF rate (rather than the IP rate), and then monetize those rates, was invalid because inconsistent with BPA's statutory authority. 580 F.3d at 823. After BPA modified its contract with Alcoa to offer power at the IP rate, we held that BPA's decision to "incur a $32 million expense that will increase the rates of its preference customers, provides no direct benefit to the agency, and subsidizes the operations of its competitors" violated its statutory obligation to set rates for power sales in a manner that is "consistent with sound business principles." PNGC II, 596 F.3d at 1085-86. We held that this "sound business principles" standard was applicable, even though BPA's contract required it to sell Alcoa power at the IP rate. Id. at 1072-73. As we explained, BPA had no obligation to sell Alcoa power at all, but if it entered into a contract with Alcoa, it would have to offer the IP rate. Id. at 1073. We noted that if the market rate were higher than the IP rate, BPA should consider whether sound business principles weighed against entering into such a contract. Id.
Although striking down BPA's prior contracts with Alcoa on the ground that they were inconsistent with BPA's statutory requirements, we did not expressly establish any criteria that BPA would have to meet to ensure its contracts were consistent with sound business principles. BPA, however, interpreted PNGC II as holding that in order for BPA "to offer a sale of power to a DSI, BPA must conclude based on evidence in the record that the proposed transaction will result in benefits that equal or exceed the costs to BPA of the transaction." BPA has dubbed its interpretation the "Equivalent Benefits standard" or the "Equivalent Benefits Test."
D. The Current Alcoa Contract
BPA restructured its agreement with Alcoa in light of this Equivalent Benefits standard. On December 21, 2009, it entered into the Alcoa Contract, which defined four different time periods: (1) an "Initial Period," (2) an "Extended Initial Period," (3) a "Transition Period"; and (4) a "Second Period."
The Alcoa Contract defined the Initial Period as "the period December 22, 2009, through the earlier of (i) May 26, 2011; or (ii) the start of the Second Period."*fn6 During the Initial Period, BPA agreed to sell, and Alcoa to buy, up to 320 average megawatts (aMW) of electricity. As required by statute, all such power sales "will be made to Alcoa at the then applicable Industrial Firm power (IP) rate." See also Administrator's Record of Decision ("The sale [in the Alcoa Contract commencing December 22, 2009] is priced at the Industrial Firm power ('IP') rate, . . . which is the applicable rate for sales of non-surplus firm power to BPA's direct service industrial ('DSI') customers.").
Although BPA complied with the statutory requirement to sell power to Alcoa at the IP rate, because BPA could have declined to sell power to Alcoa at all, BPA was also required to consider whether its power sale to Alcoa was consistent with "sound business principles." PNGC II, 596 F.3d at 1073. BPA did so. As explained in its Record of Decision, BPA determined that its sale of power during the Initial Period was consistent with the Equivalent Benefits standard that it had derived from PNGC I and II. Using market forecasts, projected water-flow patterns, and other data, BPA concluded it could earn a profit on a sale of electricity to Alcoa from December 22, 2009 through May 26, 2011. It calculated this total net benefit to be approximately $10,000.
The Alcoa Contract also provided that at the end of the Initial Period, Alcoa could request a three- to twelve-month extension (the "Extended Initial Period"). BPA was required to agree to this extension if it determined that it would obtain Equivalent Benefits, as defined, from its sales to Alcoa during that period. As noted, the Alcoa Contract defined "Equivalent Benefits" as benefits accruing to BPA as a result of providing power to Alcoa that equal or exceed BPA's costs of providing the power. At oral argument, the parties informed us that Alcoa and BPA had executed an agreement to enter into the Extended Initial Period for one year; that period expired on May 26, 2012. According to BPA, this separate action could have formed the basis for a separate petition for review and, therefore, the validity of the Extended Initial Period was not before us.
After the Initial Period and any Extended Initial Period, the Alcoa Contract provided for a Transition Period and a Second Period. The one-year Transition Period would occur only if "the Ninth Circuit issues an opinion or other ruling holding, or that BPA determines can reasonably be interpreted to mean, that the Equivalent Benefits standard does not apply to sales under [the Alcoa Contract]." (emphasis added).
Upon the occurrence of this contingency, BPA would have up to one year to determine whether: (i) service to Alcoa during the Second Period would be "consistent with any alternative standard established by any such opinions" and other applicable rulings; and (ii) the cost to serve Alcoa will not exceed specified cost caps. If these criteria were met, the Second Period would commence and last for five years. During the Second Period, BPA would sell, and Alcoa would buy, 320 aMW of electric power at the IP rate during each year the contract is in effect.
