Xcel Energy Servs. Inc. v. Fed. Energy Regulatory Comm'n

• Decision Date: 19 July 2022
• Docket Number: 20-1295,C/w 20-1426
• Citation: 41 F.4th 548
• Parties: XCEL ENERGY SERVICES INC., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent
• Court: U.S. Court of Appeals — District of Columbia Circuit

41 F.4th 548

XCEL ENERGY SERVICES INC., Petitioner

v.FEDERAL ENERGY REGULATORY COMMISSION, Respondent

No. 20-1295

C/w 20-1426

United States Court of Appeals, District of Columbia Circuit.

Argued November 10, 2021

Decided July 19, 2022

Bryan Killian argued the cause for petitioner. With him on the briefs were Stephen M. Spina and Joseph Lowell.

Lopa Parikh, Jeremy C. Marwell, Margaret E. Peloso, and Matthew X. Etchemendy were on the brief for amicus curiae Edison Electric Institute in support of petitioner.

Jared Fish, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Matthew R. Christiansen, General Counsel, and Robert H. Solomon, Solicitor. Susanna Y. Chu, Attorney, entered an appearance.

Before: Henderson, Millett, and Walker, Circuit Judges.

Millett, Circuit Judge:

Electricity grids are natural monopolies. To prevent utilities such as grid operators from abusing their market power, Congress has given the Federal Energy Regulatory Commission the responsibility to ensure that rates and rules under its jurisdiction are "just and reasonable[.]" 16 U.S.C. § 824d(a). The issue in this case is whether the Commission reasonably used that authority to reject a rule the agency found would risk favoring a vertically integrated operator's own power plants over those of its rivals.

The Public Service Corporation of Colorado is a grid owner and subsidiary of petitioner Xcel Energy Services, Inc. (collectively, "PS Colorado"). The utility is vertically integrated in that it both operates an electricity transmission network and owns power plants that generate about 60% of the power on its grid.

In 2020, PS Colorado filed an application with the Commission to change how it processes power plant requests to interconnect—that is, to plug in—to its grid. Under Commission rules, grid operators generally must consider requests to connect on a first-come, first-served basis. PS Colorado proposed a fast-track process for generators looking to replace an existing power plant with a new one on the same site. (By generators, we mean both power plants and owners and developers of powers plants.) The company reasoned that this fast-track process would avoid wasteful grid-impact studies and would allow new power plants to join the network more quickly. PS Colorado noted that the agency had granted virtually identical requests filed by other grid operators.

The Commission denied PS Colorado's request. It held that the proposal risked unduly preferring the company's own power plants over would-be entrants to its grid. While the Commission had granted similar interconnection proposals in the past, all of those had been filed by independent grid operators, which are operators that do not also own generators on their networks. The agency was less concerned in those cases that the operator would have a reason to prefer some generators over others.

We hold that the Commission reasonably explained its rejection of PS Colorado's proposal. There was nothing arbitrary or capricious about its decision to bar a vertically integrated grid operator from adopting a rule that could favor its own generators and so cement its dominant market position. The Commission's holding is consonant with decades of agency policy reflected in orders upheld by the Supreme Court and our court. The Commission also reasonably applied a different rule to a vertically integrated grid operator than it did to independent grid operators because vertically integrated operators have distinct competitive incentives.

We therefore deny the petitions for review.

I

A

The Federal Power Act gives the Commission the authority to regulate "both the transmission and the wholesale marketing of electricity in interstate commerce" to protect the public interest. Public Citizen, Inc. v. FERC , 7 F.4th 1177, 1182–1183 (D.C. Cir. 2021). In that capacity, the Commission oversees prices for interstate electricity "and all rules and practices affecting such prices." FERC v. Electric Power Supply Ass'n , 577 U.S. 260, 266, 136 S.Ct. 760, 193 L.Ed.2d 661 (2016).

Section 205 of the Act mandates that electrical utilities’ rates and rules within the Commission's jurisdiction be "just and reasonable," and it bars regulated utilities from "mak[ing] or grant[ing] any undue preference or advantage to any person or subject[ing] any person to any undue prejudice or disadvantage[.]" 16 U.S.C § 824d(a), (b). Such utilities must seek permission from the Commission to make any changes to their rates or rules. Id . § 824d(d). A utility seeking a rate or rule adjustment under Section 205 bears the burden of showing that its proposal is just and reasonable. Emera Maine v. FERC , 854 F.3d 9, 24 (D.C. Cir. 2017).

