                  FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

PORTLAND GENERAL ELECTRIC              
COMPANY; PUBLIC UTILITY DISTRICT
NO. 1 OF SNOHOMISH COUNTY,
WASHINGTON; UTILITIES OF THE
WESTERN PUBLIC AGENCIES GROUP;
NORTHWEST REQUIREMENTS
UTILITIES,
                        Petitioners,
AVISTA CORPORATION; PUBLIC
GENERATING POOL (PGP);
                                       
INDUSTRIAL CUSTOMERS OF                      No. 01-70003
NORTHWEST UTILITIES; THE PUBLIC            BPA No. Power Act
UTILITY COMMISSION OF OREGON;
ALCOA INC.,
                       Intervenors,
                v.
BONNEVILLE POWER
ADMINISTRATION; DEPARTMENT OF
ENERGY; JUDI JOHANSEN,
Administrator of the Bonneville
Power Administration,
                      Respondents.
                                       




                            4829
4830   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER



PACIFICORP; PUBLIC UTILITY             
DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON;
UTILITIES OF THE WESTERN PUBLIC
AGENCIES GROUP; NORTHWEST
REQUIREMENTS UTILITIES,
                        Petitioners,
AVISTA CORPORATION; PUBLIC
                                       
                                             No. 01-70005
POWER COUNCIL; AVISTA
CORPORATION; THE PUBLIC UTILITY            BPA No. Power Act
COMMISSION OF OREGON; ALCOA,
INC.,
                      Intervenors,
                 v.
BONNEVILLE POWER
ADMINISTRATION,
                      Respondent.
                                       
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER    4831



PUBLIC POWER COUNCIL; PUBLIC           
UTILITY DISTRICT NO. 1 OF
SNOHOMISH COUNTY, WASHINGTON;
UTILITIES OF THE WESTERN PUBLIC
AGENCIES GROUP,
                        Petitioners,
AVISTA CORPORATION; PUBLIC
                                       
GENERATING POOL (PGP); THE                   No. 01-70010
PUBLIC UTILITY COMMISSION OF               BPA No. Power Act
OREGON; ALCOA, INC.,
                       Intervenors,
                 v.
UNITED STATES OF AMERICA;
BONNEVILLE POWER
ADMINISTRATION,
                      Respondents.
                                       
4832   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER



BENTON RURAL ELECTRIC                  
ASSOCIATION; WASHINGTON, CITY OF
PORT; WASHINGTON, CITY OF
CHENEY, WASHINGTON, CITY OF
ELLENBURG; WASHINGTON, CITY OF
FIRCREST; WASHINGTON, CITY OF
MILTON; WASHINGTON, TOWN OF
EATONVILLE, WASHINGTON, TOWN OF
STEILACOOM; WASHINGTON, ALDER
MUTUAL LIGHT COMPANY,
WASHINGTON, ELMHURST MUTUAL
POWER AND LIGHT COMPANY;
WASHINGTON, LAKEVIEW LIGHT AND
POWER COMPANY; WASHINGTON,
PENINSULA LIGHT COMPANY,
                                       
WASHINGTON, PARKLAND LIGHT AND               No. 01-70012
WATER COMPANY; WASHINGTON,                 BPA No. Power Act
PUBLIC UTILITY DISTRICT NO. 1 OF
KITTITAS COUNTY; WASHINGTON,
PUBLIC UTILITY DISTRICT NO. 1 OF
LEWIS COUNTY; WASHINGTON,
PUBLIC UTILITY DISTRICT NO. 2 OF
PACIFIC COUNTY, ET AL.; FALL
RIVER RURAL ELECTRIC
COOPERATIVE; COLUMBIA RIVER
PEOPLE’S UTILITY DISTRICT; PUBLIC
UTILITY DISTRICT NO. 1 OF
SNOHOMISH COUNTY, WASHINGTON;
UTILITIES OF THE WESTERN PUBLIC
AGENCIES GROUP; NORTHWEST
REQUIREMENTS UTILITIES,
                        Petitioners,
                                       
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER    4833


AVISTA CORPORATION; THE PUBLIC         
UTILITY COMMISSION OF OREGON;
ALCOA, INC.,
                      Intervenors,
                v.                     
DEPARTMENT OF ENERGY;
BONNEVILLE POWER
ADMINISTRATION,
                     Respondents.
                                       

PUGET SOUND ENERGY, INC.; PUBLIC       
UTILITY DISTRICT NO. 1 OF
SNOHOMISH COUNTY, WASHINGTON;
UTILITIES OF THE WESTERN PUBLIC
AGENCIES GROUP; NORTHWEST
REQUIREMENTS UTILITIES,
                        Petitioners,         No. 01-70041
WASHINGTON UTILITIES AND                  BPA No. Power Act
TRANSPORTATION COMMISSION,                     OPINION
                        Intervenor,
                 v.
U.S. DEPT. OF ENERGY; BONNEVILLE
POWER ADMINISTRATION,
                      Respondents.
                                       
         On Petition for Review of an Order of the
             Bonneville Power Administration

                Argued and Submitted
         November 14, 2005—Seattle, Washington

                     Filed May 3, 2007
4834   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   Before: Stephen Reinhardt, William A. Fletcher, and
              Jay S. Bybee, Circuit Judges.

                 Opinion by Judge Bybee
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER      4837


                         COUNSEL

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

Michael A. Goldfarb, Law Offices of Michael A. Goldfarb,
Seattle, Washington, for petitioner Public Utility District No.
1 of Snohomish County, Washington.

Terence L. Mundorf, Marsh Mundorf Pratt Sullivan & Mc-
Kenzie PSC, Mill Creek, Washington, for petitioner Utilities
of the Western Public Agencies Group.

Susan K. Ackerman, Portland, Oregon, for petitioner North-
west Requirements Utilities.

R. Blair Strong, Paine Hamblen Coffin Brooke & Miller LLP,
Spokane, Washington, for intervenor Avista Corporation.

Melinda J. Davison and Irion A. Sanger, Davison Van Cleve
PC, Portland, Oregon, for intervenor Industrial Customers of
Northwest Utilities.

Kurt R. Casad, Office of United States Attorney, Portland,
Oregon, for respondent Bonneville Power Administration.
4838       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
                              OPINION

BYBEE, Circuit Judge:

   Petitioners, publicly owned utilities (“PUDs”) operating in
the Pacific Northwest,1 and Intervenor Industrial Customers of
Northwest Utilities, challenge the actions taken by the Bonne-
ville Power Administration (“BPA”) in reaching settlement
agreements in 2000 with six investor-owned utilities
(“IOUs”). While the statutory and factual background in this
appeal is quite complicated, the ultimate issue is relatively
straightforward: whether BPA’s authority to settle out of
power contracts is bound by the power exchange requirements
of the Northwest Power Act (“NWPA”), and if so, whether
the exercise of its settlement authority was contrary to those
requirements. We hold that BPA was bound by the power
exchange requirements of the NWPA, and that BPA exercised
its settlement authority contrary to those requirements.

I.       STATUTORY AND REGULATORY BACKGROUND

  Our prior opinions have discussed BPA’s operations in
some detail. See, e.g., M-S-R Public Power Agency v. BPA,
297 F.3d 833 (9th Cir. 2002) (as amended); Ass’n of Pub.
Agency Customers, Inc. v. BPA, 126 F.3d 1158 (9th Cir.
1997). Nevertheless, because of the complexity of this case,
we review the statutory and regulatory framework surround-
ing BPA to understand its actions in this case.

A.       Bonneville Project Act and the Northwest Power Act

  BPA is an agency within the Department of Energy created
by Congress in 1937. See Bonneville Project Act, 16 U.S.C.
§§ 832-832m (2000). BPA was tasked with marketing the
     1
  The petitioners include the Western Public Agencies Group; Northwest
Requirements Utilities; Public Power Council; and Public Utility District
No. 1 of Snohomish County, Washington.
         PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER                 4839
power generated by federally owned dams on the Columbia
River.2 BPA serves two principal classes of customers: (1)
preference utilities; and (2) everyone else. Preference utilities
(also “preference customers”) comprise publicly-owned utili-
ties, cooperatives, and federal agencies (including petitioners
Western Public Agencies Group, Northwest Requirements
Utilities, and Public Utility District No. 1 of Snohomish
County), all of which are accorded priority to federal power
under the Bonneville Project Act. See 16 U.S.C. § 832c(a),
(d). Non-preference utilities include investor-owned utilities
(“IOUs”)3 (including intervenors Avista, Pacificorp, Portland
General Electric, and Puget Sound Energy), direct service
industries customers (“DSIs”),4 and all others who purchase
BPA power in the market. BPA originally operated under an
annual congressional appropriation, but was restructured as a
self-financed agency in 1974. See The Bonneville Power
Administration Fund, 16 U.S.C. § 838i (2000).

   From the 1930s through the 1960s, BPA’s relatively inex-
pensive power costs and broad control over most of the trans-
mission facilities in the Pacific Northwest made it the region’s
dominant power supplier. During this period, BPA’s power
resources were sufficient to meet the needs of its preference
and non-preference customers. However, increasing demand
for low-cost federal power in the 1970s led BPA to forecast
that it would not have sufficient resources to meet demand by
the end of the decade. In order to protect the preference cus-
  2
     BPA’s authority to market power is derived from four separate acts:
the Bonneville Project Act; the Regional Preference Act of 1964, 16
U.S.C. §§ 837-837k (2000); the Federal Columbia River Transmission
System Act, 16 U.S.C. §§ 838-838k (2000); and the Pacific Northwest
Electric Power Planning and Conservation Act of 1980, 16 U.S.C. §§ 839-
839h (2000).
   3
     Investor-owned utilities purchase power from BPA and distribute it to
consumers. They are not preference customers and are not publicly owned.
   4
     “ ‘Direct service industrial customer’ means an industrial customer that
contracts for the purchase of power from the Administrator for direct con-
sumption.” 16 U.S.C. § 839a(8).
4840    PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
tomers’ access to its power, BPA advised the non-preference
utilities that it would not be renewing existing power con-
tracts or entering into new power contracts with them. See
Ass’n of Pub. Agency Customers, 126 F.3d at 1165. This
action forced BPA’s non-preference customers to pursue
power and power-generation facilities elsewhere, and it put
them at a severe cost disadvantage in the marketplace vis-a-
vis BPA’s preference customers.

