Public Utilities Commission of v. FERC ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
ILLINOIS C OMMERCE C OMMISSION, et al.,
Petitioners,
v.
F EDERAL E NERGY R EGULATORY C OMMISSION, et al.,
Respondents.
Petitions to Review Orders of the
Federal Energy Regulatory Commission.
A RGUED A PRIL 13, 2009—D ECIDED A UGUST 6, 2009
Before C UDAHY, P OSNER, and T INDER, Circuit Judges.
P OSNER, Circuit Judge. We have before us challenges to a
decision by the Federal Energy Regulatory Commission
concerning the reasonableness of rates for the transmission
of electricity over facilities owned by utilities that belong
to a Regional Transmission Organization (that is, a power
pool) called PJM Interconnection. PJM Interconnection,
L.L.C., 119 F.E.R.C. ¶ 61,063 (2007), rehearing denied, 122
F.E.R.C. ¶ 61,082 (2008); see 16 U.S.C. § 824e; Atlantic City
Electric Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002). (“PJM”
2 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
stands for “Pennsylvania-New Jersey-Maryland,” but the
full name is not used any more.) “RTOs are voluntary
associations in which each of the owners of transmission
lines that comprise an integrated regional grid cedes
to the RTO complete operational control over its transmis-
sion lines.” Richard J. Pierce, Jr., “Regional Transmission
Organizations: Federal Limitations Needed for Tort
Liability,” 23 Energy L.J. 63, 64 (2002); see also Regional
Transmission Organizations, 65 Fed. Reg. 810-01, 2000
WL 4557 (FERC Jan. 6, 2000); Morgan Stanley Capital Group
Inc. v. Public Utility District No. 1, 128 S. Ct. 2733, 2741
(2008). PJM’s region stretches east and south from the
Chicago area, primarily to western Michigan and eastern
Indiana, Ohio, Pennsylvania, New Jersey, Delaware,
Maryland, the District of Columbia, and Virginia. PJM
Interconnection, L.L.C., supra, p. 3, see FPL Energy Marcus
Hook, L.P. v. FERC, 430 F.3d 441, 442-43 (D.C. Cir. 2005).
The region is home to more than 50 million consumers
of electricity.
Two issues are presented. The first, raised by American
Electric Power Service Corporation and the Public
Utilities Commission of Ohio (participation by state
commissions in rate proceedings before FERC is au-
thorized by 16 U.S.C. § 825g(a); see also § 825l(a)), involves
the pricing of electricity transmitted from the Midwest
to the East through Ohio. PJM wants that transmission to
be priced on the basis of the cost to American Electric
of transmitting one more unit of electricity, that is, the
marginal cost; and FERC agrees. Such a price excludes
the cost that the company incurred when it built the
transmission facilities. That cost—which American
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 3
Electric wants to be permitted to reflect in its rates—is
what economists call a “sunk” cost, that is, a cost that has
already been incurred. So while its financial burden can
be shifted (from American Electric to the eastern utili-
ties), the cost itself cannot be shifted, and therefore
shifting the financial burden created by the cost from one
set of shoulders to another will have no direct effect on
service or investment.
Had FERC decided that American Electric would not
be permitted to charge a price that covered the cost of
building a new transmission facility or upgrading an
existing one, its decision would have affected the alloca-
tion of resources and not just of money. It would have
deterred the building of new facilities that benefited
customers outside American Electric’s service area, be-
cause building them would become an unprofitable
venture. FERC emphasizes, however, that the company’s
existing facilities, which are all that are involved in this
case, were built before 2001 when PJM became a Regional
Transmission Organization, and were intended to serve
American Electric’s customers only. So even if the
facilities had not been fully paid for, there would be no
economic basis for shifting any part of their costs to
other members, because American Electric did not
expect when it built the facilities that any part of their
cost would be defrayed by anyone besides its customers.
PJM and FERC have made clear that American Electric will
be allowed to charge a price that covers its costs for
transmission to other utilities over new or upgraded
facilities.
4 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
American Electric points out that some of its existing
facilities are not fully depreciated. But it can continue to
depreciate them over their remaining useful life in order
to create an accounting reserve or obtain a tax benefit.
