D.C. Circuit Sides with FERC; Prevents Full Abandonment

Akin Gump Strauss Hauer & Feld LLP

Akin Gump Strauss Hauer & Feld LLP

In 2005, Congress sought to encourage investment in the nation’s power grid by requiring the Federal Energy Recovery Commission (FERC) to establish “incentive-based” rate treatments for electric transmission facilities.1 Order No. 679,2 FERC’s transmission incentives rule adopted in 2006, created eight categories of incentive rate treatment for which utilities could apply, including a so-called “abandonment” incentive. An applicant seeking this incentive rate treatment may apply to FERC for approval to recover from ratepayers 100 percent of the prudently incurred costs of transmission facilities that are canceled or abandoned due to factors beyond the utility’s control. The idea behind this incentive rate treatment was to facilitate investment by mitigating some of the investment risk in transmission projects, including the state and local permitting process.3   

San Diego Gas & Electric Company (SDG&E) filed a petition for declaratory order with FERC in September 2015 to establish its eligibility for the abandonment incentive for the South Orange County Reliability Enhancement Project, an effort to rebuild and upgrade a substation and to replace and relocate certain transmission and distribution line segments. By the time of the application, the company had already spent roughly $31 million on the project. FERC issued a declaratory order in March 2016 finding that, should the project be abandoned for reasons beyond the company’s control, SDG&E could recover 100 percent of the prudently incurred project costs going forward, but that it would not be entitled to recover all of the $31 million that has already been spent on the project.4 Instead, half of those costs could be recovered from ratepayers in accordance with FERC’s pre-Order No. 679 practice. SDG&E appealed that decision, arguing that it should be entitled to the abandonment incentive rate treatment for the full cost of the project.

The D.C. Circuit sided with FERC in a split decision.5 Writing for the majority, Judge Pillard emphasized that the purpose of FERC’s incentive program is to encourage investment in needed infrastructure projects. The majority therefore agreed with FERC that the portion of the project that was already financed and paid for before receiving approval for the incentive rate treatment “lacked the requisite nexus to the facilitation of new investment.”6 In other words, the incentive rate treatment cannot encourage an investment that has already occurred. The company itself had acknowledged that it had incurred the $31 million of costs “without assurance of cost recovery.”7

In a lengthy dissent, Judge Randolph took issue with, among other things, the majority’s characterization of when the “incentive” to invest begins. “The fallacy in [the majority’s] theory is its failure to recognize that FERC created the incentive when it promulgated the regulation in 2006,” Judge Randolph wrote, “well before San Diego began incurring costs for its transmission project.” Judge Randolph points out that FERC has rejected a “but for” test (i.e., the applicant does not need to show that the investment would not occur but for the incentive rate treatment), and that lack of “certain recovery” prior to a FERC application does not render the incentive treatment meaningless. Indeed, even if an applicant is approved for the rate treatment, the applicant still lacks “certain recovery,” since it will later have to make a prudency showing to recover the costs from ratepayers.

FERC has granted preorder abandonment incentives before, although not in a case where a party objected to such recovery, as here. As the first case to litigate the precise issue of when the abandonment incentive rate treatment may begin, this decision establishes a precedent that FERC is likely to follow in future cases. FERC has emphasized, however, that each application for transmission incentives will be evaluated on a case-by-case basis.

1 Energy Policy Act of 2005, Pub. L. No. 109-58, § 1241, 119 Stat. 961 (2005) (codified at 16 U.S.C.
§ 824s).

2Promoting Transmission Investment Through Pricing Reform, Order No. 679, 116 FERC ¶ 61,057 (2006), order on reh’g, Order No. 679-A, 117 FERC ¶ 61,345 (2006), order on reh’g, Order No. 679-B, 119 FERC ¶ 61,062 (2007); see also Promoting Transmission Investment Through Pricing Reform, 141 FERC ¶ 61,129 (2012) (“Policy Statement”).

3 Order No. 679 at P 155; see also Policy Statement, 141 FERC 61,129, at P 14.

4San Diego Gas & Elec., 154 FERC ¶ 61,158, at PP 17-18 (2016).

5San Diego Gas & Elec. v. FERC, No. 16-1433 (D.C. Cir. Jan. 15, 2019).

6Id. at 15.

7Id. at 19.

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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