In this petition for review, we consider whether the Federal Energy Regulatory Commission (“FERC” or “Commission”) arbitrarily and capriciously determined that Pacific Gas & Electric Company (“PG&E”) was eligible for an incentive adder for remaining a-member of the . California Independent System Operator Corporation (“Cal-ISO”) when state ■ law prevented PG&E’s departure without authorization. We conclude that it did, and we grant the petition.
I
Section 201 of the Federal Power Act (“FPA”) gives FERC jurisdiction over the rates, terms, and conditions of service for the transmission and salé at wholesale of electric energy in interstate commerce. 16 U.S.C. §§ 824(a)-(b). Section 219 of the FPA, added in 2005, directed FERC to promulgate a rule providing incentive-based rates for electric transmission for the purpose of benefitting consumers through increased reliability and lower costs of power. 16 U.S.C. § 824s(a). As relevant here, section 219(c) required FERC to provide incentives to induce utilities to join regional transmission organizations. 16 U.S.C. § 824s(c). FERC did so in 2006 through the adoption of Order 679 and the rehearing orders that followed. Promoting Transmission Investment Through Pricing Reform, Order No. 679,
Order 679 established upward adjustments, or “incentive adders,” to the rate of return on equity of utilities that participate in transmission organizations. Order 679 set forth the terms on which FERC would grant the incentive adders. FERC determined that it would “not grant outright any incentives,” but that it would grant such incentives “when justified” in the context of • individual declaratory orders or
Orddr 679 provided that adders would be available for utilities that “have already joined, and that remain members of,” transmission organizations in “recognition of the benefits that flow from membership” and the fact that “continuing membership is generally voluntary.”'Order 679 at P 331. The order stated that a utility <fwill be presumed to be eligible for the incentive” if it can demonstrate that it has joined a transmission organization and that its membership is ongoing. Id. at P 327.
FERC declined to create a “generic adder” for membership in a transmission organization. Order 679 at P 326. Commen-ters had urged FERC to make a “generic finding” that any entity that joins a transmission organization “automatically qualifies]” for an incentive adder, with at least one commenter specifically proposing a 50 basis-point incentive adder. Id. at P 318. FERC declined to adopt this proposal, electing to consider “on a case-by-case basis” what incentive (if any) is appropriate for a utility. Id. at P 326.
In 1995, as part of its restructuring of California’s electric power industry, the California Public Utilities Commission (“CPUC”) ordered the state’s three largest investor-owned utilities, including PG&E, to submit to FERC a proposal to establish an independent system operator (“ISO”) and to transfer operational control of their facilities to that ISO.
In 1997, California’s three largest investor-owned utilities, including PG&E, sought CPUC authorization to turn over operational control of certain transmission assets to the newly-created Cal-ISO. CPUC approved this transfer of control. In its decision approving the transfer, CPUC stated that any further transfers of control, such as transfers of control from the Cal-ISO back to the utilities, would also require CPUC authorization under state law. Joint Application of Pac. Gas & Elec. Co., San Diego Gas & Elec. Co., and S. Cal. Edison Co., 78 CPUC 2d 307, p. 313,
Since it joined • the Cal-ISO in- 1997, PG&E has submitted an annual “transmission owner” tariff filing to FERC pursuant to section 205 of the FPA. See Pac. Gas. & Elec. Co.,
Jn 2014 and 2015, PG&E filed its sixteenth and seventeenth transmission owner tariff filings, respectively (“TO 16” and “TO 17”). In each of those filings, PG&E requested a 50 basis-point incentive adder. CjPUC filed timely protests to both of the filings. CPUC’s protests claimed that be-cáuse PG&E’s continued participation in tlje Cal-ISO is mandated by CPUC order, granting it incentive adders would reward P|G&E for doing something it was already required to do.
