United States Court of Appeals, District of Columbia Circuit
September 22, 2017
Petitions for Review of Orders of the Federal Energy
Christopher R. Jones argued the cause for petitioners. With
him on the briefs was Kurt H. Jacobs.
E. Cafer, Senior Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were David L. Morenoff, General Counsel, and Robert H.
A. Grabow, Jennifer Brough, and Gene Grace were on the joint
brief for intervenors American Wind Energy Association, et
al. in support of respondent.
Before: Rogers and Tatel, Circuit Judges, and Silberman,
Senior Circuit Judge.
Silberman, Senior Circuit Judge.
new sources of power generation connect to the existing
transmission grid, the grid often requires new construction
beyond the point of interconnection in order to accommodate
the increased flows of electricity. FERC issued a series of
orders empowering incoming generators within the Midcontinent
Independent System Operator (MISO) region to elect to
self-fund this new construction, or to seek financing from
third parties, regardless of whether the current grid owners
wish to fund the construction themselves.
Commission justified the orders on two grounds. First, it
found that allowing transmission owners to choose between
funding options - and thus, potentially, to impose subsequent
charges to generators via transmission owner funding - could
allow the transmission owners to discriminate among
generators. Secondly, it held that the charges to generators
would be (or could be) unjust and unreasonable under the
Federal Power Act. Petitioning transmission owners challenge
both grounds. We conclude that Petitioners are correct
regarding the discrimination point: there is neither evidence
nor economic logic supporting FERC's discriminatory
theory as applied to transmission owners without affiliated
second ground raises a unique and important conceptual issue.
Petitioners argue that involuntary generator funding compels
them to construct, own, and operate facilities without
compensatory network upgrade charges - thus forcing them to
accept additional risk without corresponding return as
essentially non-profit managers of these upgrade facilities.
We do not think that FERC adequately responded to this
argument. We therefore remand the case to the Commission.
previously explained the series of steps FERC took to
unbundle the electric power system, enabling and encouraging
new independent generators to create a competitive market for
power generation. Transmission owners, which had previously
served their own vertically integrated sources of power
generation, were obliged to accept power from any source on a
independent generators to utilize the grid, they must first
connect to it. FERC thus used its rulemaking powers to issue
Order No. 2003, which standardized the procedures for
generator interconnection and directed each transmission
network to maintain a pro forma generator
interconnection agreement. Order No. 2003 also established the
"at or beyond" rule, which distinguished between
two types of new construction necessary to connect new
generation sources into the grid. See Nat'l Ass'n
of Regulatory Util. Comm'rs v. FERC, 475 F.3d 1277,
1284-86 (D.C. Cir. 2007). The first category, called
"interconnection facilities, " includes those
facilities and equipment that lie between the generation
source and the point of interconnection with the transmission
network. Under the "at or beyond" rule, the cost of
interconnection facilities are the sole responsibility of the
incoming generator. That allocation of costs is undisputed in
this proceeding. And Petitioners do not own or manage those
"interconnection facilities." The second category
includes those additional facilities and equipment that are
needed beyond the "point of interconnection" - in
other words, any new construction that occurs within
Petitioners' transmission grid itself to accommodate the
incoming flows of new power. This latter category of
construction, called "network upgrades, " is the
focus of the present dispute.
have also explained, FERC encouraged the creation of Regional
Transmission Organizations (RTOs) to integrate the fragmented
transmission grid on a regional basis, along with Independent
System Operators (ISOs) as non-profit entities which would
control access to the grid within their respective regions.
Wisconsin Public Power, Inc., 493 F.3d at 247. In
Order No. 2003, the Commission set a default rule that
transmission owners would bear responsibility for the network
upgrades, but gave ISOs "flexibility to customize its
interconnection procedures and agreements to meet regional
needs." Order No. 2003 at P 827; id. at P 676.
In this case, we encounter MISO, which qualifies as both an
RTO and an ISO.
