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Seventh Circuit Rejects FERC's Cost-Spreading Mechanism for High-Voltage Transmission, Raising Questions for the Pacific Northwest

July 01, 2014 posted by Eric Christensen

Last week, the U.S. Court of Appeals for the Seventh Circuit once again rejected a cost-spreading mechanism developed by the Federal Energy Regulatory Commission ("FERC") for high-voltage transmission facilities constructed in the PJM Interconnection. While PJM is located on the opposite coast, the Seventh Circuit's decision may nonetheless have important implications for transmission construction here in the Pacific Northwest. The basic problem FERC has wrestled with is that utilities in the eastern end of PJM's footprint in the heavily-populated mid-Atlantic region will benefit disproportionately from construction of high-voltage transmission. By contrast, utilities in the western portion of PJM will receive only modest benefits from high-voltage transmission construction, which is currently driven largely by the need to improve reliability in the east. FERC has been wrestling with this problem for more than seven years, with final resolution likely several years away. In the Northwest, the problem is a mirror image of PJM -- congestion and reliability problems are largely in population centers along the West Coast, meaning that high-voltage transmission upgrades are likely to disproportionately benefit utilities serving these areas. FERC's initial attempt to resolve the problem was to require PJM utilities to pay for high-voltage transmission on a pro rata basis, with each member utility paying based on its share of loads in PJM. In 2009, in a decision written by influential Judge Richard Posner, the Seventh Circuit vacated FERC's order, finding that "FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members." Because the administrative record lacked evidence that the benefits received by utilities in PJM's western region were "at least roughly commensurate" with the costs imposed on those utilities, the court concluded that FERC's orders were not supported by substantial evidence. Judge Richard Cudahy dissented, concluding that FERC's solution, pro rata assignment of costs, "eliminates not only lawsuits but nitpicking controversies of every sort and delays standing in the path of action." Prophetically, Judge Cudahy argued that the majority's approach would lead inevitably to long delays and would undercut the nation's "urgent project to upgrade its electric transmission grid, which for years has been generally regarded as inadequate, and may become more deficient with the addition of major new anticipated loads." Judge Cudahy's opinion is particularly notable because he was a member of the Wisconsin Public Service Commission before his appointment to the federal bench, and he continues to publish frequently on energy and regulatory issues. Last week's decision examines FERC's decisions in response to the Seventh Circuit's 2009 remand and once again finds FERC's orders lacking. Once again, Judge Posner authored the opinion for the split panel, with Judge Cudahy writing an impassioned dissent. This time, FERC concluded that a "postage stamp" rate -- a uniform charge per unit of electricity transmitted -- would best support construction of high-voltage transmission in PJM. Once again utilities and state commissions from PJM's western region challenged FERC's orders in the Seventh Circuit. Once again Judge Posner rejected FERC's rate mechanism, finding that FERC failed to meet the "rough commensurability" standard laid down in the 2009 decision because it failed to perform any cost-benefit analysis with regard to PJM's western utilities. In Judge Posner's view, "the basic fallacy" of FERC's analysis "is to assume that the 500-kV lines that have been or will be built in PJM's eastern region are basically for the benefit of the entire grid" where those lines primarily address reliability problems along the Eastern Seaboard and therefore primarily benefit utilities in PJM's eastern region. FERC's "hand-wringing" about the difficulty of accurately measuring the benefits of high-voltage transmission, especially over the decades-long life of such facilities, was not, in Judge Posner's view, sufficient to justify FERC's failure to conduct some form of cost-benefit analysis. In dissent, Judge Cudahy criticized the majority for laboring under the "impression that somehow there is a mathematical solution to this problem." In estimating the benefits of high voltage transmission over long periods, however, FERC is "dealing with incommensurable forces and conditions as skillfully and honestly as it can." Judge Cudahy therefore would allow FERC to presume that the costs of high-voltage transmission can be socialized broadly over the region in which the facilities are constructed. Of particular interest, Judge Posner's majority opinion contrasts last year's opinion (also written by Judge Posner) upholding postage-stamp rates for high-voltage lines in the Midwest Independent System Operator ("MISO"). Those lines are designed to move wind power from the high plains to load centers farther to the east. In that case, Judge Posner observed, the evidence demonstrated that "benefits from the new lines would be spread almost evenly across all utilities," justifying postage-stamp rates. In the PJM case, however, all FERC did "was express a hope that things might turn out that way." While the Pacific Northwest lacks an independent system operator like PJM or MISO, these cases nonetheless may have major implications for transmission rates and investments in the region. If courts in this region follow the Seventh Circuit's lead, broad cost-spreading for high-voltage transmission facilities will be allowed only where a record can be established showing widely-spread benefits of that transmission. As with the MISO case, it is likely that such a case could be made for several high-voltage transmission projects now in construction or planning that are designed to move wind power from, for example, areas of eastern Montana and Wyoming with premium wind resources to load centers along the West Coast. On the other hand, cost-spreading for transmission projects designed to relieve transmission constraints or reliability problems in western population centers is likely to be limited. If you have any questions about FERC, electric transmission, rate regulation, the federal appeals courts, or other matters involving the energy or environmental law, please contact a member of GTH's Energy, Telecommunications, and Utilities or Environment & Natural Resources practice groups. We're proud that our partner Jim Waldo was recently named 2013 Lawyer of the Year for Energy and Natural Resources Law, and six practice members were recently recognized as Washington Super Lawyers.