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Steptoe & Johnson PLLC: FERC Electric Transmission Line Rate Incentives Affirmed

By Kurt L. Krieger 

On January 24, the United States Court of Appeals for the Fourth Circuit upheld a 2012 order issued by the Federal Energy Regulatory Commission (“FERC”) denying rehearing of a 2008 order granting rate incentives to an electric utility for various transmission projects with a total estimated cost of nearly $880 million (“Rehearing Order”).  On appeal, the North Carolina Utilities Commission (“NCUC”) challenged FERC’s decision to grant incentives for five of the projects.  NCUC argued that FERC abused its discretion by granting the incentives in 2008, and that FERC should be required to apply a subsequent change in its policy announced in 2010 to the projects at issue.

The incentives were granted in 2008 pursuant to Section 219 of the Federal Power Act (“FPA”).  Under the FPA, FERC exercises general jurisdiction over all rates, terms and conditions of interstate electric transmission service provided by public utilities.  Pursuant to that authority, FERC adopted a rule to establish incentive-based rate treatments for qualifying projects in an effort to restore the country’s aging transmission system and spur infrastructure investment.  Under the rule, a three-prong test was used to evaluate applications for incentives.  First, the utility must show that its infrastructure project will increase reliability or reduce congestion.  Next, the utility must demonstrate a nexus between the requested incentive and the project.  Last, the utility must prove that its resulting rates with the incentive would remain just and reasonable.

NCUC disagreed with FERC’s decision not to apply a change in its policy related to how the test would be applied to incentive applications.  Under previous FERC interpretations of prong two, when a utility included multiple, unrelated projects in a single application for incentives, FERC evaluated the projects in the aggregate to determine whether the nexus test was met.  In 2010, however, FERC announced that it would no longer apply the nexus test in the aggregate to unrelated projects presented in the same application.  Instead, the utility would be required to meet the nexus test for each individual project.  In its Rehearing Order, FERC acknowledged that if the utility had made its request for incentives under the new policy, the outcome might have been different.

Although, because of practical timing reasons, the Fourth Circuit allowed NCUC to raise the issue of the 2010 policy change for the first time on appeal, the court held that FERC exercised its discretion appropriately in declining to modify its earlier decision and apply the revised policy to the incentives it had granted.  The court acknowledged FERC’s considerations that the utility had legitimately relied on the application of the nexus test as interpreted at the time of the initial FERC order and the broader issue of regulatory uncertainty with respect to Section 219 incentives.

To read the Fourth Circuit's opinion, click here. [enhanced opinion available to subscribers].

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