After the Extended Initial Period passed, the parties entered into discussions regarding extending the contract beyond May 26, 2012. To accommodate these negotiations, the parties entered into three successive short term amendments, which extended the Initial Period from: (1) May 27, 2012 to June 30, 2012; (2) July 1, 2012 to July 31, 2012; and (3) August 1, 2012 to August 31, 2012. In addition, the May-June 2012 amendment provided that "all references in the Agreement to 'Second Period' are hereby removed and all contract clauses implementing the Second Period shall have no effect."
E. The Record of Decision for the Alcoa Contract
BPA released a draft of the Alcoa Contract for public comment in October 2009, and issued the final version of the contract and Record of Decision (ROD) on December 21, 2009. In the ROD, BPA explained its determination that it did not have to prepare an Environmental Impact Statement (EIS) for the Alcoa Contract because it fell within a categorical exclusion from review under the National Environmental Policy Act (NEPA), 42 U.S.C. §§ 4321-4347. See 10 C.F.R. pt. 1021, subpart D, App. B4.1.*fn7 The ROD stated that BPA would be able to "supply power to Alcoa's Intalco Plant from existing generation sources, [which] would be expected to continue to operate within their normal operating limits." The power "would be supplied to the Intalco Plant over existing transmission lines," meaning that "no physical changes to this system would occur." BPA therefore concluded that the above categorical exclusion applied and exempted the Alcoa Contract from NEPA's requirements.
F. Effect of Amendment to PNGC II
In March 2010, after the parties executed the Alcoa Contract, we added a clarifying amendment to PNGC II in response to BPA's petition for review. The amended opinion distinguished "BPA's voluntary decision to provide Alcoa with up to $32 million in cash payments" from "the decision to sell physical power to Alcoa" (at the IP rate) noting that the latter was different because "the sale of physical power to the DSIs is expressly authorized by statute, see § 839c(d)(1)(A)," and therefore "BPA's conclusion that such a sale is in its business interests is more likely to be reasonable." 596 F.3d at 1085. Further, we observed that "many of the justifications that BPA gave for its decision to execute the costly amended contract, though inapplicable to a 'monetized' sale, would apply to a physical power sale." Id. Finally, we noted that "a physical power sale implicates a number of issues that fall within BPA's particular expertise," such as "BPA's current and future generating capacity, its transmission capabilities, its relationship with suppliers, its current and projected commitments of physical power to other customers, its ability to acquire additional power if needed, and so forth." Id. Accordingly, we stated that "the agency's conclusion that a physical sale of power to Alcoa, even at loss, furthered its business interests might very well warrant our deference." Id.
In its briefs on appeal here, BPA argued that this amendment to PNGC II, which acknowledged that a physical sale of power at the IP rate, "even at a loss" (compared to selling the power at the market rate), might further BPA's business interest, could "reasonably be interpreted to mean that the Equivalent Benefits Test does not apply to sales under the Alcoa Contract," and therefore might meet the first contingency for the Second Period. But both at oral argument and in a subsequent letter brief, BPA clarified that no prior opinion of this court, including PNGC II as amended, had rejected the Equiv- alent Benefits Test and that the first requirement for triggering the Second Period had not been met.*fn8
After BPA issued the ROD and executed the Alcoa Contract, many of BPA's preference customers, as well as other entities and organizations in the Pacific Northwest, filed this petition for review, requesting that we hold that the contract is unlawful and invalid because it is inconsistent with the agency's statutory mandate to act in accordance with sound business principles. They claim that BPA should not have entered into a contract with Alcoa at the IP rate when BPA could have instead sold that same power at a higher market rate. Because BPA must set its rates to cover all its system costs, petitioners argue, if BPA had maximized profits by selling power in the market, it could have charged its preference customers a lower rate. According to petitioners, this failure to maximize profits violates BPA's duty to provide power "at the lowest possible rates to consumers consistent with sound business principles."
Alcoa also petitions for review, asking us to hold that BPA erred in adopting the Equivalent Benefits standard, because such a ruling is a condition precedent for commencement of a Second Period under the Alcoa Contract. Finally, PPC argues that BPA violated NEPA by failing to prepare an EIS. According to PPC, the Alcoa Contract did not fall within a categorical exclusion to NEPA, because the status quo is Alcoa's inevitable closure of its smelter, and the Alcoa Contract changes the status quo by allowing the smelter to keep operating. All these arguments are wrong.
