United States: D.C. Circuit Vacates FERC Orders On Transmission Owner Funding For Network Upgrades In MISO

On January 26, 2018, a divided panel of the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") vacated a series of FERC orders that removed from transmission owners in the Midcontinent Independent System Operator, Inc. ("MISO") the ability to elect to fund the construction of network upgrades on their transmission systems to accommodate the interconnection of new generation. The D.C. Circuit vacated FERC's orders and remanded the case back to FERC for further proceedings.

Network upgrades are modifications to a transmission system that a transmission owner must construct in order to accommodate the interconnection of a new generator. Under the MISO Tariff, generators have the ultimate payment responsibility for network upgrades. At issue in this case was how generators meet that payment obligation. There are two options in the MISO Tariff available with respect to the provision of capital to fund the construction of network upgrades. Under one option, the transmission owner provides the capital to fund the network upgrades, and recovers its costs over time by assessing a network upgrade charge on the interconnecting generator that includes both a return of capital, and a return on capital. Under the second option, the interconnecting generator provides the capital to construct the network upgrades. Under this second "generator funding" option, the transmission owner does not earn a return on the funding of the network upgrades because the transmission owner does not provide the capital. Prior to FERC's orders under review, the MISO Tariff vested in the transmission owner, as opposed to the interconnecting generator, the ability to choose between these two funding options.

In the series of orders under review by the court, FERC concluded that providing MISO transmission owners with the ability to elect to fund network upgrades "may be unjust, unreasonable, unduly discriminatory or preferential because it . . . may result in discriminatory treatment by the transmission owner of different interconnection customers." FERC found that a transmission owner could potentially discriminate against third-party generators in favor of its own generators by electing to apply two different funding schemes to required network upgrades (transmission owner funding for one, generator funding for another). FERC ordered MISO to modify its Tariff to require generator consent before the transmission owner funding option could be employed. Several MISO transmission owners ("Petitioners") appealed to the D.C. Circuit.

In its January 26, 2018 opinion, the D.C. Circuit held for the Petitioners and vacated FERC's orders. The court found that FERC's reasoning that removing the transmission owner's option to fund network upgrades was necessary to prevent transmission owners from discriminating against third-party generators in favor of their owner generation was lacking in evidence, economic theory, or logic. The court noted that of the six petitioning MISO transmission owners, only one owned generation, indicating that the incentive to discriminate could not logically apply to most of the Petitioners.

Further, the court found that FERC had failed to address Petitioners' argument that removal of the transmission owner's ability to elect to fund network upgrades effectively compelled MISO transmission owners to construct, own, and operate additions to their transmission systems (i.e., network upgrades) without the opportunity to earn a return. Specifically, the court agreed with Petitioners that FERC had not addressed at all the increased risks that transmission owners must bear when constructing, owning, and operating new transmission facilities, nor the need for transmission owners to be compensated for assuming these risks. The court also acknowledged that U.S. Supreme Court precedent states that a regulated entity like a transmission owner is entitled to earn a return that is sufficient to attract new capital to its enterprise, and that FERC had failed to address Petitioners' arguments that its orders—which would effectively require MISO transmission owners to construct, own, and operate transmission facilities with no return at all—inhibited their ability to attract new capital. The court did not decide, but remanded to FERC, the fundamental question of whether transmission owners should ever be compelled to construct facilities with no opportunity to earn a return.

Senior Circuit Judge Laurence Silberman authored the court's opinion. Circuit Judge Judith Rogers issued a dissenting opinion. A copy of the opinion can be found here.

*Disclosure – Troutman Sanders LLP represented the successful Petitioners in this case.

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