El Paso Elec. Co. v. Fed. Energy Regulatory Comm'n

Docket Number18-60575
Decision Date02 August 2023
Citation76 F.4th 352
CourtU.S. Court of Appeals — Fifth Circuit

Patrick Joseph Pearsall, Marnie A. McCormick, Duggins Wren Mann & Romero, L.L.P., Austin, TX, for Petitioner.

Matthew Estes, Carol Jayne Banta, Robert Harris Solomon, Esq., Solicitor, Federal Energy Regulatory Commission, Washington, DC, for Respondent.

Catherine Patricia McCarthy, Bracewell, L.L.P., Washington, DC, Tony Lee Visage, Esq., Bracewell, L.L.P., Houston, TX, for Intervenors Black Hills Colorado Electric, L.L.C., Black Hills Power, Incorporated, Cheyenne Light Fuel & Power Company.

Jennifer Lynn Spina, Esq., Arizona Public Service Company, Phoenix, AZ, for Intervenor Arizona Public Service Company.

Michael T. Raupp, Husch Blackwell, L.L.P., Kansas City, MO, for Intervenor NV Energy, Incorporated.

Julia Dryden English, Senior Counsel, McGuireWoods, L.L.P., Washington, DC, for Intervenor Public Service Company of New Mexico.

Daniel Archuleta, Troutman Pepper Hamilton Sanders, L.L.P., Washington, DC, for Intervenors Tucson Electric Power Company, UNS Electric, Incorporated.

John Daniel Skees, Morgan, Lewis & Bockius, L.L.P., Washington, DC, for Intervenors Xcel Energy Services, Incorporated, Public Service Company of Colorado.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, for Intervenor Sacramento Municipal Utility District.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, Michael Ray Postar, Duncan, Weinberg, Genzer & Pembroke, P.C., Washington, DC, for Intervenor Transmission Agency of Northern California.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, Sarah Leonard, Platte River Power Authority, Fort Collins, CO, Bhaveeta K. Mody, Esq., Duncan, Weinberg, Genzer & Pembroke, P.C., Washington, DC, for Intervenor Platte River Power Authority.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, Karilee Ramaley, Salt River Project Agricultural Improvement and Power District, Phoenix, AZ, for Intervenor Salt River Project Agricultural Improvement and Power District.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, Syndi Driscoll, Los Angeles Department of Water and Power, Los Angeles, CA, for Intervenor Los Angeles Department of Water and Power.

Timothy Woolley, TriState Generation & Transmission Association, Incorporated, Denver, CO, for Intervenor TriState Generation and Transmission Association, Incorporated.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, Kenneth Burgess, Colorado Springs Utilities, Colorado Springs, CO, for Intervenor Colorado Springs Utilities.

Clifford Alan Godiner, Esq., Thompson Coburn, L.L.P., Saint Louis, MO, for Intervenor Basin Electric Power Cooperative.

Harvey L. Reiter, Stinson, L.L.P., Washington, DC, David Fitzgerald, Davison Van Cleve, P.C., Portland, OR, for Intervenor Arizona Electric Power Cooperative, Incorporated.

Before Jones, Southwick, and Ho, Circuit Judges.

Edith H. Jones, Circuit Judge:

Seven years ago, this court vacated, as arbitrary and capricious, the Federal Energy Regulatory Commission's ("FERC") cost allocation scheme for electrical grid improvements in the WestConnect region, which covers utility service to much of the American West. El Paso Elec. v. FERC, 832 F.3d 495, 505-06 (5th Cir. 2016) ("El Paso Elec. I"). Because FERC had not reasonably explained how its orders, which implement the generally applicable Order No. 1000, complied with the Federal Power Act's requirement that rates be "just and reasonable," we remanded for further proceedings. FERC was instructed to provide more complete justification for its orders. The petition under review asserts that the reasons FERC gave on remand remain insufficient. We agree. FERC's orders violate the Federal Power Act as a matter of law and, alternatively, the agency has again inadequately explained its actions. The cost causation principle that binds FERC does not authorize it to force its regulated jurisdictional utilities to assume the costs of providing service to non-jurisdictional utilities. We therefore GRANT the petition and REVERSE the orders.


The court thoroughly summarized this case's regulatory, factual, and procedural history in El Paso Elec. I. Only the highlights and more recent developments warrant attention here. See 832 F.3d at 499-503.

