               FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


INDUSTRIAL CUSTOMERS OF               No. 11-71368
NORTHWEST UTILITIES,
                      Petitioner,

                v.

BONNEVILLE POWER
ADMINISTRATION,
                      Respondent,

PORT TOWNSEND PAPER
CORPORATION; AVISTA
CORPORATION; ALCOA INC.; IDAHO
POWER COMPANY; PUGET SOUND
ENERGY, INC; PACIFICORP;
PORTLAND GENERAL ELECTRIC
COMPANY,
          Respondents-Intervenors.



PUBLIC POWER COUNCIL,                 No. 11-71396
                        Petitioner,

                v.

U.S. DEPARTMENT OF ENERGY;
BONNEVILLE POWER
ADMINISTRATION,
2                    ICNU V. BPA

                      Respondents,

AVISTA CORPORATION; ALCOA INC.;
IDAHO POWER COMPANY;
PORTLAND GENERAL ELECTRIC
COMPANY,
         Respondents-Intervenors.



PACIFIC NORTHWEST GENERATING          No. 11-71401
COOPERATIVE; BLACHLY-LANE
COUNTY COOPERATIVE ELECTRIC
ASSOCIATION; CENTRAL ELECTRIC
COOPERATIVE INC.; CLEARWATER
POWER COMPANY; CONSUMERS
POWER, INC.; COOS-CURRY
ELECTRIC COOPERATIVE, INC.;
DOUGLAS ELECTRIC COOPERATIVE;
FALL RIVER RURAL ELECTRIC
COOPERATIVE, INC.; LANE ELECTRIC
COOPERATIVE; LINCOLN ELECTRIC
COOPERATIVE, INC.; NORTHERN
LIGHTS, INC.; OKANOGAN COUNTY
ELECTRIC COOPERATIVE, INC.; RAFT
RIVER RURAL ELECTRIC
COOPERATIVE, INC.; UMATILLA
ELECTRIC COOPERATIVE
ASSOCIATION; WEST OREGON
ELECTRIC COOPERATIVE, INC.,
                       Petitioners,

                v.
                     ICNU V. BPA                     3

U.S. DEPARTMENT OF ENERGY;
BONNEVILLE POWER
ADMINISTRATION,
                    Respondents,

ALCOA INC.; AVISTA CORPORATION;
IDAHO POWER COMPANY; PUGET
SOUND ENERGY, INC; PACIFICORP;
PORTLAND GENERAL ELECTRIC
COMPANY,
          Respondents-Intervenors.



CANBY UTILITY BOARD,                  No. 11-71419
                        Petitioner,

                v.
                                       OPINION
U.S. DEPARTMENT OF ENERGY;
BONNEVILLE POWER
ADMINISTRATION,
                    Respondents,

ALCOA INC.; IDAHO POWER
COMPANY; AVISTA CORPORATION;
PUGET SOUND ENERGY, INC;
PACIFICORP; PORTLAND GENERAL
ELECTRIC COMPANY,
          Respondents-Intervenors.


           On Petition for Review of the
          Bonneville Power Administration
4                          ICNU V. BPA

                    Argued and Submitted
                May 9, 2013—Portland, Oregon

                    Filed September 18, 2014

Before: Alex Kozinski, Chief Judge, and Stephen Reinhardt
          and Marsha S. Berzon, Circuit Judges.

                Opinion by Judge Berzon;
Partial Concurrence and Partial Dissent by Judge Reinhardt


                           SUMMARY*


              Bonneville Power Administration

    The panel denied in part, and granted in part, petitions for
review brought by public utilities and cooperatives who buy
power from the Bonneville Power Administration and
industrial customers who are end-users of BPA power,
challenging the BPA’s decision not to seek refunds of
unlawful subsidies that the BPA previously gave to certain
longtime industrial customers and which were invalidated by
prior Ninth Circuit decisions.

    The petitioners alleged that their power costs had been
impermissibly raised by BPA’s decision because, if BPA
sought refunds of the subsidies, it could pass along the
recovered funds to its customers as lower rates. At issue are
three contractual arrangements: the 2007 Block Contracts

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                        ICNU V. BPA                          5

(three way contracts between BPA, Alcoa Inc. and two other
aluminum direct-service customers, and local public utilities
in which BPA agreed to make payments to the aluminum
companies in lieu of supplying them with actual electrical
power); the Alcoa Amendments (an amended contract in
which BPA again agreed to subsidize Alcoa rather than sell
it power directly); and the Port Townsend Contract (an
arrangement in which BPA supplied Port Townsend Paper
Company, a non-aluminum direct-service customer, with its
full requirements for power at a reduced rate).

    The panel held that the BPA had no general constitutional
or statutory duty to seek a refund any time it made an
unlawful payment, but an individual decision not to pursue
such a refund could be arbitrary, capricious or an abuse of
discretion under the Administrative Procedure Act. The
panel also held that the BPA’s decisions in most respects
sufficiently and reasonably balanced its competing
obligations to merit the panel’s deference, but in one respect
did not. Finally, the panel held that the BPA reasonably
explained why the challenged refund decisions were not
inconsistent with BPA’s earlier decision to seek recovery of
the different payments that had been declared unlawful by the
court in Portland Gen. Elec. Co. v. Bonneville Power Admin.,
501 F.3d 1009 (9th Cir. 2007).

    The panel denied the petition for review with regard to the
decision not to seek refunds with respect to the 2007 Block
Contracts and the Port Townsend Contract. The panel
granted the petition and remanded to the BPA for further
proceedings with regard to recovery of subsidies paid under
the Alcoa Amendment.
6                      ICNU V. BPA

    Judge Reinhardt concurred in part, but dissented from
section B.1.a which related to the 2007 Block Contracts.
Judge Reinhardt would hold that the contractual damages
waiver provision in the 2007 Block Contracts, as applied,
operated in excess of the BPA’s statutory authority.


                        COUNSEL

Melinda J. Davison (argued) and Irion Sanger, Davison Van
Cleve, P.C., Portland, Oregon, for Petitioner Industrial
Customers of Northwest Utilities.

Zabyn Towner, Pacific Northern Generating Cooperative,
Portland, Oregon, for Petitioners Pacific Northwest
Generating Cooperative and Members.

David F. Doughman, Beery Elsner & Hammond LLP,
Portland, Oregon, for Petitioner Canby Utility Board.

Irene A. Scruggs (argued), Public Power Council, Portland,
Oregon, for Petitioner Power Council.

Randy A. Roach, General Counsel, Timothy A. Johnson,
Assistant General Counsel, Jon D. Wright (argued) and
Hilary Browning-Craig, Attorneys, Bonneville Power
Administration, Portland, Oregon; and S. Amanda Marshall,
United States Attorney, District of Oregon, Stephen J. Odell,
Assistant United States Attorney, David J. Adler and J.
Courtney Olive, Special Assistant United States Attorneys,
Portland, Oregon, for Respondent Bonneville Power
Administration.
                       ICNU V. BPA                        7

Michael C. Dotten (argued) and Dustin T. Till, Marten Law,
Portland, Oregon, for Intervenor Alcoa Inc.

Jay T. Waldron and Sara Kobak, Schwabe Williamson &
Wyatt P.C., Portland, Oregon; and Ryan L. Flynn, PacifiCorp,
Portland, Oregon, for Intervenor PacifiCorp.

Donald G. Kari and Jason Kuzma, Perkins Coie LLP,
Bellevue, Washington; and Dan L. Bagatell, Perkins Coie
LLP, Phoenix, Arizona, for Intervenor Puget Sound Energy,
Inc.

Michael G. Andrea, Avista Corporation, Spokane,
Washington, for Intervenor Avista Corporation.

R. Blair Strong, Paine Hamblen LLP, Spokane, Washington,
for Intervenor Idaho Power Company.

Scott G. Seidman, Tonkon Torp LLP, Portland, Oregon, for
Intervenor Portland General Electric Company.

Leonard J. Feldman, Marcus Wood, and Maren R. Norton,
Stoel Rives LLP, Seattle, Washington, for Intervenor Port
Townsend Paper Corporation.


                        OPINION

BERZON, Circuit Judge:

   The Bonneville Power Administration (“BPA”) is an
agency within the Department of Energy that markets the
energy output of federal power projects in the Pacific
Northwest. In two previous decisions, we invalidated three
8                       ICNU V. BPA

sets of contractual arrangements in which BPA agreed to
subsidize certain longtime industrial customers rather than
sell them power directly. See Pac. Nw. Gen. Coop. v.
Bonneville Power Admin. (“PNGC II”), 596 F.3d 1065 (9th
Cir. 2010); Pac. Nw. Gen. Coop. v. Dep’t of Energy (“PNGC
I”), 580 F.3d 792 (9th Cir 2009). We held these subsidy
arrangements unreasonable and contrary to BPA’s statutory
authority, as they did not comport with Congress’s mandate
that BPA operate in a businesslike manner. See 16 U.S.C.
§§ 839f(b), 838g.

     In both cases, we remanded to BPA the question whether
it could or should seek refunds of the improper subsidies. On
remand, BPA concluded that it was contractually barred from
seeking refunds as to some of the invalidated contracts, and
that it had no legal or equitable basis for seeking refunds as
to the others. Moreover, BPA concluded, if it did pursue
recovery of the subsidies, it might face counterclaims from
the subsidized entities and become mired in
counterproductive, protracted litigation over the amount, if
any, of refunds owed. As a result, BPA decided not to pursue
recovery of the unlawful subsidies invalidated by PNGC I
and PNGC II.

