913 F.3d 127
D.C. Cir.2019Background
- SDG&E sought a FERC declaratory order (two-step process) that it was eligible for the Abandonment Incentive (18 C.F.R. § 35.35(d)(1)(vi)) for its SOCRE transmission project, which would allow recovery of 100% of prudently incurred costs if the project is abandoned for reasons beyond the utility’s control.
- SDG&E had already spent roughly $31 million on the project over about four years before filing for the declaratory order and admitted those expenditures were made "without assurance of cost recovery."
- FERC granted eligibility prospectively (covering costs incurred after the effective date of the declaratory order) but held that pre-order sunk costs could only be treated under its prior 50/50 cost-sharing policy (Opinion No. 295).
- FERC’s rationale: the Abandonment Incentive is meant to facilitate future investment by hedging abandonment risk; it must be prospectively tailored (nexus test) and should not reward investments that occurred without reliance on the incentive.
- SDG&E petitioned for review in the D.C. Circuit arguing the Incentive Rule itself guarantees 100% recovery for the entire facility (including pre-order costs), and that FERC’s prospective-only limitation is contrary to the rule and arbitrary and capricious.
- The D.C. Circuit majority denied the petition, finding FERC’s prospective limitation consistent with the statute, the Incentive Rule’s nexus requirement, precedent, and agency practice; Judge Randolph dissented.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Abandonment Incentive authorizes recovery of pre-order sunk costs | SDG&E: the rule grants a fixed 100% recovery for the transmission facilities, so future abandonment should allow recovery of all prudently incurred costs including pre-order spending | FERC: entitlement depends on an applicant-specific order and the nexus must tie the incentive to investment decisions; incentive typically operates prospectively to encourage future investment | Held: FERC reasonably limited full Abandonment Incentive to costs incurred after the declaratory order; pre-order costs fall under Opinion No. 295 sharing absent a showing nexus was present for those costs |
| Whether the Incentive Rule itself is a binding "offer" entitling immediate recovery | SDG&E: the Rule’s language and availability create an entitlement to the incentive once project meets criteria | FERC: the Rule only lists incentives the Commission may approve when justified; actual entitlement requires an order showing the nexus and tailoring | Held: Rule is not self-executing; Commission reasonably requires case-by-case approval and nexus showing |
| Whether the two-step vs one-step procedures require retrospective coverage | SDG&E: one-step (Section 205) path shows rule contemplates post-abandonment recovery of all costs, so two-step declaratory timing cannot bar pre-order recovery | FERC: not every incentive fits both procedures; Abandonment Incentive functions as an ex ante hedge and typically requires declaratory approval for its incentive effect | Held: FERC reasonably treats procedural options differently by incentive; prospective approach does not nullify the one-step path for other incentives |
| Whether FERC departed from its prior practice aribtrarily | SDG&E: FERC previously granted pre-order costs in earlier cases without limitation; failure to reconcile is arbitrary | FERC: many prior orders did not face protest or expressly resolve the pre-order issue; agency addressed consistency and relied on more recent decisions applying prospective approach | Held: Court found FERC’s approach supported by record and not arbitrary given case-specific adjudication and precedent; petition denied |
Key Cases Cited
- Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (jurisdictional standing principle)
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (Article III standing requirements)
- Exxon Mobil Corp. v. FERC, 571 F.3d 1208 (aggrieved party standard under FPA review provision)
- Great Lakes Gas Transmission v. FERC, 984 F.2d 426 (economic injury from risk supports standing)
- Connecticut Dep’t of Pub. Utility Control v. FERC, 593 F.3d 30 (nexus test requires meaningful link to investment/consumer benefit)
- Me. Pub. Utils. Comm’n v. FERC, 454 F.3d 278 (prospective nature of incentive ratemaking acknowledged)
- ANR Storage Co. v. FERC, 904 F.3d 1020 (agency must justify treating similarly situated parties differently)