Fourth Circuit Upholds FERC Transmission Incentives Order Despite Intervening Change in Policy

On January 24, the U.S. Court of Appeals for the Fourth Circuit upheld an order  issued by the Federal Energy Regulatory Commission (FERC) in 2012 denying rehearing (Rehearing Order) of a 2008 order  granting Virginia Electric and Power Company (VEPCO) rate incentives for eleven different transmission projects (Incentives Order). On appeal, the North Carolina Utilities Commission (the NC commission) challenged FERC’s decision to grant incentives for five of the projects. The NC commission argued that FERC should be required to apply a subsequent change in policy, announced by FERC in 2010, to the VEPCO incentives. The NC commission also argued that FERC erred in granting incentives to the five projects in the first place.  The Fourth Circuit disagreed with the NC commission and affirmed the Rehearing Order as falling within FERC’s broad discretion and expertise. 

FERC issued the Incentives Order pursuant to Section 219 of the Federal Power Act, finding a required “nexus” between the risks and challenges faced by VEPCO in developing the projects and the requested transmission incentives. The NC commission filed a petition for rehearing.  However, in the words of the Fourth Circuit: “[f]or reasons that remain unsatisfactorily explained even after oral argument, FERC failed to issue its Order Denying Rehearing until almost four years after its initial order . . . .”  In the interim, FERC changed its policy regarding the nexus requirement, deciding that it would no longer consider unrelated projects in aggregate when deciding if there was a nexus with the requested incentives. Under the new policy, FERC requires a nexus between the requested incentives and each individual project. In the Rehearing Order, FERC acknowledged that, had VEPCO made its request for incentives under the new policy, the outcome might have been different.

The Fourth Circuit allowed the NC commission to raise the issue of the 2010 policy change for the first time on appeal, observing that, “absent extraordinary prescience it could not” have raised the issue in its 2008 petition, and that the Federal Power Act did not permit the filing of a renewed petition. However, the court held that FERC exercised its discretion appropriately in declining to rehear the Incentives Order and apply the revised policy. Considerations included VEPCO’s reliance on the nearly four-year-old Incentive Order and the broader issue of regulatory certainty with regard to Section 219 incentives. 

The Fourth Circuit also affirmed FERC’s decision to grant transmission incentives for the five challenged projects on the merits.  Among these issues was the question of cost. Section 219 requires that projects be “economically efficient,” and the NC commission argued that there were cheaper alternatives to some of the projects. However, the court concluded that the statute does not require that FERC grant incentives only to the most inexpensive approach.

Copies of the Fourth Circuit’s opinion may be found here, and copies of FERC’s August 29, 2008 Order Granting Transmission Rate Incentives and its May 22, 2012 Order Denying Rehearing may be found here and here.