     At issue in this consolidated appeal are challenges by two
groups to BPA’s decision to forgo refunds: public utilities
and cooperatives that buy power from BPA, and that
Congress has designated as BPA’s first-priority or
“preference” customers; and industrial customers who buy
power from public utilities in the Pacific Northwest and so
are end-users of BPA power. The challengers’ core argument
is that their power costs have been impermissibly raised by
BPA’s decision because, if BPA did seek refunds of the
                       ICNU V. BPA                         9

subsidies, it could pass along the recovered funds to its
customers as lower rates.

                     BACKGROUND

    “BPA is an agency within the Department of Energy
created by Congress in 1937” to “market[] the power
generated by federally owned dams on the Columbia River.”
Portland Gen. Elec. Co. v. Bonneville Power Admin.
(“PGE”), 501 F.3d 1009, 1013 (9th Cir. 2007); see 16 U.S.C.
§§ 832–832m. “Congress has since expanded BPA’s
mandate to include marketing authority over nearly all the
electric power generated by federal facilities in the Pacific
Northwest.” Ass’n of Pub. Agency Customers, Inc. v.
Bonneville Power Admin. (“APAC”), 126 F.3d 1158, 1163
(9th Cir. 1997); see 16 U.S.C. § 838f. In numerous prior
opinions, we have provided extensive background on BPA’s
history and operations. See, e.g., PGE, 501 F.3d at 1013–16;
PNGC I, 580 F.3d at 797–800; APAC, 126 F.3d at 1163–66.
Here, we summarize only those statutory provisions and
recent developments directly relevant to this appeal.

   A. Statutory Framework

    Four statutes govern BPA’s operations: the Pacific
Northwest Electric Power Planning and Conservation Act of
1980, 16 U.S.C. §§ 839–839h (“Northwest Power Act”); the
Pacific Northwest Federal Transmission System Act of 1974,
16 U.S.C. §§ 838–838k (“Transmission Act”); the Pacific
Northwest Consumer Power Preference Act of 1964,
16 U.S.C. §§ 837–837h (“Preference Act”); and the
Bonneville Project Act of 1937, 16 U.S.C. §§ 832–832m
(“Bonneville Project Act”). As we have noted before,
“[t]hese statutes subject BPA to a variety of detailed and
10                          ICNU V. BPA

potentially conflicting statutory directives,” ranging from
fiscal to environmental concerns. APAC, 126 F.3d at 1164.
Of most direct relevance to this appeal are two sets of
statutory directives: the rate-setting guidelines and the “sound
businesslike principles” obligation.

         1. Rate-Setting Guidelines

    A complex of statutory provisions dictates how BPA must
proceed when selling federal power. First, BPA must give
priority, as well as its most favorable cost-based rate (“the PF
rate”), to publicly owned utilities, cooperatives, and federal
agencies, known as “preference customers.” PNGC I,
580 F.3d at 798–99, 802; PGE, 501 F.3d at 1013–15; see
16 U.S.C. §§ 839c(b), 839e(b). Preference customers are also
the only group whose energy needs BPA is required, as
opposed to authorized, to meet. See PNGC I, 580 F.3d at
811. After meeting the preference customers’ needs, BPA
may, if it so chooses, sell surplus power directly to certain
longstanding industrial customers (“direct-service industrial
customers” or “DSIs”) at a higher but still-cost based rate
(“the IP rate”), or to anyone else at market rates. Id. at 799,
802–03; PGE, 501 F.3d at 1014; see 16 U.S.C. § 839e(c).1
“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.” Alcoa, Inc. v. BPA, 698 F.3d
774, 780 (9th Cir. 2012); see 16 U.S.C. § 839e(a)(1).




  1
    This summary is simplified, and so omits some of BPA’s less relevant
rate-setting strictures, detailed more fully in PNGC I, 580 F.3d at 802–03.
                       ICNU V. BPA                         11

       2. Sound Business Principles

    In addition to the above rate-setting guidelines, BPA also
must set rates “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.”
16 U.S.C. § 838g (emphasis added). A different provision
similarly requires that BPA set rates that “recover, in
accordance with sound business principles, the costs
associated with the acquisition, conservation, and
transmission of electric power.” Id. § 839e(a)(1) (emphasis
added). More generally, Congress has directed BPA to
implement the Northwest Power Act “in a sound and
businesslike manner.” Id. § 839f(b) (emphasis added). We
have previously explained that BPA’s business decisions are
judicially reviewable for compliance with this overarching
“sound business principles” standard, albeit with great
deference to BPA’s conclusions. See Alcoa, 698 F.3d at
788–89; PNGC II, 596 F.3d at 1075–80.

   B. The Aluminum DSI Contracts

    Historically, the aluminum manufacturers of the Pacific
Northwest were among BPA’s largest direct-service industrial
customers. See PNGC I, 580 F.3d at 797–98. Until recently,
BPA did not have trouble meeting the needs of its preference
customers while also providing abundant power to the
aluminum DSIs, including Alcoa. See id. But, as the Pacific
Northwest has grown, BPA has found itself constrained by
competing demands. Its preference customers now serve a
larger population with greater energy needs, and rising energy
prices have made BPA’s relatively cheap power increasingly
attractive to nonpreferential would-be buyers. See id. at 798.
12                        ICNU V. BPA

    Beginning in 2007, BPA embarked upon a series of
attempts to aid the aluminum manufacturers without selling
them power directly. See id.

        1. The 2007 Block Contracts (PNGC I)

    In 2006, BPA entered into three-way contracts, effective
starting in the 2007 fiscal year, between BPA; Alcoa, and two
other aluminum DSIs; and local public utilities (“the 2007
Block Contracts” or “Block Contracts”). The DSIs wanted to
continue buying physical power from BPA at a cost-based
rate. Instead, BPA agreed “to make payments to the
[aluminum DSIs] totaling a maximum of $59 million per year
for five years in lieu of supplying them with actual electrical
power, while retaining the option to sell them physical power
instead in the final two years.” PNGC I, 580 F.3d at 798.2

    Alcoa challenged these contracts, arguing that BPA was
required to sell it physical power, sufficient to meet its needs,
at a cost-based rate. Id. at 806–07, 809. Concurrently,
several of BPA’s preference and other industrial customers
challenged the same contracts from the opposite direction,
objecting to subsidies or sales to the DSIs except for
discretionary market-rate sales of surplus power. Id. at
807–09.

   We held that, under the relevant statutory provisions,
BPA is not required to sell physical power to the DSIs. Id. at
811–12. Rather, it is required to meet the power needs only


  2
    The two other aluminum DSIs that received Block Contracts were
Golden Northwest Aluminum and CFAC. However, Golden Northwest
subsequently allocated its power allocation to Alcoa and CFAC, so BPA
never made any payments to Golden Northwest.
                        ICNU V. BPA                           13

of its preference customers, and has the option to sell to DSIs
thereafter, if it so chooses. Id. However, if BPA does sell to
DSIs, it must offer them the IP rate, not a market rate. See id.
at 812–18.         We also held that, “under appropriate
circumstances, BPA may lawfully monetize its energy
contracts,” “so long as the decision to monetize is otherwise
consistent with BPA’s statutory obligations.” Id. at 819, 820.
But we did not find the Block Contracts justified under that
standard. As the Block Contracts were effectively a sale of
power “at a rate below what [BPA] is statutorily required to
offer (i.e., the IP rate), and below what it could receive on the
open market” from non-DSI customers, the contracts were
inconsistent with BPA’s statutory obligation to fulfill its role
consistent with “sound business principles.”                  Id.
Consequently, “BPA’s decision to monetize the aluminum
DSI contracts amount[ed] to an impermissible subsidy of
those companies’ operations.” Id. at 819.

   The question remained whether the aluminum DSIs owed
BPA a refund for any past subsidy payments. Each of the
Block Contracts contained a damages waiver providing,

        In the event the Ninth Circuit Court of
        Appeals or other court of competent
        jurisdiction issues a final order that declares
        or renders this Agreement void or otherwise
        unenforceable, no Party shall be entitled to
        any damages or restitution of any nature.

Id. at 826. We did not decide in PNGC I whether this waiver
was applicable, noting that there was no indication in the
administrative record of “how BPA believe[d] the damages
waiver provision should be construed and, in particular, what
effect it [was] to have if a contract [were] only partially
14                         ICNU V. BPA

invalidated.” Id. Instead, we remanded to BPA “to
determine in the first instance the applicability and
construction” of several elements of the Block Contracts,
including the damages waiver. Id. at 827. In doing so, we
made clear that we were not declaring the Block Contracts
void ab initio. Id. at 826–27. Rather, given that the contracts
contained a severability clause and, in addition to the
invalidated monetary benefits provision, a possibly valid
physical power sale option, they were potentially partially
enforceable. See id. at 826.

        2. The Alcoa Amendment (PNGC II)

    As it turned out, the physical power sale option in the
Block Contracts was never exercised. Instead, after PNGC I,
BPA entered into an amended contract with Alcoa (“the
Alcoa Amendment”) in which it again agreed to subsidize
Alcoa rather than sell it power directly. Specifically, “BPA
agreed voluntarily to make a nearly $32 million cash ‘benefit’
payment” to Alcoa during fiscal year 2009, which Alcoa
could use to “purchase power from one of BPA’s
competitors.” PNGC II, 596 F.3d at 1068–69.3 BPA argued
that this subsidy was necessary to avoid interruption of
Alcoa’s smelter operations; would assure the continued
existence of the DSI load (which had historically benefitted
BPA in various ways); and was only an interim fix before
BPA could carry out the full administrative process needed to
respond to the remand issues in PNGC I. Id. at 1081–84.