   In order to avoid an energy crisis and to redress BPA’s
diminishing ability to satisfy the region’s power demands,
Congress enacted the Pacific Northwest Electric Power Plan-
ning and Conservation Act of 1980, 16 U.S.C. §§ 839-839h
(2000) (“Northwest Power Act” or “NWPA”). The NWPA
authorized the BPA Administrator to establish and revise the
rates at which BPA’s power is sold, 16 U.S.C. § 839e, and,
“[s]ubject to the provisions of [the NWPA],” to enter into
contracts, agreements, and settlements of claims and contrac-
tual obligations upon such terms and conditions and in such
manner as he may deem necessary. 16 U.S.C. § 839f(a) (cit-
ing 16 U.S.C. § 832a(f)). The NWPA authorized BPA to exer-
cise greater control over its power supply and to augment that
supply by purchasing electric power in the market, with the
intent that the IOUs and their customers would have access to
BPA’s cheaper power while meeting the preference custom-
ers’ power needs. Although the NWPA cleared the way for
IOUs and others to contract with BPA for power, the Act
made clear that “[a]ll power sales under [the NWPA] shall be
subject at all times to the preference and priority provisions
of the Bonneville Project Act . . . and, in particular, sections
4 and 5 thereof.” 16 U.S.C. § 839c(a).5

   Congress’s mechanism for granting the IOUs access to
BPA’s cheaper power was § 5(c) of the NWPA, which estab-
lished the Residential Exchange Program (“REP”). See 16
  5
   Section 4 of the Bonneville Project Act “give[s] preference and priority
to public bodies and cooperatives.” 16 U.S.C. § 832c(a).
        PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER                4841
U.S.C. § 839c(c). Section 5(c) permits IOUs to exchange
power they have purchased or generated for lower-cost power
generated by BPA. The REP provides that whenever a Pacific
Northwest utility offers to sell to BPA electricity intended for
residential customers at the utility’s average system cost
(“ASC”) for producing such power, BPA shall purchase that
power and offer, in exchange, to sell an equivalent amount of
power to the utility for resale to its residential customers. Id.
§ 839c(c)(1). A utility’s ASC is determined according to a
methodology to be developed by BPA and approved by the
Federal Energy Regulatory Commission (“FERC”). Id.
§ 839c(c)(7). The REP essentially acts as a cash rebate to the
IOUs where the IOUs’ power costs exceed those of BPA.
This “exchange” is a paper transaction, see CP Nat’l Corp. v.
BPA, 928 F.2d 905, 907 (9th Cir. 1991) (as amended), and the
NWPA requires that any exchange benefit be passed through
to the utility’s residential customers.6

   While § 5(c) authorizes BPA to sell power to IOUs for
resale to their residential users, “[s]uch sales shall be at rates
established pursuant to section 839e [, or § 7,] of [the
NWPA].” 16 U.S.C. § 839c(a). Section 7 contains two impor-
tant constraints relevant here. First, § 7(b)(2) provides that
BPA’s preferred customers are entitled to rates as if “no pur-
chases or sales by the Administrator as provided in section
[5(c), 16 U.S.C. §] 839c(c) of this title were made.” 16 U.S.C.
§ 839e(b)(2)(C). In effect, § 7(b)(2) means that BPA cannot
charge preference customers higher rates than BPA would
charge in the absence of the REP. This is known as the “rate
ceiling” protection, or the “Rate Ceiling Test.”7 Second,
  6
     16 U.S.C. § 839c(c)(3). Section 5(c)(5) of the NWPA also provides
that BPA may sell, at its discretion, actual power purchased from other
sources (for residential use) in lieu of participation in the exchange pro-
gram (“in-lieu transactions”), so long as BPA’s cost for purchasing such
power is less than the IOUs’ cost to produce or secure their own power
(i.e., less than the IOUs’ ASCs). See 16 U.S.C. § 839c(c)(5).
   7
     The Rate Ceiling Test compares the preference customers’ projected
power costs with a hypothetical cost based on five specific assumptions,
set forth in 16 U.S.C. §§ 839e(b)(2)(A)-(E). Only one of those assump-
tions (§ 7(b)(2)(C)) is at issue here.
4842   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
§ 7(b)(3) provides that any amounts not charged to BPA’s
preference customers because of the Rate Ceiling Test “shall
be recovered through supplemental rate charges for all other
power sold by the Administrator to all customers.” 16 U.S.C.
§ 839e(b)(3). In other words, when, in order to pay out addi-
tional REP benefits to the IOUs, BPA must recover REP ben-
efit costs from the preference customers, the rate ceiling
protection has been “triggered.” When the rate ceiling has
been triggered, § 7(b)(3) mandates that further REP benefits
must be paid for by non-preference customers (i.e., IOUs,
DSIs, and all other customers) through supplemental rate
charges. Id. The practical effect of the rate ceiling is that once
it is reached, qualifying IOUs must then pay for the costs of
the additional benefit they receive, thereby reducing the over-
all value of their benefits.

   The legislative history of the NWPA suggests that Con-
gress viewed the NWPA as a compromise between the prefer-
ence and non-preference utilities. The REP program created
by the NWPA granted non-preference utilities access to low-
cost federal power, while still maintaining the preferred status
of BPA’s traditional preference customers. See H.R. REP. NO.
96-976(I), pt. 1, at 60 (1980) (“The [REP] is not likely to
result in parity in the retail rates being paid by consumers of
preference customers and consumers of investor-owned utili-
ties, but it should equalize the wholesale costs of the electric
power with a resulting benefit [to] the investor-owned utili-
ties’ customers”). Key to that compromise was the premise
that the cost of the REP benefit would not be shouldered by
the preference customers, who could expect their costs to be
calculated as if there was no REP:

    Section 7(b)(2) establishes a “rate ceiling” for pref-
    erence customers that seeks to assure these custom-
    ers that their rates will be no higher than they would
    have been had the Administrator not been required
    to participate in power sales or purchase transactions
    with non-preference customers under this Act. The
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER            4843
     assumptions to be made by the Administrator in
     establishing this ceiling are specifically set forth. It
     is through rate ceilings that this Act provides addi-
     tional protection to public bodies and cooperatives’
     preference customers as to the price of the sale of
     power by the Administrator. In the event that this
     rate ceiling is triggered, then the additional needed
     revenues must be recovered from BPA’s other rate
     schedules.

Id. at 68-69. Thus, the REP program broadened residential
customers’ access to cheaper BPA power, but at the same
time § 7(b)(2)’s rate ceiling “added protection against prefer-
ence utilities and their customers suffering adverse economic
consequences as a result of [the NWPA].” H.R. REP. NO. 96-
976(II), pt. 2, at 36 (1980).

B.   ASC Methodology and Administration of the REP
     Program

   The following year, in 1981, BPA entered into the first of
its long-term power contracts (i.e., twenty years) with non-
preference utilities, as provided in the NWPA. See 16 U.S.C.
§ 839c(g)(1). Shortly thereafter, BPA began developing the
first ASC methodology, the 1981 Methodology, for participa-
tion in the REP, as required under 16 U.S.C. § 839c(c)(7). As
we have previously explained:

        BPA first adopted a methodology for computing
     the ASC in August 1981. After interim approval and
     formal administrative proceedings, FERC gave final
     approval to the methodology in September 1983. At
     the request of the DSI’s, BPA initiated a new ASC
     consultation in October 1983. The DSI’s and BPA
     believed the then current ASC methodology failed to
     exclude IOU costs required to be excluded by the
     Act, 16 U.S.C. § 839c(c)(7), resulting in DSI rates
     that were unlawfully high. After providing for con-
4844     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
      siderable public participation, BPA published a pro-
      posed ASC methodology. . . .

         On June 5, 1984, . . . BPA adopted and submitted
      the revised ASC methodology to FERC with a
      request for interim approval by July 1, 1984.
      Although the Commission decided not to grant
      interim approval, it issued a final order approving
      and implementing the revised ASC methodology as
      submitted by BPA on October 1, 1984.

Pub. Util. Comm’r of Or. v. BPA, 767 F.2d 622, 625 (9th Cir.
1985) (as amended). The IOUs challenged the 1984 method-
ology, but we upheld FERC’s decision in Pacificorp v. FERC,
795 F.2d 816, 821 (9th Cir. 1986), and the 1984 methodology
remains the approved means for determining an ASC. See 18
C.F.R. § 301.1. We have characterized the 1984 methodology
as the “ ‘crucial part of the agreement’ between BPA and the
IOUs participating in the [REP].” CP Nat’l Corp., 928 F.2d
at 907 (quoting Cent. Elec. Coop., Inc. v. BPA, 835 F.2d 199,
201 (9th Cir. 1987)).

   Under the 1984 methodology, a utility desiring to partici-
pate in the REP must file an Appendix 1 form,8 which identi-
fies PUC-approved utility costs.9 The Appendix 1 filing is
  8
     18 C.F.R. § 301.1(c) (“Beginning July 1, 1985, each utility’s ASC will
be calculated exclusively under this section.”); id. § 301.1(d)(1)
(“Appendix 1 is a form that identifies Contract System Costs and Contract
System Load and permits the calculation of ASC.”); id. § 301.1(d)(2) (pro-
viding that “[f]or each Exchange Period and for each regional Jurisdiction
in which a Utility provides service, the Utility shall complete and file three
copies of Appendix 1.”).
   9
     “The 1984 ASC methodology takes a jurisdictional approach to cost
determination. It relies heavily on the findings of state regulatory authori-
ties that the rates submitted to BPA have been found reasonable for retail
rate purposes. . . . The ASC methodology makes clear to all involved in
the power exchange program that costs must be approved by a state com-
mission before they will be considered in an ASC determination.” CP
Nat’l Corp., 928 F.2d at 907-08.
         PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER              4845
then reviewed by the BPA Administrator within a 210-day
period; review may include discovery and comments by inter-
vening parties. 18 C.F.R. § 301.1(b)(12). Following the
review period, BPA issues a final ASC report reflecting
BPA’s review and possible adjustment of the submitted costs.
If BPA has adjusted the submitted costs and the submitting
utility disputes the adjustment, the utility may appeal BPA’s
determination to FERC or to this court. See id.; 16 U.S.C.
§ 839f(e)(5).

  Once BPA has approved an ASC, that ASC is used to
determine the utility’s REP benefit throughout the exchange
period defined in a Residential Purchase and Sales Agreement
(“RPSA”).10 A RPSA is an agreement that implements the
payment of REP benefits over the course of an exchange
period. At the end of the exchange period and the termination
of the RPSA, a utility wishing to further participate in the
REP must make a new Appendix 1 filing and enter into a new
RPSA.11

C.     REP Settlement Agreements

  1.    BPA’s Settlement Authority

   In the NWPA and other legislation establishing BPA and
its authority, Congress “endowed the Administrator with
broad-based powers to act in accordance with BPA’s best
business interests—powers not normally afforded government
agencies.” Ass’n of Pub. Agency Customers, 126 F.3d at 1170.
An integral aspect of that business-enabling structure is
  10
      18 C.F.R. § 301.1(b)(5) (defining exchange periods as “the period of
time during which a Utility’s jurisdictional retail rate schedules are in
effect” and providing that “no Exchange Period shall commence prior to
or extend beyond the term of the Utility’s Residential Purchase and Sales
Agreement.”).
   11
      18 C.F.R. § 301.1(b)(5) (providing that “the Exchange Period shall
commence on the date such Appendix 1 is filed and end with the effective
date of the next retail rate change.”).
4846     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
BPA’s ability to enter into and settle out of contractual obliga-
tions. 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 con-
       tracts, 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). NWPA’s § 9(a), codified at 16 U.S.C.
§ 839f(a), endorses this broad earlier grant of contractual
authority: “Subject to the provisions of this chapter, the
Administrator is authorized to contract in accordance with
§ 2(f) of the Bonneville Project Act of 1937 (16 U.S.C.
§ 832a(f)).” Id.

