Appeals Court Upholds RTO Integration Rate Design

A federal appellate court has sustained a 2014 Federal Energy Regulatory Commission (FERC) ruling that addressed the sharing of “legacy” facility costs among participants in the Southwest Power Pool (SPP), a regional transmission organization (RTO) that prior to 2014 encompassed eight states in the lower Midwest section of the country, with the RTO overseeing approximately 50,000 miles of electric transmission lines.

The issue before the FERC was how to allocate the costs of another 9,500 miles of transmission lines in the Upper Great Plains Region, which facilities were added to the SPP region as part of what was known as the Integrated System (IS). The FERC order pertained to how those costs were to be apportioned as between SPP’s previously existing member utilities and those that joined the RTO subsequent to execution of an ISrelated interconnection agreement. The Kansas State Corporation Commission (SCC), representing Kansas power consumers, filed suit before the U.S. Court of Appeals for the District of Columbia Circuit, claiming that in accepting SPP’s proposed changes to its post-IS open access tariff, the FERC had wrongly accepted a rate structure that failed to account for the use of the facilities by all SPP participants, to the detriment of Kansas consumers. More specifically, the Kansas SCC argued that because the IS agreement assigned no costs of SPP’s previously existing facilities to its new IS partners, the RTO got “taken for a ride.”

In objecting to the manner in which the IS parties agreed to allocate the costs of SPP’s legacy facilities, the Kansas commission noted that the transmission rate design relied upon by the parties employed a “need by date” method of allocating costs rather than one based on actual current usage. According to the SCC, the tariff approved by the FERC accepted that need by date construct, such that the various plant and facilities would continue to be paid for by the utilities depending on whichever pre-integration entity—SPP or the IS parties—had planned and built them.

The Kansas commission contended that by accepting those provisions, the SPP lost out on benefits potentially afforded by an alternative allocation system, which would have charged legacy costs in the SPP region to the IS parties as well. The Kansas SCC informed the court that it had provided the FERC with expert witness calculations indicating that the forgone benefits “swamped” SPP’s estimate of the transaction’s benefits to SPP — $334 million over ten years. The state commission added that its expert witness had estimated that SPP would have received another $475 million in revenue under a system in which the IS parties were required to help pay for use of SPP legacy facilities. The court, however, denied the SCC’s challenge and said it concurred with the FERC’s conclusion deeming the IS parties’ plan a practical, reciprocal cost allocation approach for facilities in service before the date of integration.

To that end, the court pointed out that the FERC had provided a thorough explanation of its decision, which was premised in part on a finding that the authorized apportionment protocol reflected the fact that both SPP’s prior investment decisions and its construction projects had been undertaken for the principal purpose of supporting load within each sub-region in the RTO’s pre-IS territory. Highlighting the reciprocity features of the IS arrangement, the court cast doubt on the testimony from the Kansas SCC’s expert that SPP left $475 million in integration benefits “lying on the table.”

To the contrary, the court found that the record indicated there was no reason to believe that the IS participants would have agreed to share in SPP’s legacy facility costs without demanding that the RTO’s pre-IS members do the same in return with respect to IS investments and costs. Nevertheless, the court acknowledged that an arrangement could be reciprocal and yet violate critical norms of rate making. Responding to such concerns, the court held that apart from mistakenly trying to reevaluate the integration transaction on the basis of an alternative rate allocation not shown to have been plausible, the SCC had predicated its claim, in part, on challenging a cost study that had been commissioned by the IS parties and supported by the SPP. Importantly, the court stated, although the Kansas SCC had contested the study, it did so without ever actually examining the report.

Indeed, the court refuted as decidedly exaggerated the SCC’s assertions that it never had access to the study for its own independent review. According to the court, the SCC was offered a redacted electronic version of the report but failed to take advantage of the opportunity to look at it before the original FERC proceedings began. State Corporation Commission of the State of Kansas v. Federal Energy Regulatory Commission, No. 15-1447, Nov. 28, 2017 (D.C. Cir.).