The Initial Period of the Alcoa Contract
We consider each of petitioners' distinct legal and factual challenges in turn. We have jurisdiction over these consolidated petitions pursuant to 16 U.S.C. § 839f(e)(5) and must uphold "BPA's actions unless they are 'arbitrary, capricious, an abuse of discretion, or in excess of statutory authority.' " PNGC I, 580 F.3d at 806 (quoting Aluminum Co. of Am. v. BPA, 903 F.2d 585, 590 (9th Cir. 1990)). When reviewing whether BPA has acted "in accordance with law," we defer to BPA's reasonable interpretations of its governing statutes. See, e.g., Nw. Envtl. Def. Ctr. v. BPA, 117 F.3d 1520, 1530 (9th Cir. 1997).
A. The Controversy Is Not Moot
Before considering the contract terms relating to the Initial Period, we must first determine whether the petitioners' challenges to this part of the contract are moot. City of Colton v. Am. Promotional Events, Inc.-West, 614 F.3d 998, 1005 (9th Cir. 2010). The Initial Period of the Alcoa Contract concluded on May 26, 2011, and BPA has completed its performance under that part of the contract. Thus, we cannot return the parties to their original position because Alcoa cannot return the power it obtained from BPA. Friends of the Earth, Inc. v. Bergland, 576 F.2d 1377, 1379 (9th Cir. 1978) (holding that "[w]here the activities sought to be enjoined have already occurred, and the appellate courts cannot undo what has already been done, the action is moot"); see also Feldman v. Bomar, 518 F.3d 637, 642-43 (9th Cir. 2008). Nor is there any legal basis to conclude that Alcoa is liable to BPA for the difference between the IP rate for power charged under the contract and a higher market rate. BPA charged Alcoa the statutorily mandated IP rate; it was not empowered to charge either more or less. PNGC I, 580 F.3d at 818. In short, to the extent that the petitioners' claim is that BPA should have sold surplus power at market rates, and not contractually bound itself to sell power at the lower IP rate during the Initial Period, we cannot offer relief after the Initial Period has concluded.
 Nevertheless, we conclude that the petitioners' challenge "is not moot because it falls within a special category of disputes that are 'capable of repetition' while 'evading review.' " Turner v. Rogers, 131 S. Ct. 2507, 2514-15 (2011) (quoting S. Pac. Terminal Co. v. ICC, 219 U.S. 498, 515 (1911)). "A dispute falls into that category, and a case based on that dispute remains live, if '(1) the challenged action [is] in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there [is] a reasonable expectation that the same complaining party [will] be subjected to the same action again.' " Id. at 2515 (quoting Weinstein v. Bradford, 423 U.S. 147, 149 (1975) (per curiam) (alterations in original)). The rationale behind this exception is straightforward: some activities or situations are inherently fleeting in nature, such that orderly and effective judicial review would be precluded if we hewed strictly to the requirement that only a presently live controversy presents a justiciable question. In such cases, if a particular plaintiff is likely to suffer the same or very similar harm at the hands of the same defendant, the alleged wrongdoer should not be permitted to escape responsibility simply because the transaction is completed before an appellate court has a chance to review the case.
We have previously relied on this exception to the mootness doctrine in a case examining a BPA contract. In California Energy Resources Conservation & Development Commission v. BPA, 754 F.2d 1470 (9th Cir. 1985), a state energy agency challenged a contract between BPA and certain electric utilities for the provision of hydroelectric power that had been fully performed within a four month period. BPA argued that the case was moot because the challenged contracts had been completed and terminated. Id. at 1473. We disagreed, observing that "short-term transactions such as these before us can evade review in the sense that they can be completed in a shorter time than that required by the parties and this court to file, brief, argue, and decide a case." Id. We also reasoned that because the unpredictability of the hydro-electric power market could give rise to conditions where short-term sales were desirable, it was foreseeable that the parties could enter similar agreements in the future. Id.