  2.     2000 REP Settlement Agreement ROD

  a. General Background and Approach. Following the
implementation of the 1984 methodology, the IOUs disputed
various aspects of their ASC calculations, including the 1984
methodology itself. See Pacificorp, 795 F.2d 816. These dis-
putes coincided with diminishing REP benefits for IOUs that
were forecasted to continue to decline. Against that backdrop
—and in an effort to spread the benefits of its low-cost power
more broadly among residential customers—in the 1990s,
BPA began developing a subscription-based approach to
power allocation and sales to its customers. Beginning in
1997, BPA invited public comment and involvement in this
process, culminating in the December 21, 1998 publication of
a Power Subscription Strategy and Rule of Decision (“Power
Subscription Strategy ROD”).

  In the Power Subscription Strategy ROD (Dec. 1998), BPA
announced that it was willing to treat the IOUs as a class for
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER         4847
purposes of effecting a global settlement of REP benefits.
Accordingly, BPA developed two approaches to satisfying the
REP obligation: a new Residential Purchase and Sales Agree-
ment, which was BPA’s traditional means for implementing
the REP program, and a prototype REP Settlement Agree-
ment. BPA invited public comment on both approaches, and
elicited broad participation (including that of petitioners). Fol-
lowing the public comment period, BPA published two
Records of Decision (“ROD”) on October 4, 2000: the 2000
RPSA ROD and the 2000 REP Settlement Agreement ROD,
which is the subject of this litigation.

   The 2000 RPSA ROD, which is not the subject of this liti-
gation, offered qualifying utilities the opportunity to enter into
traditional RPSAs and receive the traditional REP benefit
computed under the approved 1984 methodology. The alter-
native 2000 REP Settlement Agreement ROD presented a
novel approach to discharging BPA’s REP obligations. Under
the 2000 REP Settlement Agreement ROD, BPA proposed to
settle out of all potential future REP obligations with qualify-
ing IOUs under “a global approach to [REP] settlement. This
approach treated the exchanging regional IOUs as a class and
proposed a settlement with the entire class at the same time.”
REP Settlement Agreement ROD at 30-31 (Oct. 2000).
Although BPA stated that it would apply the “ASC Methodol-
ogy as part of developing its ASC forecasts for purposes of
the Settlement Agreements,” id. at 31, BPA asserted that its
settlement authority allowed it to bypass the 1984 methodolo-
gy’s requirements:

    [Although] formal ASC determinations must be
    made in the implementation of the REP, this is not
    so for Settlement Agreements, where BPA may
    “make such expenditures, upon such terms and con-
    ditions and in such manner as [the Administrator]
    may deem necessary.” [16 U.S.C.] §§ 832a(f),
    839f(a). In addition, new ASC determinations were
    impractical given BPA’s schedule for implementing
4848   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
    the Power Subscription Strategy. Furthermore, ASCs
    are not the sole factor that is considered in determin-
    ing the propriety of a settlement.

Id. BPA further noted that

    while the determination of ASCs is part of the tradi-
    tional REP and is prescribed in section 5(c) of the
    Northwest Power Act, section 5(c) does not establish
    conditions for the settlement of IOUs’ rights to par-
    ticipate in the REP. Instead, the guidelines for BPA’s
    Settlement Agreements are found in section 2(f) . . . .
    Fundamentally, BPA must determine the appropriate
    consideration for a utility’s agreement to waive par-
    ticipation in the REP. This consideration may con-
    sider, in part, forecasted future REP benefits, which
    can be based on a formal determination of a utility’s
    ASC or a forecast of a utility’s ASC. Furthermore,
    a utility’s ASC need not be included as a provision
    in a Settlement Agreement or a Block Sales Agree-
    ment. It is something that is considered by BPA in
    determining REP eligibility and benefit determina-
    tions, but these determinations are not required to be
    made in a contract provision.

Id. at 36-37.

   b. Participation in the global settlement. Notwithstanding
BPA’s assertions that an ASC analysis was unnecessary in the
settlement context, BPA applied projected ASCs from an ear-
lier Wholesale Power Rate Adjustment Proceeding (WP-02
ROD) as the baseline for determining which utilities would be
eligible to participate in any REP settlement. In the WP-02
ROD (formulated in the late nineties to determine power rates
for the 2002-2006 period), BPA carried forward the exchange
rate from an earlier rate-making proceeding: a 1996 rate case.
BPA then forecasted the ASCs for six regional IOUs that ser-
viced residential and small farm loads and might qualify to
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER      4849
participate in the REP: Pacificorp (both its Pacific Power and
Utah Power divisions), Puget Sound Energy, Portland General
Electric, Montana Power Company, Avista Corp., and Idaho
Power Company. BPA forecasted the ASC for Pacificorp,
Puget Sound Energy, PGE, and MPC by applying expense
data and other assumptions from the 1996 rate case. See 2000
REP Settlement Agreement ROD at 32-40. BPA forecasted the
ASCs for Avista and Idaho Power by taking these IOUs’ last
ASC filings (respectively 1983 and 1984), estimating an ASC
for 1997, and multiplying that estimate by 2.5 percent, com-
pounded annually. Id. at 33-34. BPA then estimated the load
forecasts for these six IOUs by multiplying the amount of res-
idential power supplied by the IOUs by the IOUs’ cost per
unit of power to “establish forecasted exchange benefits of the
IOUs for purposes of the settlement offers.” Id. at 34.

   After estimating the potential REP benefit of the IOUs,
BPA incorporated an earlier consideration of § 7(b)’s rate
ceiling protection to determine whether the ceiling was
reached, and, if so, whether the IOUs would still be entitled
to a REP benefit. In the context of the 1996 rate case, BPA
had estimated the IOUs’ ASCs and residential power loads
and compared those estimated costs to BPA’s own projected
power costs. Based on this comparison, BPA determined that
the § 7(b) rate ceiling would be needed and surpassed, and
arrived at an exchange rate that discounted the entire benefit
accordingly. Id. at 32. In the context of the subsequent WP-02
ROD, BPA then considered the 1996 Rate Case’s exchange
rate, determined that BPA’s power generation costs had
remained relatively flat since the 1996 Rate Case, and there-
fore carried the earlier exchange rate forward as the WP-02
ROD exchange rate. Id. Likewise, BPA carried this § 7(b)
analysis forward into the 2000 REP Settlement Agreement
ROD and, using the earlier data, determined that the six IOUs
would be eligible to receive a potential REP benefit.

  c. Distribution of global settlement. Having determined
which utilities would qualify for a global settlement, BPA
4850   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
turned its attention to the size and distribution of the settle-
ment. In the Power Subscription Strategy ROD, BPA pro-
posed a total global settlement amount of 1800 average
megawatts (“aMW”) for the fiscal years 2002-2006 and 2200
aMW for the fiscal years 2007-2011 through implementation
of either a five-year or ten-year settlement contract. Under the
five-year settlement contract,

    BPA proposes a settlement in which residential and
    small farm loads of the IOUs will be assured access
    to the equivalent of 1,800 aMW of federal power for
    the 2002-2006 period. Of this amount, at least 1,000
    aMW will be met with actual BPA power deliveries.
    The remainder may be provided through either a
    financial arrangement or additional power deliveries,
    depending on which approach is more cost-effective
    for BPA.

    ...

    The IOUs’ settlement of rights to request Residential
    Exchange benefits under section 5(c) of the [NWPA]
    will be in effect until the end of the five-year term
    of the contract. Under the 10-year contract, BPA will
    offer and guarantee 1,800 aMW of power or finan-
    cial benefits for the 2002-2006 period and 2,200
    aMW for the 2007-2011 period. BPA intends for this
    2,200 aMW to be all power deliveries. If BPA is
    unable to deliver all power for the 2007-2011 period,
    a mechanism similar to that described above will be
    used for determining the financial component pay-
    ment. The IOUs’ settlement of rights to request Resi-
    dential Exchange benefits under section 5(c) will be
    in effect until the end of the 10-year term of the con-
    tract. In the event of reduction of federal system
    capability and/or the recall of power to serve its pub-
    lic preference customers during the terms of the five-
    year and 10-year contracts, BPA will either provide
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER              4851
    monetary compensation or purchase power to guar-
    antee power deliveries.

Power Subscription Strategy ROD (Dec. 1998) at 9. In formu-
lating the 2000 REP Settlement Agreement ROD, BPA carried
forward the Power Subscription Strategy ROD’s settlement
amounts and general approach.

   Following publication of the Power Subscription Strategy
ROD and before the publication of the 2000 REP Settlement
Agreement ROD, BPA asked the public utility commissions
(“PUCs”) of four Pacific Northwest states (Idaho, Montana,
Oregon, and Washington) to submit a recommendation on
how the global settlement should be allocated among the
IOUs. 2000 REP Settlement Agreement ROD at 13. On July
23, 1999, the PUCs requested that BPA increase the total set-
tlement amount for the FY 2002-2006 period from 1800
aMW to 1900 aMW. Id. at 12. According to BPA,

    [The PUCs’] request was made in order for the
    [PUCs] to arrive at a joint recommendation for allo-
    cating the settlement benefits among the IOUs for
    both the FY 2002-2006 and FY 2007-2011 periods.
    Many parties supported this increase for many rea-
    sons, including: (1) the increase is a wise policy
    decision and it helps to ensure that the regional inter-
    est in the system and preserving the system as a
    valuable benefit in the Northwest will be shared as
    broadly as possible among the region’s voters; (2)
    the increase is appropriate in order for BPA to
    achieve the stated Subscription Strategy goal to
    “spread the benefits of the Federal Columbia River
    Power System as broadly as possible, with special
    attention given to the residential and rural customers
    of the region,” . . . ; (3) the increase creates a fair and
    reasonable settlement to the REP for the IOUs; (4)
    the increase to the settlement staves off contentious
    issues surrounding the traditional REP as well as
4852   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
    provides a fair allocation of power to the IOUs; and
    (5) the increase will help ensure an appropriate shar-
    ing of benefits of Federal power among the residen-
    tial ratepayers in the Northwest. After review of the
    comments, BPA found the arguments for increasing
    the IOU settlement amount by 100 aMW to be com-
    pelling. BPA determined that the conditions sur-
    rounding the proposed increase to the proposed
    [REP Settlement] were expected to be met. There-
    fore, BPA increased the amount of total benefits for
    the proposed settlements of the REP with regional
    IOUs from 1800 aMW to 1900 aMW.

Id. at 12-13. The PUCs then submitted a joint recommenda-
tion for distribution of the global settlement amount among
the regional IOUs. Id. In this joint recommendation, the PUCs

    noted that their recommendation reflects many dif-
    ferent considerations, including the amount of resi-
    dential and small farm load eligible for the REP, the
    historical provision of REP benefits, the REP bene-
    fits received in the last five-year period ending June
    30, 2001, rate impacts on qualifying customers, and
    the individual needs and objectives of each state.