And when it builds a new facility it will be allowed, as
we said, to recover the full costs of that facility in its prices.
The company may be trying to extract a monopoly price
for the use of its facilities. It stands between western
sellers of electricity and their eastern customers and
would like to extract a toll for giving the former passage
to the latter, a toll that has no relation to its costs of render-
ing that service. It charged its customers for the costs
of building its existing facilities and recovered those
costs fully and now wants to recover them all over again
from another group of consumers. And it’s not as if
American Electric were being required to provide trans-
mission to the east at zero price. It is permitted to
charge for the service—just not to include in the charge
its sunk costs.
The second issue relates to the financing of new trans-
mission facilities. Here the Ohio commission joins its
Illinois counterpart, representing the interests of the
midwestern utilities in PJM’s region, in objecting to
PJM’s proposed method, approved by FERC, for pricing
new transmission facilities that have a capacity of 500
kilovolts or more. Heretofore all new facilities in PJM’s
region have been financed by contributions from the
region’s electrical utilities calculated on the basis of the
benefits that each utility receives from the facilities. This
will continue to be the rule for facilities with capacities of
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 5
less than 500 kV. But for the higher-voltage facilities
FERC has decided that all the utilities in PJM’s region
should contribute pro rata; that is, their rates should be
raised by a uniform amount sufficient to defray the facili-
ties’ costs.
FERC’s stated reasons are that some of PJM’s members
entered into similar pro rata sharing agreements with
each other more than forty years ago and would like to
follow that precedent, that figuring out who benefits
from a new transmission facility and by how much is
very difficult and so generates litigation, and that every-
one benefits from high-capacity transmission facilities
because they increase the reliability of the entire net-
work. Despite the stakes in the dispute—the new policy
might, for example, force Commonwealth Edison to
contribute hundreds of millions of dollars to an above-500
kV eastern project called “Project Mountaineer,” when it
would not have had to pay a dime under the benefits-
based system applicable to lower-voltage transmission
facilities—no data are referred to in FERC’s two opinions
(the original opinion and the opinion on rehearing). No
lawsuits are mentioned. No specifics concerning difficul-
ties in assessing benefits are offered. No particulars are
presented concerning the contribution that very high-
voltage facilities are likely to make to the reliability of
PJM’s network. Not even the roughest estimate of likely
benefits to the objecting utilities is presented. The first
sentence in this paragraph is an adequate summary of the
Commission’s reasoning, minus recourse to metaphor, as
in the Commission’s repeated references to very high-
voltage facilities as the “backbone” of PJM’s network. The
Commission’s insouciance about the basis for its ruling
6 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
is mirrored by its lawyers: their brief devotes only five
pages to the 500 kV pricing issue.
The objections to the Commission’s ruling pivot on an
asymmetry between the eastern and western portions
of PJM’s region. In the west the electrical generating
plants usually are close to the customers—Chicago for
example is ringed by power plants. As a result, relatively
low-voltage transmission facilities—mainly 345 kV—are
preferred. In the east, where the power plants generally
are farther away from the customers, 500 kV and even
higher-voltage transmission facilities are preferred,
because high voltage is more efficient than low for trans-
mitting electricity over long distances. So far as appears,
few if any such facilities will be built in the objectors’
service areas, that is, in the Midwest, within the fore-
seeable future. FERC seems not to care whether any will
ever be built, because the reasons it gave for approving
PJM’s new pricing method are independent of where
the facilities are located.
The first two reasons the Commission gave can be
dispatched briefly. The fact that some of the same
members of PJM who agreed to share the costs of such
facilities with each other many years ago would like
contributions from midwestern utilities carries no
weight. The eastern utilities that created PJM refer to
themselves revealingly as the “classic” PJM utilities, and
the fact that these utilities thought it appropriate to
share costs in 1967 says nothing about the advantages
and disadvantages of such an arrangement in the larger,
modern PJM network.
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 7
The Commission said that it would be inclined to defer
to “regional consensus,” but acknowledged there was
none; the midwestern utilities are part of PJM’s region
but did not agree to the eastern utilities’ cost-sharing
proposal. As we shall see, the fact that one group of
utilities desires to be subsidized by another is no reason
in itself for giving them their way.