The test for transactions that are "capable of repetition while evading review" is applicable to the petitioners' challenge to the Initial Period. Turning to the "evading review" prong of the test, we consider whether the 17 months of the Initial Period is so short a time that it renders effective review unlikely. "[W]e have recognized that 'evading review' means that the underlying action is almost certain to run its course before either this court or the Supreme Court can give the case full consideration." Alaska Ctr. for Env't v. U.S. Forest Serv., 189 F.3d 851, 855 (9th Cir. 1999) (quoting Miller v. Cal. Pac. Med. Ctr., 19 F.3d 449, 453-54 (9th Cir. 1994)). According to Turner, events that are completed within 18 months, First Nat'l Bank of Boston v. Bellotti, 435 U.S. 765, 774-75 (1978), or even within 2 years, S. Pac. Terminal Co., 219 U.S. at 515, can be " 'too short to be fully litigated' through the state courts (and arrive [at the Supreme Court]) prior to its 'expiration.' " Turner, 131 S. Ct. at 2515. We have held that a federal regulation establishing a "total allowable catch" for pollock in the Gulf of Alaska, which was in effect for less than one year, would evade "effective judicial review," Greenpeace Action v. Franklin, 14 F.3d 1324, 1329-30 (9th Cir. 1992), and have held with respect to the Forest Service's issuance of a two-year special use permit that "the duration of the permit is too short to allow full litigation before the permit expires." Alaska Ctr., 189 F.3d at 856. Nor, as discussed above, is BPA any stranger to this mootness exception. See Pub. Util. Comm'r v. BPA, 767 F.2d 622, 625 (9th Cir. 1985) (holding that a BPA ratemaking procedure of one year's duration did not supply sufficient time for adequate judicial review). And the exception may be applied even where (as here) the parties do not seek expedited review or a stay pending appeal. Alaska Ctr., 189 F.3d at 856. Although petitioners may bring a challenge to a BPA contract directly in this court, as a practical matter a transaction set for a term of 17 months, such as the Initial Period in this case, would be likely to expire before our review (let alone the Supreme Court's) could be completed.*fn9 Accordingly, we conclude that the transaction at issue here is likely to "evade review."
Turning to the second prong, the challenged conduct is capable of repetition where there is evidence that it has occurred in the past, or there is a "reasonable expectation" that the petitioner would again face the same alleged invasion of rights. Id.; First Nat'l Bank v. Bellotti, 435 U.S. 765, 774 (1978); Cal. Energy Res., 754 F.2d at 1473; Trans Int'l Airlines, 650 F.2d at 956 n.5. This case presents the required "reasonable expectation" of repetition. Indeed, BPA has already extended the Initial Period four times using identical terms, except that the extensions (of 12 months, 1 month, 1 month, and 1 month, respectively) were for briefer periods of time than the 17-month Initial Period.
 Furthermore, even though the petitioners can theoretically challenge the Extended Initial Period, that challenge would likely also be moot by the time we are ready to hear the case. Because BPA could continue to enter into agreements of such short duration, the agreements could effectively escape judicial review before their completion. Under these circumstances, we should apply the "capable of repetition yet evading review" exception, as directed by Turner.
Accordingly, we proceed to the merits of petitioners' and Alcoa's claims regarding the Initial Period.
B. BPA's Failure to Maximize Its Profits
The petitioners argue that BPA violated its statutory responsibilities in agreeing to sell surplus power at the IP rate to Alcoa pursuant to the terms of the Initial Period. First, the petitioners argue that by selling the power to Alcoa at the statutorily mandated IP rate, and thus forgoing the profits that could be made by selling surplus power on the market, BPA violated its statutory responsibility to operate pursuant to sound business principles. Second, the petitioners challenge the analysis supporting BPA's conclusion that it will make a modest profit of $10,000 by selling power to Alcoa at the IP rate during the Initial Period. The petitioners claim that BPA erred in its method for determining the cost of the program and will likely fail to make a profit, contrary to the Equivalent Benefits standard. Third, the petitioners claim that BPA's waiver of potential claims against Alcoa violates BPA's statutory and constitutional authority. Finally, Alcoa argues that it is arbitrary and capricious for BPA to adhere to the Equivalent Benefits standard because neither PNGC II nor the governing statutes requires BPA to sell power to DSIs at the market rate.
In reviewing these arguments, we consider merely whether "the agency considered the relevant factors and articulated a rational connection between the facts found and the choices made"; we do not second-guess its policy judgments. Cal. Wilderness Coal. v. U.S. Dep't of Energy, 631 F.3d 1072, 1084 (9th Cir. 2011) (quoting Nw. ...