VERSO CORPORATION, PETITIONER v. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT MARQUETTE BOARD OF LIGHT AND POWER, ET AL., INTERVENORS
No. 15-1098
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Decided July 31, 2018
Argued April 6, 2018
Consolidated with 16-1205, 16-1212, 16-1226, 16-1228, 16-1385, 16-1388, 16-1389, 16-1391, 16-1397, 16-1404
On Petitions for Review of Orders of the Federal Energy Regulatory Commission
David W. D‘Alessandro argued the cause for petitioner Michigan Public Service Commission. William F. Demarest Jr. argued the cause for petitioners Tilden Mining Company L.C. and Empire Iron Mining Partnership. With them on the joint briefs were Kelly A. Daly, M. Denyse Zosa, Steven A. Neeley Jr., Sylvia J.S. Bartell, Lauren D. Donofrio, Assistant Attorney General, Office of the Attorney General for the State of Michigan, Jennifer U. Heston, Saulius K. Mikalonis, Christopher R. Jones, Elizabeth W. Whittle, Thomas J. Waters, Christine C. Ryan, Phyllis G. Kimmel, Robert C. Fallon, and Andrew B. Young. Steven D. Hughey, Assistant Attorney General, Office of the Attorney General for the State of Michigan, Francis A. Taylor Jr., and A. Hewitt Rose III, entered appearances.
Holly E. Cafer, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were James P. Danly, General Counsel, Robert H. Solomon, Solicitor, and Nicholas M. Gladd, Attorney.
William L. Massey argued the cause for intervenor Public Service Commission of Wisconsin. On the joint brief of intervenors were Cynthia S. Bogorad, David E. Pomper, Rory McGarry, Justin M. Vickers, Regina Y. Speed-Bost, and Debra Ann Palmer.
Before: ROGERS, SRINIVASAN and WILKINS, Circuit Judges.
WILKINS, Circuit Judge: In Louisiana Public Service Commission v. Federal Energy Regulatory Commission, 883 F.3d 929 (D.C. Cir. Mar. 6, 2018), this Court affirmed FERC‘s denial of refunds in a cost-allocation case, upholding its discretion to deny refunds where a flaw in rate design caused the costs to be borne disproportionately among customers. See 883 F.3d 929. This case presents a
We conclude that the reallocation at issue here does not constitute an impermissible retroactive rate increase. FERC reasonably determined that the prior rate methodology was unjust and unreasonable, and its reliance on certain evidence in reaching this conclusion was appropriate. Having established that the existing rate was unjust and unreasonable, and having determined that a different methodology would comply with cost-causation principles, FERC had authority to order refunds and corresponding surcharges under Section 206 and its broad remedial authority under Section 309. Accordingly, we deny the Petitions for review.
I.
This case involves system support resource (“SSR“) costs in the territory of the American Transmission Company (“ATC“) under the Midcontinent Independent System Operator, Inc. (“MISO“) Tariff. To ensure system stability, MISO requires energy producers in its territory to notify MISO prior to ceasing operation. MISO then evaluates the importance of the would-be retired facility and may require continued operation if necessary for the reliability of energy supply. Such providers are designated SSRs, and they are compensated for the cost of continued operation under SSR agreements with MISO.
For most of the MISO service area, SSR costs have long been shared by customers based on the load served. Midwest Indep. Transmission Sys. Operator, Inc. Pub. Utils. with Grandfathered Agreements in the Midwest Iso Region, 108 FERC ¶ 61,163, ¶ 61,968, P 372 (Aug. 6, 2004). Under this allocation methodology, each load-serving entity (“LSE“) pays for the reliability resources in proportion to its reliability needs.
For the ATC area, however, the MISO Tariff allocated SSR costs pro rata among all customers. See id. at P 368. FERC originally approved the ATC pro rata allocation as part of the separate tariff for ATC‘s territory in Michigan‘s Upper Peninsula and Wisconsin. See Wis. Elec. Power Co. Am. Transmission Co., LLC Madison Gas & Elec. Co. Wis. Pub. Serv. Corp. Wis. Power & Light Co., 97 FERC ¶ 61,337, 62,582 & n.4 (Dec. 21, 2001). However, FERC incorporated ATC into the MISO system around the same time that it approved ATC‘s SSR-cost-allocation methodology. See Am. Transmission Co., LLC, 97 FERC ¶ 62,182, ¶ 64,269 (Nov. 28, 2001). The MISO Tariff continued the pro rata allocation methodology for the ATC area after it became part of MISO. Specifically, Section 38.2.7.k of the Tariff provided that “any costs of operating an SSR Unit allocated to the footprint of [ATC] shall be allocated to all LSEs within the footprint of [ATC] on a pro rata basis.” See Midcontinent Indep. Sys. Operator, Inc. Pub. Serv. Comm‘n of Wis., 148 FERC ¶ 61,071, 61,443, P 12 (July 29, 2014) (“July 29, 2014 Order“). Only the ATC area was subject to such a specified methodology: for the rest of the MISO area, the Tariff provided only that reliability costs were allocated to the LSEs “which require[] the operation” of reliability resources. Id. at P 18. In other words, SSR costs for all non-ATC service areas were allocated to the LSEs that actually benefited from the reliability resources.