FERC issued orders in both proceedings summarily granting PG&E’s requested adders. Pac. Gas & Elec. Co.,
“[Consistent with previous Commissions [sic] orders, we summarily accept PG&E’s request for a 50 basis point incentive ROE adder for its continued participation in [Cal-ISO] ... Parties opposing PG&E’s request ... have presented no new evidence or circumstances to warrant reexamining whether the adder is appropriate in this proceeding.”
TO 16 Initial Order at P 30 (footnotes oinitted). The TO 17 Initial Order held similarly:
“[Consistent with previous Commission orders, we accept PG&E’s request for a 50 basis point incentive ROE adder for its continued participation in [Cal-ISO] ... PG&E is a member of [Cal-ISO] ... and its membership is ongoing; therefore, PG&E is presumed to be eligible for this incentive adder in accordance with Order No. 679.”
TO 17 Initial Order at P 23 (footnotes omitted). FERC rejected CPUC’s argument that the incentive adder was not justified because it did not “induce” PG&E’s continuing membership in the Cal-ISO: “Notwithstanding CPUC’s argument asserting that PG&E’s participation is not voluntary because it is mandated by state law, it is within the Commission’s authority to grant incentive adders as described in Order No. 679.” Id. at P 24. FERC also rejected. CPUC’s argument that it had created a generic adder, stating that PG&E had demonstrated that it was a Cal-ISO member and “thus satisfied the criteria set forth in Order No. 679.” Id. at P 25.
CPUC sought rehearing of both FERC orders. CPUC explained that FERC erred by granting PG&E an incentive adder even though it was not free to leave the Cal-ISO; failing to respond to CPUC’s arguments about PG&E’s involuntary membership in the Cal-ISO; and granting a generic adder inconsistent with Order 679. FERC denied CPUC’s rehearing requests. Pac. Gas & Elec. Co.,
In response to CPUC’s claims that FERC had adopted a generic adder, FERC stated that utilities with ongoing membership in transmission organizations are “presumed eligible” for the adder and that CPUC “concedes” that PG&E had an ongoing membership in the Cal-ISO. TO 16 Reh’g Order at P 11; TO 17 Reh’g Order at P 11. FERC added that because PG&E’s membership in the Cal-ISO helps the Cal-ISO to “fulfill its duties,” FERC found the incentive adders “to be justified.” TO 16 Reh’g Order at P 12; TO 17 Reh’g Order at P 10.
Finally, FERC asserted that CPUC’s objection amounted to a “collateral attack” on Order 679 and Order 679-A that it did not need to address. TO 16 Reh’g Order at P 13; TO 17 Reh’g Order at P 12. CPUC timely petitioned for review.
II
FERC has jurisdiction over the two transmission owner rate filings (TO 16 and TO 17) that initiated the instant proceedings pursuant to section 205 of the FPA. See 16 U.S.C. § 824d. We have jurisdiction to review “order[s] issued by the Commission” under section 313(b) of the FPA. See 16 U.S.C. § 8252(b). All parties to this petition for review agree that the incentive adder issue was definitively resolved by FERC in the orders under review.
We review a decision by FERC to determine whether its action was “arbitrary, capricious, an abuse of discretion, 'or otherwise not in accordance with law.” 5 U.S.C. § 706(2), see also Fall River Rural Elec. Coop., Inc. v. FERC,
Ill
FERC’s determination that PG&E was entitled to incentive adders for remaining in the Cal-ISO was, arbitrary and capricious. FERC did not reasonably interpret Order 679 as justifying summary grants of adders for remaining in a transmission organization. Because its interpretation was unreasonable, FERC’s grants of adders to PG&E were an unexplained departure from longstanding policy. Moreover, FERC created a generic adder in violation of the order.
A
FERC’s interpretation of Order 679 as justifying summary grants of incentive adders to utilities that remain in transmission organizations was not reasonable.