MISO had allocated the costs equally between the incoming
generator and the transmission owner. As such, under
transmission owner funding - which it could choose - the
transmission owner would initially provide the capital for
construction, but would recover 50 percent of that capital (a
"return of" capital), along with an appropriate
return on that capital, through network upgrade
charges. It would fund the other 50 percent of the costs by
passing them on to all of its customers through its rates -
again, including an appropriate rate of return. Under
generator funding, the generator would initially provide the
capital for construction, and would receive 50 percent of
that capital from the transmission owner through credits for
transmission service. E.ON at P 3.
problem arose: this 50/50 arrangement placed most of the cost
burden on the pricing zone where interconnection occurred,
but the power from the new generation sources often exceeded
the load within those local zones in which they connected.
Midwest Independent Transmission System
Operator, Inc., 129 FERC ¶ 61, 060, at P 7
(2009) ("MISO Tariff Amendment"). As a
result, the local customers of the transmission owner bore a
disproportionate share of the cost burden of upgrades that
supported power that would ultimately benefit more remote
customers throughout the MISO region. Id. at P 11.
Rather than forcing their local customers to shoulder this
regional burden, several local transmission owners threatened
to withdraw from MISO if the cost allocation remained
unchanged. Id. at P 10.
remedy this problem, MISO proposed (and FERC approved) a new
allocation of capital costs: for network upgrades rated at
345 kilovolts or above, the interconnecting generator bears
90 percent of those costs, and transmission owners (and their
local customers) bear 10 percent. In other words, the 10
percent would be included in the transmission owner's
rate base. For projects rated below 345 kilovolts, the
interconnecting generator bears 100 percent of the costs.
This reallocation was intended to comport with FERC's
"principle that network upgrades should be paid for by
the parties that cause and benefit from such upgrades."
MISO Tariff Amendment at P 3.
manner in which the incoming generator and transmission owner
actually pay these capital costs depends upon the way the
network upgrades are funded. Originally, the MISO tariff
contained three options for providing the capital required to
construct the network upgrades. We need not discuss the first
because it was removed by the Commission in its E.ON
the second alternative, Option 2 or "generator funding,
" the interconnecting generator would provide the
funding for the network upgrades prior to construction. The
transmission owner would not refund this capital to the
interconnecting generator, and would neither include the
capital in its rate base nor charge the interconnecting
generator a return on that capital. In short, generator funding
means the owner of the transmission grid neither pays for,
nor earns a return upon, the new construction that takes
place within its network.
the third alternative, "transmission owner funding,
" the transmission owner pays for the construction of
the upgrades to its network and then recovers the incoming
generator's portion of the cost burden over time through
periodic network upgrade charges that include a return on the
capital investment. These network upgrade charges are paid
from the incoming generator to the transmission owner over
the duration of the agreement. Importantly, they include
both a return of capital, which is the 90
percent cost reimbursement paid over time as the network
upgrades depreciate, and a return on capital. They
are thus economically equivalent to inclusion in the rate
base, with the exception that they are charged specifically
to the incoming generator rather than to all of the
transmission owner's customers. Any portion of the
upgrade costs that remains to be borne by the transmission
owner is then passed on to all of its customers through its
the Commission's E.ON decision, then, it was
clear that the transmission owner could choose between two
options - generator funding or transmission owner funding -
to finance construction of network upgrades when an incoming
generator sought to directly interconnect with its network.
further complicate the matter, however, the addition of new
generation sources can cause second-order effects across the
grid. Sometimes, in order to support flows of power from a
new source, network upgrades must be made by transmission
owners that do not connect directly to the incoming
generator. And in other instances, the coincidence of
multiple interconnection requests can create a need for a set
of common network upgrades, which enable the grid to support
the several incoming generators. In these two situations,
MISO's tariff did not initially permit transmission
owners to choose between funding options.
that disparity between the treatment of direct and indirect
network upgrades which gave rise to this case. In 2014, when
faced with the prospect of building network upgrades to
support an indirectly connected incoming generator, a
transmission owner named Otter Tail requested that MISO offer
it the same choice (between generator funding and
transmission owner funding) enjoyed by directly connected
transmission owners. MISO consented, and submitted an
agreement to FERC that would allow Otter Tail to elect
transmission owner funding. The incoming generator objected
to this request, preferring instead to utilize generator
funding for the network upgrades that would be needed to
support its power.
