Seal of the Court of Appeals for the District of ColumbiaOn August 3, 2018, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit or Court) found that the Federal Energy Regulatory Commission (FERC) acted arbitrarily and capriciously in approving a PJM Interconnection, L.L.C. (PJM) tariff amendment that proposed to exclude from regional cost sharing, high-voltage transmission projects undertaken to satisfy an individual utility’s planning criteria.[1] The Court found FERC failed to justify its departure from the cost-causation principle, a long-standing rule that requires FERC to make some reasonable effort to match costs to benefits in order to ensure just and reasonable rates.

The proceeding stems from a proposal by a group of PJM member utilities to amend Schedule 12 of PJM’s Tariff, which establishes the cost-allocation formula for “Regional Facilities,” and addresses the cost-sharing requirements of Order No. 1000. Order No. 1000 is FERC’s seminal order, requiring inter alia, the costs of new transmission projects selected for regional cost allocation to be assigned based on the ex-ante regional cost allocation methodology selected by the region for that type of project. The amendment proposed to “prohibit cost sharing for any project included in the Regional Plan only to satisfy individual utilities’ planning criteria.” FERC approved the amendment, finding that the amendment did not contravene the principles of Order No. 1000 because the amendment creates a category of projects included in the Regional Plan but not selected for cost sharing. FERC applied this decision to the Elmont-Cunningham and Cunningham-DOOMS projects, which are high-voltage projects needed to meet a single utility’s “end-of-life” planning criteria, but which under a FERC-endorsed cost allocation methodology provided only 47% and 43%, respectively to the utility’s zone.

The Court agreed with FERC that the proposed amendment was not in violation of Order No. 1000 because the category of projects at issue was not selected for regional cost sharing. However, the Court found that the proceeding highlighted that Order No. 1000 is “largely silent on which projects may or must be selected for cost sharing.” The Court stated that “compliance with Order No. 1000 does not necessarily ensure compliance with the cost-causation principle—a pre-existing, more general rule that, in order to ensure just and reasonable rates, FERC must make some reasonable effort to match costs to benefits.” The Court also noted that the “cost-causation principle prevents regionally beneficial projects from being arbitrarily excluded from cost sharing—a necessary corollary to ensuring that the costs of such projects are allocated commensurate with their benefits.” In this regard, the Court found that FERC’s approval of the proposed amendment produces a severe misallocation of the costs of high-voltage projects, and represented a “wholesale departure from the cost-causation principle” in that it would shift a “grossly disproportionate share” of the costs of the high-voltage projects conceded to produce “significant regional benefits” into a single zone. The Court thus found that FERC acted arbitrarily and capriciously in approving the amendment to PJM’s tariff.

The Court stated it was sensitive to the concern of certain parties that “individual utilities should not have free rein to impose unjustified costs on an entire region by unilaterally adopting overly ambitious planning criteria.” However, the Court held that its opinion does not prevent “PJM or its member utilities from amending the Tariff, the Operating Agreement, or PJM’s own planning criteria to address any problem of prodigal spending, to establish appropriate end-of-life planning criteria, or otherwise to limit regional cost sharing—as long as any amendment respects the cost-causation principle.” The Court also noted that its opinion does not: (1) prevent “FERC from trimming excessive spending in the course of exercising its overarching mandate to ensure just and reasonable rates,” (2) “limit the ability of PJM or FERC to assess whether individual projects are in fact appropriate under the governing planning or reliability criteria,” or (3) constrain “PJM’s or FERC’s ability to require competitive-bidding processes for regionally beneficial projects.”

The case has been remanded back to FERC for further proceedings consistent with the Court’s Opinion, which is accessible here.
For more information regarding this matter, please contact Bhaveeta Mody or Joshua Adrian.

[1] Old Dominion Elec. Coop. v. FERC, No. 17-1040 (D.C. Cir. Aug. 3, 2018).