The second reason the Commission gave for approving
PJM’s pricing scheme—the difficulty of measuring
benefits and the resulting likelihood of litigation over
them—fails because of the absence of any indication that
the difficulty exceeds that of measuring the benefits to
particular utilities of a smaller-capacity transmission
line. Like the D.C. Circuit in Sithe/Independence Power
Partners, L.P. v. FERC, 285 F.3d 1, 5 (D.C. Cir. 2002) (citation
omitted), we acknowledge “that feasibility concerns play
a role in approving rates, indicating that FERC is not
bound to reject any rate mechanism that tracks the cost-
causation principle less than perfectly.” But we also agree
that “the Commission’s cursory response simply will not
do. At no point did the Commission explain how these
considerations [that the tariffs and refund mechanism
produced ‘efficient price signals,’ and that petitioner’s
requested refunds would somehow disrupt that price
signaling, would be ‘infeasible,’ and a matter of ‘unending
controversy’] applied. Why, we wonder, would a dif-
ferent method of refunds, based more closely on cost-
causation principles, jeopardize desirable price signaling
or be infeasible?” Id.No doubt the more a transmission facility costs, and
therefore the greater the stakes in a dispute between
8 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
potential contributors to that cost, the more litigation
there is likely to be. But how much more (at least approxi-
mately) is the critical consideration and the Commission
ignored it.
That leaves for consideration the benefits that the
midwestern utilities might derive from the greater re-
liability that the larger-capacity transmission facilities
might confer on the network as a whole. The reason for
building such facilities is to satisfy the demand of eastern
consumers for electricity, but the more transmission
capacity there is, the less likely are blackouts or brownouts
caused by surges of demand for electricity on hot
summer days or by accidents that shut down a part of the
electrical grid. Because the transmission lines in PJM’s
service region are interconnected, a failure in one part of
the region can affect the supply of electricity in other
parts of the network. So utilities and their customers in the
western part of the region could benefit from higher-
voltage transmission lines in the east, but nothing in
FERC’s opinions in this case enables even the roughest
of ballpark estimates of those benefits.
At argument FERC’s counsel reluctantly conceded that
if Commonwealth Edison would derive only $1 million
in expected benefits from Project Mountaineer, for which
it is being asked to chip in (by its estimate) $480 million,
the disparity between benefit and cost would be unrea-
sonable. The concession was prudent. Algonquin Gas
Transportation Co. v. FERC, 948 F.2d 1305, 1313 (D.C. Cir.
1991); Pacific Gas & Electric Co. v. FERC, 373 F.3d 1315, 1320-
21 (D.C. Cir. 2004). As FERC itself explained in Trans-
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 9
continental Gas Pipe Line Corp., 112 F.E.R.C. ¶ 61,170, 61,924-
61,925 (2005), “a claim of generalized system benefits
is not enough to justify requiring the existing shippers to
subsidize the uncontested increase in electric costs caused
by the Cherokee project. . . . The rehearing applicants
suggest that the use of the Cherokee shippers’ transporta-
tion quantities in deriving the fuel retention percentages
and their payment of such charges reduce the fuel costs
borne by the existing shippers. However, they point to
no evidence in the record that seeks to quantify this
benefit, or even shows that such a benefit has occurred . . . .
The Commission concludes that all these alleged
benefits are simply too speculative and unsupported to
be taken into account.”
FERC is not authorized to approve a pricing scheme
that requires a group of utilities to pay for facilities from
which its members derive no benefits, or benefits that are
trivial in relation to the costs sought to be shifted to its
members. “ ‘[A]ll approved rates [must] reflect to some
degree the costs actually caused by the customer who must
pay them.’ KN Energy, Inc. v. FERC, 968 F.2d 1295, 1300
(D.C. Cir. 1992); Transmission Access Policy Study Group v.
FERC, 225 F.3d 667, 708 (D.C. Cir. 2000); Pacific Gas & Elec.
Co. v. FERC, No. 03-1025, 373 F.3d 1315, 1320-21 (D.C. Cir.