Id. at 13.

   After reviewing the PUCs’ recommendation, BPA deter-
mined that the proposal was “a reasonable approach upon
which to take public comment.” Id. at 13. Accordingly, on
May 5, 2000, BPA requested public comment on “(1) any
comments on the terms and conditions of the prototype Settle-
ment Agreement; and (2) whether the total amount of benefits
and the proposed terms and conditions for settling the rights
of regional IOUs to request benefits under the REP were rea-
sonable.” Id. at 15. In the 2000 REP Settlement Agreement
ROD, BPA reported that nearly
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER          4853
    all commenters supported the allocation recom-
    mended by the Commissions and proposed by BPA.
    The reasons for such support included: (1) it is
    appropriate for BPA to weigh heavily the Commis-
    sions’ joint recommendation concerning the alloca-
    tion of benefits; (2) the Commissions are the best
    arbiters of the settlement among the IOUs; and (3)
    the proposed allocation establishes access to a level
    of benefits that recognizes changed market condi-
    tions while at the same time addresses the needs and
    issues important to each of the four states. It is wor-
    thy of note that BPA’s allocation has received sup-
    port from diverse customer and interest groups:
    publicly owned utilities, IOUs, the Commissions,
    state agencies, and a city commission.

Id. at 13. BPA then adopted the PUCs’ recommendation.

   d. Funding the global settlement and cost issues. After
implementing the REP Settlement Agreement, BPA classified
the REP settlement as a “settlement cost” for accounting pur-
poses and not as an ordinary REP benefit. As we have stated
above, § 7(b)’s rate ceiling analysis provides a means of
determining whether REP benefits will impact the preference
customers’ power rates and, if so, § 7(b)(3) ensures that the
preference customers’ power rates are unaffected by the
implementation of the REP. However, in implementing the
2000 REP Settlement Agreements, BPA took the position that
“settlement costs” are unaffected by § 7(b) and may be recov-
ered by BPA as ordinary expenses through increased rate
costs for all of BPA’s customers, including the preference
utilities. See 16 U.S.C. § 839e(g) (requiring that BPA “shall
equitably allocate to power rates, in accordance with gener-
ally accepted ratemaking principles and the provisions of this
chapter, all costs and benefits not otherwise allocated under
this section”). Accordingly, BPA incorporated the settle-
ment’s costs into its general power rates in the WP-02 ROD.
See WP-02 ROD, WP-02-FS-BPA-05 at 67.
4854   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   In addition to charging the preference utilities for the settle-
ment of prospective REP benefits, BPA made several deci-
sions in the 2000 REP Settlement Agreement ROD that
increased the settlement’s total cost—and, by extension,
increased the impact of the settlement agreements on the pref-
erence customers’ power rates. First, BPA’s settlement agree-
ments provided that the IOUs could purchase power at either
the RL Rate, a rate calculated for the REP settlement, or at the
PF Preference Rate, the prime power rate at which the prefer-
ence customers purchase their power, whichever was lower.
Prior to the settlement agreements, the IOUs purchased power
under the PF Exchange Rate, which is a rate equal to the PF
Preference Rate plus any adjustment required by § 7(b).
Under the settlement agreements, IOUs could purchase power
at no worse than the PF Preference Rate, which was less than
or equal to the PF Exchange Rate, which is the rate available
to IOUs who entered into the traditional REP program.
Accordingly, REP settlement agreements insulate the IOUs
from the costs of any future REP benefit for any other utility
and guarantee them at least the same rate as preference cus-
tomers.

   Second, BPA’s proposed settlement amount significantly
exceeded BPA’s own projection of future REP costs. In addi-
tion to cash payments, BPA also included “net requirement
power sales” at fixed rates to IOUs as a component of the
2000 REP Settlement Agreements. In the 2000 REP Settle-
ment Agreement ROD, BPA acknowledged that the combined
value of the settlement agreements’ required sales and cash
payments exceeded by nearly three times its own estimate (in
the WP-02 Rate Case) of the total expected REP obligation
for the settlement period. See 2000 REP Settlement Agree-
ment ROD at 49 (noting the DSI Vanalco’s assertion that the
proposed REP settlement offered $736.6 million in benefits to
the IOUs for FY 2002-2006 as compared to BPA’s WP-02
ROD estimate that it would owe $240.6 million in REP bene-
fits for the same period); see also id. at 78 (stating that
“BPA’s [WP-02 ROD] forecasted REP benefits to the IOUs
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER     4855
comprised approximately $48 million per year during the rate
period, although there are circumstances that could increase
these benefits” and noting that, in the 2000 REP Settlement
Agreement ROD, “BPA forecasted REP settlement benefits to
the IOUs that comprise approximately $140 million per year
during the rate period”).

   Third, § 5(c)(5) of the NWPA provides that BPA may, in
its discretion, sell the IOUs actual power purchased from
other sources in lieu of participating in the REP so long as
BPA’s cost for purchasing such power is less than the IOUs’
cost to produce or secure their own power. See 16 U.S.C.
§ 839c(c)(5). Prior to the settlement agreements, BPA was
able to discharge approximately fifty percent of its REP obli-
gations through in-lieu transactions under § 5(c)(5), although
BPA asserted in the 2000 REP Settlement Agreement ROD
that rising market energy costs would reduce the availability
of in-lieu sales. In the 2000 REP Settlement Agreement ROD,
BPA proposed to do away with all in-lieu transactions. The
in-lieu exchange permits BPA to acquire power from other
sources only when that power is cheaper than BPA’s power.
Thus, it is not guaranteed that BPA will always be able to
obtain cheaper power. In situations where BPA cannot obtain
lower cost power, the settlement agreements would not
increase the cost to BPA to fulfill its REP obligations. How-
ever, in situations where BPA can obtain lower cost power,
the settlement agreements would increase the cost to BPA.

   BPA proffered several reasons why it was reasonable to
settle future REP obligations for a sum nearly three times
greater than its own forecast of those obligations. First, BPA
noted that it planned to hold regional discussions regarding
whether BPA should revert to the 1981 ASC methodology, as
the IOUs urged; BPA asserted that if it reverted to the 1981
methodology, the change would result in an increase of
$161.5 million per year in REP benefits. 2000 REP Settlement
Agreement ROD at 50. Second, if the IOUs were to prevail on
various challenges to BPA’s computation of its own costs for
4856       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
purposes of the REP, BPA’s REP obligations would increase
by $243 million per year. Id. at 51-52. Finally, BPA found
that higher power rates in FY 2002-2006 would significantly
reduce BPA’s ability to use in-lieu transactions to reduce its
REP obligations (in the WP-02 ROD, BPA had estimated such
transactions would reduce its REP obligations by one-half).
Id. at 50-51. BPA noted that the settlement of these three dis-
putes in the proposed REP settlement agreements merited the
high settlement amount.

   On October 30, 2000, BPA entered into the first 2000 REP
settlement agreement with Pacificorp, and subsequently exe-
cuted settlement agreements with the five remaining IOUs.
Petitioners timely filed the instant petitions. Following oral
argument, we requested supplemental briefing.12

         II.   JURISDICTION AND JUDICIAL REVIEW

   [1] Under § 9(e)(5) of the NWPA, we have original subject
matter jurisdiction over BPA’s “final actions and decisions”
taken pursuant to the Act. 16 U.S.C. § 839f(e)(5). BPA’s final
actions include the execution of settlement agreements and
other contracts, 16 U.S.C. §§ 839f(e)(3), 839f(e)(1)(B), which
are final only upon execution of such agreements. Petitioners
challenge BPA’s Record of Decision, dated October 4, 2000,
which was executed on October 31, 2000. The petition was
  12
    We requested answers to the following questions:
       (1) Did BPA consider actual ASC calculations in determining
       which of the IOUs were eligible for the REP Settlement?;
       (2) Assuming that BPA did consider such calculations, what is
       the relationship between the amount of REP benefit paid to each
       IOU under the Settlement and its ASC?;
       (3) If BPA did not consider actual ASC calculations, what is the
       relationship between the amount of the REP benefit paid to each
       IOU under the Settlement and its ASC?; and
       (4) Do Sections 7(b)(2)-(3) of the NWPA prohibit, in part or in
       toto, allocation of REP costs to PUDs?
        PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER              4857
timely filed within ninety days of the challenged action. See
16 U.S.C. § 839f(e)(5).

   BPA argues that we should not consider petitioners’ argu-
ments because they were not adequately raised before the
agency. As a general rule, we will not review challenges to
agency action raised for the first time on appeal. See Exxon
Mobil Corp. v. EPA, 217 F.3d 1246, 1249 (9th Cir. 2000)
(“Petitioners have waived their right to judicial review of
these final two arguments as they were not made before the
administrative agency, in the comment to the proposed rule,
and there are no exceptional circumstances warranting
review.”); City & County of San Francisco v. United States,
615 F.2d 498, 502 (9th Cir. 1980) (“[T]his issue was not
raised until this litigation commenced.”). While the principle
has sometimes been phrased in terms of standing or exhaus-
tion, see Marathon Oil Co. v. United States, 807 F.2d 759,
767-68 (9th Cir. 1986); Kunaknana v. Clark, 742 F.2d 1145,
1148 (9th Cir. 1984), we have made clear that it is best char-
acterized as waiver. As we explained, “the waiver rule only
forecloses arguments that may be raised on judicial review; it
is not an exhaustion of remedies rule that forecloses judicial
review.” Universal Health Servs., Inc. v. Thompson, 363 F.3d
1013, 1020 (9th Cir. 2004). In general, we will not invoke the
waiver rule in our review of a notice-and-comment proceed-
ing if an agency has had an opportunity to consider the issue.
See Natural Res. Def. Council, Inc. v. EPA, 824 F.2d 1146,
1150-51 (D.C. Cir. 1987) (en banc). This is true even if the
issue was considered sua sponte by the agency or was raised
by someone other than the petitioning party.13 See Portland
Gen. Elec. Co. v. Johnson, 754 F.2d 1475, 1481 (9th Cir.
  13
    BPA sought broad public participation and invited comments in these
proceedings. If we required each participant in a notice-and-comment pro-
ceeding to raise every issue or be barred from seeking judicial review of
the agency’s action, we would be sanctioning the unnecessary multiplica-
tion of comments and proceedings before the administrative agency. That
would serve neither the agency nor the parties.
4858   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
1985). The waiver rule protects the agency’s prerogative to
apply its expertise, to correct its own errors, and to create a
record for our review. See Cal. Energy Res. Conservation &
Dev. Comm’n v. BPA, 831 F.2d 1467, 1475 (9th Cir. 1987);
BERNARD SCHWARTZ, ADMINISTRATIVE LAW § 8.33, at 542 (3d
ed. 1991). We have also recognized that, so long as a statute
does not require exhaustion, we may excuse waiver in excep-
tional circumstances. See Universal Health Servs., 363 F.3d
at 1020-21; Exxon Mobil Corp., 217 F.3d at 1249; Johnson v.
Director, 183 F.3d 1169, 1171 (9th Cir. 1999); Marathon Oil
Co., 807 F.2d at 767-68.