FERC interprets Order 679 as conferring on it “the authority ... to continue to grant incentive adders for electric utilities ..!. that remain members of regional transmission organizations” without further inquiry into the voluntariness of their membership. Brief of Respondent at 20. FERC notes that Order 679 makes an entity presumptively eligible to receive an adjdér if it demonstrates continuing membership in a transmission organization. See Order 679 at P 327. FERC appears to interpret the “presumed to be eligible” language as absolving it of an obligation to consider whether the presumption should apply to utilities that are prohibited from withdrawing from transmission organizations- without the consent of a higher authority. Under this interpretation, ongoing membership itself is the sole criterion for receipt of an incentive adder.
FERC’s interpretation of Order 67j9 is plainly erroneous and inconsistent with the regulation. Order 679 provides thjat a utility demonstrating that it has remained in a transmission organization is “presumed to be eligible” for an incentive adder. Order 679 at P 327. However, language throughout Orders 679 and 679-A suggests that the presumption of eligibility may be rebutted by the arguments, CPUC has made and that ongoing membership is not sufficient for an incentive adder.
The orders commit FERC to case-by-case review of incentive adders even for utilities that have demonstrated ongoing membership in transmission organizations. Order 679 states that 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. Order 679, at P 326 (emphasis added). If all utilities that continued to be members of transmission organizations automatically qualified for incentive adders, the “when justified” language would be surplusage. In the same paragraph, FERC declines proposals to “create a generic adder for such membership” and states .that it will “consider specific incentives on a case-by-case basis.” Id. If FERC’s interpretation were correct, case-by-case review would be meaningless.
The justification for, incentive adders , as articulated in Order 679 also belies FERC interpretation of the order. The order states that the “basis for the incentive is a recognition of the benefits that flow from membership in [transmission] organizations and the fact that continuing membership is generally voluntary.” Order 679 at P 331 (emphasis added). When membership is not voluntary, the incentive is presumably not justified. Challenges to the presumption of eligibility for the incentive on such grounds Would not be precluded by the order and would need to be addressed by FERC if raised in tariff filing proceedings.
‘ Order 679-A, citing section 219’s purpose of ensuring reliability and reducing the cost of power, describes incentive adders as “an inducement for utilities to join, and remain in, Transmission Organizations.” Order 679-A at P 86 (emphasis added). An incentive cannot “induce” behavior that is already. legally mandated.
Finally, Order 679-A states that with respect to incentives under section 219, “[a] prior contractual commitment or statute may have a bearing on our nexus evaluation of individual applications.” Order 679-A at P 122. This also necessarily implies that ongoing membership in a transmission organization is not dispositive as to incentive adder eligibility.
FERC argues that Orders 679 and 679-A considered and rejected the argument that the voluntariness of a utility’s membership in a transmission organization should bear on its eligibility for an incentive adder. Order 679 did decline to adopt proposals making utilities ineligible for incentives if they were ordered to join transmission organizations by statute. Order 679 at P 316; Order 679-A at P 83. However, this does not support FERC’s interpretation, which holds that utilities that remain in transmission organizations qualify for adders even when their continued participation is compelled by statute. No party to the Order 679 proceedings raised the issue of whether a utility could qualify for an incentive for its involuntary continued participation in a transmission organization.
The text of Orders 679 and 679-A makes it clear that FERC’s interpretation of those orders is plainly erroneous and inconsistent with the regulations. The orders did not make ongoing membership in a transmission organization the sole criterion for an incentive adder, and the orders did not preclude challenges based on-the vol-untariness of a utility’s membership ..in a transmission organization. We decline to defer to FERC’s interpretation of the orders.