The instant Petitions arise from SSR agreements regarding three facilities in the ATC service area. MISO filed the first SSR agreement using the ATC pro rata allocation in October 2012, for the continued operation of a City of Escanaba, Michigan facility, which FERC accepted. See Midwest Indep. Transmission Sys. Operator, Inc., 142 FERC ¶ 61,170, 61,812, P 11 (Mar. 4, 2013). In early 2014, MISO filed an SSR agreement requiring the continued operation of a Presque Isle facility located in Marquette, Michigan, with costs allocated to customers pro rata. FERC accepted the proposed Presque Isle SSR Agreement on April 1, 2014. Midcontinent Indep. Sys. Operator, Inc., 147 FERC ¶ 61,004, ¶ 61,013, PP 5, 12 (Apr. 1, 2014). MISO also submitted an SSR agreement regarding the continued operation of a White Pine Electric Power, LLC unit, which FERC accepted on June 13, 2014. Midcontinent Indep. Sys. Operator, Inc., 147 FERC ¶ 61,199, 62,114, PP 1, 3, 11 (June 13, 2014).
On April 3, 2014, two days after FERC accepted the Presque Isle SSR Agreement, the Public Service Commission of Wisconsin (“Wisconsin Commission” or “PSCW“) filed a complaint under
On July 29, 2014, FERC granted the Wisconsin Commission‘s Complaint. See July 29, 2014 Order, 148 FERC 61,071. FERC concluded that the Wisconsin Commission “met its burden ... to show that the ATC pro rata cost allocation provision in MISO‘s Tariff is unjust, unreasonable, unduly discriminatory, or preferential because ... it does not follow cost causation principles.” Id. at P 59. Relying on the preliminary load-shed study, FERC reasoned that the pro rata allocation “would allocate 92 percent of the Presque Isle SSR costs to LSEs located in Wisconsin even though ... such LSES only receive 42 percent of the reliability benefit.” Id. at P 61. This evidence “demonstrat[ed] that the methodology d[id] not reflect a proper allocation of costs.” Id. FERC explained that the “preliminary nature of the load-shed study” was not problematic for its analysis because the data showed that “the current ATC pro rata cost allocation [] bears little, if any, relation to the benefits provided” from the reliability agreement. Id.
By way of remedy, the July 29, 2014 Order directed MISO to remove the pro rata provision from the Tariff, “thereby extending to the ATC footprint the general SSR cost allocation Tariff language, which requires MISO to allocate SSR costs to ‘the LSE(s) which require(s) the operation of the SSR Unit for reliability purposes.‘” July 29, 2014 Order, 148 FERC 61,071, P 66. FERC further determined that the assessment encapsulated in the preliminary load-shed study was appropriate, but required MISO to submit a final load-shed study within 30 days. Id. Finally, and most critically for this Petition, FERC ordered
Within weeks, FERC also addressed the Escanaba and White Pine SSR Agreements that similarly allocated costs on a pro rata basis. See Midcontinent Indep. Sys. Operator, Inc., 148 FERC ¶ 61,116, P 12 (Aug. 12, 2014) (“Escanaba Initial Order“); Midcontinent Indep. Sys. Operator, Inc., 148 FERC ¶ 61,136, P 7 (Aug. 21, 2014) (“White Pine Initial Order“). FERC directed MISO to conduct load-shed studies and submit revised proposals allocating the costs of continued operation of each of these units in accordance with the results. Escanaba Initial Order, 148 FERC ¶ 61,116, P 37; White Pine Initial Order, 148 FERC ¶ 61,136, P 44. FERC also ordered refunds dated to April 16, 2014, for White Pine and June 15, 2014, for Escanaba. See Pub. Serv. Comm‘n of Wis., 156 FERC ¶ 61,205, P 12 (Sept. 22, 2016) (“September 22, 2016 Order“).