2004). Not surprisingly, we evaluate compliance with
this unremarkable principle by comparing the costs
assessed against a party to the burdens imposed or
benefits drawn by that party.” Midwest ISO Transmission
Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir. 2004); see
also Alcoa Inc. v. FERC, 564 F.3d 1342, 1346-47 (D.C. Cir.
2009); Sithe/Independence Power Partners, L.P. v. FERC, supra,
10 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
285 F.3d at 4-5; Federal Power Act, 16 U.S.C. § 824d. To
the extent that a utility benefits from the costs of new
facilities, it may be said to have “caused” a part of those
costs to be incurred, as without the expectation of its
contributions the facilities might not have been built, or
might have been delayed. But as far as one can tell from
the Commission’s opinions in this case, the likely benefit
to Commonwealth Edison from new 500 kV projects is
zero. The opinion on rehearing attributes the need for
new transmission capacity in PJM to the threat of “de-
graded reliability in Eastern PJM,” 122 F.E.R.C. ¶ 61,082,
p. 13 (emphasis added), and nowhere do the Commission’s
opinions suggest that degraded reliability is a danger
in Midwestern PJM.
No doubt there will be some benefit to the midwestern
utilities just because the network is a network, and there
have been outages in the Midwest. But enough of a benefit
to justify the costs that FERC wants shifted to those
utilities? Nothing in the Commission’s opinions enables
an answer to that question. Although the Commission
did say that a 500 kV transmission line has twice the
capacity of a 345 kV line, it added that “the reliability of
500 kV and above circuits in terms of momentary and
sustained interruptions is 70 percent more reliable than
138 kV circuits and 60 percent more than 230 kV circuits
on a per mile basis,” PJM Interconnection, L.L.C., supra,
119 F.E.R.C. ¶ 61,063, p. 23; 122 F.E.R.C. ¶ 61,082, p. 16
(emphasis added)—but did not compare the reliability
of a 500 kV line to that of a 345 kV line, even though
network reliability is the benefit that the Commission
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 11
thinks the midwestern utilities will obtain from new
500 kV lines in the East.
Rather desperately FERC’s lawyer, and the lawyer for
the eastern utilities that intervened in support of its
ruling, reminded us at argument that Commission has a
great deal of experience with issues of reliability and
network needs, and they asked us therefore (in effect) to
take the soundness of its decision on faith. But we
cannot do that because we are not authorized to uphold
a regulatory decision that is not supported by substantial
evidence on the record as a whole, or to supply reasons
for the decision that did not occur to the regulators. E.g.,
5 U.S.C. § 706; Bethany v. FERC, 276 F.3d 934, 940 (7th
Cir. 2002); Central Illinois Public Service Co. v. FERC, 941
F.2d 622, 627 (7th Cir. 1991); Pacific Gas & Electric Co. v.
FERC, supra, 373 F.3d at 1319. The reasons that did occur
to FERC are inadequate.
We do not suggest that the Commission has to calculate
benefits to the last penny, or for that matter to the last
million or ten million or perhaps hundred million dollars.
Midwest ISO Transmission Owners v. FERC, supra, 373
F.3d at 1369 (“we have never required a ratemaking
agency to allocate costs with exacting precision”);
Sithe/Independence Power Partners, L.P. v. FERC, supra,
285 F.3d at 5. If it cannot quantify the benefits to the
midwestern utilities from new 500 kV lines in the East,
even though it does so for 345 kV lines, but it has an
articulable and plausible reason to believe that the benefits
are at least roughly commensurate with those utilities’
share of total electricity sales in PJM’s region, then fine;
12 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
the Commission can approve PJM’s proposed pricing
scheme on that basis. For that matter it can presume that
new transmission lines benefit the entire network by
reducing the likelihood or severity of outages. E.g., Western
Massachusetts Elec. Co. v. FERC, 165 F.3d 922, 927 (D.C.
Cir. 1999). But it cannot use the presumption to avoid the
duty of “comparing the costs assessed against a party to
the burdens imposed or benefits drawn by that party.”
Midwest ISO Transmission Owners v. FERC, supra, 373 F.3d
at 1368. Nor did it in the Western Massachusetts case.
