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Court denies two petitions for review involving FERC Order No. 1000

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The United States Court of Appeals for the District of Columbia Circuit, in an April 18 opinion, denied two petitions for review involving FERC Order No. 1000 that were filed by New England transmission owners and the New England States Committee on Energy Inc., (NESCOE).

As noted in the opinion, FERC in 2011 issued Order No. 1000, ordering utilities to remove certain “right of first refusal” provisions from their existing tariffs and agreements. Those provisions, the court said, granted incumbent utilities “the option to construct any new transmission facilities in their particular service areas, even if the proposal for new construction came from a third party.”

In response to Order No. 1000, ISO New England (ISO-NE) and its participating transmission owners (referred to in the opinion as the Transmission Owners) made a compliance filing, the court said.

After FERC issued the initial order and a rehearing order, the Transmission Owners filed a petition for review with the court, as did NESCOE and governmental entities from five of the six states it represents in regional electricity matters: Connecticut, Massachusetts, New Hampshire, Rhode Island and Vermont (collectively, with NESCOE, referred to as the state petitioners).

In a statement provided to TransmissionHub on April 19, NESCOE said: “On the issues that NESCOE raised, while the Court denied our petition, its ruling provides an interpretation that we have long sought: that ISO New England is not required to select a policy-driven project as part of the Order 1000 process. This is an important potential ‘off ramp’ and clarification, which helps to prevent costly projects from being selected for development that states do not view as advancing their policies or that are not in the interest of consumers. We are still reviewing the court’s ruling and have not made a determination at this point regarding further review.”

A National Grid spokesperson told TransmissionHub on April 19, “We are still reviewing the decision and considering what if any additional steps we might undertake.”

Transmission Owners’ petition

The court noted that the Transmission Owners allege, among other things, that FERC’s determinations in the challenged orders are inconsistent with two prior actions by FERC: Order No. 1000 and the 2004 order that first approved the Transmission Operating Agreement among ISO-NE and the Transmission Owners.

In Order No. 1000, FERC declined to resolve the question of whether the Mobile-Sierra presumption applied to the threatened rights of first refusal in existing tariffs and agreement. That presumption requires FERC to “presume a contract rate for wholesale energy is just and reasonable” and prohibits FERC from setting aside that rate unless FERC finds that the rate “seriously harm[s] the public interest.”

The court added that FERC noted that one commenter – National Grid – had argued that the presumption applied to the specific right of first refusal in the Transmission Operating Agreement, but FERC found “that the record is not sufficient to address the specific issues raised by National Grid in this generic proceeding.”

The court said that in the rehearing order, FERC noted that the record at the time of Order No. 1000 was insufficient because FERC issued Order No. 1000 “prior to having before it the universe of contracts and arguments to determine which lend support to, or provide evidence against the specific issue.”

Once the specific contract and relevant arguments were submitted as part of the compliance filing process, “the commission was able to examine together all the arguments relating to this specific issue – Mobile-Sierra protection of the right of first refusal provisions – as well as the individual contract provisions and other related documents, such as commission orders addressing these provisions.”

The court added that the Transmission Owners argued that FERC’s decision in the orders arbitrarily departed from FERC’s finding in Order No. 1000 that the record was not sufficient to address the applicability of the Mobile-Sierra presumption.

The thrust of the petitioners’ argument is that the only new empirical data introduced between the time FERC issued Order No. 1000 and the initial order was information introduced by the Transmission Owners to show that regional transmission needs were already being addressed while the right of first refusal was in place, the court said.

The court noted that while the Transmission Owners view the initial order as reaching a different verdict from Order No. 1000 in spite of the fact that no new evidence was introduced in support of that new verdict, FERC did not come to any verdict on the Mobile-Sierra issue in Order No. 1000 and instead, FERC deferred until later compliance proceedings the introduction of specific evidence about the Transmission Operating Agreement and the region.

Because the evidence had not yet been introduced, the record in Order No. 1000 was “insufficient” to reach any verdict, not just insufficient to find that the right of first refusal was sufficiently harmful to overcome the Mobile-Sierra presumption, the court said. It was not inconsistent for FERC to treat the record as sufficient to reach such a verdict after the introduction of the language of the provision at issue and other information from interested parties, the court said.

The Transmission Owners cite a second example of purportedly inconsistent decision-making, namely FERC’s 2004 order approving the Transmission Operating Agreement in which FERC found that the agreement’s right of first refusal provision “will have no adverse impact on third parties or the New England market,” the court said.

In its initial order, FERC asserted that the 2004 finding presents no barrier because FERC “is permitted to adapt its rules and policies in light of changing circumstances” and “changes in the electric industry driving the demand for new transmission, coupled with the advent of nonincumbent transmission developers, led the commission to reexamine the effect of federal rights of first refusal on customers and nonincumbent transmission developers.”

The court added that while FERC reached a different conclusion in its initial order than in its 2004 order, the different conclusion was not the result of arbitrary decision-making by FERC; rather, it was the natural consequence of the new policy adopted in Order No. 1000 to address the changing circumstances identified by FERC.