Tail also filed a complaint under Sections 206 and 306 of the
Federal Power Act. It contended that the disparity between
directly connected transmission owners (who could choose to
fund the upgrades to their networks) and indirectly connected
transmission owners (who could not choose transmission owner
funding) rendered MISO's tariff unjust and unreasonable.
Otter Tail requested that FERC order MISO to bring all
transmission owners into alignment by modifying its tariff to
allow the choice of transmission owner funding for indirect
Commission agreed with Otter Tail that this disparity was
unsupportable. In its June 2015 Order,  the first of the
orders under review in this case, it found that because
"the funding and construction obligations are equal
whether the connection of a new generator is direct or
indirect . . . the same funding options should be available
to all interconnection customers in MISO." June 2015
Order at P 47. Ironically, it cured the disparity not by
providing the choice of transmission owner funding to
indirectly connected owners - but instead by removing that
choice from those with direct connections. Otter Tail was
hoist on its own petard.
Commission determined that providing directly connected
transmission owners with the ability to select transmission
owner funding "may be unjust, unreasonable,
unduly discriminatory or preferential because it . . .
may result in discriminatory treatment by the
transmission owner of different interconnection
customers." June 2015 Order at P 48 (emphasis added).
This discriminatory treatment, according to FERC, stemmed
from the difference in costs borne by the generator under the
two types of funding.
* * *
cost differences, according to the Commission, had two main
causes. FERC thought that generators missed the opportunity
to seek favorable construction funding in competitive capital
markets; in other words, the use of transmission owner
funding could prevent the generator from finding a better
deal from a third party. June 2015 Order at P 48. Second,
FERC contended that transmission owner funding imposed a more
onerous "security" requirement on generators. June
2015 Order at P 49 & n.110. Transmission owners required
generators to provide some form of financial assurance - such
as a guarantee, surety bond, or letter of credit - that was
sufficient to cover the cost commitments undertaken by the
transmission owner in constructing the network upgrades.
Under generator funding, this requirement lasted only for the
duration of construction. But under transmission owner
funding, security was required for the duration of the
funding agreement. As an example, one proposed transmission
owner funding agreement specified that an incoming generator
would maintain a letter of credit over a term of 20 years.
December 2015 Order at P 33 & n.60.
these tentative findings, FERC instituted a formal
adjudicatory proceeding under Section 206 of the Federal
Power Act, requiring MISO to either modify its tariff to
require generator consent for transmission owner funding, or
to explain why the Commission's views were not correct.
This proceeding attracted a large cohort of intervenors;
various transmission owners (including Petitioners),
independent generators, and associations that represent those
groups each contributed comments before the Commission. In
the second of the orders under review in this case
("December 2015 Order"), FERC affirmed its earlier
finding that "it is potentially unjust, unreasonable and
unduly discriminatory to deprive the interconnection customer
of the ability to provide its own capital funding." This
petition for review followed.
Commission's position before us largely tracks its final
decision below. It relied, as we noted, on two grounds to
determine that transmission owners may not insist on
transmission owner funding, but that generators must instead
have the option to self-fund. The first is that giving
transmission owners the option to fund the upgrades provides
them with the power to discriminate amongst generators who
wish to connect to the grid. (Discrimination is, of course,
prohibited by the Federal Power Act. See 16 U.S.C.