   Once again, BPA’s priority customers filed a legal
challenge, and once again we invalidated the subsidy, holding

 3
   BPA entered into a substantially similar amended contract with CFAC,
not challenged before this court.
                        ICNU V. BPA                          15

that “BPA’s justifications for this unusual transaction . . .
[did] not demonstrate that the transaction was ‘consistent
with sound business principles,’ as required by BPA’s
governing statutes.” Id. at 1068–69. We rejected BPA’s
proffered rationales as irrelevant to BPA’s statutory mandate,
unsupported by record evidence, or illogical. As clarified by
PNGC I, we stated, BPA has no obligation to contract with
Alcoa at all, much less “to provide [a] voluntary gift [to
Alcoa] that will lead to higher rates for its other customers”
and effectively subsidize its competitors. Id. at 1080–84. We
went on to explain that protecting jobs within the region,
however laudable a goal, is not among the purposes that
Congress has authorized BPA to pursue. Id. at 1082. We
suggested, however, that a “decision to sell physical power to
Alcoa,” as opposed to merely providing monetary benefits,
“might produce a different result.” Id. at 1085.

    Finally, like the earlier PNGC I opinion, PNGC II
declined to compel BPA to recover any payments it had
already made to Alcoa. See id. at 1086. Instead, in part
because the PNGC I remand remained pending, we remanded
“to BPA to determine whether and how it [would] seek a
refund from Alcoa.” Id.

       3. Alcoa v. BPA

    After PNGC II issued, BPA entered into yet another
contract with Alcoa, one that we upheld. See Alcoa, 698 F.3d
at 782–85, 796. Although not directly implicated in this
appeal, this final Alcoa-BPA contract merits some brief
discussion, to complete the story of BPA’s efforts to assist the
aluminum DSIs.
16                      ICNU V. BPA

     Under this latest contract, BPA agreed to sell physical
power to Alcoa at the cost-based IP rate for a modest profit
(projected at $10,000 for the contract’s initial, roughly 18-
month period). Id. at 783. BPA’s preference customers again
mounted a challenge, arguing that instead of selling to Alcoa
at the cost-based IP rate, BPA should focus on selling to other
customers, whom it can charge higher market rates. Id. at
785. In the preference customers’ view, BPA’s failure to
maximize its profits demonstrated that it “[was] not acting
according to a profit-making purpose,” but rather was still
attempting to “subsidiz[e] Alcoa . . . so as to preserve jobs at
its smelting plant and the surrounding community.” Id. at
788–89.

    In Alcoa, we rejected these challenges, explaining that the
“sound business principles” mandate does not mean “that
BPA is required to maximize its profits.” Alcoa, 698 F.3d at
789. To the contrary, BPA has wide discretion as to how best
to pursue its businesslike role while also complying with
other statutory mandates, such as environmental protection.
Id. Applying the high level of deference owed to BPA’s
business decisions, we allowed the most recent Alcoa-BPA
contract to stand, noting that: (1) unlike the monetized energy
contracts at issue in PNGC I and PNGC II, it provided only
for physical power sales; (2) it was expected to yield some
profit to BPA, albeit modest; and (3) there was no record
evidence to support the preference customers’ speculation
that BPA’s decision was motivated by concerns about job
losses. Id. Therefore, we concluded, we had to “defer to
BPA’s determination” that its power sale to Alcoa comported
“with sound business principles.” Id.
                        ICNU V. BPA                           17

    C. The Port Townsend Contracts (PNGC I)

    Aside from the 2007 Block Contracts with the aluminum
DSIs, also at issue in PNGC I was an arrangement between
BPA and its sole remaining non-aluminum DSI, the Port
Townsend Paper Company (“Port Townsend”). Under this
arrangement, BPA agreed to “provide Port Townsend with its
full requirements for power . . . to be supplied through” the
Clallam County public utility (“Clallam”). PNGC I, 580 F.3d
at 802. BPA would sell Clallam the power at the PF rate
“plus the margin typically charged by [public utilities] to their
industrial customers,” and Clallam would then sell the power
to Port Townsend. Id. In effect, therefore, BPA would be
selling power to Port Townsend, via Clallam, “at a rate below
both the market rate and the IP rate,” id. at 823, but not as
low as the PF rate.

    We invalidated the Port Townsend arrangement as
inconsistent with BPA’s statutory obligations. Id. at 824.
BPA, we explained, is not obligated to sell Port Townsend
power at all, much less at a subsidized rate, and had provided
no convincing explanation as to why doing so comported
“with ‘sound business principles.’” Id. (quoting 16 U.S.C.
§ 838g).

    D. BPA’s Decision on Remand from PNGC I and
       PNGC II

    The present litigation arises from BPA’s decision-making
process on remand from our decisions in PNGC I and PNGC
II. This decision-making process became known within the
Northwest power community as the “Lookback.”
18                     ICNU V. BPA

       1. Lookback Proceedings

   In June 2009, BPA issued a letter indicating that it would
begin addressing the issues remanded to it by PNGC I.

    The Lookback was structured as a two-step process:
First, BPA would answer the contractual questions identified
in PNGC I: “the applicability and construction of the
severability clause, the damage waiver, and the physical
power sale option in light of our holdings [in PNGC I].”
580 F.3d at 827. If it was determined that the contracts
barred refunds, then the proceedings would end there. If BPA
determined instead that it could seek recovery
notwithstanding the damages waiver, it would move on to the
second step: determining how much money was owed. BPA
also considered in the Lookback whether it was “permitted to
seek additional payments directly from Port Townsend Power
Company (or indirectly through the Public Utility District No.
1 of Clallam County) for any undercharges for power
delivered to Clallam by BPA for the benefit of Port
Townsend, both during the Lookback period and
subsequently.” Once PNGC II was decided, BPA expanded
the scope of the Lookback to include any refunds that might
be owed for payments made to Alcoa during the nine-month
period before payments were ceased in compliance with
PNGC II.

   BPA issued a draft record of decision (“Draft ROD”) in
June 2010 and invited public comment. The Draft ROD
proposed three sets of conclusions: First, as to the Block
Contracts, the Draft ROD proposed that the invalid rate
provisions were severable from the remainder of the
contracts; that the damages waiver was therefore enforceable;
and that, as a result, BPA was contractually barred from
                       ICNU V. BPA                        19

seeking recovery. BPA also proposed that this conclusion
was not inconsistent with its earlier decision to seek
repayment under a series of settlement agreements
invalidated in PGE.

    Second, as to the Alcoa Amendment, the Draft ROD
proposed that BPA was not obligated to seek a refund, and
that it did not have any contractual basis for doing so.
According to the Draft ROD, “Alcoa did not breach any
obligation to BPA under the Amendment, so it is not clear a
legal claim for money, in the form of damages or otherwise,
could be pursued by BPA under the contract based solely on
PNGC II.” The Draft ROD noted, however, that “BPA
possibly could pursue an extra-contractual or equitable claim
for restitution based on an unjust enrichment theory,” and
“specifically invite[d] the parties to comment on whether
such a claim could or should be pursued against Alcoa.” The
Draft ROD also floated the possibility that BPA could “seek
to administratively recover payments made to Alcoa under
the Amendment” by adding a surcharge to future power sales
to Alcoa. The Draft ROD noted, however, that: (1) such a
surcharge might run into its own legal problems, as BPA is
required to set rates pursuant to the strictures of the
Northwest Power Act, and (2) BPA may have “already
recouped some or all of any illegal overpayments under the
Amendment . . . by withholding payments to Alcoa for the
final two months of the term of the Amendment,” i.e. after
PNGC II was handed down.

    Finally, as to the Port Townsend transaction, the Draft
ROD proposed that BPA had no legal or equitable basis for
recovering from Port Townsend directly. “While it appears
BPA could assert an equitable claim for restitution against
Port Townsend, it is not clear that Port Townsend was
20                     ICNU V. BPA

unjustly enriched.” Moreover, Port Townsend might have an
equitable estoppel defense, although BPA concluded that it
lacked sufficient information to evaluate this question.

    Not surprisingly, Alcoa, Port Townsend, and Clallam all
agreed with the Draft ROD’s proposed findings. Alcoa,
moreover, threatened that, if “BPA were to change its
position and conclude that the damages waiver is not
enforceable,” then Alcoa could bring claims of its own
against BPA “greatly exceeding any amount that BPA could
recover from Alcoa.” Specifically, Alcoa estimated that it
had a potential damages claim against BPA totaling $218
million, based on the difference between Alcoa’s power costs
during the time period covered by the monetized contracts
and what its power costs would have been had BPA sold it
power directly at the IP rate during that time.

    The preference customers viewed the Draft ROD very
differently — as yet another instance of BPA capitulating to
the DSIs. Both PPC and PNGC argued that BPA had not just
the legal authority but also the duty to seek repayment of the
unlawful subsidies. ICNU submitted similar comments.