   [2] BPA was fully apprised of the issues raised by the peti-
tioners and has had a fair opportunity to address these chal-
lenges to its REP settlement. During the comment period,
other parties repeatedly argued that the REP benefits afforded
IOUs were excessive and contravened the requirements of the
NWPA. For example, the Public Power Council raised con-
cerns associated with the direct financial harm imposed on
public utilities by the increased benefits to IOUs. PPC com-
mented that

    ASC is neither referred to, nor defined in, the draft
    prototype agreements. In neglecting to address ASC,
    BPA appears to ignore the requirement in the North-
    west Power Act to incorporate the electric utility’s
    ASC in determining that utility’s Residential
    Exchange benefits.

    ...

    We are concerned that BPA would further weaken
    its financial position and expose public power utili-
    ties to additional financial risk by offering new gen-
    erous deals to various entities that further weaken
    BPA financially.

Another utility argued: “In § 5(c) Congress provided for a res-
idential exchange program that would not diminish the
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER          4859
amount of federal power available to other customers. Under
the guise of a Settlement Agreement, BPA would make a
direct sale . . . to IOUs that would circumvent this Congres-
sional intent.” Similarly, in June 2000, a DSI argued:

    BPA’s proposal to substitute, in whole or in part, a
    direct sale of power to utilities for the exchange pro-
    gram established by Section 5(c) of the [Act] is
    beyond BPA’s statutory authority and the overall
    purposes of the Northwest Power Act. . . . [W]e
    believe the “settlement” benefits far exceed the
    exchange rights BPA purports to settle.

    ...

    The proposed benefits are obviously excessive and
    unreasonable.

    ...

    The Residential Exchange Program authorized by
    the Northwest Power Act was specifically designed
    to assure that BPA’s ability to meet its other power
    supply responsibilities would not be diminished.
    BPA’s current proposal fails to carry out this statu-
    tory goal.

BPA repeatedly defended the legality of its position in the
Settlement Agreement ROD and consistently argued that it
was not bound exclusively by its prior ASC methodology in
calculating REP benefits and exercising its settlement powers
under § 2(f). There has been no waiver of the issues, and the
parties before us may raise them.

              III.   STANDARD OF REVIEW

   Our review of BPA’s actions is governed by the Adminis-
trative Procedure Act, 5 U.S.C. § 706 (“APA”). See 16 U.S.C.
4860     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
§ 839f(e)(2) (incorporating scope of review provisions of the
APA). Under the APA, BPA’s decisions may be set aside
only if they are “arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(a). See Pub. Power Council, Inc. v. BPA, 442 F.3d
1204, 1209 (9th Cir. 2006).

                          IV.    ANALYSIS

   The question in this case is whether BPA’s authority to set-
tle out of future power exchange contracts is bound by the
requirements of the NWPA.14 BPA contends that it has broad
and otherwise unregulated authority to make contracts and to
enter into settlements, and that this authority permits it to
bypass the requirements that Congress has imposed with
regard to ordinary exchanges of power under the NWPA. We
first address how much flexibility BPA has to craft a settle-
ment under § 2(f) of the Bonneville Project Act and the rela-
tionship, if any, that any REP settlement must bear to the REP
program described in § 5(c) and constrained by § 7(b) of the
NWPA. We then turn to whether BPA’s settlements complied
with the requirements of BPA’s REP authority. While the
facts that comprise this case are extremely complicated, we
believe that the outcome is clear: BPA construed and exer-
cised its settlement authority in a manner that was contrary to
the clearly expressed intent of Congress in the Bonneville
Project Act and the NWPA.

A.     The Scope of BPA’s Settlement Authority

   We give administrative agencies considerable leeway in the
interpretation of the scope of their authority. See FDA v.
Brown & Williamson Tobacco Corp., 529 U.S. 120, 125
(2000) (explaining that agencies possess “deference in the
interpretation of statutes that they administer.”). Owing to the
  14
    The petitioners do not allege that the REP settlement is arbitrary and
capricious, but that the settlements violate the NWPA as a matter of law.
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER      4861
complexity of BPA’s regulatory scheme, and its “unusually
expansive mandate to operate with a business-oriented philos-
ophy,” we have been particularly deferential to BPA. Ass’n of
Pub. Agency Customers, Inc., 126 F.3d at 1171; see also
Dep’t of Water & Power v. BPA, 759 F.2d 684, 690-91 (9th
Cir. 1985).

   Our deference, however, does not abrogate our responsibil-
ities to construe BPA’s organic acts consistent with Chevron
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837 (1984). See M-S-R Public Power, 297 F.3d at 841
(declining to defer to BPA’s statutory interpretation). As we
review BPA’s construction of the acts under which it oper-
ates, “[o]ur first question is always ‘whether Congress has
directly spoken to the precise question at issue. If the intent
of Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the unam-
biguously expressed intent of Congress.’ ” Id. at 841 (quoting
Chevron, 467 U.S. at 842-43). “On the other hand, where
Congress expressly or implicitly confers authority to fill in a
gap in the enacted law or resolve a statutory ambiguity, we
accord the agency’s ensuing decision considerable defer-
ence.” Id. (citing United States v. Mead Corp., 533 U.S. 218,
229 (2001)). Where “the statute is silent or ambiguous with
respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible con-
struction of the statute.” Chevron, 467 U.S. at 843. At the
same time, “[r]egardless of how serious the problem an
administrative agency seeks to address, . . . it may not exer-
cise its authority ‘in a manner that is inconsistent with the
administrative structure that Congress enacted into law,’ ”
Brown & Williamson, 529 U.S. at 125 (quoting ETSI Pipeline
Project v. Missouri, 484 U.S. 495, 517 (1988)), because “an
administrative agency’s power to regulate in the public inter-
est must always be grounded in a valid grant of authority from
Congress.” Id. at 161. We therefore begin by identifying the
precise scope of the statutory authority Congress has granted
to BPA.
4862   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
  [3] BPA’s settlement authority is found in provisions in
two of its organic acts: § 2(f) of the Bonneville Project Act
and § 9(a) of the NWPA. First, § 2(f) of the Bonneville Proj-
ect Act states that

    Subject only to the provisions of this chapter, the
    Administrator is authorized to enter into such con-
    tracts, 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); see also 16 U.S.C. § 832d(a) (“Contracts
entered into with any utility engaged in the sale of electric
energy to the general public shall contain such terms and con-
ditions . . . as the administrator may deem necessary, desirable
or appropriate to effectuate the purposes of this chapter. . . .”).
Second, in § 9(a) of the NWPA, Congress reauthorized BPA’s
contract and settlement authority in connection with its new
authority. “Subject to the provisions of this chapter, the
Administrator is authorized to contract in accordance with
section 2(f) of the Bonneville Project Act of 1937 (16 U.S.C.
832a(f)).” 16 U.S.C. § 839f(a) (emphasis added). Congress
thus incorporated its prior grant of contract and settlement
authority by reference and subjected it to the new require-
ments of the NWPA.

   [4] In § 5 of the NWPA, Congress, for the first time,
granted explicit authority to BPA to exchange power with
IOUs and DSIs. Even as it did so, Congress first reaffirmed
that “[a]ll power sales under this chapter shall be subject at all
times to the preference and priority provisions of the Bonne-
ville Project Act.” 16 U.S.C. § 839c(a). Next, Congress either
granted BPA new authority or constrained BPA’s existing
authority over three kinds of power sales: (1) sales to public
bodies, cooperatives, and Federal agency customers; (2) sales
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER            4863
to DSIs; and (3) purchase and exchange sales. 16 U.S.C.
§§ 839c(b)-(d). Only the latter situation is relevant to this
appeal: the purchase and exchange of power.

  Section 5(c)(1) of the NWPA provides:

    Whenever a Pacific Northwest electric utility offers
    to sell electric power to the Administrator at the
    average system cost of that utility’s resources in each
    year, the Administrator shall acquire by purchase
    such power and shall offer, in exchange, to sell an
    equivalent amount of electric power to such utility
    for resale to that utility’s residential users within the
    region.

16 U.S.C. § 839c(c)(1). As previously explained, this provi-
sion affords Northwest utilities the opportunity to sell their
power to BPA at their average system costs. BPA must pur-
chase the power and offer the utility BPA’s power at BPA’s
average system cost. This process is essentially a paper trans-
action, where BPA subsidizes the cost of a utility’s high-cost
power. Following the enactment of the NWPA, BPA entered
into a series of long-term Residential Exchange Program
agreements, or REPs, with various customers. In anticipation
of the agreements’ expiration in 2000, BPA proposed revising
its practices and offering its non-preference customers two
options: (1) enter into a traditional REP agreement with BPA,
or (2) enter into a new agreement for a global, long-term “set-
tlement” of BPA’s prospective REP obligations. In other
words, BPA offered its non-preference customers the option
of maintaining the status quo or settling out of any future ben-
efits.

   According to BPA, its legal obligations were different,
depending on which of those two options its non-preference
customers pursued. In BPA’s view, in a traditional REP
agreement with a non-preference customer, such as an IOU,
§ 5(c) (and, by extension, § 7(b)) would apply. By contrast,
4864     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
with regard to a non-preference customer who chose to enter
into a settlement agreement and settle out of any future power
claims, BPA took the position that the agreement was gov-
erned by § 2(f) only, and it expressly denied that the settle-
ment agreement would be subject to §§ 5(c) and 7(b). In the
2000 REP Settlement Agreement ROD, BPA flatly stated that
“section 5(c) does not establish conditions for the settlement
of IOUs’ rights to participate in the REP. Instead, the guide-
lines for BPA’s Settlement Agreements are found in section
2(f).” 2000 REP Settlement Agreement ROD at 36, 53. In its
brief to this court, BPA repeated that in the REP settlements,
“BPA is not interpreting section 5(c) of the Northwest Power
Act.” Thus, BPA argued that “Petitioners’ argument about
section 5(c) is irrelevant with respect to the 2000 REP Settle-
ment Agreements. BPA has interpreted section 2(f) of the
Bonneville Project Act, not section 5(c) of the Northwest
Power Act, as providing BPA authority to settle disputes aris-
ing under the RPSAs.”15 If we needed further evidence of
BPA’s position, BPA argued elsewhere in its brief:

