45 F.4th 1028
D.C. Cir.2022Background
- Mystic (a subsidiary of ExGen/Exelon) announced retirement of Mystic Generating Station’s units 8 & 9 (≈1,400 MW) after capacity obligations expired in May 2022; ISO New England found their loss would threaten winter reliability and the Everett LNG terminal.
- ISO New England and Mystic/ExGen filed a cost‑of‑service agreement (the Mystic Agreement) with FERC to retain Mystic 8 & 9 from June 2022–May 2024; FERC approved the Agreement with substantial modifications.
- Key contested modifications: application of the original‑cost test for Mystic 8 & 9’s rate base; choice of capital structure; allocation and recoverability of Everett (LNG terminal) costs including treatment of Everett’s acquisition price; scope of a full‑agreement true‑up; and a clawback provision for capital/repair expenditures.
- Two petitioning groups sought review in court: Mystic (challenging rate base, capital structure, Everett acquisition cost exclusion, and true‑up scope) and New England state regulators (challenging Everett cost allocation, exclusion from clawback, true‑up reviewability of revenue credits and tank congestion charges, and delay‑incentive issues).
- The court (per curiam) upheld FERC’s application of the original‑cost test, dismissed as moot Mystic’s capital‑structure challenge, affirmed FERC’s exclusion of Everett’s acquisition price from rate base, granted state petitions on Everett cost allocation and clawback jurisdictional reasoning, and remanded for clarification on true‑up revenue credit/tank congestion review and incentives to delay capital projects.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Rate base: applicability of original‑cost test | Mystic: original‑cost test inapplicable to merchant generators; 2012 merger valuation ($925M) should set rate base | FERC: precedent applies original‑cost test to cost‑of‑service conversions; sales history (2004 transfer in lieu of foreclosure) resets net book value | Court upheld FERC; application of original‑cost test was reasonable and consistent with precedent |
| Capital structure for ROE calculation | Mystic: use ExGen (immediate parent) capital structure | FERC: used Exelon’s structure (parent) as more representative | Moot — FERC later vacated its prior capital‑structure ruling (May 2022 Order); court dismissed challenge as moot |
| Everett operating‑cost allocation & jurisdiction | States: FERC lacks basis to burden ratepayers with Everett costs not caused by Mystic; 91% allocation to Mystic is arbitrary | FERC: Everett costs may be included as inputs to Mystic’s jurisdictional cost‑of‑service rate; allocation justified by tank‑management benefits and (initially) revenue crediting | Court rejected jurisdictional bar but found the 91% allocation arbitrary and capricious and remanded that portion to FERC |
| Everett acquisition price in rate base | Mystic: Everett purchase price should be included in Everett’s rate base (recoverable via Fuel Supply Charge) | FERC: excluded acquisition cost based on cost‑causation — acquisition benefited ExGen, not ratepayers | Court upheld FERC’s exclusion; Mystic failed to show acquisition price was properly chargeable to ratepayers |
| True‑up scope; revenue credits; tank congestion charges | Mystic: true‑up should not reopen pre‑2018 historic costs already litigated; States: request clarification whether revenue‑credit calculations and tank congestion charges can be challenged in true‑up | FERC: true‑up should cover the whole Agreement (except ROE); revenues not subject to true‑up; tank congestion review addressed inconsistently | Court denied Mystic’s claim re historic costs (true‑up proper). Court remanded for FERC to address States’ request to clarify whether revenue‑credit calculations and who may challenge tank congestion charges during true‑up |
| Clawback: inclusion of Everett costs; delay‑incentives | States: clawback should cover Everett costs and address incentives to delay capital projects into the Agreement term | FERC: excluded Everett costs from clawback, citing lack of jurisdiction over Everett; required only identification (not prohibition) of delayed projects | Court found FERC’s jurisdictional rationale arbitrary and capricious, vacated clawback portions re Everett and remanded for further explanation; also remanded on failure to address delay‑incentive argument |
Key Cases Cited
- New York v. FERC, 535 U.S. 1 (2002) (describing FERC jurisdiction over interstate wholesale sales)
- FERC v. Elec. Power Supply Ass’n, 577 U.S. 260 (2016) (limits on FERC authority to regulate rules that merely “affect” wholesale rates)
- New England Power Generators Ass’n v. FERC, 881 F.3d 202 (D.C. Cir. 2018) (FERC review to ensure rates are just and reasonable)
- NEPCO Mun. Rate Comm. v. FERC, 668 F.2d 1327 (D.C. Cir. 1981) (Commission may adopt any valuation method so long as result is just and reasonable)
- Mo. Pub. Serv. Comm’n v. FERC, 783 F.3d 310 (D.C. Cir. 2015) (acquisition premium does not raise net book value/rate base absent demonstrated benefits to ratepayers)
- Mont. Power Co. v. FERC, 599 F.2d 295 (9th Cir. 1979) (original‑cost accounting provides objective valuation and avoids subjective methods)
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (1983) (arbitrary and capricious standard requires reasoned explanation)
- Black Oak Energy, LLC v. FERC, 725 F.3d 230 (D.C. Cir. 2013) (cost‑causation principle: rates should reflect costs caused by the paying customer)
- BP West Coast Prods., LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004) (nexus requirement for cost recovery; costs must be tied to provision of service)
- Grand Council of Crees v. FERC, 198 F.3d 950 (D.C. Cir. 2000) (environmental and other off‑site costs can be recoverable under FERC ratemaking subject to normal rate review)