D.C. Circuit Vacates and Remands FERC Orders Permitting Formula Rate Pass-Through of “Indirect” Public Relations and Advocacy Expenditures

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On December 28, 2021, the Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated and remanded a series of FERC orders that allowed for the formula rate pass-through of “indirect” public relations and advocacy expenditures incurred by Potomac-Appalachian Transmission Highline, LLC (“PATH”) related to its pursuit of certificates of public convenience and necessity to build a proposed electric transmission line (“December 28 Opinion”). The D.C. Circuit held that PATH had improperly booked the expenditures to incorrect accounts under FERC’s Uniform System of Accounts (“USofA”), and that Account 426.4–Expenditures for Certain Civic, Political and Related Activities, should have been used instead because it contemplated the inclusion of indirect, as well as direct, public relations and advocacy expenses.

From 2009 through 2011, PATH spent more than $6 million on various activities to support its applications for the certificates. Through hired public relations contractors, PATH organized coalitions that would recruit individuals to testify before the state utility commissions in support of PATH’s certificate applications. PATH’s contractors also polled public opinion of the project, ran promotional advertisements, and sent lobbyists to persuade state officials that the certificates should be granted. The Court found that “[t]here is little question that PATH made these disputed expenditures to influence the decisions of public officials.” PATH, however, categorized most of those expenditures into Accounts 923–Outside Services Employed, and 930.1–General Advertising Expenses, of FERC’s USofA, which enabled PATH to pass through those costs via its formula rate.

Petitioners argued below in proceedings before FERC and at the D.C. Circuit that the $6 million in public relations and advocacy expenditures belonged in Account 426.4–Expenditures for Certain Civic, Political and Related Activities, which is not incorporated in PATH’s formula rate and therefore not recoverable from ratepayers. In relevant part, Account 426.4 “shall include expenditures [1] for the purpose of influencing public opinion with respect to the election or appointment of public officials, referenda, legislation, or ordinances . . . or approval, modification, or revocation of franchises; or [2] for the purpose of influencing the decisions of public officials.” While initially agreeing with Petitioners that the disputed expenditures did indeed belong in Account 426.4, because the account “broadly covers ‘any costs incurred to influence the opinion of the public during the period when public officials were deliberating on whether to approve a new project,’” on rehearing FERC reversed course, concluding that the matters on which PATH incurred costs to influence public opinion were “not contemplated” by Account 426.4. FERC reasoned that PATH’s expenditures fell outside of the first clause of Account 426.4 because they were “general promotional efforts” unrelated to referenda, legislation, ordinance, or the grant of franchise. As to the second clause, FERC viewed the expenditures as intended only “to indirectly influence public officials.”

The court focused on the second clause of Account 426.4 and found that, because “the disputed expenses belong in Account 426.4 under [second clause], we need not interpret the [first clause].” The court held that the second clause of Account 426.4 includes expenditures for the purpose of indirectly, as well as directly, influencing the decisions of public officials because “purpose, not directness, is the touchstone of that [c]lause.” To start, the court found that FERC was owed no deference in its interpretation of Account 426.4’s second clause because it was “plainly inconsistent” with the account’s “obvious” meaning, as confirmed by “all the traditional tools of construction.” The court then proceeded to examine the text, structure, history, precedent, and purpose of Account 426.4 to reach its conclusion that “[t]he [second] [c]lause is not confined to expenditures for ‘directly’ influencing the decisions of public officials.” Regarding the text of Account 426.4, the court noted that the word “directly” appears nowhere, and that FERC’s limiting rationales for implying it into the text to be “unpersuasive” because “[p]urpose, not directness, is the definitional boundary,” and the first clause of Account 426.4 would not be rendered superfluous without implying a “directly” limitation since it covers activities that the second clause does not, as FERC had argued.

Regarding the structure and history of Account 426.4’s second clause, the court’s review “substantiates the [second clause’s] inclusion of indirect as well as direct forms of influence.” The court similarly found that FERC’s precedent on the issue “favors reading the [second clause] to include expenditures aimed at indirect as well as direct forms of influence of public officials” because FERC “has never before interposed a directness requirement.” The court explained that “[i]n at least two cases, FERC has ordered costs like those disputed here to be sorted into Account 426.4,” and in the one case in which FERC allowed the recovery of similar costs contained in Account 426.4, the expenditures met certain legitimate objectives and were reviewed in a stated rate filing, “a markedly distinct ratemaking process from the one at issue here.” The court clarified that “when a stated rate is used, the recoverability of expenditures does not depend on the identity of the account to which the expenditures are assigned. Accounts may be used for convenience and organization, but lack the legal significance they have in formula rates . . . [because] the Commission examines expenditures on a case-by-case basis to determine whether they can be recovered from ratepayers.”

Finally, the court found that the other USofA accounts to which PATH purported the disputed costs belonged, i.e., Account 923–Outside Services Employed and Account 930.1–General Advertising Expenses, are residual and therefore inapplicable since the disputed costs clearly fit into Account 426.4. Therefore, according to the court, because the text of Account 426.4’s second clause clearly encompasses the disputed expenditures and the “traditional tools” of statutory interpretation align with the most natural reading of its text, “[e]xpenditures for the purpose of influencing the decisions of public officials—whether directly or indirectly—belong in Account 426.4.” The court, therefore, vacated FERC’s challenged orders and remanded the case for further proceedings. Given that PATH’s formula rate excluded costs in Account 426.4, the court’s decision rendered PATH’s $6 million in public relations and advocacy expenditures unrecoverable from customers.

A copy of the court’s decision in Newman v. FERC can be found here.

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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