A. The Federal Power Act

The Federal Power Act ("FPA") gives FERC "jurisdiction over all facilities" involved in "the transmission of electric energy in interstate commerce." 16 U.S.C. § 824(b)(1). The FPA requires that "[a]ll rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy . . . be just and reasonable." 16 U.S.C. § 824d(a). "For decades, the Commission and the courts have understood this requirement to incorporate a 'cost-causation principle'—the rates charged for electricity should reflect the costs of providing it." Old Dominion Elec. Coop. v. FERC, 898 F.3d 1254, 1255 (D.C. Cir. 2018). This principle is "foundational" and a "basic tenet" of ratemaking. El Paso Elec. I, 832 F.3d at 505; S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41, 85 (D.C. Cir. 2014) (per curiam) ("South Carolina").

FERC need not "utilize a particular formula" when applying this principle, nor "allocate costs with exacting precision." Old Dominion, 898 F.3d at 1260. FERC may even "emphasize other, competing policies and approve measures that do not best match cost responsibility and causation." Carnegie Nat. Gas Co. v. FERC, 968 F.2d 1291, 1294 (D.C. Cir. 1992). Nevertheless, "all approved rates [must] reflect to some degree the costs actually caused by the customer who must pay them." K N Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C. Cir. 1992); see also Ill. Com. Comm'n v. FERC, 576 F.3d 470, 477 (7th Cir. 2009) (Benefits should be "at least roughly commensurate" with costs.). Courts have generally held that costs "are to be allocated to those who cause the costs to be incurred and reap the resulting benefits." Nat'l Ass'n of Reg. Util. Comm'rs v. FERC, 475 F.3d 1277, 1285 (D.C. Cir. 2007); see also BNP Paribas Energy Trading GP v. FERC, 743 F.3d 264, 268 (D.C. Cir. 2014) (The principle is a "matter of making sure that burden is matched with benefit.").

B. Order No. 1000

In 2011, FERC promulgated Order No. 1000 to promote efficient and cost-effective regional transmission planning and provide that grid improvement costs are allocated fairly among regional beneficiaries. See Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000, 136 FERC ¶ 61,051 at PP 4, 487 (2011) ("Order No. 1000").1 Noting the "fundamental link" between regional planning and "cost allocation," FERC implemented a number of cost allocation reforms. Id. at P 599. These require jurisdictional utilities to develop "a method . . . for allocating ex ante the costs of new regional transmission facilities that complies with six regional cost allocation principles." El Paso Elec. I, 832 F.3d at 499 (quoting South Carolina, 762 F.3d at 53). The first and "most pertinent" is the well-established "cost causation" principle. Id. Accordingly, the "cost of transmission facilities must be allocated to those within the transmission planning region that benefit from those facilities in a manner that is at least roughly commensurate with estimated benefits." Id. at 500; Order No. 1000 at PP 586, 622.

A stated purpose is "to prevent subsidization by ensuring that costs and benefits correspond to each other." Order No. 1000-A at P 578. "Free ridership," where "an entity is not required to pay for a benefit it receives," is the main form of subsidization combatted by the cost-causation principle. Id. at P 573. Requiring jurisdictional utilities to "allocate the costs of their new transmission facilities to the beneficiaries of those facilities" is one step toward "eliminat[ing] free riders on the transmission grid." Id. at PP 568-69. Further, stated Order No. 1000, if compliance with the cost causation principle were not mandated, FERC would be unable to address free ridership and thus "ensure that rates . . . are just and reasonable." Id. at P 535.

Crucially, Order No. 1000 applies only to public utilities subject to FERC jurisdiction. FERC appears to have statutory authority under § 211A of the FPA "to require participation in these processes by non-jurisdictional utilities," but it "has thus far declined to exercise" it. El Paso Elec. I, 832 F.3d at 500 (emphasis omitted). Non-jurisdictional utilities may, however, join a transmission planning region for cost allocation purposes by "enrolling" in the region. Order No. 1000-A at PP 275, 656. But Order No. 1000 explicitly provides that jurisdictional utilities are "not required to plan for the transmission needs of . . . a non-[jurisdictional] utility transmission provider that has not made the choice to join." Id. at P 276.

C. Factual and Procedural History

In the WestConnect transmission planning region, jurisdictional and non-jurisdictional electric utility transmission providers are roughly equal in number and are interspersed throughout the vast geographic region. El Paso Elec. I, 832 F.3d at 501. According to FERC, the jurisdictional and non-jurisdictional utilities' transmission services are highly integrated. Historically, they enjoyed a mutually beneficial relationship in which they planned new transmission facility projects together and allocated funding through negotiated agreement. Id. Under Order No. 1000 as implemented by the cost allocation scheme ordered by FERC, however, the WestConnect jurisdictional utilities must take into account the transmission needs of the non-jurisdictional utilities when planning a new facility and the jurisdictional utilities must pay for the facility's development. Id. at 501-02. The non-jurisdictional...

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