MISO completed a second load-shed study as directed by the July 29, 2014 Order and submitted compliance filings regarding each of the three SSR facilities. Pub. Serv. Comm‘n of Wis., 150 FERC ¶ 61,104, PP 8-9, 12-13, 15-16 (Feb. 19, 2015) (“February 19, 2015 Order“). The second load-shed study attributed approximately 86 percent of the SSR benefits to Local Balancing Authorities (“LBAs“) located in Wisconsin. See J.A. 984-85. These results were far closer to the original allocation – where 92 percent of the costs were allocated to Wisconsin customers – than were the results of the preliminary load-shed study upon which the Wisconsin Commission Complaint and the July 29, 2014 Order relied.
FERC reviewed the compliance filings, among other proceedings, in an order dated February 19, 2015. See Pub. Serv. Comm‘n of Wis., 150 FERC ¶ 61,104. In the February 19, 2015 Order, FERC reaffirmed its prior finding that MISO‘s pro rata allocation of SSR costs in the ATC area was unjust, unreasonable, unduly discriminatory, or preferential under Section 206 of the Federal Power Act. Id. at P 2. During this time, MISO divided one of the LBAs that spanned areas of Michigan and Wisconsin to “provid[e] a more granular identification of reliability events in the Wisconsin-Michigan boundary area.” MISO Tariff Filing at 2, FERC Docket No. ER14-2952 (Sept. 26, 2014), J.A. 1163; see also Feb. 19, 2015 Order, 150 FERC ¶ 61,104, PP 17-18. Accounting for the newly divided LBAs, approximately 99 percent of the reliability benefits were attributed to Michigan LSEs, while Wisconsin LSEs received the remaining 1 percent. Feb. 19, 2015 Order, 150 FERC ¶ 61,104, P 19. FERC determined that MISO‘s proposed reallocation based on LBA boundaries “can produce results that are not consistent with MISO‘s Tariff or cost causation principles by failing to allocate SSR costs to the LSEs that benefit from those SSR Units.” Id. at P 2. Accordingly, FERC required further compliance filings allocating the costs from the Presque Isle, White Pine, and Escanaba SSR Units to the benefitting LSEs directly. Id. This required MISO to revise its study methodology to identify the LSEs relying on the SSR resources. Id. at P 113. By order dated May 3, 2016, FERC accepted MISO‘s revised SSR-cost-allocation methodology and ordered MISO to prepare a refund report describing how MISO would effectuate that methodology in the previously ordered refunds. Midcontinent Indep. Sys. Operator, Inc., 155 FERC ¶ 61,134, P 37 (May 3, 2016).
On September 22, 2016, FERC issued the final order under review in these Petitions. See Sept. 22, 2016 Order, 156 FERC 61,205. FERC denied requests for rehearing
Petitioners – customers “that paid too little” and are now subject to surcharges – challenge FERC‘s authority to impose surcharges as part of its remedy, contending that it amounts to an impermissible retroactive rate increase. They also contend that FERC‘s decision was arbitrary and capricious because the difference between the allocation rejected and the allocation ultimately approved was insignificant.
II.
“Under the Federal Power Act, [FERC] must ensure that all rates charged for the transmission or sale of electric energy are ‘just and reasonable.‘” Maine v. Fed. Energy Regulatory Comm‘n, 854 F.3d 9, 15 (D.C. Cir. 2017) (quoting
A.
Petitioners challenge FERC‘s determination that the pro rata methodology for distributing SSR costs was unjust and unreasonable, contending that there was no new evidence or change in circumstances to justify this conclusion, that the results of the final load-shed study undermined FERC‘s reasoning, and that FERC “fail[ed] to consider the historical basis” for that methodology, such that its orders
FERC must undertake a two-step inquiry regarding a Section 206 challenge. See Maine, 854 F.3d at 21. The first step involves reviewing the rate subject to a Section 206 complaint to determine whether it is unjust, unreasonable, unduly discriminatory, or preferential. Id. (citing
Petitioners contend that the preliminary load-shed study is not sufficient to support FERC‘s conclusion that the existing rate is unreasonable because the study merely confirmed the difference between a load-shed methodology and the pro rata methodology. Pet‘rs’ Br. 41-45.
