D.C. Circuit Upholds Cutting of Transmission Incentives by FERC

George D. Billinson

On February 19, 2021, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) upheld a decision by the Federal Energy Regulatory Commission (“FERC” or the “Commission”) cutting transmission incentives previously granted to three electric transmission companies.

The Energy Policy Act of 2005[1] amended the Federal Power Act to require FERC to promulgate a rule creating incentive-based rate treatment for electric transmission.[2] The rule was intended to “promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all [transmission] facilities, . . . provide a return on equity that attracts new investment in transmission facilities, . . . [and] encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities . . . .”[3] FERC promulgated such a rule, which is codified in the Commission’s regulations.[4] One incentive available to a stand-alone transmission company (a “Transco”)[5] is “[a] return on equity [“ROE”] that both encourages Transco formation and is sufficient to attract investment.”[6]

Because FERC has traditionally viewed independence as a hallmark of a Transco, it considers the ownership and business structure of the Transco to ensure that the Transco operates independently of other market participants when deciding whether to grant such incentives. FERC has declined to establish a particular methodology for reflecting the degree of a Transco’s independence or specific incentive levels.[7] However, the Commission has made clear that it “will consider the level of independence of a Transco as part of our analysis when we determine the proper ROE for the Transco, and evaluate the specific attributes of a particular proposal, including the level of independence, to determine appropriate incentives.”[8]

ITC Holdings is the parent company of International Transmission Company (“ITC”), Michigan Electric Transmission Company (“METC”), and ITC Midwest, LLC (“Midwest”) (collectively the “ITC companies”), all of which had previously been granted Transco adders to their ROEs.[9] In 2016, ITC Holdings was acquired by Fortis, Inc., a Canadian holding corporation with electric distribution and natural gas utility holdings in the United States, and GIC (Ventures) Private Limited, an investment company indirectly owned by the government of Singapore. Both parent companies have representatives on the ITC Holdings Board.

Following the merger, several customers filed a complaint with FERC under Section 206 of the Federal Power Act,[10] alleging that the Transco adders that had previously been granted to the ITC companies were no longer “just and reasonable” because the companies were affiliated with market participants that could affect ITC’s independence. In granting the complaint, FERC noted that, under current Commission policy, a 50-basis-point Transco Adder was available to a “fully independent transmission company”[11] and concluded:

Given the ITC Companies’ reduced level of independence, we find that a Transco Adder of less than 50 basis points is appropriate here. Because the merger has reduced, but not eliminated, the ITC Companies’ level of independence, we find that a 25 basis point Transco Adder appropriately encourages the Transco business model in these circumstances and promotes corresponding consumer benefits.[12]

After FERC denied the ITC Companies’ request for rehearing, they filed a petition for review with the D.C. Circuit. On February 19, 2021, in a two-to-one decision, the D.C. Circuit denied the petition for review.[13]

ITC’s first argument was that FERC had improperly departed from a “geographically focused methodology” purportedly established in several prior cases in favor of a “corporate structure” methodology. The court rejected this argument, stating that FERC “never established any definitive methodology, let alone the one ITC claims it did.”[14] Instead, “FERC has consistently applied a case-by-case approach to determining Transco independence, considering ownership and business structure as part of that inquiry since it first granted a Transco adder in 2003.”[15]

ITC’s second argument was that FERC had exceeded its statutory authority under Section 206 of the Federal Power Act. In a complaint filed under Section 206, the Commission must: (1) determine whether the existing rate is unjust or unreasonable; and if so, (2) “’determine the just and reasonable rate . . . [and] fix the same by order.’”[16] ITC argued that FERC had failed to follow this two-step procedure because it did not expressly find that the existing Transco adder was “unjust or unreasonable.” The court rejected this argument, holding:

ITC’s challenge to that conclusion seems to rest primarily on FERC’s failure to use the words “unjust and unreasonable” at the first step. But because FERC granted a complaint that itself explicitly alleged the existing adders were unjust and unreasonable and its analysis tracked the two-step procedure of Section 206, its failure to “use the magic words . . . did not reflect a fatal flaw in its decision.”[17]

Judge Sentelle dissented. Although he agreed that FERC had not arbitrarily or capriciously departed from its precedent regarding the independence analysis, he would have granted the petition for review and remanded the case to FERC because it had failed to use the “magic words” stating that “[a]lthough ‘unjust’ or ‘unreasonable’ are congressional requirements rather than magic words, I would likewise refuse to allow FERC to escape a trap of its own making.”[18]

The first part of the D.C. Circuit’s opinion may have limited significance for future decisions. Last year, FERC proposed completely eliminating the Transco adder, noting, among other things, that circumstances have changed significantly and “the Transco business model has not enhanced the deployment of transmission infrastructure sufficiently to justify incentives based on this business model beyond those incentives available to all public utilities.”[19] What impact, if any, the second part of the opinion—not requiring the use of the “magic words”—may have remains to be seen.

[1] Pub. L. No. 109-58, § 1241, 119 Stat. 594, 961 (2005) (“EPAct 2005”).

[2] Even prior to that time, FERC had granted transmission incentives but EPAct 2005 mandated the promulgation of a rule.

[3] 16 U.S.C. § 824s.

[4] 18 C.F.R. § 35.35(d)(2)(i) (2021).

[5] Id. at § 35.35(b)(i) (“Transco means a stand-alone transmission company that has been approved by the Commission and that sells transmission services at wholesale and/or on an unbundled retail basis, regardless of whether it is affiliated with another public utility.”)

[6] Id. at § 35.35(d)(2)(i).

[7] Promoting Transmission Investment through Pricing Reform, Order No. 679, 116 FERC ¶ 61,057 at P 239 (2006).

[8] Id.

[9] ITC had been granted an adder of 100 basis points in 2003, METC had been granted an adder of 50 basis points before it was acquired by ITC Holdings, and Midwest was granted an adder of 50 basis points in 2015.

[10] 16 U.S.C. § 824d(a).

[11] Consumers Energy Co. v. Int’l Transmission Co., 165 FERC ¶ 61,021 at P 73 (2018), reh’g denied, 168 FERC ¶ 61,035 (2019).

[12] Id. Then Commissioner (now Chairman) Glick, dissented because he would have denied any Transco adder on the basis that the companies were no longer sufficiently independent.

[13] Int’l Transmission Co. v. FERC, No. 19-1190, 2021 WL 642485 (D.C. Cir. Feb. 19, 2021).

[14] Slip Op. at 17.

[15] Id. at 17-18.

[16] Id. at 25 quoting 16 U.S.C. § 824e.

[17] Slip op. at 26 (quoting TransCanada Power Mktg. Ltd. v. FERC, 811 F.3d 1, 10 (D.C. Cir. 2015)).

[18] Id. (Sentelle, dissenting)

[19] Electric Transmission Incentives Policy Under Section 219 of the Federal Power Act, Notice of Proposed Rulemaking, 170 FERC ¶ 61,204 at P 90-91 (2020).

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