United States: Second Circuit Upholds FERC's Approval Of NERC's BES Definition

On April 22, 2015, the United States Court of Appeals for the Second Circuit (the "Second Circuit") upheld the Commission's approval of NERC's Bulk Electric System ("BES") definition—a regulatory mechanism that plays a key role in determining which facilities are subject to NERC mandatory Reliability Standards.

On December 20, 2012, the Commission issued Order No. 773, which adopted NERC's proposed BES definition. Under NERC's definition, the BES consists of "all Transmission Elements operated at 100 kV or higher and Real Power and Reactive Power resources connected at 100 kV or higher," subject to certain enumerated inclusions and exclusions. Order No. 773 also approved an exemption process that permits entities to petition for: (i) removal of a facility from, or addition of a facility to, the BES on a case-by-case basis, as determined by NERC; and (ii) a jurisdictional determination that certain facilities are used in "local distribution," as determined by FERC. The State of New York and the New York Public Service Commission ("New York") were denied rehearing on April 18, 2013 in Order No. 773-A, and sought review of both orders from the Second Circuit.

Among its contentions, New York argued that adoption of a 100 kV threshold to define the BES was an "unreasonable" construction of FERC's statutory jurisdiction because the BES, so defined, could include facilities engaged in "local distribution," which are explicitly exempt from FERC's jurisdiction under the Federal Power Act. The court rejected this argument, noting that: (i) FERC's adoption of the 100 kV threshold was grounded in NERC's factual finding that the vast majority of 100 kV and above facilities operate in interconnected transmission networks within the national power grid; and (ii) the 100 kV threshold is used only as an initial jurisdictional determination, and is always subject to the enumerated inclusions and exclusions within the definition, as well as the individualized exemption process referenced above. Applying the deferential Chevron standard, the court found that this was a reasonable means for FERC to clarify an "otherwise ambiguous" statutory distinction between those facilities over which it has regulatory jurisdiction, and those facilities over which it does not.

New York also argued, among other things, that FERC unreasonably construed its statutory jurisdiction because the adopted BES definition and procedures did not require an express factual finding that a given facility is not used in local distribution as a precondition to the exercise of federal jurisdiction, and that the orders impermissibly required facilities to shoulder the burden of proving their exemption from federal regulatory jurisdiction. The court rejected these arguments as well, finding that: (i) Order Nos. 773 and 773-A did not permit FERC to exercise regulatory jurisdiction prior to determining whether a facility falls within the FPA's local distribution exception, but rather established a procedure for the prerequisite fact-finding necessary to subsequently assert jurisdiction thereafter; and (ii) the fact that a facility must petition for an individualized assessment of jurisdiction does not, by extension, mean that the facility bears the burden of proving that it falls within an exception to jurisdiction.

A copy of the Court's opinion may be found here.

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