    None of BPA’s major conclusions changed in its final
record of decision (“the ROD”), issued February 18, 2011. In
the ROD, BPA decided not to pursue refunds of any of the
subsidies invalidated in PNGC I and PNGC II, explaining its
reasoning as follows:

1. As to the 2007 Block Contracts, BPA is contractually
   prohibited from seeking repayment because the damages
   waiver in those contracts is applicable and enforceable.
                          ICNU V. BPA                              21

2. As to the Alcoa Amendment, which does not contain a
   damages waiver, while BPA is not contractually
   prohibited from seeking repayment, it has no “reasonable
   legal or equitable basis for doing so.”4 Alcoa fully
   performed its contractual obligations, leaving BPA
   without any basis for a contract action, and BPA would
   be unlikely to prevail in any quasi-contract action.
   Moreover, if BPA sues Alcoa, Alcoa has indicated that it
   will bring its own action against BPA, and the low
   likelihood of success of any BPA suit is not worth the risk
   (even if small) of owing a judgment to Alcoa.

3. As to the Port Townsend Contract, BPA has no legal or
   equitable basis for seeking repayment. Because the Port
   Townsend Contract formally consisted of two separate
   bilateral contracts (BPA-Clallam and Clallam-Port
   Townsend), BPA had no direct contractual relationship
   with Port Townsend, and has no equitable or quasi-
   contract basis for suing Port Townsend. While BPA did
   have a direct contract with Clallam, “Clallam was no
   more than an intermediary” between BPA and Port
   Townsend, and therefore was not “enriched, unjustly or
   otherwise,” by the contract. Even if BPA could recover
   from Clallam, doing so “would not be fair or just”
   because “it would be nearly impossible for Clallam to
   recover [in turn] from Port Townsend.”

     ICNU, PPC, PNGC and its members, and the Canby
Utility Board filed petitions in this court for review of the
ROD. Port Townsend, Alcoa, and several investor-owned
utility companies (“IOUs”) intervened to defend the ROD.

 4
   PNGC II mistakenly stated that the Alcoa Amendment incorporated the
damages waiver by reference. PNGC II, 596 F.3d at 1086.
22                           ICNU V. BPA

                   STANDARD OF REVIEW

    As petitions for review of BPA decisions are governed by
the Administrative Procedure Act, 5 U.S.C. § 706(2)(A),
“[w]e affirm BPA’s actions unless they are arbitrary,
capricious, an abuse of discretion, or in excess of statutory
authority.” PGNC II, 596 F.3d at 1072 (internal quotation
marks omitted). When, as here, we are measuring BPA’s
actions against the “sound business principles” standard
embodied in BPA’s governing statutes, “we are particularly
deferential to the agency’s assessment of whether its actions
further BPA’s business interests consistent with its public
mission.” Id. at 1080 (internal quotation marks omitted).
This deferential standard of review is not, however, toothless.
While “we do not second-guess [BPA’s] policy judgments,”
we do ask “whether the agency considered the relevant
factors and articulated a rational connection between the facts
found and the choices made.” Alcoa, 698 F.3d at 788
(internal quotation marks omitted); see Lands Council v.
McNair, 537 F.3d 981, 987 (9th Cir. 2008) (en banc).5




 5
  Although BPA and Port Townsend challenge ICNU’s standing, “[o]nly
one of the petitioners needs to have standing to permit us to consider the
petition for review,” Massachusetts v. EPA, 549 U.S. 497, 518 (2007). No
party contests PPC’s standing, and there is no basis for doing so.

     In addition, ICNU has standing through at least two of its members,
International Paper and Weyerhauser. The record indicates that both these
companies have “pass-through” contracts to purchase electric power from
BPA preference customers, pursuant to which they are required to “pay for
all BPA rates and charges incurred by” the preference customers in
providing them with electric service. Thus, they are “directly impacted
by any rate increased adopted by BPA.” We recently held similar
contracts and injuries sufficient to support standing in another suit brought
                         ICNU V. BPA                            23

                        DISCUSSION

    A. Constitutional and Statutory Arguments

    Petitioners argue, first, that BPA has a duty, under either
the Constitution’s Appropriations Clause or BPA’s governing
statutes, to seek all refunds to which it may be entitled. We
disagree. BPA decisions not to seek refunds must be
evaluated, like all other BPA decisions, case-by-case,
applying BPA’s governing statutes, the APA, and general
principles of administrative law.

        1. Appropriations Clause

    The crux of Petitioners’ Appropriations Clause argument
is that, “[h]aving disbursed funds to the DSIs from the
Treasury without lawful authority, [BPA] acted in direct
violation of the Constitution. Therefore, it now has a duty to
seek recovery of these illegally-paid funds.” (citations
omitted).

   Viewed as a general challenge to BPA contractual
damages waiver provisions, this argument is foreclosed by
Alcoa, 698 F.3d at 791. Alcoa rejected the argument “that
BPA is constitutionally obligated to sue for any damages to
which it is entitled.” Id. at 791. In so ruling, Alcoa noted that
the BPA administrators have statutory authority to
compromise or settle claims, and held that a bilateral waiver
provision is consistent with that authority, as it balances in
advance the risk of being sued for damages against the


against BPA by the customers of its direct customers. Ass’n of Pub.
Agency Customers v. Bonneville Power Admin., 733 F.3d 939, 949–55
(9th Cir. 2013).
24                     ICNU V. BPA

opportunity to obtain damages from the contracting party. Id.
at 792.

     Viewed as a narrow, case-specific challenge, the
Appropriations Clause argument fares no better. Any
disbursements BPA made under the invalidated monetary
benefits provisions likely did not violate the Appropriations
Clause. BPA is funded by a permanent appropriation, or
revolving fund, which the BPA Administrator has wide
latitude in spending. See 16 U.S.C. § 838i (establishing
revolving fund within the U.S. Treasury for BPA); see also
3 General Accounting Office, Principles of Federal
Appropriations Law 15-159 (discussing BPA revolving fund)
and 2-17 (defining revolving funds as permanent
appropriations). So there may well have been an adequate
appropriation for the subsidies, even though they were later
held invalid.

    We need not wade further into the “largely uncharted
area” of Appropriations Clause law, however. Md. Dep’t of
Human Res. v. U.S. Dep’t of Agric., 976 F.2d 1462, 1486 (4th
Cir. 1992) (Hall, J., concurring in part and concurring in the
judgment). Even if the subsidy payments did rise to an
Appropriations Clause violation, petitioners have pointed to
no convincing authority establishing that BPA would
therefore have a constitutional duty to recover the subsidies.

    Certainly, the text of the Appropriations Clause provides
no basis for inferring such a duty, nor do the cases relied
upon by petitioners. Office of Personal Management v.
Richmond, 496 U.S. 414, 416 (1990), held only that a court
cannot order an agency to expend funds contrary to statute —
not that, if an agency has already done so, the Appropriations
Clause requires the agency to get the funds back. Certainly
                            ICNU V. BPA                                25

agencies are generally permitted to seek recovery of
erroneously or illegally disbursed funds. Even in the absence
of a specific statutory cause of action, “[t]he Government by
appropriate action can recover funds which its agents have
wrongfully, erroneously, or illegally paid,” so long as there is
no clear statutory barrier to doing so. United States v. Wurts,
303 U.S. 414, 415–16 (1938).6

    But that recovery authority does not suggest that the
government has a constitutional duty to seek a refund every
time an erroneous or illegal payment has been made. To the
contrary, Wurts suggested that Congress may statutorily
preclude agencies from recovering erroneously paid funds so
long as it “clearly manifest[s] its intention” to do so.
303 U.S. at 416 (internal quotation marks omitted). If the
Appropriations Clause imposed an affirmative constitutional
duty upon agencies to recover erroneously paid funds,
Congress could not eliminate the duty by statute.7


  6
   See Wisc. Cent. R.R. Co. v. United States, 164 U.S. 190, 212 (1896)
(“parties receiving moneys illegally paid by a public officer are liable ex
aequo et bono to refund them”); United States v. Fowler, 913 F.2d 1382,
1386–87 (9th Cir. 1990) (holding that government agent’s error in
disbursing funds does not waive government’s right to reimbursement);
Old Repub. Ins. Co. v. Fed. Crop Ins. Corp., 746 F. Supp. 767, 769–70
(N.D. Ill. 1990) (discussing statutory authority under which government
may recover funds erroneously or illegally paid).
 7
   Petitioners also point to Fansteel Metallurgical Corp. v. United States,
172 F. Supp. 268, 270 (Ct. Cl. 1959), which stated that “when a payment
is erroneously or illegally made, it is in direct violation of article IV,
section 3, clause 2 of the Constitution” and “it is not only lawful but the
duty of the Government to sue for a refund thereof.” Fansteel is not, of
course, binding on us, and we decline to follow it. Fansteel misreads
Wurts as holding that government has a duty to recover illegally paid
funds; in fact, Wurts held only that the government “can recover funds
26                          ICNU V. BPA

         2. BPA’s governing statutes

    Petitioners next argue, more modestly, that BPA has a
statutory duty to seek recovery of unlawfully disbursed funds,
relying on the requirement in 16 U.S.C. § 838g that BPA
provide “the lowest possible rates to consumers consistent
with sound business principles.” We reject the suggestion
that BPA has a statutory duty to pursue any potentially
available source of income so as to lower its rates.

     As this court recently clarified, the “sound business
principles” mandate does not require BPA to “maximize its
profits” or to “always charge the lowest possible rates”
regardless of any other considerations. Alcoa, 698 F.3d at
789. Rather, Congress has given BPA wide latitude to decide
“how best to further BPA’s business interests consistent with
its public mission.” Id. (internal quotation marks omitted).
Along these lines, Congress has delegated to the BPA
Administrator broad authority to compromise or settle claims.
See 16 U.S.C. § 832a(f). Thus, Congress contemplated that
BPA may sometimes make a business decision that it is not
worth pursuing a particular potential source of income.
Petitioners’ argument to the contrary fails.

