LawFlash

DC Circuit Affirms FERC Decision on MISO Cost Allocation

June 27, 2018

The US Court of Appeals for the District of Columbia denied challenges to Federal Energy Regulatory Commission orders that rejected a Midcontinent Independent System Operator (MISO) cost allocation proposal on the grounds that it improperly undervalued interregional transmission projects.

The DC Circuit denied a petition filed by various transmission owning utilities (Petitioners) within the MISO region challenging a Federal Energy Regulatory Commission (FERC or the Commission) order on interregional cost allocation under Order No. 1000. The court’s decision in Ameren Services Company et al. v. FERC, No. 16-1150 (DC Cir. June 22, 2018), affirms FERC’s finding that interregional project costs must be allocated roughly commensurate with the project’s estimated benefits, even if that means other approved regional projects will be displaced as a result.

Background

Under FERC’s Order No. 1000 reforms, RTOs and ISOs must evaluate interregional transmission projects and adopt cost allocation methodologies based on a certain set of parameters. The goal of FERC’s Order No. 1000 cost allocation policies is to ensure that the relative costs borne by a particular transmission provider are commensurate with the relative benefits gained by that provider from the project. To comply with those policies, MISO proposed an interregional cost allocation methodology for use with the neighboring Southeastern Regional Transmission Planning region (SERTP). That cost allocation proposal involved a cost-avoidance method, in which the share of costs allocated to MISO corresponds to the benefits to MISO of “identified” regional projects that would be rendered superfluous by the interregional project. To perform that calculation, MISO proposed to count only regional transmission projects that had been identified but not yet been approved by MISO.

FERC rejected MISO’s proposed approach, finding that the exclusion of approved regional projects in the cost-avoidance method would undervalue the benefits to MISO of an interregional project and result in an improper cost allocation. FERC also reasoned that the inclusion of approved regional projects in the cost allocation would incentivize MISO to pursue greater efficiencies by selecting interregional projects that displace less cost-effective regional projects. MISO sought rehearing, arguing FERC’s decision could result in “approved” regional projects being rendered unnecessary by interregional projects, leading to uncertainty for investors and consumers. FERC rejected MISO’s arguments, prompting Petitioners to seek judicial review.

Court Finds Regional Projects Can Be Bumped

Petitioners argued that FERC did not adequately consider their position that already-approved regional transmission projects could be displaced by interregional projects, providing uncertainty for project developers. FERC found that by excluding such projects MISO would be unable to calculate the true benefits of an interregional project, resulting in the project’s undervaluation. FERC recognized that some uncertainty would result from its approach, but the benefits and more accurate costs allocation that would result was appropriate. The court’s opinion found no fault in FERC’s rationale, and emphasized one of Order 1000’s cost allocation principles to ensure that interregional project costs are allocated in a manner “roughly commensurate” with the project’s benefits.

In fact, the court found FERC’s explanations to be sufficient to support its decisionmaking. According to the court, although Petitioners may disagree with the Commission’s policy decision to emphasize proper cost allocation for interregional projects at the potential expense of approved regional projects, that disagreement “does not render the Commission’s explanation any less thorough or reasoned.”

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Stephen Spina
Mark Williams
J. Daniel Skees
Arjun Ramadevanahalli