       REP Settlement Agreements are entered into pursu-
       ant to and are authorized by section 2(f) of the Bon-
       neville Project Act. Accordingly, REP Settlement
       Agreements are not required to include elements
       required by section 5(c) of the Northwest Power Act
       to be included in RPSAs, such as the ASC Method-
       ology, ASCs, in lieu transactions, and the PF
       Exchange rate (including the section 7(b)(2) test.
  15
     By contrast, in response to our request for supplemental briefing fol-
lowing oral argument, see supra note 13, BPA argued that “BPA has not
argued and does not argue that it can enter into REP settlements and disre-
gard sections 7(b)(2)-(3) and 5(c) of the Act pursuant to its section 2(f)
settlement authority.” BPA’s latest argument is “newly-minted, it seems,
for this lawsuit, and inconsistent with prior agency actions.” Defenders of
Wildlife v. Norton, 258 F.3d 1136, 1145-46 n.1 (9th Cir. 2001). To the
extent BPA’s latest statement purports to be an interpretation of its statu-
tory authority, we owe no deference to it. To the extent BPA’s latest state-
ment is a characterization of its historic position, it is not true.
           PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER                 4865
   BPA took a similar position with respect to its obligation
under § 7(b). That section provides that preference customers
are entitled to rates as if no REP program existed. 16 U.S.C.
§ 839e(b)(2)(C). The costs of the REP program must be
charged in a supplemental rate against other BPA customers,
and not against preference customers. Id. § 839e(b)(3). Not-
withstanding this clear instruction, BPA treated the REP set-
tlement as though it were not a rate subject to §§ 7(b)(2) and
7(b)(3). Instead, BPA treated the REP settlement as an ordi-
nary cost of doing business and allocated the cost to all cus-
tomers, including preference customers. See 16 U.S.C.
§ 839e(g).16 Again, this was clear in BPA’s proceedings and
briefs. For example, in its briefs in a companion case, Golden
Northwest Aluminum v. BPA, Nos. 03-73426+, BPA advised
us that while it “allocated the total ‘trigger amount’ resulting
from the section 7(b)(2) test only to non-preference custom-
ers’ rates,” it “also equitably allocated Residential Exchange
Program settlement costs and benefits to BPA’s power rates
under Section 7(g) of the Northwest Power Act because such
settlement costs are not otherwise allocated under section 7 of
the Act.” As BPA stated: “The record in this proceeding
establishes that BPA allocated the costs of the REP Settle-
ment to both non-preference and preference rates pursuant to
section 7(g).” In another instance, BPA argued that “section
7(b)(2) says nothing about subtracting REP Settlement costs,
or any other settlement costs, from the 7(b)(2) [calculation].”
  16
    Section 7(g) provides in part:
       Except to the extent that the allocation of costs and benefits is
       governed by provisions of law in effect on December 5, 1980, or
       by other provisions of this section, the Administrator shall equita-
       bly allocate to power rates, in accordance with generally accepted
       ratemaking principles and the provisions of this chapter, all costs
       and benefits not otherwise allocated under this section . . . .
BPA thus treated the REP settlement as though it were an “allocation of
costs and benefits” and not “allocated . . . by other provisions of this sec-
tion.”
4866   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   [5] BPA’s broad reading of its settlement authority is con-
trary to a plain reading of the Bonneville Project Act and the
NWPA, and it is inconsistent with general principles of
administrative law. In these two acts, Congress has clearly
established three propositions: BPA’s general settlement
authority is subject to the constraints of the Bonneville Project
Act and the NWPA; whenever BPA exchanges power with a
Pacific Northwest utility, it acts pursuant to its § 5(c) power;
and when BPA acts under § 5(c), the projected power rates to
be charged to BPA’s non-preference customers are subject to
the constraints of § 7(b) of the NWPA. We discuss each of
these propositions in turn.

   [6] First, Congress has plainly stated that BPA’s settlement
authority is subject to the constraints of the NWPA. Section
9(a) of the NWPA, which makes BPA’s § 2(f) contracting and
settlement authority applicable to the NWPA, is directly pref-
aced by the express requirement that such authority is
“[s]ubject to the provisions of this chapter.” 16 U.S.C.
§ 839f(a) (emphasis added). Congress could not have made it
any clearer that it intended for BPA to exercise its general set-
tlement authority within the confines of the NWPA. In North-
west Forest Resource Council v. Glickman, 82 F.3d 825 (9th
Cir. 1996) (as amended), we considered the definition and
scope of the words “subject to section 318” in § 2001(k)(1) of
the 1995 Rescissions Act, Pub. L. 104-19, 109 Stat. 194
(1995). We concluded, inter alia, that the phrase “subject to”
means “governed or affected by.” Nw. Forest Res. Council,
82 F.3d at 833; see also U.S. ex rel. Totten v. Bombardier
Corp., 286 F.3d 542, 547 (D.C. Cir. 2002) (“[A]n entity is
‘subject to’ a particular legal regime when it is regulated by,
or made answerable under, that regime.”); Texaco Inc. v.
Duhe, 274 F.3d 911, 918-19 (5th Cir. 2001) (holding that nat-
ural gas became “ ‘subject to’ an existing contract” within the
meaning of the Natural Gas Policy Act when it was “governed
by” terms of that contract); Michelin Tires (Canada) Ltd. v.
First Nat’l Bank of Boston, 666 F.2d 673, 677 (1st Cir. 1981)
(“The words ‘subject to,’ used in their ordinary sense, mean
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER         4867
‘subordinate to,’ ‘subservient to,’ or ‘limited by.’ ”); Burgess
Const. Co. v. M. Morrin & Son Co., 526 F.2d 108, 113 (10th
Cir. 1975) (“The words ‘subject to’ usually indicate a condi-
tion to one party’s duty of performance and not a promise by
the other.”). And we concluded in Northwest Forest Resource
Council that a contrary conclusion would make mere surplus-
age of the provision. See 82 F.3d at 834; see also id. (“[A]
statute must be interpreted to give significance to all of its
parts.”). We therefore cannot agree with BPA’s general char-
acterization that its § 2(f) settlement authority is not subject
to the NWPA. As the plain language of the NWPA indicates,
BPA’s settlement authority is governed and limited by the
remaining provisions of the Act.

   [7] Second, Congress has plainly stated that § 5(c) applies
whenever BPA exchanges power with a Pacific Northwest
utility. In § 5(c), Congress for the first time conferred explicit
authority on BPA to exchange power with all qualified utili-
ties, including non-preference customers. Whenever a non-
preference utility offers to sell power to BPA at the utility’s
average system cost, BPA must purchase the power at that
cost and offer to sell an equivalent amount of power to such
utility for resale to that utility’s customers. Congress further
provided that the average system cost is to be determined by
BPA “on the basis of a methodology developed for this pur-
pose,” and approved by FERC. See 16 U.S.C. § 839c(c)(7).

   [8] Third, Congress has plainly stated that all purchase and
exchange sales under § 5 are governed by § 7(b) of the
NWPA. Section 5(a) of the NWPA, which is a preamble of
sorts to § 5(c), states that “[a]ll power sales under this chapter
. . . shall be at rates established pursuant to section 839e of
this title.” See 16 U.S.C. § 839c(a). Section 839e, of course,
is § 7 of the NWPA. In turn, § 7(b)(3) states that “[a]ny
amounts not charged to [preference] customers . . . shall be
recovered through supplemental rate charges for all other
power sold by the Administrator to all customers.” 16 U.S.C.
§ 839e(b)(3).
4868     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   [9] Even if we thought that Congress had not spoken
plainly, BPA’s interpretation of its scope of its § 2(f) author-
ity is not reasonable under “established administrative law
principles.” Aluminum Co. of Am. v. Cent. Lincoln Peoples’
Util. Dist., 467 U.S. 380, 389 (1984). Section 2(f) of the Bon-
neville Project Act and § 5(c) of the NWPA serve different
functions. Consistent with BPA’s charge to function as a busi-
ness, § 2(f) is a general corporate power.17 We observed in
Utility Reform Project v. BPA that the “unrestricted language
of the statute gives the Administrator expansive authority to
settle contract claims.” 869 F.2d 437, 443 (9th Cir. 1989). We
pointed out that Congress thought “ ‘[t]he discretion to com-
promise and settle [claims] should be a part of Bonneville’s
business operations. It should not be compelled to lose, or run
the risk of losing, advantageous settlements because of the
delays involved in sending offers back and forth across the
continent for consideration by a number of agencies before
acceptance is possible.’ ” Id. (quoting H.R. REP. NO. 79-777,
at 4 (1945), reprinted in 1945 U.S.C.C.A.N. 874, 875).

   [10] As important as it may be, the power to compromise
claims is not a substantive power in the sense that it defines
BPA’s mission or jurisdiction, but a facilitative power to
place BPA on an equal footing with the public and corporate
entities with which it must contract. By styling BPA’s § 2(f)
  17
     Unlike many regulatory agencies, “Congress endowed the Administra-
tor with broad-based powers to act in accordance with BPA’s best busi-
ness interests,” allowing BPA “to function more like a business than a
governmental regulatory agency.” Ass’n of Pub. Agency Customers, 126
F.3d at 1170; see 16 U.S.C. § 838i; id. § 839f(b) (“the Administrator shall
take such steps as are necessary to assure the timely implementation of
this chapter in a sound and businesslike manner.”).
   When Congress added § 2(f) in 1945, Harold Ickes, Secretary of the
Interior, noted in his departmental report on the bill that “The Bonneville
Power Administration is not engaged in a governmental regulatory pro-
gram. It operates a business enterprise . . . [Section 2(f)] will facilitate its
operations as a regional and business agency.” S. REP. NO. 79-469, at 13
(1945).
        PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER             4869
power “facilitative,” we do not mean to diminish at all its
importance to BPA. The ability to settle claims without resort
to litigation or full-throated regulatory proceedings is cer-
tainly an important aspect for making BPA an efficient
agency and fulfilling the Administrator’s charge to conduct
BPA as a well-run business. The ability to compromise
claims, by its nature, requires flexibility and discretion. Regu-
latory claims are rarely capable of a sum-certain determina-
tion and an either/or assessment of the likelihood of success
on the merits. It is thus implicit in the grant of settlement
power that BPA have the flexibility to take into account a
variety of considerations, including its litigation costs, differ-
ing damage assessments, and the risk of loss on the merits.

   [11] By contrast, §§ 5(c) and 7(b) are part and parcel of
more traditional regulatory powers,18 and are substantive
grants of authority that both enable and restrict BPA. Section
5(c) enables in the sense that BPA acquired authority it did
not previously possess: the ability to exchange power with
non-preference utilities. Sections 5(c) and 7(b) are restrictive
in that they establish the conditions upon which BPA may
exercise that newfound § 5(c) authority. BPA may not provide
power under the REP program on whatever terms—whether
good business or not—that BPA likes. It may enter into REP
settlement contracts with IOUs, but only on terms that will
protect the position of its preference customers, consistent
with §§ 5(c) and 7(b). In short, it must exercise its § 5(c)
power according to the NWPA.

  We cannot agree with BPA that § 2(f) functions wholly
independent of BPA’s substantive authority. Section 2(f)
grants BPA the power to enter into contracts, but it says noth-
  18
    When Congress amended BPA’s authority through the NWPA, it
added “new, more typically governmental responsibilities” which “donned
BPA with more of the usual trappings of a federal regulatory agency than
it had previously worn.” Ass’n of Pub. Agency Customers, 126 F.3d at
1170.
4870    PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
ing 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. Congress may have authorized BPA to
enter into contracts, but BPA cannot acquire an NBA fran-
chise just because it can be accomplished by contract; BPA
has broad authority to settle claims, but it cannot buy time-
shares in the Bahamas by calling them a “settlement.” Taken
at face value, BPA’s argument—that its settlement authority
is essentially unlimited, and free from the constraints of the
NWPA—would allow it to run circles around the express
requirements Congress sought fit to impose in the NWPA.19
In our view, however, settlement of BPA’s REP obligations
must be grounded in the REP program authorized by § 5(c)
that creates the occasion for the settlement in the first place.
A settlement agreement cannot be a means of bypassing con-
gressionally mandated requirements.