Contrary to Petitioners’ view, FERC‘s determination that the pro rata methodology was unjust and unreasonable relied on new information not previously before the Commission. In one sense, the eventuality that two different methodologies would yield different results was reasonably known to the parties and FERC during the initial decision that the pro rata methodology was just and reasonable. But just because some difference between the results of these two methodologies is predictable does not make the information actually collected any less telling. See OXY USA, Inc. v. Fed. Energy Regulatory Comm‘n, 64 F.3d 679, 690 (D.C. Cir. 1995) (explaining that “[no] finding of unforeseeability is required before the Commission may reach the conclusion that a rate that was previously just and reasonable is no longer so“). The preliminary load-shed evidence demonstrated a sizable gap between the benefits accrued by each LSE and the allocated cost, supporting FERC‘s determination that the pro rata methodology did not comport with cost-causation principles. And the actual data underlying FERC‘s consideration was not before it in prior proceedings regarding the ATC SSR-cost-allocation methodology. As the February 19, 2015 Order noted, MISO did not previously require load-shed studies for SSR units in the ATC area – there was no need for this information in light of the pro rata allocation. See Feb. 19, 2015 Order, 150 FERC ¶ 61,104, PP 12, 15. In any event, the preliminary load-shed study regarding the Presque Isle, Escanaba, and White Pine units was new information about newly designated SSRs. That MISO could have collected similar information before designating these support resources does not detract from the new information available through the load-shed data underlying the Complaint, upon which FERC relied.
We also are unpersuaded by Petitioners’ argument that the final load-shed study defeats FERC‘s conclusion that the pro rata methodology was unjust and unreasonable. Petitioners point out that, according to the second study, the pro rata methodology was off by only about 6 percent with respect to the benefits received by Michigan and Wisconsin respectively. As an initial matter, the load-shed study that FERC actually accepted showed that the
Finally, we reject Petitioners’ contention that FERC failed to take into account the historical rationale for the ATC carve-out. See Pet‘rs’ Br. 48-53. To the contrary, FERC acknowledged the origins of the pro rata methodology as springing from ATC‘s cost-sharing philosophy and explained its conclusion that ATC‘s “original intent” in sharing costs was “not served by the pro rata sharing of SSR costs ... because decisions concerning the operational status of ... generation assets are not subject to the ATC transmission planning process.” July 29, 2014 Order, 148 FERC ¶ 61,071, P 65. FERC further addressed the historical basis for the ATC‘s pro rata allocation in its February 19, 2015 Order, reasoning that the new evidence related to cost causation undermined the propriety of that vestigial methodology. See Feb. 19, 2015 Order, 150 FERC ¶ 61,104, P 76. That FERC rejected then-protesters’ position – twice – does not mean that it failed to consider it. Accordingly, we defer to FERC‘s rate allocation determination as supported by substantial evidence and reasoned decision-making.
B.
Having concluded that FERC reasonably determined that the pro rata allocation was unjust and unreasonable under Section 206, we turn to Petitioners’ challenge relating to remedy.
Petitioners posit that the ordered surcharges effect a retroactive rate increase, violating Section 206 and the filed-rate doctrine. The Commission argues that because “[t]his is a cost allocation case,” the limitations surrounding retroactive rate changes do not come into play, and the remedy imposed here was otherwise within FERC‘s broad power to effectuate the FPA under Section 309. See Resp‘t‘s Br. 39-46. Because Section 206 contemplates surcharges in cost-allocation cases, FERC‘s orders here are within its remedial
i.
Section 206 defines FERC‘s authority when an existing rate is found unjust, unreasonable, unduly discriminatory, or preferential.
While Section 206‘s limitations and the filed-rate doctrine thus restrict the remedies that FERC may order, FERC‘s remedial authority is otherwise expansive. Section 309 of the FPA provides that
The Commission shall have power to perform any and all acts, and to prescribe, issue, make, amend, and rescind such orders, rules, and regulations as it may find necessary or appropriate to carry out the provisions of this chapter.
The reallocation of SSR costs, including through surcharges, is well within
Petitioners rely heavily on this Court‘s decision in City of Anaheim, California v. Federal Energy Regulatory Commission to argue that surcharges are unlawful, but that decision is inapt. See 558 F.3d 521 (D.C. Cir. 2009). City of Anaheim involved a Section 206 complaint by wholesale electricity generators alleging that the FERC-approved rate for must-offer generation was too low. FERC agreed, ordered a rate increase, and applied it retroactively, with surcharges to make up the difference. We rejected FERC‘s action as an impermissible retroactive rate change: long-standing precedent holds that rate changes may be prospective only. Id. at 523-25. Because the rate change increased what customers paid during the past period of depressed rates, it made no difference that FERC ordered the higher rates through forward-looking surcharges. City of Anaheim thus stands for the unremarkable proposition that FERC cannot order through surcharges what it could not otherwise accomplish directly. But reallocation is a different animal altogether, and the surcharges ordered here are part and parcel of that reallocation. As FERC explained in its September 22, 2016 Order, ”City of Anaheim involved the Commission‘s direct imposition of retroactive surcharges to effectuate a rate increase,” while in “the instant case [] the Commission has not changed the SSR rates.” Sept. 22, 2016 Order, 156 FERC ¶ 61,205, P 48. Because FERC‘s remedial authority allows for rate reallocation, and Section 206(c) buttresses this understanding, FERC‘s use of surcharges to effectuate the reallocation is squarely within FERC‘s authority.
