880 F.3d 571
D.C. Cir.2018Background
- MISO (an RTO/ISO) revised its tariff allocating 90–100% of network-upgrade capital costs to interconnecting generators; transmission owners could previously choose between “generator funding” (generator fronts capital; TO gets limited credits and no rate-base return) and “transmission owner funding” (TO funds and recovers costs plus a return).
- Dispute arose when Otter Tail sought the option to elect transmission-owner funding for indirectly triggered upgrades; MISO sought parity between direct and indirect upgrades. FERC instead removed the TOs’ unilateral option to choose transmission-owner funding, requiring generators the option to self-fund.
- FERC justified its orders on two grounds: (1) allowing TOs to choose transmission-owner funding could enable discriminatory treatment of different interconnection customers; and (2) forcing generators to accept TO funding could impose unjust and unreasonable charges (generators should be allowed to seek potentially cheaper financing).
- Petitioning transmission owners challenged both rationales, arguing (a) no evidence or economic incentive supports a discrimination finding for non-vertically-integrated TOs, and (b) FERC’s orders force TOs to own/operate generator-funded upgrades without compensatory returns or recovery for incremental risks, potentially impairing their ability to attract capital.
- The D.C. Circuit panel agreed that FERC’s discrimination theory lacked evidentiary and economic support as applied to non-affiliated TOs and concluded FERC failed to adequately address TOs’ “entire enterprise” / uncompensated-risk argument; the court vacated the orders and remanded for further explanation.
Issues
| Issue | Petitioners' Argument (Transmission owners) | Respondent's Argument (FERC) | Held |
|---|---|---|---|
| Whether allowing TOs unilateral election of transmission-owner funding creates unlawful discrimination among generators | No evidence or incentive for discrimination where TOs lack affiliated generation; systemic discrimination theory unsupported | Allowing TOs to choose can let them impose higher charges on some interconnection customers and deprive generators of financing options—creating potential undue discrimination | Court: FERC failed to show evidence or economic logic of discrimination for non-vertically-integrated TOs; discrimination rationale weak as applied here |
| Whether forbidding TOs from insisting on transmission-owner funding is unjust and unreasonable under the FPA (confiscation/nonprofit concern) | Orders force TOs to construct/operate generator-funded upgrades without rate-base inclusion or return, shifting uncompensated incremental risks and harming ability to attract capital | Generators bear financing/ construction risk under generator funding; TO investors not exposed to that risk so a return tied to that risk is unnecessary; generators have incentive to seek low-cost funding | Court: FERC did not adequately address TOs’ “entire enterprise” / uncompensated-risk argument; remand required for reasoned analysis |
| Whether alleged uncompensated operational, environmental, reliability risks are already "baked in" and recoverable later under Section 205 | Many risks (fines, liabilities, insurance deductibles, long-term operational exposure) are not necessarily recoverable; future Section 205 relief may be inadequate | TOs recover operations and non-capital costs through transmission rates; if TOs can demonstrate uncompensated costs they can seek relief later | Court: FERC failed to meaningfully analyze whether those risks are uncompensated or unrecoverable; Section 205 remedy cannot substitute for reasoned adjudication now; remand appropriate |
| Remedy: vacate vs. remand only | Leave orders in place risks disruptive investment and stranded projects while FERC reconsiders; merits uncertain so vacatur warranted | FERC argued review premature and that future rate filings could address compensation; also conducting separate rulemaking on interconnection costs | Court: Vacated the orders and remanded because (i) prejudice/disruption from allowing orders to stand counseling vacatur and (ii) FERC must answer the identified deficiencies on remand |
Key Cases Cited
- Hope Natural Gas Co. v. FPC, 320 U.S. 591 (1944) (regulated rates must allow a utility’s opportunity to attract capital; balancing investor and consumer interests)
- New York v. FERC, 535 U.S. 1 (2002) (recognizes risk of discriminatory behavior by vertically integrated transmission owners)
- Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 475 F.3d 1277 (D.C. Cir. 2007) (describing Order No. 2003 and post-divestiture landscape)
- Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004) (context on RTO development and divestiture)
- PSEG Energy Res. & Trade LLC v. FERC, 665 F.3d 203 (D.C. Cir. 2011) (agency must respond to significant arguments or risk arbitrary and capricious decisionmaking)