   To support its general argument that § 2(f) is not subject to
these constraints, BPA relies on a series of power cases previ-
ously decided by our court that interpreted BPA’s § 2(f)
authority broadly. None of these cases, however, controls the
circumstances of this case. In Utility Reform Project, certain
BPA preference customers challenged a settlement agreement
between BPA and its IOU customers. The settlement agree-
ment resolved a dispute arising from BPA’s recommendation
that the construction of a nuclear power plant be delayed.
When construction halted, the IOUs filed suit challenging the
delay. BPA and the IOUs subsequently negotiated a settle-
  19
    By relying exclusively on § 2(f) of the Bonneville Project Act, BPA
has effectively claimed that it could have entered into REP settlements
prior to the passage of the NWPA in 1980, which created the REP pro-
gram. We do not think that BPA’s § 2(f) authority is so capacious that it
could create ex nihilo a REP program if Congress had not authorized one
in § 5(c). But even if BPA’s general charge were so broad, BPA surely
cannot ignore what Congress has required once Congress took the initia-
tive and established the REP.
        PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER            4871
ment agreement whereby BPA would transfer power to IOUs
with certain conditions, and, in return, the IOUs were obli-
gated to make an equal amount of energy available to BPA.
The settlement agreement was thus a power exchange. We
considered the scope of BPA’s § 2(f) authority and concluded
that “[t]he unrestricted language of the statute gives the
Administrator expansive authority to settle contract claims.”
Util. Reform Project, 869 F.2d at 443; see also id. (character-
izing BPA’s settlement authority as “broad”). But in doing so
we recognized that the broad authority is subject to clear con-
gressional directives:

      This is not to say that BPA could act contrary to a
      clear statutory directive in settling, but if there is
      room for doubt, we ought not to resolve it in a man-
      ner that sends the parties back to litigation. This set-
      tlement will therefore be set aside only for the
      strongest of reasons.

Id.

   We similarly recognized BPA’s broad § 2(f) powers in
Ass’n of Pub. Agency Customers, 126 F.3d at 1170-71, but
deferred to BPA’s legal interpretation of its statutory authority
because “Congress did not directly communicate its desire.”
Id. at 1169. The issue in that case, whether BPA possessed the
authority to transmit non-federal power, highlighted a statu-
tory gap that Congress had not filled. Id. (“[N]one of BPA’s
four organic statutes explicitly grants BPA authority to trans-
mit non-federal power.”). Our judgment rested upon the
absence of contrary congressional directive and BPA’s gen-
eral “authority to run BPA like a business.” Id. at 1171. By
contrast, where Congress has spoken to an issue and BPA acts
inconsistent with Congress’s directions, we will not defer to
BPA’s judgment. See M-S-R Public Power Agency, 297 F.3d
at 844 (refusing to extend deference to BPA’s statutory inter-
pretation where Congress had clearly spoken to the issue).
4872   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   Finally, in Coos-Curry Electric Cooperative, Inc. v. Jura,
821 F.2d 1341 (9th Cir. 1987), BPA argued that its authority
under §§ 2(f) and 9(a) was so broad that the court was juris-
dictionally barred from hearing the case under 5 U.S.C.
§ 701(a)(2), which applies when agency action “is committed
to agency discretion by law.” Id. at 1345. We rejected BPA’s
argument. Id. at 1346. Section 701(a)(2) is a “narrow excep-
tion to judicial review” that applies only “ ‘in those rare
instances where . . . there is no law to apply.’ ” Id. (quoting
Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S.
402, 410 (1971) (citations omitted)). Or, expressed differ-
ently, when no law limits the exercise of administrative dis-
cretion, the courts have no standard to guide judicial review.
See id. We found that the “flaw” in BPA’s argument was that
there was law to apply. See id. at 1345-46. If BPA had an
unfettered power to settle claims, there might indeed be no
law by which we could judge the REP settlement. But, as in
Coos-Curry, we do have law that governs contracts for the
exchange of power, and we have to measure BPA’s settle-
ments against those constraints.

   [12] In sum, BPA is not excused from § 5(c) by calling its
actions here a § 2(f) “settlement.” Sections 5(c) and, by exten-
sion, 7(b) are triggered because what BPA seeks to settle out
of is the Residential Exchange Program. Settlement of BPA’s
REP obligations is thus directly related to, and inextricably
intertwined with, the authority conferred to it under § 5(c).
Indeed, § 5(c) is the express provision granting BPA the
power to exchange power instead of merely selling it at mar-
ket rates. See 16 U.S.C. § 832d. Without § 5(c), there are no
REP “claims” to be settled; and without REP claims, there
can be no “settlement.” Thus, whenever BPA engages in a
purchase and exchange of power—whether on a yearly basis,
under a REP program, or pursuant to a settlement agreement
—BPA acts pursuant to its § 5(c) authority, and is thus subject
to the Congressionally imposed limitations on that authority
as expressed in § 5(c) and § 7(b).
         PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER               4873
   [13] Because Congress has clearly spoken to the issue at
hand, we decline to afford BPA’s construction of § 2(f) Chev-
ron deference. Its position is neither consistent with the plain
language of its organic acts nor with general principles of
administrative law.20 BPA’s contract and settlement powers
must facilitate and be grounded in its substantive authority
contained in “this chapter.” 16 U.S.C. § 839f(a). “While we
generally accord substantial deference to BPA’s decisions
interpreting its organic statutes, extending such deference is
unwarranted where, as here, Congress has squarely addressed
the issue.” M-S-R Pub. Power Agency, 297 F.3d at 844.

B.     The Exercise of BPA’s Settlement Authority

   Although we have concluded that BPA’s settlement author-
ity is subject to the requirements of §§ 5(c) and 7(b) and that
BPA approached the REP settlement from a faulty legal
premise, we must examine BPA’s actions closely to deter-
mine whether in this case BPA exercised its settlement
authority in a manner that violates those requirements and is
contrary to law. In other words, we must review the REP set-
tlement to determine whether BPA’s misreading of its author-
ity was essential to its decision; or, stated yet again: whether
BPA in fact relied on its erroneous reading of the law. We
conclude that BPA ignored §§ 5(c) and 7(b) and that BPA’s
exercise of its settlement authority is inconsistent with the
NWPA.

   When determining traditional REP benefits—as it did in the
WP-02 rate case—BPA calculated the cost of the traditional
REP benefit and made a determination of the IOUs’ eligibil-
ity. Based largely on forecasted ASCs, BPA estimated that the
  20
    We note that we do not in any way rule on the legality of BPA’s set-
tlement authority when it settles out of contractual power obligations in a
manner consistent with the requirements of the NWPA. We simply hold
that BPA cannot bypass the requirements of §§ 5(c) and 7(b) altogether
when it settles out of purchase and exchange sale obligations.
4874   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
REP benefit would cost $240.6 million for the 2002-2006 rate
period, or $48 million per year. 2000 REP Settlement Agree-
ment ROD at 78. This figure was based on § 5(c) calculations,
as capped by the § 7(b)(2) ceiling. Id. at 78-81. According to
BPA’s calculations, only three IOUs were eligible for the
REP benefit: Portland General Electric, Puget Sound Energy,
and Pacificorp’s Utah Power & Light division. Of these three,
Portland General Electric and Puget Sound Energy were enti-
tled to some 98 percent of the benefits. See 2000 REP Settle-
ment Agreement ROD at 34.

   When it proposed settling REP claims, however, BPA pro-
ceeded very differently. First, it did not rely on ASCs.
Although BPA reviewed “[t]he IOUs’ most recent ASC
reports” in the WP-02 proceeding, BPA decided that it did not
have usable data to calculate ASCs for purposes of offering
a settlement. 2000 REP Settlement Agreement ROD at 37; see
also id. at 32. BPA explained that “[it] no longer receives cost
and load data from utilities through ASC filings as was previ-
ously required and provided under the RPSAs. BPA therefore
does not have information for precise determinations of ASCs
available.” Power Subscription Strategy, Administrator’s Sup-
plemental ROD (April 2000) at 26. More importantly, instead
of developing data from which ASCs could be calculated,
BPA rejected using current ASCs as the exclusive basis for
preparing its REP settlement proposal. Again, as BPA
explained: “[I]f BPA were to adopt [Puget Sound Energy’s]
proposed methodology [of using ASCs to allocate REP settle-
ment benefits], only a few IOUs would be allocated the large
majority of the total settlement amount. This conflicts with
BPA’s stated Power Subscription Strategy goal to ‘spread the
benefits of the Federal Columbia River Power System as
broadly as possible.’ ” 2000 REP Settlement Agreement ROD
at 81.

   BPA estimated the cost of REP settlement at $736 million
for the 2002-06 period—$496 million more than its WP-02
estimate of the cost of the REP benefit over the same rate
         PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER           4875
period. See id. at 49, 78. BPA explained the striking differ-
ence between BPA’s two estimates: BPA had used a different
methodology to determine who would be eligible for the REP
settlement. Instead of relying exclusively on ASCs, as it had
done when it estimated the costs of the REP program, BPA
had factored in three other variables: (1) a possible legal chal-
lenge to the 1984 methodology; (2) a possible challenge to the
PF Exchange Rate; and (3) future fluctuations in the energy
market. As BPA explained:

       [A] settlement of the REP would not be based solely
       on forecasted benefits using ASCs. . . . [T]here are
       a number of factors that must be weighed . . . , for
       example, possible revision of the ASC Methodology,
       market prices in relation to the viability of in-lieu
       transactions, and challenges to BPA’s PF Exchange
       rate.

2000 REP Settlement Agreement ROD at 67. This was a criti-
cal set of assumptions because each one served to enlarge the
group of IOUs eligible for the settlement and to increase the
benefits of those already qualified for the REP. For example,
whereas the WP-02 proceeding concluded that effectively two
IOUs were eligible for the REP benefit, after making its new
assumptions, BPA concluded that seven IOUs would be eligi-
ble for the REP settlement.21 Not only did BPA dramatically
revise its assumptions about ASCs to determine eligibility, it
ignored the ASCs entirely to decide how to allocate its settle-
ment. Instead of allocating the settlement through its tradi-
tional REP model, BPA proposed to allocate 1800 aMW total
power to the IOUs and then asked the public utility commis-
sions of Idaho, Montana, Oregon and Washington to negotiate
  21
    The seven were Avista Corp., Idaho Power Co., Montana Power Co.,
Portland General Electric, Puget Sound Energy and Pacificorp, which has
two divisions—Pacific Power & Light, serving Oregon and Washington,
and Utah Power & Light, serving southern Idaho—which we have counted
here as separate entities.
4876     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
a proposal for dividing the power among the IOUs. The PUCs
did, recommending to BPA that it increase the power allo-
cated to 1900 aMW, which BPA agreed to do. Id. at 12.

