Transmission Owners Prevail Shedding Doubt On FERC’s Refusal To Authorize Rate Of Return For Major Generator Interconnection Upgrade Projects
Transmission owners prevail shedding doubt on FERC’s refusal to authorize rate of return for major generator interconnection upgrade projects. On January 26, 2018, the D.C. Circuit Court of Appeals vacated and remanded five FERC orders that rejected Transmission Owners’ request to self-fund indirect interconnection upgrades of 345 kilovolts (kV) or greater (Network Upgrades), required to accommodate interconnection of a generator, seeking to interconnect directly elsewhere on the system. The immediate impact of the D.C. Circuit’s opinion in Ameren Services Company v. FERC (D.C. Cir. 2018) (“Ameren Services Co.”), is that FERC’s elimination of Transmission Owners’ unilateral right to self-fund direct Network Upgrades is vacated and therefore, currently has no legal effect. Judge Silberman, writing for the majority in a 2-1 opinion, ordered FERC to supplement its record on remand, to provide “reasoned consideration” as to whether risks in constructing indirect and direct Network Upgrades – risks like insurance coverage deductibles and the potential for environmental and reliability litigation are “baked in” to the Midcontinent Independent System Operator’s (MISO) pro forma Generator Interconnection Agreement (GIA) revisions it ordered. Although the court did not rule on the merits, it charged FERC to consider the effect of its orders on the ability of MISO Transmission Owners to attract future capital and satisfy the capital attraction standard as articulated by the United States Supreme Court in Hope. See FPC v. Hope Nat. Co., 320 U.S. 591 (1944).
Indirect Network Upgrades are those on the transmission system that do not physically and directly interconnect with the generator or (Interconnection Customer), whereas, direct Network Upgrades are those that physically interconnect with the Interconnection Customer. A Transmission Owner’s right to self-fund direct Network Upgrades had prescribed the Transmission Owner with authority to recover its development and construction costs from the applicable Interconnection Customer over time through periodic Network Upgrade charges inclusive of a rate of return on equity. Ameren Services Company, et al. v. FERC, at 7 (D.C. Cir. 2018). In 2014, MISO’s tariff did not empower Transmission Owners with the same authority to self-fund indirect Network Upgrades.
The FERC fight began back in 2014, when Border Winds Energy LLC, a 150 MW wind power project located in Rolette County, North Dakota, sought to interconnect to the MISO operated transmission system. Border Winds Energy, LLC (“Border Winds”) is situated within the Otter Tail Power Company’s (“Otter Tail”) service territory. Otter Tail is an electric transmission and distribution company based in Fergus Falls, Minnesota, serving wholesale and retail customers in Minnesota, North Dakota and South Dakota. In order to accommodate the Border Winds facility, MISO determined that Otter Tail would need to upgrade a portion of its 345 kV transmission system. The underlying upgrade, an indirect Network Upgrade for an Interconnection Customer, unveiled a matter of first impression for MISO and Otter Tail. MISO’s tariff was silent on what entity would be responsible to fund an indirect Network Upgrade. Seeing as MISO’s tariff permitted Transmission Owner funding for direct Network Upgrades Otter Tail requested that MISO allow it to also self-fund this indirect Network Upgrade. MISO obliged and submitted to FERC an unexecuted Facilities Construction Agreement identifying that Otter Tail would self-fund the development and construction of the applicable indirect Network Upgrades and that Border Winds would pay Otter Tail for the costs incurred inclusive of Otter Tail’s rate of return on equity. Border Winds protested this filing.
Separately, Otter Tail submitted a complaint against MISO pursuant to sections 206 and 306 of the Federal Power Act, arguing that MISO’s tariff could result in disparate treatment to Transmission Owners required to construct direct Network Upgrades versus indirect Network Upgrades. Otter Tail requested that FERC order MISO to revise its tariff so that Transmission Owners may unilaterally elect to self-fund indirect Network Upgrades in the same manner as it could fund direct Network Upgrades.
The Commission in its review of the Facilities Construction Agreement, hoisted Otter Creek “on its own petard[,]”as Judge Silberman observed, and sought to cure the disparate treatment by finding that Transmission Owner unilateral authority to self-fund direct Network Upgrades “may be unjust, unreasonable, unduly discriminatory or preferential because it…may result in discriminatory treatment by the Transmission Owner of different interconnection customers.” Midcontinent Independent System Operator, 151 FERC ¶ 61,220 (Jun. 18, 2015). FERC did not stop there, by the same order, it initiated a proceeding pursuant to its section 206 authority, resulting in a mandate where MISO was ordered to either modify its tariff or explain why the Commission’s views were incorrect. Adding insult to injury, FERC affirmed its findings made in the June order and applied the same in its order resolving the Otter Tail section 206 complaint proceeding. See Otter Tail Power Co. v. Midcontinent Independent System Operator, 153 FERC ¶ 61,352 (Dec. 29, 2015). FERC rejected another section 206 complaint lodged by Otter Tail, Ameren Services Company (“Ameren”), International Transmission Company (“ITC”), and the Indianapolis Power & Light Company (together “MISO Transmission Owners”). Otter Tail Power Co. v. Midcontinent Independent System Operator, 156 FERC ¶ 61,099 (Aug. 9, 2016). The Commission accepted MISO’s compliance filing, which complied with its order requiring the ISO to eliminate Transmission Owner unilateral self-funding and make such only available pursuant to mutual agreement. MISO Transmission Owners took one final swing at the Commission, which resulted in an order summarily denying rehearing, thus leading the long hard fought war to appeal.