B

Throughout most of the 20th century, electricity in the United States was generated, transmitted, and distributed by vertically integrated monopolies. See Midwest ISO Transmission Owners v. FERC , 373 F.3d 1361, 1363 (D.C. Cir. 2004) (Roberts, J.). Prodded in part by parallel efforts in Congress, in the mid-1990s the Commission undertook efforts to boost competition in the market for wholesale electricity. See Transmission Access Policy Study Group v. FERC , 225 F.3d 667, 682 (D.C. Cir. 2000) (per curiam), aff'd sub nom. New York v. FERC , 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002). As part of that process, the Commission determined that vertically integrated grid operators were unduly discriminating against independent generators. As owners of both transmission wires and power plants, these grid operators had the incentive and ability to favor their own generators over those of rivals either by "refus[ing] to deliver energy produced by competitors or [by] deliver[ing] competitors’ power on terms and conditions less favorable than those they appl[lied] to their own transmissions." New York , 535 U.S. at 8–9, 122 S.Ct. 1012.

To redress that problem, the Commission's Order No. 888 required grid operators to provide unaffiliated power plants with equal access to their grids. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, 61 Fed. Reg. 21,540 (May 10, 1996) ("Order No. 888"). By "remedy[ing] undue discrimination in access to the monopoly owned transmission wires[,]" id . at 21,541, the Commission sought to promote vigorous competition between generators.

To ensure that generators received equal access to transmission grids, the agency required operators to offer standard terms and conditions for transmission service, outlined in a pro forma tariff designed by the Commission. Order No. 888, 61 Fed. Reg. at 21,618 ; Transmission Access Policy , 225 F.3d at 682. The Commission permitted grid operators to alter these standard terms only if they could show that "such deviations are ‘consistent with, or superior to’ the terms in the pro forma tariff." Sacramento Mun. Util. Dist. v. FERC , 428 F.3d 294, 296 (D.C. Cir. 2005) (quoting Order No. 888, 61 Fed. Reg. at 21,619 ). To further prevent market abuses, the Commission encouraged utilities to hand over control of their grids to independent system operators—that is, neutral third parties that would have no reason to favor one set of generators over another. Order No. 888, 61 Fed. Reg. at 21,551.

Soon after issuing Order No. 888, the Commission identified two additional roadblocks to open markets. First, utilities were not employing independent system operators in sufficient numbers, leaving "lingering opportunities for transmission owners to discriminate in their own favor[.]" Midwest ISO , 373 F.3d at 1364. Second, before a generator could take advantage of the newly non-discriminatory transmission rates, it had to connect to the grid. The Commission was concerned that operators could use the complex process of interconnecting to the grid to "favor[ ] affiliated generators over independents[.]" National Ass'n of Regul. Util. Comm'rs v. FERC , 475 F.3d 1277, 1279 (D.C. Cir. 2007).

To address the first issue and "remove remaining opportunities for discriminatory transmission practices[,]" the Commission issued Order No. 2000, which offered more inducements to grid owners to hand over control of their networks to independent regional transmission organizations. Regional Transmission Organizations, 65 Fed. Reg. 810, 811 (Jan. 6, 2000) ("Order No. 2000"); see also Public Util. Dist. No. 1 v. FERC , 272 F.3d 607, 611 (D.C. Cir. 2001) (per curiam). In this opinion, we will refer to independent regional transmission organizations and independent system operators collectively as "independent operators."

The Commission then turned to the problem of operators favoring their own generators when considering grid interconnection requests. See ESI Energy, LLC v. FERC , 892 F.3d 321, 324 (D.C. Cir. 2018). In 2003, the Commission issued an order directing operators to adopt a standard set of procedures for processing applications from generators to plug in to the grid. See Standardization of Generator Interconnection Agreements & Procedures, 68 Fed. Reg. 49,846, 49,847 ¶ 2 (Aug. 19, 2003) ("Order No. 2003"); see also National Ass'n , 475 F.3d at 1279 (upholding Order No. 2003) ; Standardization of Small Generator Interconnection Agreements & Procedures, Order No. 2006, 70 Fed. Reg. 34,190 (June 13, 2005). The Commission explained that it was issuing Order No. 2003 to:

(1) [l]imit opportunities for Transmission Providers to favor their own generation, (2) facilitate market entry for generation competitors by reducing interconnection costs and time, and (3) encourage needed investment in generator and transmission infrastructure.

Order No. 2003, 68 Fed. Reg. at 49,848 ¶ 12.

Under the standard procedures the Commission outlined in its order, operators generally consider interconnection requests on a first-come, first-served basis. See Order No. 2003, 68 Fed. Reg. at 49,851 ¶ 35. Recognizing that vertically integrated operators are more likely to play favorites...