   The most significant of the assumptions BPA made was its
decision to consider the effect of a possible legal challenge to
its 1984 methodology. BPA hypothesized that the IOUs might
challenge BPA’s current ASC methodology and demand that
BPA revert to its 1981 methodology.22 By giving full effect to
this hypothesis, BPA estimated much higher ASCs for the
IOUs, which made more IOUs eligible for the REP benefit23
and increased the cost of the REP benefits payable to IOUs
already qualified for the program.24 The consequences of this
  22
      Similarly, BPA assumed it would lose any challenge to the way it cur-
rently calculates its PF Exchange Rate. BPA’s assumption entirely disre-
garded the likelihood that if BPA reduced the PF Exchange rate—thereby
increasing the REP benefits to qualified IOUs and making additional IOUs
eligible for the REP benefit—it would almost surely have increased BPA’s
liability for a REP benefit, thereby making it more likely that §§ 7(b)(2)
and (3)’s Rate Ceiling Test would trigger, and “when the 7(b)(2) rate test
triggers, the IOUs receive lesser benefits.” 2000 REP Settlement Agree-
ment ROD at 80. See Residential Purchase and Sale Agreements ROD at
21 (“Congress was well aware that section 7(b)(2) could result in the
reduction or complete elimination of Residential Exchange benefits for
utilities participating in the REP.”); id. at 19 (“Congress contemplated that
section 7(b)(2) could completely eliminate exchange benefits for utilities
with ASCs less than BPA’s PF Exchange rate.”).
   23
      For example, when BPA forecasted the ASCs of Pacific Power and
Idaho Power, it calculated they would not be eligible for the traditional
REP because their ASCs were less than BPA’s PF Exchange Program rate.
But, when BPA took into account the potential revision to the 1984 meth-
odology, BPA forecasted a 26 percent increase in Pacific Power’s and
IPC’s ASCs, thereby qualifying them for the REP benefit. See 2000 REP
Settlement Agreement ROD at 35-36. In other words, had Pacific Power
and IPC applied for the traditional REP benefit, even taking into account
anticipated changes in the energy market, they would not have qualified.
Yet, BPA found that they were eligible for the REP settlement.
   24
      This is so because eligibility and benefits are based on evidence that
an IOU’s ASC is greater than BPA’s PF Exchange Rate. As ASC
increases, more IOUs will become eligible and IOUs who have already
qualified for the REP benefit will get a higher payments:
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER               4877
assumption were enormous. BPA demonstrated this by re-
calculating the REP benefits under the 1981 methodology:

    If, as suggested by the IOUs, BPA were to revert to
    the 1981 ASC Methodology, REP benefits for the
    upcoming rate and contract periods would be dra-
    matically increased. Using a twenty-six percent esca-
    lation of ASCs to represent the 1981 ASC
    Methodology (the amount of average decrease in
    ASCs after adoption of the 1984 ASC Methodology)
    the average annual benefits for the five-year rate
    period would be approximately $323 million. Total
    REP benefits for the rate period would be $1.615 bil-
    lion. Even assuming in-lieu transactions for fifty per-
    cent of the exchangeable loads, average annual
    benefits would be $161.5 million and total REP ben-
    efits for the five-year period would be $807.5 mil-
    lion. These figures still exceed the amounts of the
    proposed settlements.

2000 REP Settlement Agreement ROD at 50; see also id. at 36
(“If the methodology is revised and exchanging utilities are
allowed to exchange greater costs, this would increase their
ASCs and exchange benefits.”); id. (“When BPA moved from
the 1981 ASC Methodology to the 1984 Methodology, the
ASCs for exchanging utilities were reduced by an average of
26 percent. Assuming that moving back to the 1981 ASC
Methodology were to increase ASCs by an average of 26 per-
cent, the would substantially increase exchange benefits.”).

      REP benefits are determined by the difference between a utili-
   ty’s ASC and the PF Exchange Program rate. Thus, if a utility’s
   ASC goes up, its REP benefits go up. If the PF Exchange Pro-
   gram rate goes down, the utility’s REP benefits also go up. While
   a utility might not be eligible for REP benefits because its ASC
   is lower than the PF Exchange Program rate, a reduction in the
   PF Exchange rate could make the utility eligible.
2000 REP Settlement Agreement ROD at 36.
4878     PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
   [14] What is unusual about BPA’s assumption is that there
was no existing legal challenge nor had BPA proposed chang-
ing its methodology.25 BPA had done nothing more than sug-
gest that it would “begin regional discussions of whether the
ASC Methodology should be revised.” 2000 REP Settlement
Agreement ROD at 50. BPA’s decision to revert to its prior
methodology is especially puzzling because its 1984 method-
ology was approved by FERC and this court some twenty
years ago. The 1984 methodology has been in place continu-
ously since then. See 16 U.S.C. § 839c(c)(7); Order No. 400,
Final Rule, 49 Fed. Reg. 39,293 (1984); Order No. 400-A, 50
Fed. Reg. 4,970 (1985). We reviewed FERC’s decision in
Pacificorp v. FERC, 795 F.2d 816 (9th Cir. 1986), and we
denied the IOUs’ petitions for review.26 BPA has not identi-
fied any problem in the 1984 methodology that it fears may
be exploited by those seeking to challenge it. Until BPA
adopts new regulations, FERC or this court disapprove the
existing regulations, or Congress changes the law, BPA is
bound by its regulations. See, e.g., Shalala v. Guernsey Mem’l
Hosp., 514 U.S. 87, 110-111 (1995) (holding that HHS is
  25
      At the time, BPA was not considering changes to its ASC methodol-
ogy. In fact, in its Power Subscription Strategy ROD, BPA expressly
stated that the current methodology would be used for any Residential
Exchange forecasts. Furthermore, BPA noted that the current Subscription
Strategy did not include a proposal for a new ASC methodology; such
changes, BPA noted, “require a separate public process involving consul-
tation with regional parties. Such a process would occur separately from
the Subscription process. The Subscription Strategy does not propose and
will not direct any changes to the ASC Methodology at this time.” Power
Subscription Strategy Administrator’s ROD at 27-28.
   26
      Specifically, we upheld “BPA’s ASC determinations in this case” but
declined to “sanction any permanent implementation” of BPA’s decision
to exclude certain costs. Pacificorp, 795 F.2d at 823. As we explained, the
statute “neither commands nor proscribes these adjustments in ASC meth-
odology.” Id. Accordingly, we did not approve BPA’s ASC methodology
for all time as a construction of the Act, but as a “question of policy.” Id.
at 821. We simply concluded that BPA retained discretion to exercise its
expertise to determine what should or should not be included in the ASC,
subject to FERC’s approval and our review.
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER      4879
bound by the rules it promulgates and cannot circumvent the
amendment process by substantive changes recorded in an
informal policy); Esch v. Yeutter, 876 F.2d 976, 991 (D.C.
Cir. 1989) (“It is well settled that an agency is legally bound
to respect its own regulations, and commits procedural error
if it fails to abide them.”); Am. Fed’n of Gov. Employees,
AFL-CIO v. Fed. Labor Relations Auth., 777 F.2d 751, 759
(D.C. Cir. 1985) (holding that an agency “seeking to repeal or
modify a legislative rule promulgated by means of notice and
comment rulemaking is obligated to undertake similar proce-
dures to accomplish such modification or repeal . . . . [U]ntil
it amends or repeals a valid legislative rule or regulation, an
agency is bound by such a rule or regulation.”); Dyniewicz v.
United States, 742 F.2d 484, 485 (9th Cir. 1984) (as amended)
(holding that agencies are bound by both procedural and sub-
stantive rules they promulgate); Panhandle E. Pipeline Co. v.
FERC, 613 F.2d 1120, 1135 (D.C. Cir. 1979) (holding that
FERC is bound by its regulations and does not have authority
to “play fast and loose with its own regulations.”).

   [15] In effect, then, BPA settled the REP program as if it
had changed its regulations, which it had not. While spreading
the benefits of cheap federal power as broadly as possible
may have been one of BPA’s goals in the Power Subscription
Strategy ROD, Congress did not confer on BPA the discretion
to create new regulatory schemes in pursuit of that goal. Con-
gress made clear that its primary purpose remained to protect
BPA’s preference customers and that any steps BPA took to
exchange power with non-preference customers could not
result in an increase in the preference customers’ rates. The
REP settlement does not reflect the current REP program, as
defined by BPA’s own regulations.

   [16] Finally, consistent with its view that its authority to
enter into the REP settlement rested on § 2(f) rather than
§ 5(c), BPA classified the costs of the REP as a “settlement
cost.” This permitted BPA to assess the cost of the REP settle-
ment as ordinary expenses to be incorporated into BPA’s gen-
4880   PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER
eral power rates. The net effect is that BPA’s preference
customers are paying for the REP settlement the same as
BPA’s other customers. This is in plain violation of the Rates
Adjustment Test, which guarantees preference customers
rates as if “no purchases or sales . . . were made [under the
REP program].” 16 U.S.C. § 839e(b)(2)(C). Section 7(b)(3)
specifically provides that such REP costs “shall be recovered
through supplemental rate charges for all other power sold by
the Administrator to all customers.” 16 U.S.C. § 839e(b)(3)
(emphasis added). BPA ignored its obligations under these
pressures.

                     V.   CONCLUSION

   We conclude that BPA ignored the exchange program that
Congress created in the NWPA and that BPA has imple-
mented through its regulations. BPA proceeded from a flawed
legal premise about its settlement authority, and its defense of
the settlement as consistent with the NWPA appears to be
post-hoc rationalization for BPA insisting on greater flexibil-
ity in designing a REP program than Congress was willing to
give it. Congress ordained one system; BPA appears to prefer
another. In saying this, we do not impugn BPA’s motives or
its business judgment. BPA itself has written that as “a result
of the implementation of the directives of the Northwest
Power Act,” “different customer classes may receive greater
or lesser benefits. . . . While it is unfortunate that some cus-
tomer classes may receive greater benefits than other cus-
tomer classes, BPA cannot unilaterally change the law.” 2000
REP Settlement Agreement ROD at 80. Yet, it appears to us
that, in an effort to spread its relatively cheap power across
the Pacific Northwest, BPA has done precisely that.

   We have recognized within this opinion that BPA has
broad authority to settle claims under the NWPA. We repeat:
flexibility inheres in compromises under that authority. Nev-
ertheless, BPA’s settlement does not resemble the REP pro-
gram created in §§ 5(c) and 7(b) that it purports to be settling.
       PORTLAND GENERAL ELECTRIC v. BONNEVILLE POWER     4881
Rather, BPA created a new residential exchange benefit sys-
tem under § 2(f) that better suited BPA’s goals. BPA’s actions
conflict with its governing statutes and regulations and are,
accordingly, “not in accordance with law.” 5 U.S.C.
§ 706(2)(A).

   For the foregoing reasons, we conclude that the settlement
agreements entered into between BPA and the IOUs are
inconsistent with the NWPA, and we grant the petitions. All
remaining motions are dismissed as moot.

  PETITIONS GRANTED.