In Midwest ISO, where the objecting utilities con-
tended that they were being asked to pay far more
than their share of the benefits—which they said was a
measly 5 percent—the court found that they were mis-
representing the record. 373 F.3d at 1370. There is no
comparable basis on which to affirm the Commission’s
decision in this case. Our review of decisions by FERC is
deferential, e.g., Town of Norwood v. FERC, 962 F.2d 20, 22
(D.C. Cir. 1992); “we require only that the agency have
made a reasoned decision based upon substantial
evidence in the record.” Id. But the Commission failed to
do that, and so the case must be remanded for further
proceedings; we intimate no view on their outcome.
To summarize, the petitions for review that concern
the pricing of existing transmission facilities are denied,
but the petitions concerning the pricing of new facilities
that have a capacity of 500 kilovolts or more are granted.
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 13
C UDAHY, Circuit Judge, concurring in part and dissenting
in part. I concur fully in the majority’s approval of FERC’s
rate design for existing facilities’ transmission costs.
I write separately to express my concerns over the major-
ity’s disapproval of the proposed rate design for new
transmission lines operating at voltages at or in excess
of 500,000 volts.
The United States is now engaged in an urgent project
to upgrade its electric transmission grid, which for years
has been generally regarded as inadequate,1 and may
become more deficient with the addition of major new
anticipated loads.2 The existing transmission system
originally served vertically integrated utilities that built
their own generation relatively close to their customers.
The system was not designed for long-distance power
1
E.g., House Report on the Energy Policy Act of 2005, H.R. Rep.
No. 109-215(I), at 171 (“Investment in electric transmission
expansion has not kept pace with electricity demand. Moreover,
transmission system reliability is suspect as demonstrated by
the blackout that hit the Northeast and Midwest in August of
2003. Legislation is needed to address the issues of transmis-
sion capacity, operation, and reliability. In addition, state reg-
ulatory approval delays siting of new transmission lines by
many years. Even if a project is completed, there is uncer-
tainty as to whether utilities will be able to recover all of their
investment, which hinders new transmission construction.”).
2
See, e.g., Argonne, Impact of Plug-in Hybrid Electric Vehicles on
the Electricity M arket in Illinois, available at
http://www.dis.anl.gov/news/Illinois_PluginHybrids.htm l
(visited 7/27/09).
14 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
transfers between different parts of the country. The
inadequacy of the present network and the urgency of
the need for its improvement has only been exacerbated
by the additional burdens imposed by deregulation (or
restructuring), which “unbundled” generation and trans-
mission and created a need to bring power from distant
generators.3 Additional challenges have been posed by
the demand for power from renewable generation
sources (such as wind farms) that are often located in
places remote from centers of electric consumption.4
Long-distance transmission, which inherently presents
challenges to reliability, is accomplished most efficiently
by the highest levels of voltage—500 kV and above.
According to FERC, “500 kV and above circuits . . . [are]
70 percent more reliable than 138 kV circuits and 60
percent more than 230 kV circuits on a per mile basis.” PJM
Interconnection LLC, 122 FERC ¶ 61,082, 2008 WL 276596,
at *16 (Jan. 31, 2008) (order on rehearing). Further,
because power transfer capability increases with the
square of voltage,5 extra-high voltage transmission also
3
See Mark Cooper, Electricity Deregulation Puts Pressure on the
Transmission Network and Increases its Cost, available at
http://www.consumersunion.org/Transmission%20brief%208.
27.pdf (visited 7/27/09).
4
See Matthew L. Wald, Debate on Clean Energy Leads to
Regional Divide, N.Y. Times, July 14, 2009, at A13.
5
See generally Peter W. Sauer, Reactive Power and Voltage Control
Issues in Electric Power Systems, Applied Mathematics for
(continued...)
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 15
facilitates enormous transfers of power: “the maximum
transfer capability at 500 kV and above is approximately
6 times greater than a similar transmission line operated
at 230 kV and more than twice that at 345 kV . . . .” Id.In light of its unique contributions to reliability and
transfer capability, extra-high voltage transmission is
especially fitted to be financed equally by all utilities
that benefit from its role as the “backbone” of the system.6
Pro rata rates for extra-high voltage transmission, through
their simplicity of application, also provide a strong
incentive to build transmission undeterred by fruitless
controversy over the allocation of costs.