Petitioners also argue that the Section 309 cases relied upon by FERC in its September 22, 2016 Order are distinguishable as involving error by the Commission. Pet‘rs’ Br. 38; Pet‘rs’ Reply Br. 7-8 (citing TNA, 857 F.3d at 360). But Section 309 grants FERC broad remedial power regardless of whether a mistake by FERC
ii.
Having established that FERC has the statutory authority to order a reallocation of SSR costs through refunds and surcharges, we next consider whether FERC acted within its discretion in doing so here. Petitioners argue that FERC previously “acknowledged that it has no authority to order retroactive surcharges,” making this action a departure from its ordinary policy. See Pet‘rs’ Br. 36. However, as Petitioners note, FERC consistently has construed its refund authority to be equitable and flexible, with appropriate remedies dictated by the circumstances. Id.
The circumstances here support FERC‘s decision to order refunds paid for by surcharges. In Louisiana Public Service Commission v. Federal Energy Regulatory Commission, a reallocation case like this one, this Court validated FERC‘s “previously muddled position” that “it has no generally applicable policy of granting refunds” where a rate has been unfairly allocated between multiple constituent payers, but “the utility has received no net over-recovery.” 883 F.3d at 932. As the Court explained, FERC‘s “default position” with respect to reallocation refunds
As FERC explained in the September 22, 2016 Order, neither of these circumstances are present here. First, there is no risk of “under-recovery” because “MISO has a record of the SSR costs paid by each LSE ... and [] can calculate the exact amount of SSR costs that should be assessed to each LSE that underpaid in order to refund LSEs that overpaid” based on the revised methodology. Sept. 22, 2016 Order, 156 FERC 61,205, P 47. MISO‘s LSE customer population has not changed, so the calculation of over- and under-payments does not present any concern of inequitable recovery. Second, no challenger “identified any particular decisions made in reliance on the previous SSR cost allocation methodology.” Id. at P 45. While parties protesting the retroactive application of the changed rate design argued that the reallocation “create[d] market uncertainty” by disrupting “sellers’ expectations,” FERC concluded that because “SSR cost-allocation is an out-of-market process,” “there are no markets involved, there is no undermining of those markets, nor is there previous market conduct that would have been adjusted to account for eventual refunds.” Id. at P 46. In other words, because the SSR costs cannot be avoided, changing rate design does not implicate market-reliance concerns.
FERC‘s rationale for distinguishing the reallocation at issue here is particularly compelling in light of the unique nature of the SSR agreements at issue. Reliability resources are so designated because they are essential to the reliability of the system‘s energy supply, and SSR agreements are accomplished in short order so as to avoid any gap in coverage. As the Commission explained in its September 22, 2016 Order, SSR agreements “must go into effect quickly to ensure that the resource continues to operate,” and without an agreement in place, a designated unit “would otherwise have provided SSR service on an uncompensated basis while the required Tariff process took its course.” Sept. 22, 2016 Order, 156 FERC ¶ 61,205, P 52. In addition, MISO is a non-profit that itself lacks any funding to cover the costs of refunds to the LSEs that paid too much. See Wis. Pub. Power, Inc. v. Fed. Energy Regulatory Comm‘n, 493 F.3d 239, 245 (D.C. Cir. 2007). Accordingly, there was no over-recovery due to the pro rata methodology that would have resulted in a surplus in MISO‘s hands. See Sept. 22, 2016 Order, 156 FERC ¶ 61,205, P 42 (discussing La. Pub. Serv. Comm‘n & the Council of the City of New Orleans, 155 FERC ¶ 61,120 (Apr. 29, 2016)). The only way that FERC‘s ordered refunds may be accomplished is by collecting the necessary funds from MISO‘s customers. As the Commission reasoned, it is equitable that those customers receiving a windfall from the pro rata methodology pay it back to effect the reallocation.
FERC‘s consideration of these “relevant, significant facts” distinguished its approach in this case from its usual policy and the precedent it set in other cases. Cf. PG&E Gas Transmission, Nw. Corp. v. Fed. Energy Regulatory Comm‘n, 315 F.3d 383, 388-90 (D.C. Cir. 2003). Accordingly, we are satisfied that FERC‘s atypical remedy in this case reflects a reasoned decision-making process and was within the Commission‘s discretion.
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