     B. BPA’s decision

    Although BPA has no general constitutional or statutory
duty to seek a refund any time it makes an unlawful payment,
an individual decision not to pursue such a refund could be
“arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” 5 U.S.C. § 706(2)(A).


which its agents have wrongfully, erroneously, or illegally paid,” 303 U.S.
at 415 (emphasis added).
                         ICNU V. BPA                            27

        1. The aluminum DSI contracts

    With respect to the aluminum DSI contracts, Petitioners
maintain that BPA’s ROD had several of these faults,
because: the damages waiver is not enforceable; BPA does
have available quasi-contractual or common law avenues of
recovery against the aluminum DSIs, such as an unjust
enrichment suit; and it is not a sound business decision to
forgo those avenues entirely because of speculation that its
counterparties might assert defenses.

    After reviewing these challenges, we conclude that we
must defer to BPA’s reasonable interpretation of the 2007
Block Contracts as including a severable, enforceable
damages waiver, and so do not disturb BPA’s decision as to
refunds of the 2007 Block Contracts subsidy payments. We
grant the petition for review, however, as to the Alcoa
Amendment, as we conclude that the ROD’s reasons for not
pursuing refunds for the subsidies proved by that Amendment
are, as they stand, so insufficiently grounded in the record as
to be “arbitrary, capricious, [or] an abuse of discretion.”

            a. 2007 Block Contracts

    Each of the 2007 Block Contracts included a damages
waiver providing that, “[i]n the event the Ninth Circuit Court
of Appeals . . . issues a final order that declares or renders this
Agreement void or otherwise unenforceable, no Party shall be
entitled to any damages or restitution of any nature, in law or
equity, from any other Party, and each Party hereby waives
any right to seek such damages.” Each Contract also
included a severability clause providing that “[i]f any term of
this Agreement is found to be invalid by a court of competent
jurisdiction,” “[a]ll other terms shall remain in force unless
28                      ICNU V. BPA

that term is determined not to be severable from all other
provisions of this Agreement by such court.”

    BPA’s conclusion that the damages waivers are
enforceable was consistent with the statute and otherwise
within BPA’s authority. To begin, the Alcoa court enforced
a very similar mutual damage waiver in another Alcoa-BPA
contract. Its reasons for doing so apply equally here.

    Contrary to petitioners’ contention that no entity
operating according to “sound business principles” would
agree to a sweeping waiver, Alcoa interpreted such a mutual
waiver as a valid exercise of BPA’s general claim-settling
authority. 698 F.3d at 791–92. Noting that such a waiver
equally protects BPA against claims brought by the customer,
Alcoa concluded that “[i]t is not our place to second-guess the
agency’s considered judgment regarding the balance of risks
embodied in a damage waiver or similar release or settlement
provision.” Id. Moreover, the waiver provision is severable
from the contracts’ void subsidy provisions. BPA received
consideration in exchange for waiving its rights to seek
damages from the aluminum DSIs — namely, a
corresponding waiver providing that the contracting parties
could not recover damages from BPA. “Legal portions of
contracts are severable from illegal portions where there is
separate legal consideration attributable to the severed portion
of the agreement.” Consul Ltd. v. Solide Enters., Inc.,
802 F.2d 1143, 1148 (9th Cir. 1986). Finally, as such a
waiver is a valid exercise of BPA’s power to compromise or
settle claims and could likewise protect BPA’s interests, it
cannot be contrary to public policy as allowing an unlawful
subsidy.
                        ICNU V. BPA                         29

    The dissent’s assertion that this determination is
controlled by PGE, and not Alcoa, is incorrect. PGE did not
concern provisions in BPA power purchase contracts
mutually waiving damages in the event the agreement is
invalidated. Alcoa did.

    PGE invalidated a series of settlement agreements BPA
had entered into with IOUs that participated in its Residential
Exchange Program (“REP” or “Exchange Program”). See
PGE, 501 F.3d at 1025–37; Golden Nw. Aluminum, Inc. v.
Bonneville Power Admin., 501 F.3d 1037, 1047–48 (9th Cir.
2007). The Exchange Program “essentially acts as a cash
rebate to the IOUs where the IOUs’ power costs exceed those
of BPA,” but requires that the Exchange Program’s costs be
covered only by supplemental rate charges assessed on non-
preference customers, not by passing costs on to preference
customers. See PGE, 501 F.3d at 1015–16. BPA and certain
IOUs entered into “settlement” agreements inconsistent with
this pass-through limitation, maintaining that the limitation
did not apply because the costs were “settlement costs,”
pursuant to BPA’s general authority to make and settle
contracts, rather than Exchange Program costs. We
disapproved this approach, holding that BPA could not
circumvent the statutory restrictions on power exchanges “by
calling its actions . . . [a] ‘settlement’” when those actions
were “inextricably intertwined” with BPA’s Exchange
Program authority. Id. at 1032.

    In short, the exercise of settlement authority at issue in
PGE concerned the whole of a comprehensive agreement, in
which BPA sought directly to avoid the statutory restrictions
placed on it. PGE did not concern a severable agreement
provision allocating among the contracting parties the purely
retroactive liability risks that could arise in the event the
30                      ICNU V. BPA

agreement is otherwise declared invalid — a second-level
pact, so to speak, covering the past, not the future, and
governing relief in the event the agreement is invalidated,
rather than the agreement itself.

    In contrast, Alcoa considered precisely that sort of purely
retroactive, partial, and mutual waiver: As here, the waiver at
issue in Alcoa was a bilateral waiver of retroactive damages;
it gave up both parties’ rights to seek compensation in the
event that a portion of the contract in which it was contained
was invalidated in the future. 698 F.3d at 791. In both Alcoa
and here, the larger agreement of which the waiver was a part
was risky for both parties that agreed to the provision, not just
for BPA. Here, for example, the aluminum DSIs gave up
their ability to sue BPA to recover any costs associated with
purchasing power through other means if the contracts were
invalidated, costs that could have been, and that the DSIs
contend were, extensive.

   The fact that the damages waivers significantly benefitted
BPA is important. Upholding the validity of the waivers here
does not preclude a finding in a future case that a damages
waiver is invalid, if the waiver at issue in that case does not
benefit the agency and is instead designed principally to
prevent an unlawful subsidy from being recouped.

    Despite the large differences between the waiver issue
here and the settlement authority question in PGE, and
despite the close similarity between the waiver approved in
Alcoa and the one at issue here, the dissent dismisses Alcoa
as the controlling precedent and relies on PGE instead.
Principally, the dissent relies for this odd choice on the
understanding that Alcoa upheld the other portions of the
agreement in which the waiver appeared, and so was not
                        ICNU V. BPA                          31

approving a damages waiver linked to statutorily unlawful
contract provisions.

    The dissent’s account mischaracterizes Alcoa. As one
would expect, the damages waiver in Alcoa applied not to
valid contractual provisions, but only when “a court renders
any part of the agreement void or unenforceable”— in other
words, unlawful. 698 F.3d at 791. And, after holding the
damages waiver lawful, Alcoa went on to decline to decide
whether the “Second Period” portion of the Alcoa contract
there at issue was valid, as the question was not yet ripe. Id.
at 793–94. This sequence necessarily left open the possibility
that the Second Period agreement would later be voided —
and yet, the damages waiver provision that would be
contained in that agreement had already been declared valid.

    The panel deciding Alcoa was entirely cognizant of this
possibility. Had the Second Period agreement been similar
to, and valid for the same reason as, the agreement covering
the initial period, there would be no reason to put off deciding
the legality of the Second Period agreement. And the
dissenting opinion in Alcoa specifically recognized that the
waiver provision was valid and would apply if and when the
Second Period agreement is challenged. Alcoa, 698 F.3d at
799, 806–807 & n.7 (Bea, J., dissenting). The dissent’s
concern was with the majority’s decision to forego addressing
the Second Period dispute before BPA suffered a monetary
loss was that, because of the damages waiver, those losses
could not be recovered. Id.

    Alcoa therefore decided essentially the same issue that
arises here regarding the enforceability of a bilateral damages
waiver in a BPA power agreement. PGE covers the
predecessor issue — was the power agreement there in fact
32                     ICNU V. BPA

void? Under such circumstances, we must follow Alcoa and
uphold the damages waiver.

    As BPA properly determined the Block Contracts waiver
provisions were enforceable, its decision not to pursue
refunds under those Contracts was likewise proper.

           b. Alcoa Amendment

    As the Alcoa Amendment does not contain a damage
waiver, BPA is not contractually barred from seeking
recovery of the subsidies invalidated in PNGC II. BPA
nonetheless declined to seek recoupment of subsidies it
provided pursuant to the Amendment, viewing the chances of
succeeding in doing so as slight, and outweighed by the
potential recovery costs.

    BPA’s rationales for this conclusion boiled down to two:
(1) Alcoa may have defenses to any equitable or quasi-
contract claim, including perhaps an estoppel defense; and
(2) Alcoa may be able to defeat a claim for unjust enrichment,
and succeed on a counterclaim against BPA, by showing that,
far from being enriched, it obtained less in monetary value
than it was entitled to under the governing statutes. We hold
both rationales “so implausible that [they] could not be
ascribed to a difference in view or the product of agency
expertise.” Lands Council, 537 F.3d at 987. As a result, we
cannot approve the current ROD’s conclusion as to recovery
of the Alcoa Amendment subsidies.