On appeal, FERC argued for the benefit of generators in an attempt to defend its orders. First arguing that if Transmission Owners are permitted to unilaterally self-fund that they would possess the power to discriminate between Interconnection Customers. Judge Silberman dismissed this argument out of hand for wont of evidence, economic theory or logic. Ameren Services Co., at 14. The majority also maintained that Order No. 888’s open access rules would not permit such discrimination if such came to pass, and that the affected Interconnection Customers could petition FERC for relief. Id.
FERC also averred that such funding would be unjust and unreasonable under the Federal Power Act (FPA) because it would impose increased costs upon Interconnection Customers without any corresponding “increase in service.” Ameren Services Co., at 14. Again, the court’s majority found FERC’s argument flawed, exclaiming that generators could challenge costs imposed by interconnecting Transmission Owners as imprudent under section 206.
By admission of the parties and observed by the court, it is a foregone conclusion that generators would opt to self-fund interconnection Network Upgrades. The likelihood that a Transmission Owner and Interconnection Customer could mutually agree, thus permitting the Transmission Owner to self-fund is dubious at best. Transmission Owners made two critical arguments in support of their appeal. First, under Interconnection Customer self-funding, Transmission Owners would be compelled to incur risks that they are never compensated for, like insurance deductibles and the prospect of litigation. The Court agreed and found that “FERC inadequately considered…that all costs, and risks, are not baked in – that, in fact, shareholders are forced to accept incremental exposure to loss with no corresponding benefit.” Ameren Services Co., at 17-18. (Emphasis added). FERC’s consideration of such risks lacked the necessary weight desired by the court and thus FERC’s determination to skirt around such an analysis was found arbitrary and capricious. Id., at 18.
Second, Transmission Owners revealed that FERC’s orders sought to modify their entire enterprise or business model, into a non-profit business. Id. (Emphasis added). The court observed that “FERC seems to believe that transmission owners are simply not entitled to participate in funding the network upgrades, and importantly to earn a return on capital.” Id. The capital attraction standard articulated in FPC v. Hope Natural Gas Co., has stood the test of time and requires that a utility’s return “be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and attract capital.” (Emphasis added). Judge Silberman wants more from FERC to better understand how its determinations made satisfy Hope’s capital attraction standard. For instance, the court recognizes that investors “invest in entire enterprises, not just portions thereof; therefore, FERC must explain how investors could be expected to underwrite the prospect of potentially large non-profit appendages with no compensatory incremental return.” Ameren Services Co., at 19. The Court wants FERC to reconcile with Hope’s capital attraction standard, its requirement that the MISO Transmission Owners absorb risk and not earn a return on such risk, thus making this portion of its business unprofitable. Id., at 20. Importantly, insofar as FERC’s orders create an environment where “more and more of a transmission owner’s business is to be owned and operated on a non-profit basis, these additions would likely deter investors and diminish the ability of the transmission grid to attract capital for future maintenance and expansion.” Id., at 20.
Despite its thorough criticism of FERC’s orders and the shallow reasoning the agency relied on in support, the court saved its determination on the merits for another day. When the court remands “orders to FERC, two factors inform [its] decision whether to vacate: the gravity of the orders’ flaws, and the ‘disruptive consequences’ that may result. Black Oak Energy v. FERC, 725 F.3d 230, 244 (D.C. Cir. 2013) (quoting Allied-Signal v. Nuclear Regulatory Comm’n, 988 F.2d 146, 150-151 (D.C. Cir. 1993). The court does not seek to rule on the merits until FERC has responded to its questions on remand; however, it is “troubled by the prospect of allowing the orders to continue in [effect] in the interim.” Ameren Services Co., at 25. As a matter of prudence, the court reasoned that it does not want potentially unjust and unreasonable generator interconnection agreements or facility construction agreements consummated during this period of uncertainty. FERC’s decision on remand may help instruct and provide certainty to MISO, MISO Transmission Owners, Interconnection Customers, and notably, investors that seek to ascertain whether Transmission Owners may unilaterally self-fund direct and indirect interconnection Network Upgrades in the MISO region. If the Transmission Owners are permitted to unilaterally self-fund indirect and direct Network Upgrades for projects requiring voltages at levels 345 kV or greater, will FERC authorize sufficient assurance to inspire “confidence in the financial integrity of the [Transmission Owner’s] enterprise, so as to maintain its credit and attract capital[?]” FPC v. Hope Natural Gas Co., 320 U.S. 391 (1944).