The court further noted that the Transmission Owners also argue that FERC did not apply the correct legal standard in analyzing whether the Mobile-Sierra presumption had been overcome. The court said that it considered the application of the Mobile-Sierra standard in a similar context in the case, Texaco Inc. v. FERC, where it upheld FERC’s application of a generic rule – Order No. 636, which required pipelines to use a new pricing method that was intended to promote a national gas-sales market by reducing the impact of fixed costs on market prices – to a particular contract.

In a rate filing shortly after FERC promulgated Order No. 636, one pipeline proposed maintaining its existing rate structure for existing customers and adopting the new rate structure for new customers only, the court said, adding that FERC rejected that proposal, finding that it would “distort the pricing information signals that Order 636 was designed to regularize.”

The court found that FERC’s public interest showing in Texaco to be sufficient, and explained that “the ‘public interest’ that permits FERC to modify private contracts is different from and more exacting than the ‘public interest’ that FERC seeks to serve when it promulgates its rules,” meaning that “more is required to justify regulatory intervention in a private contract than a simple reference to the policies served by a particular rule.”

FERC determined that retaining the existing rate structure in the contracts at issue would adversely affect the public interest, specifically by “distort[ing] gas market pricing to the detriment of the integrated national gas sales market” and by inflicting “anti-competitive” harm on the pipeline’s main competitor.

In that way, the court added, Texaco drew a distinction between mere recitation of policy goals and a “particularized” analysis of the deleterious effects of the contract provision at issue. While new policies – such as those adopted in Order No. 1000 – may be supported by “generalized public interest goals,” “particularized” analysis is required in order to overcome the Mobile-Sierra presumption where it applies, the court said.

FERC’s challenged orders in this case contain the requisite “particularized” analysis, the court said, noting that in those orders, FERC found that the specific right of first refusal in ISO-NE’s Transmission Operating Agreement “would adversely affect transmission development.”

State petitioners’ petition

The court noted that Order No. 1000 also required the consideration of transmission needs driven by public policy when determining what projects to include in the Regional System Plan for cost allocation purposes. ISO-NE’s compliance filing included a proposed multi-step procedure, under which NESCOE would first “identify state and federal public policies that may drive the need for transmission in New England.”

After transmission needs are identified, “ISO-NE will undertake scenario studies to provide a sense of the costs and benefits of various high-level alternatives,” and then, if “some or all states determine that those transmission solutions may meet their identified public policies,” those states may direct ISO-NE to solicit initial proposals from transmission developers, the court added.

ISO-NE was tasked with conducting a preliminary review of those proposals, after which NESCOE “may submit to ISO-NE a list of projects that one or more of the states would like to have further developed.”

ISO-NE would place projects into the Regional System Plan only if requested by either NESCOE or the participating states’ utility regulatory authorities, the court added.

FERC rejected that proposed procedure because it left to NESCOE or the states several roles that FERC contends Order No. 1000 had directed ISO-NE to fulfill, the court said.

The state petitioners object on two grounds, arguing, for instance, that FERC’s determination impermissibly conflicts with, and expands on, Order No. 1000. That argument, the court added, turns on the state petitioners’ reading of the word “select” in the initial order as meaning that FERC requires not only a process to identify transmission needs driven by public policy requirements and evaluate potential transmission solutions that could meet those needs, but also selection of whichever project is the most efficient or cost-effective.

FERC’s rehearing order made clear that there is no requirement that ISO-NE “must select … a transmission solution to address every identified transmission need driven by a public policy requirement,” the court said, adding that the only selection requirement is that if a solution is selected, it “must be selected by ISO-NE rather than by NESCOE.”

In light of those clarifications, the court said, there is no inconsistency with Order No. 1000.

The state petitioners’ second objection is that FERC exceeded the bounds of its authority under the Federal Power Act (FPA), and they pointed to section 201(a) of the FPA, which provides that FERC’s authority is “to extend only to those matters which are not subject to regulation by the states.”

While the state petitioners concede that the “clear and specific” grants of jurisdiction in the FPA include FERC’s authority to regulate the rates charged for transmission of electricity and to “facilitate the planning of a reliable grid,” they contend that the FPA does not grant FERC authority over what they characterize as “the means by which states meet their own public policy mandates.”

The court added that that argument fails because it is necessarily an objection to the entire regional planning and cost allocation scheme. Order No. 1000 established a regional planning process that is agnostic as to the provenance of the transmission needs, whether resulting from population growth or federal public policy or state public policy, the court said.

The division of roles between ISO-NE and the states poses no jurisdictional problem for FERC, the court said, adding that ISO-NE has no role in setting public policy for the states and considers transmission needs that arise from various sources.

Requiring that ISO-NE, instead of the states, evaluate transmission needs and potential solutions is a reasonable implementation of Order No. 1000’s regional planning process, which the court has upheld, and that is true regardless of whether those transmission needs arise from state public policy requirements or any other source, the court said.

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