    As to the ROD’s first rationale, the evaluation of the
merits of any possible defenses Alcoa might assert was far
too generous. In particular, BPA’s prediction that “Alcoa
would have a reasonably good chance of . . . mounting a
                        ICNU V. BPA                           33

viable estoppel defense against any claim by BPA,” is
particularly dubious.

    It is unlikely that the DSIs could successfully estop the
government from recovering a refund if, in fact, a court
determined that they had received unlawful overpayments.
As Richmond emphasized, although the Supreme Court has
never categorically foreclosed estoppel against the
government with regard to monetary payments, it has
“reversed every finding of estoppel that [it has] reviewed.”
496 U.S. at 422. Ignoring this history, BPA looked only at
this court’s estoppel cases, concluding “the Ninth Circuit is
more receptive to claims of estoppel against the Government
than some other circuits.” Whether that vague comparison is
correct or not is beside the point. It is of no help in assessing
the actual risk of a successful estoppel claim in this case.

    What is relevant is our actual standard: the party claiming
estoppel must show both (1) “affirmative misconduct” on the
part of the government and (2) that “the government’s
wrongful act will cause a serious injustice, and the public’s
interest will not suffer undue damage.” United States v.
Hatcher, 922 F.2d 1402, 1409, 1411 n.12 (9th Cir. 1991)
(internal quotation marks omitted). Under this standard, we
have very occasionally applied estoppel against the
government in immigration cases. See, e.g., Salgado-Diaz v.
Gonzales, 395 F.3d 1158, 1165–66 (9th Cir. 2005). But we
know of no Ninth Circuit case estopping the government
from recovering an erroneous monetary payment, nor have
the parties identified one. Cf. Heckler v. Cnty. Health Servs.
of Crawford Cnty., Inc., 467 U.S. 51 (1984).

   The ROD also reasoned that BPA may not be able
successfully to pursue an unjust enrichment claim against
34                           ICNU V. BPA

Alcoa for several reasons. One concern expressed in the
ROD was that a claim for unjust enrichment cannot lie where
the relationship between the parties is governed by a valid
express contract concerning the particular issue. See Sutter
Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401,
408–09 (9th Cir. 1992). But by the time the ROD here
challenged issued, this court had already invalidated the
relevant portion of the Alcoa Amendment. See PNGC II,
596 F.3d at 1085–86. That being so, no valid contractual
provision stood in the way of an unjust enrichment claim.

    The ROD’s second rationale — that Alcoa may be able to
show that it was not enriched, but rather illegally
disadvantaged, by the subsidies in the Alcoa Amendment —
has more support in the record. The record does establish, at
least, that the amount of any damages BPA could actually
recover from the aluminum DSIs is uncertain and disputed.
Moreover, if BPA sues, Alcoa could well counterclaim,
arguing that it actually lost money through the partially
invalidated contracts.

    Had BPA not insisted on a monetized contract, Alcoa
maintains, BPA could have (and, according to BPA, likely
would have) sold Alcoa physical power instead at the IP rate.
The ROD noted Alcoa’s contention that, as matters turned
out, Alcoa had to pay a significantly higher rate during the
Alcoa Amendment period than the IP rate because of rising
market rates.8 The ROD also acknowledged that Alcoa had


 8
   More specifically, Alcoa’s explanation in its briefs to this court of its
position begins by pointing out that, if BPA sells to DSIs, it must offer
them the IP rate, rather than a market rate. See PNGC I, 580 F.3d 812–13;
PNGC II, 596 F.3d at 1073. Alcoa then represents that, as demanded by
BPA and required under the 2007 Block Contracts and Alcoa Amendment,
                             ICNU V. BPA                                 35

argued previously that it “is potentially entitled to recoup
those additional payments.” Alcoa’s brief to this court
elaborates on its overpayment argument, maintaining that, far
from receiving overpayments under the 2007 Block Contracts
and the Alcoa Amendment, the company ended up paying
“$218 million more for power than it would have” had BPA
sold it power directly, including $26.1 million during the
Amendment period.

     One major flaw in Alcoa’s argument, and BPA’s
acceptance of it as sufficiently meritorious to constitute a
substantial risk in any litigation to recover, is that BPA could
— under our PNGC decisions — have refused to sell Alcoa
power at all, leaving Alcoa to buy power at full market rates.
But Alcoa’s position is still not entirely implausible. Given
BPA’s practices regarding Alcoa, it might be hard for BPA to
establish as a factual matter that it would have refused to sell
Alcoa power at the IP rate. And Alcoa’s persistence as to its
contention suggests that it would take an equally aggressive
litigation position in any collection action BPA might initiate.
In that light, as BPA argued, choosing to pursue recovery




it entered into forward power purchase contracts “at a time when power
prices were relatively high.” The rates it obtained were well above what
it could afford and, even after applying the credits that it received from
BPA under the 2007 Block Contracts and Amendment, were significantly
higher than the IP rate. The third link in Alcoa’s net loss argument is that,
assuming that BPA would have offered to sell to Alcoa at the IP rate in the
absence of the Amendment (as it has said it would have), Alcoa paid
more, rather than less, than had it not entered into the Amendment.
Further, when the contracts were invalidated, Alcoa had to resell the
power back into the market to “unwind” its purchases, and because the
market had declined, it sold this power at a rate significantly lower than
what it had paid.
36                     ICNU V. BPA

from Alcoa “would expose BPA to some risk of a judgment
to Alcoa under its theory of underpayment.”

    But the ROD did not objectively evaluate the degree of
this risk so much as capitulate to Alcoa’s threats. As noted,
the above explanation of the possible counterclaim comes
largely from Alcoa’s briefs and comments, not the ROD. The
ROD vaguely implies that the costs and risks of litigation
would outweigh its possible benefits, citing statutory and
regulatory provisions requiring agencies to weigh costs of
collection actions against benefits. At the same time, the
ROD acknowledged, in a conclusory fashion, that “Alcoa’s
purported claim that it has been underpaid by almost $200
million is dubious,” yet nowhere ventured any alternative
estimate of a likely litigation outcome, or of the litigation
costs likely to be incurred in obtaining that outcome.

    In fact, as petitioners point out, BPA never attempted “to
calculate the actual amounts paid” to the aluminum DSIs, and
so was in no position to determine whether there were or
were not net overpayments to Alcoa. Those gaps are reason
enough for skepticism about the ROD’s conclusion that,
whatever those amounts are, they are not worth trying to
recover. In addition, the final ROD evaluated only possible
avenues for litigation, not other ways BPA might seek to
recover the subsidies, such as offsets from future sales
contracts with Alcoa.

    We may not uphold an agency decision that “entirely
failed to consider an important aspect of the problem.” Lands
Council, 537 F.3d at 987. BPA’s assumption that Alcoa
might succeed in showing that it was not enriched, and could
even recover on an affirmative counterclaim, suffers from
such a lapse. We therefore remand to BPA to provide a
                       ICNU V. BPA                         37

defensible estimate of the amount of the subsidy it provided
to Alcoa under the Alcoa Amendment prior to its
invalidation; to provide some analysis of whether Alcoa’s
claim of net underpayment has any fair chance of success; to
analyze alternative plans for recovery of any overpayment to
Alcoa; and either to adopt one of those plans or to explain
why, with respect to each of them, the costs and downside
risks justify abandonment of the opportunity to recover any
overpayment.

       2. Port Townsend-Clallam

    In contrast to its treatment of the Alcoa Amendment,
BPA’s decision not to seek repayment from Port Townsend
was in no respect unreasonable. Whether and how much
BPA could recover from Port Townsend is entirely uncertain,
both legally and practically. And, given the small amount of
power sold under the Port Townsend Contract, the amount of
any recovery would necessarily be quite small, making it
unlikely that the costs of litigation would be justified.

    First, unlike the aluminum DSI contracts, the Port
Townsend Contract involved a sale of power, not a subsidy,
though at an unlawfully low rate. So it is unclear exactly
what amount, if any, Port Townsend would owe BPA.
Perhaps BPA could argue that Port Townsend owes it the
difference between what it paid and what the same amount of
power would have cost at the higher IP rate. But Port
Townsend could plausibly counter that, had the rate been
higher, it would have purchased less power, or even no power
at all, given its struggles to stay open in the face of large
financial losses and its reliance on the power prices provided
by BPA to do so.
38                     ICNU V. BPA

    A second, supervening problem with recovering under the
Port Townsend Contract, BPA concluded, is that, unlike the
aluminum DSI contracts, this arrangement was structured as
two separate bilateral contracts: one between BPA and
Clallam, and one between Clallam and Port Townsend. The
ROD observed that BPA had no direct contract with Port
Townsend, and that, although it could try to back-bill
Clallam, “it is far from clear . . . that Port Townsend would
voluntarily remit [the back-billed] amount to Clallam” in
return.

     Third, the ROD noted that Port Townsend could argue
that any claims against it were discharged in Port Townsend’s
bankruptcy.      BPA expressed skepticism about this
assessment, noting that Port Townsend’s bankruptcy plan was
approved in January 2007, while PNGC I was not issued until
December 2008. Thus, BPA could argue that its claims
against Port Townsend were not yet within “fair
contemplation” at the time of the bankruptcy proceedings,
and therefore were not discharged. But even if not a legal bar
to recovery, Port Townsend’s bankruptcy supports the overall
reasonableness of BPA’s decision, as it casts doubt on Port
Townsend’s practical ability to satisfy any judgment that
BPA might secure.

