Court Tells FERC to Reconsider Its Rules on Self-Funding

Describing as “especially weak” the possible discrimination claims that the Federal Energy Regulatory Commission (FERC) had relied upon as the basis for a series of five decisions in which it had revised its rules on the self-funding of electric transmission facility improvement projects, the U.S. Court of Appeals for the District of Columbia Circuit has vacated and remanded the orders. The five FERC decisions were all rendered in 2015 and 2016, and all of them pertained to new generation resources and concomitant transmission upgrades within the grid administered by the Midcontinent Independent System Operator (MISO).

As background, the court related that when a new source of electric generation seeks to connect to the existing transmission network, upgrades to the transmission facilities are often required so as to accommodate the greater flow of electricity. Historically, the court said, MISO’s tariffs had provided transmission owners (TOs) with two options for financing such upgrades.

Under the first, the TO could elect to have the interconnecting generator (IG) pay for the improvements on its own. Under that scenario, because the TO would not be investing capital of its own in the upgrades, the new facilities would not be reflected in the TO’s rate base and neither would the TO earn a return on the assets.

The second option, however, would permit the TO to self-fund the improvements and then recover most of the cost from the IG over time. Pursuant to this alternate means of funding, the TO would be able to secure both a return of its capital (up to a limit of 90% of its expenditures, depending on capacity) and a return on its capital.

However, the court noted, the choice among funding options was available only to a TO having facilities with which the IG could directly interconnect. Indirectly connected TOs were precluded from deciding which means of funding to follow. One such TO petitioned MISO to relax its rules to place directly connected TOs and indirectly connected TOs on the same footing. Although MISO acceded to the request, an IG objected, and the matter ended up before FERC.

In that proceeding, the complainant TO alleged that the disparity between funding options under MISO’s original regulations for directly connected versus indirectly connected TOs was unjust and unreasonable. FERC concurred that the differential treatment was unsupportable.

However, rather than resolving the discrepancy by affirming that both types of TOs should be able to choose from among the same funding options, FERC removed that choice from all TOs, bestowing the right to select a funding option on IGs alone. In the parlance of the court, the complaining TO was “hoist on its own petard.”

In explaining its decision, which FERC went on to replicate in other similar cases, the commission stated that allowing TOs the option of self-funding any transmission upgrades necessary for accommodating increased production from a new IG opened the door to discriminatory practices. According to FERC, a TO could be tempted to discriminate among prospective generators, especially if the TO also possessed generation assets of its own. FERC thus held that IGs should be the ones to decide who would get to self-fund any requisite transmission improvements.

In appealing FERC’s selffunding orders to the circuit court, the petitioning TOs pointed out that IGs could now finance new transmission additions solo, thus becoming entitled to a return on the facilities, but then could foist ongoing operation of the assets on the TOs. The plaintiffs argued that they thus would be required to exercise managerial control over transmission facilities over which they had neither construction control nor economic input., leaving them without even the benefit of earning a return on the facilities.

More particularly, the complainant TOs contended that they were being relegated to acting as “nonprofit managers” of transmission “appendages.” They asserted that FERC’s orders meant that they would be operating “risk-bearing additions to their network with zero return.” The appellants averred that FERC’s new approach to self-funding had left the TOs facing an increased risk but receiving no commensurate increase in return.

The plaintiffs also disputed FERC’s claims about the possibility of discrimination if the choice among funding options were returned to the TOs. They drew attention to the fact that FERC’s concerns about TOs with generating assets being apt to discriminate among new IGs was wildly misplaced, especially since only one of the petitioning TOs still owns a generating plant. Moreover, the complainants maintained that as the markets are structured today, they would have no economic incentive to discriminate. They charged that FERC had provided absolutely no evidence in support of its claims of potential discrimination.

The appeals court agreed with the TOs, finding that FERC’s stance on the possibility of discrimination, let alone the likelihood of it, defied logic. The court pointed out that the broad trend around the country has been for those TOs still owning generation assets to divest themselves of such facilities. The court admonished the commission for essentially treating discrimination by TOs as a foregone conclusion without offering even a scintilla of evidence to support that position.

The court expressed consternation that the end result of FERC’s orders was that the entire business model for TOs was under “attack” and could be disrupted. The court said that it saw merit in the TOs’ arguments that they were being made to bear a disproportionate amount of the operational risk associated with requisite transmission upgrades without receiving any form of compensation in return.

The court underscored the fact that absent some assurances of an ability to earn a return on capital, the incentive for new investments in transmission capacity may be deterred. Inferring that FERC was showing an unwarranted preference for generation owners at the expense of transmission owners, the court instructed FERC to review its prior holdings and, if it chooses not to revise the self-funding options once again, to provide a more comprehensive analysis of the reasons for its conclusion that IGs alone should be able to select from among the self-funding options. Ameren Services Co. et al. v. Federal Energy Regulatory Commission, Nos. 16-1075 et al., Jan. 26, 2018 (D.C. Cir.).