Electricity Markets

Court backs FERC in SDG&E transmission incentive case

The U.S. Court of Appeals for the District of Columbia Circuit on Jan. 15 affirmed Federal Energy Regulatory Commission decisions in a proceeding involving investor-owned San Diego Gas & Electric (SDG&E) and FERC’s transmission “abandonment incentive.”

Under the incentive, a “public” utility, upon a proper showing, can be authorized to recover 100 percent of the prudently-incurred costs of a transmission project abandoned or cancelled due to factors beyond the utility’s control. 

FERC refers to electric utilities it regulates as “public” utilities; however, these are not municipal utilities, but rather investor-owned utilities.

The abandonment incentive is intended to promote transmission investment by offering greater rate protection than FERC’s traditional policy for  cancelled projects, which only allows for utilities to recover 50% of abandoned project costs.  The Commission’s rules governing the incentive were established in Order No. 679, which was issued in 2006. Under those rules, a public utility seeking an abandonment incentive for a transmission project must make a filing at FERC demonstrating that the incentive is justified for the particular project.

SDG&E filed petition at FERC

SDG&E in 2015 filed a petition for declaratory order at FERC asking the Commission to grant SDG&E the abandonment incentive for its South Orange County Reliability Enhancement project. The petition acknowledged that SDG&E had already incurred $31 million of expenses in connection with the project at the time it made the FERC filing. 

The public power utilities for the Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside, California (Six Cities) jointly protested SDG&E’s petition. The cities argued that any abandonment incentive given to SDG&E should be limited to South Orange County Reliability Enhancement project costs incurred after issuance of a FERC order on SDG&E’s petition for declaratory order. 

In a 2016 order on SDG&E’s petition, FERC agreed with the Six Cities, granting the abandonment incentive only as to project costs incurred by SDG&E after the date of the 2016 order.  SDG&E challenged this limitation on appeal.

Court affirms FERC orders

The appeals court, in a 2-1 ruling, affirmed FERC’s orders as consistent with the requirements of Order No. 679 and the Commission’s longstanding incentive rate policies under the Federal Power Act. 

The court noted that Order No. 679 requires a project-specific showing of a nexus between a requested incentive and project investment and concludes that FERC’s prospective application of the abandonment incentive in this case “aligns with its longstanding policy that rate incentives must be prospective and that there must be a connection between the incentive and the conduct meant to be induced.”

The court said in this respect that its review of  incentive rate programs has never questioned the “obvious proposition” that FERC “will not, and cannot, create incentives to motivate conduct that has already occurred.” 

The court also found that giving prospective application to the abandonment incentive is consistent with the theory that the incentive should benefit ratepayers by reducing capital cost risk premiums.  The court reasoned that granting the abandonment incentive could not reduce risk premiums on capital that had already been invested.

The court rejected a number of other objections raised by SDG&E, including arguments that FERC’s limitation of the abandonment incentive was inconsistent with Order No. 679 and FERC’s regulations.

Finally, the court did not agree with the contention that FERC improperly departed from prior decisions in which it did not restrict the abandonment incentive only to future project expenditures. The court noted that in most of these cases no party filed a protest objecting on this ground, “as the Six Cities did here.” 


Judge A. Raymond Randolph wrote a dissent in response to the opinion, citing what he said were “three basic problems” with FERC’s decision.

The three problems cited by Randolph “are that the theory on which FERC relies is invalid; that the language of the regulation does not support the decision; and that FERC’s ruling is an unexplained departure from its precedents.”