Electricity Markets

Court sends RTO ROE incentive adder case back to FERC

The U.S. Court of Appeals for the Ninth Circuit on Jan. 8 granted a petition for review challenging Federal Energy Regulatory Commission orders that awarded investor-owned Pacific Gas & Electric Company a 50-basis point adder on its allowed return on equity (ROE) for its participation in the California ISO.

The appeal was filed by the California Public Utilities Commission. Sacramento Municipal Utility District, the Transmission Agency of Northern California and the California Department of Water Resources intervened in support of the CPUC.

Under FERC Order No. 679, which implemented section 219 of the Federal Power Act, FERC may award ROE incentive adders to utilities that participate in regional transmission organizations and independent system operators as a way of encouraging such participation.

In the FERC orders reviewed by the Ninth Circuit, the Commission summarily granted PG&E a 50-basis point ROE adder on its CAISO transmission owner revenue requirement. On appeal, the CPUC argued that FERC made the wrong call in summarily granting PG&E an incentive aimed at encouraging RTO participation since PG&E is obligated by state law to remain in CAISO absent CPUC authorization to withdraw.

The Ninth Circuit agreed with the CPUC.  “FERC’s determination that PG&E was entitled to incentive adders for remaining in the Cal-ISO was arbitrary and capricious,” the court said in its opinion.

The Ninth Circuit said that FERC did not reasonably interpret Order 679 as justifying summary grants of adders for remaining in a transmission organization. “Because its interpretation was unreasonable, FERC’s grants of adders to PG&E were an unexplained departure from longstanding policy. Moreover, FERC created a generic adder in violation of [Order 679],” the opinion states.

Under Order No. 679, a transmission-owning utility participating in an RTO is presumed to be eligible for an ROE adder, but the court found that FERC had improperly applied this presumption such that “ongoing membership itself is the sole criterion of receipt of an incentive adder.”

Order No. 679 commits FERC to case-by-case review of incentives and because an incentive cannot induce behavior that is already legally-mandated, the court reasoned that “the voluntariness of a utility’s membership in a transmission organization is logically relevant to whether it is eligible for an adder.”

The court called FERC’s argument that the voluntariness of a utility’s membership in an RTO is irrelevant to its eligibility for an incentive adder “a post hoc rationalization of its actions.” The court said that FERC “never before explicitly articulated the interpretation it relies on, even though, as the author of Order 679, it could have easily incorporated the interpretation into the order.”

Order 679 provides that utilities that demonstrate ongoing membership in transmission organizations will be “presumed to be eligible” for incentive adders, but it is silent as to whether that presumption can be rebutted for utilities that cannot voluntarily leave their organizations, the court said.  By observing in Order 679 that transmission organization membership was ‘generally voluntary,’ FERC indicated that it knew that some utilities could not voluntarily leave,” the opinion went on to say.

“FERC could have foreseen a challenge like CPUC’s challenge here,” the Ninth Circuit said.

The court went on to find that FERC acted arbitrarily and capriciously by creating a generic adder in contravention of Order 679’s requirement of case-by-case review of adders.

“Order 679 provides that FERC will approve incentive adder requests ‘when justified’ and will evaluate such requests ‘on a case-by-case basis,’” the court said. “Order 679 explicitly rejected a proposal to adopt a generic 50-basis-point incentive adder for ongoing transmission organization membership.”

In addition, the court rejected FERC’s contention that the CPUC appeal was an impermissible collateral attack on Order No. 679.

The court remanded the case to FERC for further proceedings consistent with the court’s ruling.

FERC recently signed off on adder for Southern California Edison

FERC on Dec. 29 issued an order that granted investor-owned Southern California Edison Company a similar 50-basis point ROE adder, which drew a dissent from Commissioner Richard Glick in which he raised some of the same objections accepted by the court in its opinion (Docket Nos. ER18-169, EL18-44).

Glick dissented “from the Commission’s decision to summarily award SoCal Edison an ROE ‘incentive adder’ on the basis of SoCal Edison’s membership in CAISO.”

Glick said that while he does not question the benefits of membership in an RTO, and he supports using an RTO participation adder where it incentivizes RTO membership, “I believe that the Commission’s approach in this proceeding essentially transforms the ‘case-by-case’ evaluation of a request for an RTO participation adder that the Commission described in Order No. 679 into exactly the type of generic determination that the Commission forswore in Order No. 679 and subsequent orders.”