High Noon in the 7th Circuit

The U.S. Court of Appeals for the Seventh Circuit will soon have its second opportunity to weigh in on the attempt by the Federal Energy Regulatory Commission (FERC) to spread the costs of high-voltage transmission facilities across the regional market administered by PJM Interconnection LLC (PJM). The court’s ruling will have implications for the manner in which the costs of transmission facilities are allocated in the future, not only in PJM, but throughout the country.

In a 2009 case, a majority opinion written by Judge Richard Posner struck down a FERC decision to require the allocation of the costs of high-voltage facilities across the PJM region based on generalized claims about the benefits that such facilities confer on all users of the grid. The court held that FERC’s rationale was contrary to the “cost-causation principle” that underlies all rates established by FERC – and most other utility regulators – that “rates must reflect to some degree the costs actually caused by the customer who must pay them.”

In the orders under review, FERC rejected PJM’s formula for allocating the costs of new transmission facilities operating at 500 kilovolts or above based on power flows caused by existing loads. While FERC found that the costs of facilities below this threshold should continue to be based on a “beneficiary pays” modeling methodology, FERC determined that facilities operating at 500 kV or above provide “broad regional” benefits and therefore their costs should be allocated on a postage-stamp basis under which all transmission customers pay a uniform rate per unit-of service. A number of parties appealed FERC’s decisions on the basis that it would impose significant costs on utilities in western PJM despite the fact that facilities operating at 500 kV or above tend to be built in eastern PJM.

On appeal, although Posner conceded in principle that western utilities and their customers could benefit from higher-voltage facilities in the east due to the fact that new transmission reduces the risk of reliability issues affecting the entire network, the court took issue with the fact that FERC had made no effort to provide an estimate of those benefits or to compare these benefits to the costs that the utilities would bear. Posner explained that the cost-causation principle bars FERC from authorizing “a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members.” According to the court, FERC was required to have “an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities’ share of [costs]” and could not use the presumption that facilities create network benefits to avoid the duty of “comparing the costs assessed against a party to the burdens imposed or benefits drawn by that party.”

In its March 22, 2013 order on remand, FERC reiterated its belief that transmission facilities operating at 500 kV or above create system-wide benefits, thus warranting broad cost allocation. Despite Posner’s reference to FERC’s duty to compare the “costs assessed against a party,” FERC dismissed arguments that the court’s decision required FERC to compare the costs and benefits to each utility or even to western utilities as a group. FERC maintained that the cost causation principle is satisfied so long as these facilities provide significant benefits to all members of PJM. Within a week of the Commission’s decision, a Petition for Review was filed in the 7th Circuit.

Whether the court will now accept FERC’s rationale will be an indication of the extent to which there is wiggle room in the “cost causer pays” rule. Given that FERC’s decision effectively would require one western utility and its customers to contribute hundreds of millions of dollars to high voltage facilities in the eastern part of PJM based on a presumption of benefits, there is no doubt that how the court reacts to FERC’s decision will have significant cost implications for participants in PJM and perhaps other wholesale markets. EMI

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Dave Poe, a partner in the Washington, D.C., office of Bracewell & Giuliani LLP, has more than 35 years' experience providing administrative, regulatory, and multi-jurisdictional litigation representation and advice to infrastructure clients. Stephen Hug, an associate in the firm’s Washington, D.C., office, represents clients in matters related to federal policies, regulations and rules applicable to the electric industry.

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