     BPA’s justifications for not pursuing recovery under the
Port Townsend Contract are perhaps not as well substantiated
as they could be. Nevertheless, BPA’s decision not to pursue
recovery from Port Townsend does have a sufficient
reasonable basis, to which this court must defer. See PNGC
II, 596 F.3d at 1085.
                        ICNU V. BPA                         39

   C. Inconsistency with the Residential Exchange
      Program Settlement Agreements

    Finally, BPA reasonably explained why the refund
decisions here challenged were not inconsistent with BPA’s
earlier decision to seek recovery of the different payments
that had been declared unlawful by this court in PGE.

    After we invalidated the settlement agreements in PGE,
the question then arose whether BPA would seek to recover
the improperly passed-on payments from the IOUs. BPA
concluded that, after our PGE decision, the IOUs could not
legally retain the funds, reasoning that,

       because the Court held that BPA acted beyond
       the scope of its statutory authority when it
       executed the 2000 REP Settlement
       Agreements and the Court did not carve out
       any exception with respect to the invalidity
       clause or any other clause, BPA believes the
       2000 REP Settlement Agreements are invalid
       in their entirety. As a result, the invalidity
       clause is also invalid and cannot be used as a
       shield to prohibit BPA from recovering 2000
       REP Settlement Agreement benefits from the
       IOUs through the Lookback proposal.

2007 Supplemental Wholesale Power Rate Case Final Record
of Decision, p. 178.

    In the ROD here challenged, BPA provided two bases for
reconciling its decision not to seek repayment in this instance
with its contrary decision regarding the Exchange Program
settlement agreement overpayments. First, BPA interpreted
40                          ICNU V. BPA

PGE as a ruling “that the REP Settlement Agreements were
void ab initio,” whereas PNGC I and PNGC II only partially
invalidated the contracts at issue. Second, BPA characterized
the DSI contracts here at issue as exercises of BPA’s
“commercial role” as a power marketer, and thus
distinguishable from the Exchange Program settlement
agreements, which it characterized as exercises of “BPA’s
sovereign role as a regulatory administrator of the REP.”9

    “Unexplained [agency] inconsistency is . . . a reason for
holding an interpretation to be an arbitrary and capricious
change from agency practice under the Administrative
Procedure Act.” Nat’l Cable & Telecomms. Ass’n v. Brand
X Internet Servs., 545 U.S. 967, 981 (2005); see also 5 U.S.C.
§ 706(2)(A). Here, however, BPA has provided a reasoned
explanation as to how the two situations vary sufficiently that
they may be treated differently. BPA’s decision not to seek
refunds here is therefore not arbitrary or capricious as
inconsistent with its contrary conclusion post-PGE.

                          CONCLUSION

    We have noted before that BPA’s governing statutes
subject the agency “to a variety of . . . potentially conflicting
statutory directives.” APAC, 126 F.3d at 1164. “BPA’s
peculiarly dual role, as both a federal agency and a power
business, can create situations in which it can fulfill neither



 9
   In addition, the waiver provisions in the two contracts differ; the 2007
Block Contracts at issue in PNGC I contained a mutual damage waiver,
whereas the REP Settlement Agreements contained a one-way waiver that
protected only the IOUs and therefore is less defensible as a sound
business decision.
                        ICNU V. BPA                           41

role very well and so has reasons to test the limits of its
statutory authority.” PNGC II, 596 F.3d at 1086.

    In this instance, BPA’s decisions in most respects
sufficiently and reasonably balance its competing obligations
to merit our deference, but in one respect, on the current
record, do not. We therefore DENY the petition for review
with regard to the decision not to seek refunds with respect to
the 2007 Block Contracts and the Port Townsend Contract.
We GRANT the petition and REMAND to BPA for further
proceedings, consistent with this opinion, with regard to
recovery of subsidies paid under the Alcoa Amendment.

    DENIED IN PART, AND GRANTED AND
REMANDED IN PART. The parties shall bear their own
costs on appeal.



REINHARDT, Circuit Judge, concurring in part and
dissenting in part:

    I concur in the majority opinion in part, but dissent from
section B.1.a which relates to the 2007 Block Contracts. The
question in that section is whether BPA may use a contractual
damages waiver provision to strip itself of its obligation to
seek recovery of $100 to $200 million in funds that it
expended not only illegally but contrary to the statutory limits
on its authority. The answer to that question is necessarily
no. The majority’s contrary answer allows BPA to violate its
statutory limitations at will and to shield itself against taking
any measure to remedy its unlawful actions. I would hold
that this damages waiver provision, as applied, operates in
excess of BPA’s statutory authority.
42                          ICNU V. BPA

    In my view, this case is controlled by our holding in
Portland General Electric Co. v Bonneville Power
Administration (PGE), 501 F.3d 1009 (9th Cir. 2009). In
PGE, we held that BPA’s contracting and settlement powers
are “limited by the constraints of the [Northwest Power Act].”
We explained:

         Section 2(f) grants BPA the power to enter
         into contracts,1 but it says nothing about the
         kind of contracts which BPA may sign. We
         think it obvious, as a matter of general
         administrative law, that the contracts into
         which BPA may enter must be grounded in
         the authority, express or implied, that
         Congress has granted BPA.

Id. at 1030. We then went on to list a series of contracts that
would clearly lie outside of the authority that Congress
granted to BPA. For example, we stated that BPA could not
enter into a contract to acquire an NBA franchise.2 Id. So


 1
   Section 2(f) of the Bonneville Project Act provides that, “Subject only
to the provisions of this chapter, the Administrator is authorized to enter
into such contracts, agreements, and arrangements, including the
amendment, modification, adjustment, or cancelation [sic] thereof and the
compromise or final settlement of any claim arising thereunder, and to
make such expenditures, upon such terms and conditions and in such
manner as he may deem necessary.” 16 U.S.C. § 832a(f). Section 9(a) of
the Northwest Power Act later reaffirmed this grant of contracting and
settlement authority. 16 U.S.C. § 839f(a); see also PGE, 501 F.3d at
1017.
     2
    In Pacific Northwest Generating Cooperative v. Bonneville Power
Administration (PNGC II), we similarly made clear that BPA’s mere
authority to enter into a contract could “not insulate from review” its
decision to do so. 596 F.3d 1065, 1073 (9th Cir. 2010).
                        ICNU V. BPA                           43

too, as we held in PNGC I, it may not enter into a
monetization contract that functions as an impermissible
subsidy of the aluminum industry. Pac. Nw. Generating
Coop. v. Dep’t of Energy (PNGC I), 580 F.3d 792, 823 (9th
Cir. 2009).

    Admittedly, BPA’s authority to monetize and thus
subsidize its DSI customers presented a closer question in
PNGC I than the example given in PGE in which BPA would
acquire the Portland Trail Blazers, and likely rename them the
Bonneville Smelters. Nevertheless, in PNGC I, we held that
BPA’s monetization of power at subsidized rates was (as
would be the purchase of the Trail Blazers) “inconsistent with
BPA’s authority under the [Northwest Power Act].” PNGC
I, 580 F.3d at 823. In other words, BPA’s decision to “giv[e]
a few of its customers $300 million,” id., was “so arbitrary
and capricious as to violate its statutory obligation.” Alcoa
Inc. v. Bonneville Power Admin., 698 F.3d 774, 789 (9th Cir.
2012).

    BPA argues that it is not permitted to seek recovery of the
illegally transferred funds because the contracts contain
damages waiver provisions. The majority holds that the
contractual waivers are a valid exercise of BPA’s power to
settle claims. Maj. Op. at 28. But just as BPA’s authority to
enter into contracts is constrained by its statutory limitations,
so too is its authority to settle claims. As we stated in PGE,
“Congress could not have made it any clearer that it intended
for BPA to exercise its general settlement authority within the
confines of the [Northwest Power Act].” 501 F.3d at 1028.
That BPA’s settlement authority is constrained by its
statutory limitations in the same manner as is its contracting
authority follows necessarily because otherwise BPA could
accomplish by settlement precisely what it could not
44                     ICNU V. BPA

accomplish by contract in the first instance. A settlement
provision allowing BPA to retain title to the Bonneville
Smelters and permitting the former owners of the Trail
Blazers to retain the illegally transferred purchase price
would, for example, certainly not lie within BPA’s settlement
authority.

    Here, the majority’s holding allows BPA to accomplish
the very subsidy of the aluminum DSIs that we held in PNGC
I to be unlawful and outside of its statutory authority.
Because we held in PGE that “[a] settlement agreement must
not be a means of bypassing congressionally mandated
requirements,” a damages waiver provision must be
interpreted in a manner that forbids such circumvention of the
limitations on BPA’s statutory powers. See 501 F.3d at 1030.
Construing the provision consistently with BPA’s statutory
mandate requires that we hold that the damages waiver
provision may not be applied here so as to shield the illegal
subsidy and allow the aluminum industry to retain the
unlawful payments provided for in the 2007 Block Contracts.
Unfortunately, the majority fails to acknowledge that PGE is
the controlling case.