§§ 824d(b); 824e(a).) Petitioners argue vigorously,
however, that there is neither evidence of
discrimination nor any economic incentive on the part
of transmission owners to discriminate. To be sure, if the
transmission owners still owned integrated generation
facilities, that would present a competitive motive. But in
emphasizing Order No. 888 and the Supreme Court's
decision in New York v. FERC, 535 U.S. 1 (2002), the
dissent harks back to a time we once described as "the
bad old days, " when transmission companies also owned
generation facilities and operated as vertically integrated
monopolies. Midwest ISO Transmission Owners v. FERC,
373 F.3d 1361, 1363 (2004); cf. Dissent at 10-11.
This is fighting a battle that has already been won. Here,
only one of the petitioning transmission owners - in Missouri
- still owns a generator; none of the rest do. And FERC did
not pay any attention to that small exception among
Petitioners; it did not limit its order to that generator.
Moreover, as we know from our other cases, the broader trend
following Orders No. 888 and 2000 has been toward divestiture
by transmission owners of generation assets. Granted, FERC
is not obliged to show actual evidence to support a
determination of potential discrimination, but in
the absence of evidence, the Commission must at least rest on
economic theory and logic. We agree with Petitioners; that is
dissenting colleague suggests that we actually lack
jurisdiction to consider Petitioners' anti-discrimination
argument - at least insofar as Petitioners point out that
only a transmission owner which also owns a generator would
have an incentive to discriminate - because Petitioners did
not explicitly make that specific point to the Commission.
But when Petitioners vigorously contended there was no
evidence to support a finding of discrimination and no reason
to "predict" it would occur as "a foregone
conclusion, " Request for Rehearing of the Indicated
Transmission Owners, Docket Nos. EL15-68, EL15-36 (FERC
January 28, 2016) at 23 n.59, it can hardly be thought a
new argument to suggest what might constitute
evidence of potential discrimination, if it were to exist.
second theory upon which FERC based its orders was that
allowing transmission owners to insist on transmission owner
funding would be "unjust and unreasonable" under
the Federal Power Act because it imposed increased costs
without any corresponding increase in service. We should note
at the outset that the Commission does not assert that
transmission owner funding is inherently unjust and
unreasonable; it is only if the transmission owner
chooses that method of funding that FERC believes it
crosses the unjust and unreasonable line. (That suggests that
FERC is really seeking to enhance the generator's
bargaining position vis-a-vis the transmission
owners - which, of course, is why generators have intervened
in support of the Commission.) As we explained, FERC wants
generators to have the option to seek the funding for the new
construction from parties other than the transmission owners
because it asserts that cheaper funding may be available
elsewhere. FERC observes that the transmission owners have an
incentive to increase costs because such costs will either be
included in the rate base - upon which revenue can be
predicated - or in charges back to the generator owner, which
also include a measure of profit. FERC also states that the
transmission owners have no right to the generator's
Commission contends moreover that generator funding avoids
the larger security costs under transmission owner funding.
We are puzzled by FERC's reasoning on this point, because
if the generator had found another source of capital to cover
the costs of the upgrade, we can't imagine that the
generator wouldn't have to provide the same kind of
security to that third party - covering the risk of default -
that it does for transmission owners. Still, it is
certainly possible, if not probable, that a generator could
find an alternative source of capital (including any
necessary security) that would be cheaper than that provided
by the transmission owner. Indeed, as the dissent notes, the
Commission states a simple economic truth in recognizing that
the generators "have an incentive to find lowest cost
funding solutions, while transmission owners do not."
Dissent at 6.
this proposition applies equally to all cost components of
Network Upgrade construction, which Petitioners perform on
the generators' behalf - not merely its funding. By the
same logic, since they bear a greater share of cost
responsibility, the generators also have a sharper incentive
than Petitioners to reduce the costs of raw materials, or
construction labor, or design fees. This is why the
generators can challenge inclusion of any such costs that
deviate unreasonably from a fair market price before the
event, it does not necessarily follow from any incentive
differences that FERC may compel transmission owners to
operate the upgrades without an opportunity to earn a return.
Such a determination would require reasoned justification by
the Commission, and consideration of any appropriately raised
concerns by the parties. And Petitioners do in fact ...