2
Even if not plainly erroneous, an agency’s interpretation is not owed deference if “there is(reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question.” W. Radio Servs. Co.,
FERC’s interpretation of Order 679 is a post hoc rationalization of its actions. FERC never before explicitly articulated the interpretation it relies on, even though, as the author of Order 679, it could have easily incorporated the interpretation into the order. Order 679 provides that utilities that demonstrate ongoing membership in transmission organizations will be “presumed to be eligible” for incentive adders, but it is silent as to whether that presumption can be rebutted for utilities that cannot voluntarily leave their organizations. Order 679 at P 327. Nowhere does Order 679 state that the voluntariness of a utility’s mem-bfership
Nor did FERC clearly articulate its interpretation in the two orders currently on review. In denying CPUC’s rehearing requests for' the TO 16 and TO 17 orders, lyERC merely stated that'“it is within'the Commission’s authority to grant incentive adders as described in Order No. 679,” tjiat Order 679 “is clear that the Commission may grant incentive adders for public utilities that join and/or continue to remain in” transmission organizations, and that Crder 679 does not “require that the Commission discontinue such adders in the face of arguments like those that the CPUC has made here.” TO 16 Reh’g Order at P 10; TO 17 Reh’g Order at P 9. These statements do not reflect a fair and considered judgment on the meaning of Order 679.
| It is apparent that FERC’s interpretation of Order 679 is merely a convenient litigating .position and a post hoc rationalization of the orders on review. We decline to defer to the interpretation.
3
“[Wjhen Auer deference is not warranted, an agency’s interpretation of an ambiguous regulation should be evaluated under the principle articulated in Skidmore v. Swift & Co.,
FERC’s interpretation does not reflect thorough consideration, nor is it persuasive in its own right. FERC does not develop or justify its interpretation in either the orders on review or in its briefing before this court; the interpretation is found only in FERC’s post-hoc reasoning.
In' light of our conclusion ’ that FERC’s interpretation is neither entitled to Auer deference nor persuasive in its own right, we employ traditional tools of interpretation to determine whether Order 679 permits challenges to the presumption of eligibility of the sort CPUC has lodged here. Christopher v. SmithKline Beecham Corp.,
B
Given that its interpretation of Order 679 is not controlling, FERC failed to provide a reasoned explanation for its actions in the orders under review. An agency must “articulate a satisfactory explanation for its action.” Motor Vehicle Mfrs. Ass’n,
FERC had a longstanding policy that incentives should only be awarded to induce future behavior. FERC departed from this policy without acknowledgment or explanation. This departure was arbitrary and capricious.
1
FERC has a longstanding policy that rate incentives must be prospective and that there must be a connection between the incentive and the conduct meant to be induced. This policy is incorporated in Order 679. The policy prohibits FERC from rewarding utilities for past conduct or for conduct ■vyhich they are otherwise obligated to undertake.
This longstanding policy is evinced in a series of FERC decisions and statements. In 2001, FERC denied a committee of utilities an incentive for a maintenance/construction pilot project. FERC reasoned that awarding the incentive would “unjustly reward” the committee “for doing what it is supposed to do, i.e., to adequately maintain its facilities in a prudent, cost-effective manner.” New England Power Pool,
2
Awarding PG&E incentive adders was a departure from FERC’s longstanding policy; that incentives should only be awarded to induce voluntary conduct. This unacknowledged and unexplained departure frqm policy was arbitrary and capricious.
In the initial orders and on rehearing, FERC did not acknowledge its longstanding policy, nor did it provide an explanation for its departure from that policy. It merely asserted that it had the authority to grant incentive adders to PG&E and that CPUC’s voluntariness arguments were irrelevant to adder eligibility. FERC’s statements would only explain its actions if its interpretation of Order. 679 were correct. Because that interpretation is erroneous, the orders on review were a departure from Order 679’s terms and the longstanding policy it incorporates. Without any acknowledgment or explanation of that departure, the orders were arbitrary and capricious.
C
FERC also acted arbitrarily and capriciously by creating a generic adder in contravention of Order 679’s requirement of ease-by-case review of adders;
Order 679 provides that FERC will approve incentive adder requests “when justified” and wilj evaluate such requests “on a case-by-case basis.” Order 679 at P 326. Order 679 explicitly rejected a proposal to adopt a generic 50-basis-point incentive adder for ongoing transmission organization membership. Id.
In its challenges to PG&E’s tariff filings, CPUC argued that incentive adders could not induce PG&E to remain in the Cal-ISO since its membership was involuntary.
