Maine Public Utilities Com'n v. F.E.R.C.

• Decision Date: 30 June 2006
• Docket Number: No. 05-1001.,05-1001.
• Citation: 454 F.3d 278
• Parties: MAINE PUBLIC UTILITIES COMMISSION, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Massachusetts Municipal Wholesale Electric Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 278

454 F.3d 278

MAINE PUBLIC UTILITIES COMMISSION, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Massachusetts Municipal Wholesale Electric Company, et al., Intervenors.

No. 05-1001.

United States Court of Appeals, District of Columbia Circuit.

Argued April 21, 2006.

Decided June 30, 2006.

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Charles G. Cole argued the cause for Transmission Owner Petitioners and supporting intervenors. With him on the briefs were David B. Raskin, Alice E. Loughran, Kenneth G. Jaffe, Elias G. Farrah, Mary E. Grover, Thomas N. Wies, G. Philip Nowak, Michael E. Small, Sonia C. Mendonca, and Mary A. Murphy. Michael F. McBride, Wendy N. Reed, and Stephen L. Teichler entered appearances.

Harvey L. Reiter argued the cause for State Commission Petitioners and supporting intervenors. With him on the briefs were Lucy Holmes Plovnick, John P. Coyle, Scott H. Strauss, and Randall L. Speck. Dennis Lane, Allan B. Taylor, and Michael P. Shea entered appearances.

Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were John S. Moot, General Counsel, and Judith A. Albert, Attorney.

David B. Raskin, Charles G. Cole, Alice E. Loughran, Kenneth G. Jaffe, Elias G. Farrah, Mary E. Grover, Thomas N. Wies, G. Philip Nowak, Michael E. Small, Sonia C. Mendonca, and Mary A. Murphy were on the brief for intervenors Transmission Owners in support of respondent on Retention of Return of Equity Adder. Wendy N. Reed entered an appearance.

Harvey L. Reiter, Lucy Holmes Plovnick, John P. Coyle, Scott H. Strauss, and Randall L. Speck were on the brief for intervenors in support of FERC on Elimination of ROE Adder and RTO Termination Provisions. John E. McCaffrey entered an appearance.

Before: GINSBURG, Chief Judge, and ROGERS and GARLAND, Circuit Judges.

ROGERS, Circuit Judge.

In these consolidated cases¹, owners of electric transmission facilities and several state public utility commissions petition for review of orders of the Federal Energy Regulatory Commission conditionally approving a proposal to form a regional transmission organization in New England ("RTO-NE"). The transmission owner members ("TOs") challenge FERC's authority to reject the provision of their Transmission Operating Agreement providing that FERC review withdrawals from the RTO under Mobile-Sierra's public interest standard.² The TOs also contend that FERC's rejection of this provision, and its rejection of an incentive adjustment to the TOs' return on equity ("ROE") for local transmission service, were arbitrary and capricious. The State Commissions maintain that FERC's approval of a 50 basis point incentive adjustment to the TOs' ROE for regional transmission was arbitrary and capricious.

RTOs are a creation of FERC's, and FERC has broad authority over the decision to approve a RTO. A proposal to establish a RTO is essentially a proposal to change the rates on file; as such, FERC had authority under Section 205 of the Federal Power Act ("FPA"), 16 U.S.C. § 824d (2000), to modify the operating agreement as a condition of approving the RTO. Further, in light of concerns about the effects on market participants and the electricity market, FERC was not arbitrary and capricious in requiring the "just and reasonable" standard of review for withdrawals from the RTO. Finally, consistent with the court's deferential review under § 205 of the FPA of FERC's determinations regarding rate design, FERC's ROE incentive adjustments were not arbitrary and capricious. Accordingly, we deny the petitions for review.

I.

In Order 2000, FERC required all public utilities that own, operate, or control interstate transmission facilities either to file a proposal to participate in a RTO or to describe their efforts toward joining one. See Regional Transmission Organizations, F.E.R.C. Stats. & Regs. ¶ 31,089 (1999), 65 Fed.Reg. 810 (2000) ("Order 2000"), clarified on reh'g, F.E.R.C. Stats. & Regs. ¶ 31,092, 65 Fed.Reg. 12,088 (2000) ("Order 2000-A") (codified at 18 C.F.R. § 35.34 (2006)), petitions for review dismissed sub nom. Pub. Util. Dist. No. 1 of Snohomish County, Washington v. FERC, 272 F.3d 607, 614 (D.C.Cir.2001) ("Snohomish County"). FERC conceived of the RTOs as mechanisms for providing large and stable transmission systems that would reduce regional pricing disparities and create an efficient market for new power generators. See Order 2000, F.E.R.C. Stats. & Regs. ¶ 31,089, at 30,933; Order 2000-A, F.E.R.C. Stats. & Regs. ¶ 31,092, at 31,355; see also Pub. Serv. Comm'n of Ky. v. FERC, 397 F.3d 1004, 1006-07 (D.C.Cir.2005). By combining various utilities' segmented transmission facilities into a regional transmission grid under the control of one independent entity, FERC anticipated that RTOs would eliminate certain transmission inefficiencies and opportunities for discrimination that hindered the formation of competitive wholesale electric energy markets and that these new structures would therefore result in significant benefits to the public. See Snohomish County, 272 F.3d at 610-12.