    In upholding BPA’s decision not to seek the return of the
illegally transferred funds, the majority relies primarily on
our holding in Alcoa v. Bonneville Power Administration that
a damages waiver provision similar to the ones at issue here
falls within BPA’s claim-settling authority. Maj. Op. at
30–32. Alcoa does not control this case. Alcoa upheld
BPA’s sale of power to a DSI at a below-market rate,
concluding that the terms of sale specified in the agreement
— unlike the unlawful subsidies that are the subject of this
case — were lawful and valid. 698 F.3d at 789. Finding no
violation of the agency’s statutory mandate, we then turned
                            ICNU V. BPA                               45

to the petitioners’ challenge to the agreement’s damages
waiver provision and upheld its inclusion in the contract. Id.
at 791–92.3 In short, the damages waiver provision we
upheld in general was included in a contract that did not itself
provide for illegal subsidies or otherwise for violations of
BPA’s governing statutes. Because we held that the
transaction at issue in Alcoa was consistent with the statutory
limits on BPA’s authority, we had no occasion to consider
whether a damages waiver provision that would allow BPA’s
customers to retain unlawful benefits afforded them contrary
to BPA’s statutory limits lies within BPA’s settlement
authority. The answer appears otherwise.

    That Alcoa did not address the issue we encounter in this
case is evident from BPA’s brief in Alcoa. There, BPA
argued that any holding recognizing BPA’s general authority
to waive damages in a contract would have no bearing on a

  3
     It is immaterial that Alcoa declined to address the validity of the
“Second Period” portion of the Alcoa contract. In Alcoa, we held that
petitioners’ challenge to the Second Period did not survive our standing
or ripeness inquiry in part because an amendment to the Alcoa contract
“eliminated all references to the Second Period,” meaning that “BPA and
Alcoa would need to enter into a new contract that includes a similar
Second Period before the petitioners could point to even the threat of
suffering harm.” 698 F.3d at 793–94. It would have been quite peculiar
to speculate how the damages waiver provision might have operated in the
context of an agreement that no longer existed. In any event, our decision
not to address petitioners’ challenge to the Second Period does not change
the fact that, at the time we addressed the damages waiver provision in
Alcoa, we did so in the context of an otherwise valid agreement, and
therefore did not encounter the application of a damages waiver provision.
What the majority would need to substantiate its point — and what it is
clearly lacking — is a statement in Alcoa that the damages waiver
provision could be validly applied to prevent BPA from recouping funds
that it dispersed as a result of the Second Period of the Alcoa contract
even if the terms of the Second Period violated BPA’s statutory mandate.
46                          ICNU V. BPA

situation like the one we are now presented with, in which the
underlying transaction lies beyond BPA’s statutory authority.
BPA explicitly distinguished the case before it from the
application of a damages waiver provision under the
circumstances present here. Its brief told us: “The Alcoa
Contract involves a sale of power, not a monetized
transaction such as those under review in PNGC I and II.
Therefore, this case does not involve any issue of BPA
‘recouping illegal payments’ because no such payments will
be made.” Answering Br. of Resp’t Bonneville Power
Admin. at 75, Alcoa, 698 F.3d 774 (No. 10-70211). This
statement makes clear that BPA expressly disclaimed the
authority to apply a damages waiver provision to prevent the
agency from recouping funds transferred without statutory
authority. The fact that the majority has now, on the basis of
Alcoa, granted BPA the authority it expressly disclaimed is
striking.4 But even setting that concern aside, BPA’s brief to
the Alcoa court proves that Alcoa could not have possibly
decided the issue present in this case – whether a damages
waiver provision which does prevent BPA from recouping
funds transferred without statutory authorization is
permissible – because BPA explicitly distinguished that issue
from the one presented in Alcoa.




   4
     I note but need not rely on the argument that BPA may be precluded
by judicial estoppel from relying on Alcoa. Judicial estoppel bars a party
from making an argument in a judicial proceeding that directly contradicts
an argument on which it prevailed in a prior proceeding. See Russell v.
Rolfs, 893 F.2d 1033, 1037–39 (9th Cir. 1990). BPA assured this Court
that if we ruled for it in Alcoa, our decision would not concern “any issue
of BPA ‘recouping illegal payments.’” Having prevailed on its argument,
it now tells us the opposite – that our decision in Alcoa decided precisely
the issue that BPA said our decision would not affect.
                        ICNU V. BPA                          47

     That we did not intend Alcoa to authorize the settlements
at issue here is further evident from the Alcoa court’s failure
to discuss or even mention PGE. PGE clearly requires BPA
to exercise both its contracting and its settlement authority in
a manner consistent with its statutory obligations. See
501 F.3d at 1030–31. Thus, Alcoa did not and could not have
authorized BPA, by means of its settlement authority, to
surrender its right to seek restitution from the beneficiary of
funds transferred to them in excess of BPA’s statutory
authority without creating a direct conflict with the principles
that we established in PGE. The only reading of Alcoa that
is consistent with PGE is that Alcoa approved the general
authority of BPA to include damages waiver provisions in its
agreements, a conclusion with which I firmly agree. Viewed
in this light, it is obvious why the Alcoa court did not discuss
PGE — we were simply not presented with the unlawful
application of a damages waiver provision because we did not
rule any part of the agreement at issue invalid. Had we done
so, and had the damages waiver provision applied, we
certainly could not have escaped the requirement expressed
in PGE that BPA must exercise its contracting and settlement
authority within the confines of its governing statutes.

    The majority disagrees, reasoning that the damages
waiver provisions at issue here and in Alcoa look alike, and
that Alcoa therefore controls. That Alcoa did not consider the
application of a damages waiver provision to a disbursement
of funds in contravention of BPA’s statutory authority is of
no consequence to the majority. To my colleagues, the fact
that the provisions are similar ends the inquiry. Thus, the
necessary consequence of the majority opinion is that Alcoa
— without mentioning PGE — has blessed not only BPA’s
48                          ICNU V. BPA

general authority to include a damages waiver provision in its
agreements, but also every application of such a provision.5

    Recognizing that this position is unsustainable, the
majority attempts to disclaim such a holding by noting that if
a damages waiver “does not benefit the agency and is instead
designed principally to prevent an unlawful subsidy from
being recouped,” then such a waiver would be invalid. Maj.
Op. at 30. However, this case demonstrates why the
majority’s ostensible limit on its decision will have no
practical effect. Before our Court, ICNU made the precise
argument that the majority claims would be sufficient to
invalidate a damages waiver; it argued that the waiver “was
designed to ensure that . . . BPA could circumvent Congress’
goal of prohibiting sales to the DSIs at rates lower than the
market or legal rate” (emphasis added). BPA countered that
“the damages waiver is intended to broadly protect both BPA
and Alcoa from damages claims that either party could bring
against the other.” In fact, an agency’s motive in agreeing to
a waiver of damages may well be mixed. There will
ordinarily be some potential benefit to it if it is protected
against damages. In short, it may very well be true that the


  5
     The majority also relies on the fact that in each of the 2007 Block
Contracts, the damages waiver provision is severable from the invalid
provisions that unlawfully subsidize the aluminum industry. It is difficult
to understand why. No one has suggested that the damages waiver
provision is itself invalid. Rather, it is only its applicability to the
unlawful subsidization that is at issue. To suggest that severing the
unlawful subsidization provisions from the damages waiver provision
somehow precludes BPA from seeking to recover the amounts it paid
under those unlawful provisions makes no sense whatsoever. In fact, the
severance shows only that the payments were beyond BPA’s authority, not
that BPA’s customers must be allowed to keep the $100 to $200 million
in subsidies that BPA unlawfully gave them.
                             ICNU V. BPA                                49

damages waiver provisions both protect BPA from potential
liability and were “designed principally” to ensure that the
aluminum companies could retain their subsidies — whether
they were lawful or not.

     Here, it was “apparent” that charging the DSIs a rate that
was below both the rate authorized by statute and the rate
available on the open market conflicted with BPA’s statutory
mandate, and was therefore “highly suspect.” PNGC I,
580 F.3d at 821. Under these circumstances, it is reasonable
to conclude that when BPA included a damages waiver
provision in its contracts with the DSIs, it knew that there was
at least a substantial likelihood that this Court would declare
the $100 to $200 million in subsidies to have been unlawfully
paid, it knew that the damages waiver provisions would allow
the DSIs to keep their ill-gotten gains, and such was a
principal reason for including the damages waiver provisions
in the contracts. In my view, however, it is not even
necessary to reach the question of why BPA included the
damages waiver provisions in its contracts with the DSIs.
The proper approach is simply to apply our binding precedent
in PGE and ask whether BPA is invoking a damages waiver
provision in a manner that is contrary to its statutory
authority.6 The answer to that question is clearly, yes.

    In this case, BPA operated contrary to its statutory
authority in subsidizing the aluminum companies in the
amount of $100 to $200 million, not only by making the


  6
    Of course, PGE does not bar the application of all damages waiver
provisions. Such a provision could still apply if an agreement is otherwise
invalid for a reason that does not implicate BPA’s statutory authority, such
as when an agreement is invalid for conflicting with general principles of
contract law.
50                     ICNU V. BPA

initial payments but by failing to seek restitution of the
amounts illegally transferred. Its reliance on general damages
waiver provisions in the agreements as precluding it from
securing the return of those payments is without support in
the law. Therefore, I would hold, consistent with PGE, that
applying a damages waiver provision to prevent BPA from
obtaining recovery of illegally transferred funds is beyond
BPA’s statutory authority. I respectfully concur in part and
dissent in part.
