United States: FERC Corrects Legal Error On Remand From D.C. Circuit, Orders SPP To Issue Refunds Collected For Non-Jurisdictional Co-Op's Formula Rate

On July 21, 2016, FERC issued an order in a proceeding on remand from the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit"). In its order, FERC acknowledged that it had committed legal error by accepting, without refund commitment, proposed revisions to the Southwest Power Pool Inc.'s ("SPP") Open Access Transmission Tariff ("Tariff") implementing a formula rate for Tri-County Electric Cooperative Inc. ("Tri-County"), and had failed to correct this legal error on rehearing. To remedy its error, FERC directed SPP to bill Tri-County for certain amounts collected under Tri-County's formula rate, and issue refunds to ratepayers.

Section 201(f) of the Federal Power Act ("FPA") generally excludes electric cooperatives such as Tri-County from FERC's ratemaking jurisdiction. However, federal courts have determined that FERC may nonetheless review the rates of such non-jurisdictional entities if those rates affect FERC-jurisdictional transactions or if the entity is part of a FERC-jurisdictional Regional Transmission Organization ("RTO") or Independent System Operator ("ISO"), in order to ensure that the RTO's or ISO's rates are just and reasonable. Federal courts have also found that FERC does not have authority under the FPA to order these non-jurisdictional entities to pay refunds. As a result of these determinations, in cases where FERC requires additional procedures (e.g., hearing and settlement judge procedures) to evaluate the justness and reasonableness of a proposed rate for a non-jurisdictional entity, FERC's practice has been to accept the RTO's or ISO's rate filings to take effect subject to refund, pending the outcome of the proceeding, only when the non-jurisdictional entity voluntarily agrees to make refunds in the event that FERC, upon its subsequent review, determines that the rate as proposed is not just and reasonable. If the non-jurisdictional entity does not agree to such refund protection, FERC's practice has been to delay the effective date of the proposed rate while FERC conducts its review.

In 2012, SPP filed revisions to its Tariff to implement a formula rate for Tri-County—an electric cooperative excluded from FERC's jurisdiction under Section 201(f) of the FPA. FERC accepted SPP's filing and set it for hearing and settlement judge proceedings, and granted an effective date of April 1, 2012. However, at the time of FERC's acceptance, Tri-County had not voluntarily committed to refund the difference between the as-filed rate and the rate ultimately found to be just and reasonable by FERC. As a result, Xcel Energy Services Inc. ("Xcel") and other parties sought rehearing of FERC's hearing order approving Tri-County's rate and argued that FERC did not follow its normal practice, described above.

On rehearing in 2013, FERC acknowledged that it had erred in allowing SPP's rate proposal for Tri-County's formula rate to go into effect April 1, 2012, without a commitment from Tri-County to refund the difference between the as-filed rate and the rate ultimately found to be just and reasonable, and found that the effective date should instead have been specified in an order following hearing and settlement judge procedures. In light of these findings on rehearing, FERC found that it would not be just and reasonable to allow SPP to continue to pass through Tri-County's proposed rate prior to FERC's order establishing a just and reasonable rate. Accordingly, FERC directed that SPP either: (1) remove Tri-County's rate from its Tariff until FERC issued an order following hearing proceedings; or (2) submit a compliance filing providing, prospective from the day after its order on rehearing, a voluntary commitment by Tri-County to refund any difference between the proposed rate and the rate ultimately found to be just and reasonable. On March 19, 2013, SPP submitted a voluntary commitment from Tri-County.

Several parties, again including Xcel, requested rehearing of FERC's determination in its 2013 rehearing order, arguing, among other things, that FERC's prospective remedy was insufficient, and that FERC should have used its equitable discretion to apply relief retroactively to remedy the harm caused by its legal error. In response, FERC stated that the only remedy available at the time of the 2013 rehearing order was the prospective remedy it adopted, and that FERC could not provide retroactive relief back to April 1, 2012 because such action, according to FERC, would be inconsistent with the FPA.

In a decision from the D.C. Circuit remanding the case back to FERC, the court found that "[FERC] appears, from the record before the court, to have misapprehended its remedial powers and thus arbitrarily declined to weigh the equities underlying [protesters'] request for retroactive relief." The court concluded that section 309 of the FPA provides FERC with broad remedial authority, including the ability to remedy its errors retroactively, and that FERC had yet to evaluate the equities of providing refund protection to recover unlawful rates in the current proceeding.

In its most-recent, July 21, 2016 order, FERC exercised its equitable discretion and directed SPP to bill Tri-County for the amounts collected under Tri-County's formula rate that SPP collected between April 1, 2012 and February 21, 2013, with interest, and issue refunds to ratepayers. FERC stated that this remedy was designed "to put the parties in the positions in which they would have been absent Commission legal error." FERC cited judicial precedent supporting its conclusion that, where FERC has committed legal error, it may order refunds and authorize an RTO like SPP to seek recoupment from non-jurisdictional customers (such as Tri-County's). FERC noted that the D.C. Circuit in its remand order had instructed FERC to "evaluate the equities" of providing refund protection to recover unlawful rates caused by its legal error, and that, when applying such an analysis to the present circumstances, "equity favors requiring SPP to seek recoupment." FERC added that this action was consistent with its general policy of ensuring that the parties harmed by its legal errors are put in the same position in which they would have been had FERC not committed its legal error.

A copy of FERC's order may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Christopher Zentz
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