United States: FERC Upholds Denial Of Full Retroactive Abandonment Costs For SDG&E

Last Updated: November 8 2016
Article by Adrienne Thompson and Christopher Zentz

On October 26, 2016, FERC denied a rehearing request from San Diego Gas & Electric Company ("SDG&E"), Pacific Gas and Electric Company, and Southern California Edison Company following a March 2, 2016 order wherein FERC allowed only a 50 percent cost recovery in the event that SDG&E's South Orange County Reliability Enhancement ("SOCRE") transmission project is abandoned or canceled. As the Commission reiterated, utilities are generally allowed 100 percent cost recovery for abandoned or canceled projects only after a project is found eligible for "Abandonment Incentives," whereas only 50 percent cost recovery is typically allowed for costs incurred before such determination. Thus, because SDG&E was not granted the Abandonment Incentive until FERC issued its March 2 order, FERC denied SDG&E's request for an Abandonment Incentive for 100 percent of the prudently incurred costs prior to March 2, 2016. In reaching this conclusion, the Commission noted, "it would be reasonable to infer" that utilities are required to request eligibility for Abandonment Incentives before incurring significant expenditures on a transmission project.

On September 23, 2015, SDG&E filed a petition for a declaratory order seeking authorization to recover 100 percent of all prudently-incurred costs associated with its SOCRE project, should that project be abandoned or cancelled for reasons beyond SDG&E's control. At the time of the petition, the SOCRE project was four years into construction and SDG&E had already spent roughly $31 million. In its March 2 order, FERC granted SDG&E's request for 100 percent of the Abandonment Incentive, but only for the period on and after the effective date of the order. Under FERC's March 2 order, all costs prudently incurred prior to March 2, 2016 were entitled to only 50 percent cost recovery. As the Commission explained, such a result was consistent with prior precedent and longstanding policies to ensure that Abandonment Incentives be "rationally related with the investments being proposed" and "designed to encourage future transmission investments."

SDG&E filed a request for rehearing, arguing, among other things, that prior FERC precedent does support allowing full retroactive cost recovery, and that the March 2 order essentially elevates a procedural option into a necessity by requiring utilities to seek declaratory orders on Abandonment Incentive eligibility. The utility also took issue with FERC's assertion that granting full retroactive recovery would run counter to its policy that incentives be designed to "encourage future transmission investments." As SDG&E argued, FERC's March 2 order read "encourage" to essentially require a "but-for" analysis, which the Commission had rejected in previous orders.

In its October 26 order denying rehearing, FERC distinguished the cases SDG&E relied on when arguing that retroactive recovery of Abandonment Incentives has been previously permitted by FERC. As the Commission noted, these cases never confronted the question of retroactive recovery, were silent on the matter, or were explicitly identified as "atypical" by the Commission when issuing the order. The cases cited by SDG&E, FERC noted, do in fact reinforce the policy of only allowing Abandonment Incentives from and after the effective date of FERC's order granting the Abandonment Incentive. As the Commission explained, the policy purpose behind incentives like the Abandonment Incentive is to encourage or motivate behavior. Although the Commission does not require utilities to establish that "but for" the Abandonment Incentive, they would not proceed with a project, they must at least "demonstrate that the incentives are rationally related with the investments being proposed."

Finally, FERC also rejected SDG&E's contention that utilities are now required to exercise a discretionary procedural mechanism—request for declaratory order—to secure eligibility for Abandonment Incentives. According to the Commission, although utilities are not required to request Abandonment Incentives before significant expenditures are incurred, "it is reasonable to infer such a requirement, as incentives cease to be incentives if the action that they are intended to promote has already occurred."

A copy of the Commission's order can 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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Adrienne Thompson
Christopher Zentz
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