When Order 679 is read in accordance with its plain language and evident purpose, it is clear that FERC has created a generic adder in violation of its provisions. To satisfy Order 679’s case-by-case analysis requirement and to avoid creating a generic adder, FERC needed to inquire into PG&E’s specific circumstances, i.e., whether it could unilaterally leave the Cal-ISO and thus whether an incentive adder could induce it to remain in the Cal-ISO. The fact that the other utilities have received the same adder does not make it generic; it is the fact that the adders were granted summarily without any case-specific inquiry into the circumstances of PG&E’s membership that made them generic. FERC’s summary grants are an unacknowledged and unexplained departure from Order 679. The orders on review are arbitrary and capricious. Fox,
IV
CPUC’s petition is not an impermissible collateral attack on Order 679. Under the FPA, this court’s “jurisdiction ... is limited to review of new orders,” and the court does not have jurisdiction over a petition for review “that collaterally attacks a prior FERC order.” Pac. Gas & Elec. Co. v. FERC,
For the same reasons that FERC’s interpretation of Order 679 is inconsistent with the regulation, a reasonable party in CPUC’s position would not have perceived a very substantial risk that FERC would interpret Order 679 as precluding its challenges. To the extent that FERC now interprets Order 679 as precluding such challenges, this interpretation constitutes a modification, and CPUC’s challenge is not an impermissible collateral attack on the original order.
FERC makes two additional arguments in support of its collateral attack claim. First, FERC argues that CPUC’s petition is a collateral attack on Order ,679 because CPUC is advancing the same argument that FERC considered and rejected in 2006: that utilities legally mandated to join transmission organizations should not be eligible to receive incentive adders. However, this is not the challenge CPUC is making. CPUC challenges incentive adders for remaining in a transmission organization when a utility is not free to leave. No party to the Order 679 proceeding raised the issue of whether a utility could qualify for an incentive adder for continued participation in a transmission organization when such participation was not voluntary. CPUC was not precluded from making such a challenge to the orders on review.
Neither Order 679 nor the settlement approval orders that followed gave CPUC sufficient notice that Order 679 precluded challenges to incentive adder eligibility on the ground that a utility’s membership in a transmission organization is involuntary. CPUC’s petition is thus not an impermissible collateral attack on Order 679.
V
, We grant CPUC’s petition for review and remand to FERC for further proceedings consistent with this opinion. We need not, and do not, reach any other issue urged by the parties.
PETITION GRANTED.
Notes
, “Section 205” refers to FPA § 205, codified at 16 U.S.C. § 824d.' Investor-owned utilities like PG&E make transmission owner rate case filings with FERC pursuant to section 205 in order to recover their costs of transmission service.
. An ISO is a form of regional transmission organization, and an ISO’s members are eligible for incentive adders under section 219(c) and Order 679.
. See Pac. Gas & Elec. Co.,
. In a proceeding subsequent to the orders on review here, FERC offered for the first time an explicit interpretation of the "presumption” provision in Order 679, in line with the ' implicit interpretation at issue here. See Pac. Gas & Elec. Co.,
. / FERC and PG&E each argue that PG&E's participation in the Cal-ISO is, in fact, voluntary. FERC argues-that even if PG&E is no.t free to leave the Cal-ISO without CPUC’s consent, "that still does not demonstrate that PG&E] is forbidden from seeking to leave the Cal-ISO],” and that PG&E "could take steps, With California’s approval, to voluntarily leave the [Cal-ISO].” Brief of Respondent at 23-24. PG&E goes a step further and argues :hat its withdrawal from membership in the 2al-ISO is not subject to CPUC approval. Brief of PG&E as Respondent-Intervenor at 22-25. these arguments, even if correct, could not sustain the orders on review, as they do not appear anywhere in those orders. We can only uphold agency action on grounds articulated by the agency in its orders; we "may not accept appellate counsel's post. hoc rationalizations for agency action.” Or. Nat. Desert Ass’n v. Bureau of Land Mgmt.,