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Ameren Services Co. v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

January 26, 2018

Ameren Services Company, et al., Petitioners
Federal Energy Regulatory Commission, Respondent American Wind Energy Association, et al., Intervenors

          Argued September 22, 2017

         On Petitions for Review of Orders of the Federal Energy Regulatory Commission

          Christopher R. Jones argued the cause for petitioners. With him on the briefs was Kurt H. Jacobs.

          Holly 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. Solomon, Solicitor.

          Bruce 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.

         When 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[1] 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.

         The 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 generation assets.

         FERC's 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.


         We have 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.[2] Transmission owners, which had previously served their own vertically integrated sources of power generation, were obliged to accept power from any source on a non-discriminatory basis.

         For 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.[3] 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.

         As we 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.

         Originally, 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.

         But a 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.

         To 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.

         The 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 decision.[4]

         Under 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.[5] 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.

         Under 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 rates.

         Following 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.

         To 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.

         It was 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.[6] 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.

         Otter 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 interconnections.

         The Commission agreed with Otter Tail that this disparity was unsupportable. In its June 2015 Order, [7] 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.

         The 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."[8] 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.

         * * *

         Those 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.

         Given 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.[9]


         The 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[10] 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.[11] 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 lacking here.

         Our 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.

         The 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 financing business.

         The 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.[12] 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.

         But 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 Commission.

         In any 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 ...

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