DC Circuit Upholds FERC Decision on Midwest ISO Cost Allocation Methodology

On October 31, 2008, the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit”) upheld the Federal Energy Regulatory Commission’s (“FERC” or “the Commission”) 2006 decision to allow the Midwest Independent Transmission System Operator, Inc. (“Midwest ISO”) to implement a cost allocation policy on a going forward basis. The cost allocation policy is a system for paying for upgrades to the Midwest ISO grid.

The DC Circuit reviews FERC’s decisions based on the “arbitrary and capricious” standard of the Administrative Procedure Act. In applying this standard, the DC Circuit stated they give the Commission particular deference in the area of ratemaking. The DC Circuit found that the challengers—the Public Service Commission of Wisconsin (“PSCW”) and the American Transmission Company (“ATC”) had failed to meet their burden of showing that FERC was acting arbitrarily and capriciously in approving the Midwest ISO policy.

In March 2004, the Midwest ISO created the Regional Expansion Criteria and Benefits (“RECB”) Task Force. This group was charged with developing a method for recovering the cost of projects in the Midwest ISO Transmission Expansion Plan (“MTEP”). The June 2005 MTEP was published, and it included a list of projects that were “planned” or “proposed.” Planned projects were “the preferred solution[s] to an identified issue” and proposed projects were tentative solutions.

On September 16, 2005 the RECB Task Force adopted a policy to allocate costs for new generation projects, which FERC conditionally approved on February 3, 2006. The Transmission Expansion Planning Protocol allowed cost allocation to all customers at the system-wide rate for twenty percent of the costs of the highest priority projects, called Baseline Reliability Projects, with transmission capacity higher than 345 kV. The other eighty percent was allocated through sub-regional designated pricing zones. The plan also included a list of “Grandfathered Projects” that were to be excluded from the regional cost recovery without explanation.

Having a project included on the Grandfathered Projects list meant that the project’s sponsors would not be able to socialize the costs of its projects the way non-Grandfathered Projects could. PSCW and ATC filed requests for rehearing with FERC on this issue, which were denied on November 29, 2006. The Commission argued that ATC would benefit from cost sharing in the future. However, both organizations filed petitions for review, claiming that $690,000,000 worth of Wisconsin projects were arbitrarily excluded from receiving sub-regional cost recovery. The DC Circuit was not persuaded.

The court rejected the claim that the Commission improperly relied on the RECB and that the RECB was comprised of vertically integrated utilities outside of Wisconsin. The petitioners claimed the RECB had the effect of pushing costs on Wisconsin, the minority group, while serving the majority economically by allocating their expansion costs. The court stated that the project start dates may have affected Wisconsin projects disproportionately because they had a large number of projects “planned” before the start date of the policy, but this was not enough to make the policy unduly discriminatory. The court reiterated that FERC had already concluded that the Midwest ISO policy was just and reasonable, and a “compromise” between stakeholders whose interest the RECB Task Force had to balance. ATC and PSCW also argued that the “planned” versus ”proposed” distinction for projects was arbitrary, but the DC Circuit found that this decision too was within the discretion of the Commission.

The court found that transmission providers were not unduly prejudiced by the Midwest ISO adopting a cost recovery methodology. The court further found FERC did not violate its own cost recovery policy that required the cost allocation plan to be based on “payment for transmission upgrades by the parties that cause and benefit from them.”

The opinion is available online at http://pacer.cadc.uscourts.gov/docs/common/opinions/200810/06-1408-1146852.pdf.