7th Circuit Affirms Socializing Costs of Multi-Value Electric Transmission Projects

by Davis Wright Tremaine LLP

On June 7, 2013, the U.S. Court of Appeals for the 7th Circuit issued a decision in Illinois Commerce Commission, et al. v. Federal Energy Regulatory Commission, affirming Federal Energy Regulatory Commission (“FERC”) orders that conditionally approved proposed tariff sheets filed by the Midcontinent Independent Transmission System Operator (“MISO”) under which the costs of so-called “Multi-Value Projects” (“MVP”) will be allocated on a load ratio basis to all wholesale purchasers of energy moving over any portion of the MISO grid. The case is the sequel to an earlier case, Illinois Commerce Commission v. FERC, 576 F.3d 470 (7th Cir. 2009), in which the 7th Circuit rejected and remanded FERC orders under which PJM Interconnection, LLC (“PJM”) would have socialized the costs of all electric transmission facilities of 500 kV or more on a pro rata basis among all utilities in the PJM region.

In the earlier Illinois Commerce Commission v. FERC decision, the 7th Circuit faulted FERC for making scant effort to ensure that costs were allocated in a way that reflected the relative benefits utilities received from a given transmission project. While FERC took steps to avoid making the same mistake in this new case involving MISO’s MVP proposal, the outcome before the 7th Circuit was nevertheless uncertain. On one hand, FERC had again approved a broad socialization of costs without methodically assessing how the resultant distribution of benefits and burdens would match up. On the other hand, FERC this time more explicitly based its decision on findings that all utilities in the region will benefit from the transmission projects at issue and that the relative benefits received by utilities could not be measured with any level of precision.

In ruling that FERC had gone far enough this time, the 7th Circuit rejected claims that Michigan utilities would receive little, if any, benefits from MVP projects because, under state law, out-of-state resources do not count toward compliance with Michigan’s renewable portfolio standard. The court stated, in what may be regarded as dicta, that Michigan cannot discriminate against out-of-state renewable energy without violating the Commerce Clause of U.S. Constitution. This ruling may have significant repercussions in a number of other states that restrict, to varying degrees, the extent to which out-of-state resources may count toward fulfillment of their renewable portfolio standards.

The court held that it was not enough for challengers of FERC’s orders to point out that the allocation of costs under MISO’s MVP program was crude. Where, as here, the benefits to a particular utility cannot be quantified with precision. The court reaffirmed that FERC must merely articulate a plausible reason to believe the benefits a utility receives from a transmission project are at least “roughly commensurate” with the costs it will be allocated. The court found that FERC had done so here, accepting the plausibility of FERC’s reasoning that MVP projects will broadly confer benefits across the region, such as enabling power to be transmitted efficiently across pricing zones, helping satisfy renewable energy requirements, improving reliability, and facilitating power flow to currently underserved areas. The court held that challengers could not rebut FERC’s rationale without presenting evidence that the distribution of costs and benefits would be significantly unbalanced, which the court found they failed to do.

The court also affirmed FERC’s rejection of proposals by challengers that would have required MISO to allocate the costs of MVP projects based on peak load instead of overall load ratio share, and that would have required the wind farms served by the MVP projects to bear a share of the costs. The court, however, vacated FERC’s determination that MISO may not impose an MVP surcharge on energy exported to PJM. The court held that it was arbitrary for FERC to continue prohibiting MISO from charging anything for exports of energy to PJM, while permitting it to charge for exports of energy to other regional transmission operators. While conditions may have warranted such a prohibition to prevent rate pancaking in the past, the court ruled that FERC must reevaluate the rationale for such prohibition in light of current conditions.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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