On March 22, 2013, the Federal Energy Regulatory Commission (“FERC”) issued orders addressing two Regional Transmission Organizations’ (“RTO”) filings to comply with Order No. 1000, FERC’s landmark rulemaking on regional and interregional electric transmission planning and cost allocation. The orders purport to provide greater opportunities for participation and investment in regional transmission by entities that are not currently public utility transmission providers, and set up potential jurisdictional conflicts with state regulators. The orders also reveal FERC’s interpretation of the bounds of the Mobile-Sierra doctrine, as it applies to multi-party RTO agreements, and suggest that FERC may be stepping back from its holding in Order No. 1000 that facilities aimed at addressing transmission system reliability should not be treated differently than other facilities.
Commissioners Moeller and Clark dissented from both orders, citing the likelihood of additional litigation that they anticipate will result from FERC’s actions in both proceedings and the potential threats to transmission system reliability.
Background
In Order No. 1000, FERC directed all public utility transmission providers to develop processes to engage in regional transmission planning with other public utility transmission providers, consider transmission needs driven by federal, state, and local public policy mandates, participate in broader interregional transmission coordination, and establish new cost allocation methods for regional and interregional transmission facilities that result from the Order No. 1000 processes, based on six Order No. 1000 cost allocation principles. As part of Order No. 1000, all public utility transmission providers (including RTOs) were required to remove from their FERC-jurisdictional tariffs and agreements any provisions that grant a “federal right of first refusal” to a current (“incumbent”) public utility transmission provider to construct regional transmission facilities if the costs of such facilities are allocated to customers outside of the incumbent utility’s retail distribution service territory or footprint.
FERC issued two separate orders addressing the compliance filings of the Midwest Independent Transmission System Operator, Inc. (“MISO”) and the PJM Interconnection, LLC (“PJM”), conditionally accepting both RTOs’ filings and directing both to submit additional proposals to comply with Order No. 1000.
MISO
In its order addressing MISO’s compliance filing, FERC found that MISO “largely complies” with Order No. 1000. MISO proposed to adopt a “competitive solicitation” approach to regional transmission development, whereby the MISO Board of Directors will continue to determine which regional transmission facilities will be built, but rather than assign projects based on its existing construction and ownership assignment process to incumbent utilities, MISO will solicit bids for any “Open Transmission Projects,” from interested developers, whether they are incumbents or new entrants. FERC conditionally accepted MISO’s proposal, subject to an additional filing to develop certain aspects further, such as the criteria MISO will use to determine which potential developers are qualified to submit bids.
In conditionally accepting MISO’s filing, FERC rejected various MISO proposals that address the role of state regulatory commission and state laws in regional transmission planning and cost allocation. Specifically, FERC rejected MISO’s proposal to allow state regulatory commissions, if they so choose, to select the developer for regional projects located within their state. FERC also rejected MISO’s proposal to assign projects by default to an incumbent utility in states where a state law dictates that incumbent utilities have a right to construct transmission facilities. FERC likewise rejected MISO’s proposal to preserve for incumbent transmission owners the right to develop and own any regional transmission facilities that are planned to be constructed on the incumbent transmission owner’s rights of way. Rejection of these provisions calls into question how MISO will comply with competing federal and state jurisdictional interests regarding transmission construction.
FERC accepted a separate, related filing by MISO and the MISO Transmission Owners to reform cost allocation for “Baseline Reliability Projects,” which are transmission facilities aimed at addressing potential violations of federal Reliability Standards. In their filing, MISO and the MISO Transmission Owners adopted cost allocation provisions that would allocate the costs of Baseline Reliability Projects on a local basis, thereby effectively removing such projects from the Order No. 1000 mandates and preserving a right of first refusal for incumbent utilities to construct such projects in their areas.
MISO will begin implementing its new process beginning in June of 2013, for the regional planning cycle that runs through December 2014.
PJM
FERC also found that PJM “largely complies” with Order No. 1000, through PJM’s proposed “sponsorship” approach to regional transmission project developer selection and modifications to PJM’s current regional planning process. Under the sponsorship model, PJM will identify transmission system needs and solicit project proposals from interested qualified developers, both incumbent and non-incumbent. FERC directed PJM to clarify the effective date of its proposed Order No. 1000 reforms, and to submit further modifications to its proposal.
FERC accepted PJM’s proposal for a “time-based” competitive sponsorship process consisting of “Long-lead Projects,” “Short-Term Projects,” and “Immediate-Need Reliability Projects.” When the PJM planning process identifies a transmission need that must be resolved in a shortened time frame, PJM’s proposed competitive processes will be truncated to allow for the selection of a Short-term Project or Immediate-Need Reliability Project to address the identified transmission need. In certain circumstances, because of the urgency of a reliability need, no competitive process will be held for Immediate-Need Reliability Projects and PJM will designate the incumbent utility to construct the necessary transmission facility. Acceptance of PJM’s proposal suggests a softening of FERC’s stance in Order No. 1000 and its progeny that transmission projects aimed at addressing reliability issues should be treated no differently than economic or other transmission facilities when it comes to eliminating federal rights of first refusal.
Like in MISO, FERC rejected PJM’s proposal to preserve certain rights for incumbent utilities based on state laws and state-granted rights of way, finding that such provisions establish new federal rights of first refusal that are contrary to Order No. 1000. As with MISO, FERC’s action potentially leaves PJM in the position of having to navigate between complex and conflicting federal and state policies.
FERC accepted a related filing by the PJM Transmission Owners to modify cost allocation for large-scale regional transmission facilities. The PJM Transmission Owners adopted a “hybrid” methodology, whereby the costs of extra high voltage transmission facilities (and related lower voltage facilities) will be partially allocated across the PJM region on a “postage stamp” basis, while the remaining costs will be allocated using a distribution methodology that determines the relative use of facilities by each pricing zone and allocates costs accordingly, updated on an annual basis. The new hybrid methodology will replace PJM’s current postage stamp methodology, which was the subject of a 2009 remand to FERC from the United States Court of Appeals for the Seventh Circuit. The hybrid methodology will apply to new transmission facilities, but will not modify cost allocation for previously-approved facilities.
Mobile-Sierra
Certain PJM Transmission Owners, and MISO and the MISO Transmission Owners, challenged FERC’s authority to demand that they modify their respective RTO agreements to comply with Order No. 1000 without FERC satisfying the heightened Mobile-Sierra public interest standard. In both proceedings, the utilities argued that their RTO agreements are protected by the Mobile-Sierra doctrine, and therefore FERC was barred from requiring them to modify their agreements to remove federal right of first refusal provisions unless FERC could demonstrate that the provisions “seriously harm the public interest” necessitating their removal.
In both proceedings, FERC determined that the relevant RTO agreements are not entitled to Mobile-Sierra protection, because neither agreement possesses the characteristics of agreements that FERC and the courts previously have determined warrant such protection. As non-rate, multi-party agreements among parties with similar interests, the RTO agreements are not the type of “arms-length” rate agreements among buyers and sellers for which the Mobile-Sierra doctrine was established, according to FERC. Because FERC determined that the Mobile-Sierra doctrine does not apply, FERC did not reach the issue of whether sufficient evidence exists to overturn existing federal right of first refusal provisions on public interest grounds.
FERC’s denial of Mobile-Sierra protection invites the possibility that the limits of the Mobile-Sierra doctrine will once again be subject to federal judicial review, should the parties choose to appeal FERC’s rulings on their respective agreements.
(Matthew Binette, Shareholder, Wright & Talisman PC – binette@wrightlaw.com)