By 2003, however, FERC had fully approved only two RTOs. See Proposed Pricing Policy for Efficient Operation and Expansion of Transmission Grid, 2003 WL 245747, 102 F.E.R.C. ¶ 61,032, at 61,062 (2003) ("Pricing Policy"). To encourage timely formation of RTOs, FERC proposed a 50 basis point incentive adjustment ("adder") to the ROEs for TOs participating in a FERC-approved RTO, and established the deadline of December 31, 2004 for qualifying for the proposed incentives. Id. at 61,065-66.

On October 31, 2003, an independent system operator ("ISO"), ISO-New England, and a group of TOs submitted for FERC approval, under Section 205 of the FPA, a proposal to establish RTO-NE. Under the TOs' Transmission Operating Agreement ("TOA"), the TOs would transfer operational authority over their transmission facilities to the RTO, subject to certain reserved rights. Section 10.01 of the TOA set the terms and conditions for members' withdrawal from RTO participation and termination of the RTO, providing in subpart (f) that withdrawal "shall be effective unless the FERC finds that such ... withdrawal is contrary to the public interest under the public interest standard of review as set forth" in the Mobile-Sierra doctrine, supra note 2. In a related filing, on November 4, 2003, the TOs requested approval of a ROE recoverable under the regional and local transmission rates charged by RTO-NE. The ROE would consist of a base ROE of 12.8 percent, an additional 50 basis points for participation in the RTO (and an additional 100 basis points to reward future expansion by the New England TOs, which is not at issue). The TOs sought the 50 basis point adder "to reward their willingness to transfer operational control authority over their transmission facilities to RTO-NE," and noted that FERC's proposed Pricing Policy stated:

any entity that transfers operational control of transmission facilities to a [FERC]-approved RTO would qualify for an incentive adder of 50 basis points on its ROE for all such facilities transferred.

Pricing Policy, 102 F.E.R.C. at 61,061.

FERC conditionally approved the RTO-NE by Order of March 24, 2004. See ISO New England Inc., Order Granting RTO Status Subject to Fulfillment of Requirements and Establishing Hearing and Settlement Judge Procedures, 2004 WL 595610, 106 F.E.R.C. ¶ 61,280 (2004) ("Approval Order"). The petitioners challenge three determinations FERC made in the Approval Order: First, FERC rejected the TOs' proposal that the Mobile-Sierra "public interest" standard govern FERC review of termination and withdrawal from RTO-NE and ordered that the TOA be modified to set the "just and reasonable" standard for such review in accordance with Section 205 of the FPA and FERC's published guidance. See Guidance on Regional Transmission Organization and Independent System Operator Filing Requirements Under the Federal Power Act, 2003 WL 22110804, 104 F.E.R.C. ¶ 61,248, at 61,825 (2003) ("Guidance"). FERC explained that the "public interest" standard "would prohibit any meaningful review ... under Section 205 ... even in those instances where revisions to RTO-NE's operating agreements may be necessary or appropriate as a result." Approval Order, 106 F.E.R.C. at 62,040 (para.59). Second, FERC summarily approved, without suspension or hearing, the 50 basis point ROE adder for regional transmission service, agreeing with the TOs that their voluntary entry into RTO-NE and their commitment to transfer day-to-day operational control to the RTO warranted the ROE adder. Id. at 62,056. FERC explained that the adder was consistent with its rulings in other cases and appropriate here "because of the region-wide benefits that w[ould] be set in place ...." Id. (para.245). Third, FERC rejected the TOs' proposed 50 basis point adder for local network service transmission not controlled by the RTO on the ground that it was beyond the scope of the incentive. Id. The TOs were directed to make a compliance filing within 90 days. Id. at 62,057. Upon various intervenors' requests for rehearing or clarification of the Approval Order, FERC reaffirmed its determinations by Order of November 3, 2004. ISO New England, Inc., Order Accepting Partial Settlement, Subject to Conditions; Accepting, in Part, Compliance Filings; and Granting, in Part, and Denying, in Part, Requests for Rehearing, 2004 WL 2477473, 109 F.E.R.C. ¶ 61,147 (2004) ("Rehearing Order"). These petitions for review followed.

II.

The TOs challenge FERC's modification of the termination provision of the TOA on the ground that FERC violated the Mobile-Sierra doctrine by rejecting the "public interest" standard agreed to by the parties and ordering that termination and withdrawals be subject to the "just and reasonable" standard, which would grant FERC more searching review....