It is significant that FERC’s conclusion that the costs of
extra-high voltage transmission facilities should be
shared is consistent with the proposals of fifteen of PJM’s
seventeen members. In the course of this proceeding,
5
(...continued)
Restructured Electric Power Systems: Optimization, Control,
and Computational Intelligence (Joe H. Chow, Felix F. Wu &
James A. Momoh, eds.) (2005).
6
These are “backbone” facilities because they “integrate major
system resources,” Pacific Gas & Elec. Co., 53 FERC ¶ 61146,
61520-21 & n.65, 1990 WL 319356, at *10 (Oct. 31, 1990), by
facilitating major transfers of power between and among
regions. To my knowledge, no court prior to ours has
objected to the metaphor. See Public Serv. Co. of Ind., Inc. v. FERC,
575 F.2d 1204, 1217 (7th Cir. 1978); see also Cal. Dep’t of Water
Res. v. FERC, 489 F.3d 1029, 1035 (9th Cir. 2007); Boston Edison
Co. v. FERC, 441 F.3d 10, 11 (1st Cir. 2006); Cajun Elec. Power
Coop., Inc. v. FERC, 924 F.2d 1132, 1134 (D.C. Cir. 1991).
16 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
various parties proposed voltages lower than 500 kV as
the threshold above which proportional cost-sharing
should apply. Although PJM’s members were unable to
agree on a specific voltage cutoff, they were broadly in
agreement that the rate structure should be designed to
share the costs of facilities providing general systemic
benefits. There was thus an effort by many parties to
broaden the area of rate-simplification by enlarging the
set of new transmission facilities to be governed by cost-
sharing, not to narrow or eliminate it. I think these
efforts illustrate the value of simplification and the dif-
ficulties in the design of a transmission rate structure
that attempts rigidly and in all circumstances to trace
benefits to specific utilities.
However theoretically attractive may be the principle of
“beneficiary pays,” an unbending devotion to this rule
in every instance can only ignite controversy, sustain
arguments and discourage construction while the nation
suffers from inadequate and unreliable transmission.
Unsurprisingly, it is not possible to realistically deter-
mine for each utility and with reference to each major
project the likelihood that rate-simplification will reduce
litigation, or to calculate the precise value of not having
to cover the costs of power failures and of not paying
costs associated with congestion, and all this over the
next forty to fifty years. Concerns about the real value
to individual utilities of the stability and efficiency pro-
vided by improvements to the backbone grid are
answered by their voluntary participation in the power
pool and its collaborative “RTEP” (or regional transmission
expansion planning) process. Rate-making based on cost
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 17
causation is assured by this process, since universal
cost-sharing is recommended only when developments
are found to benefit the integrated system as a whole.7
Contrary to the majority’s suggestion, FERC did not
violate principles of “cost causation” by failing to propose
a number that would represent the specific monetary
benefits to each utility of a more reliable network. Cost
causation requires that “approved rates reflect to some
degree the costs actually caused by the customer who must
pay them.” Midwest ISO Transmission Owners v. FERC, 373
F.3d 1361, 1368 (D.C. Cir. 2004) (Roberts, J.) (quoting KN
Energy, Inc. v. FERC, 968 F.2d 1294, 1300 (D.C. Cir. 1992))
(internal quotation marks omitted). However, until today,
no court has found that cost causation requires FERC to
monetize the benefits of reliability improvements in
7
“Project Mountaineer,” with which the majority seems
particularly concerned, is no exception. Project Mountaineer is
a plan to construct hundreds of miles of 500 and 765 kV linkages
between eastern and western PJM. The PJM literature, to
which Commonwealth Edison could have objected but did not,
indicates that Project Mountaineer was a response to the
nearly 200% increase in congestion costs from 2004 to 2005.
Ventyx, Major Transmission Constraints in PJM, at *3 n.4 (2007),
available at http://www.ventyx.com/pdf/wp07-transmission-
constraints.pdf (visited 7/14/09). These increased congestion
costs were partly due to the expansion of PJM’s footprint. Id. As
part of its cost allocation process, PJM determined that Project
Mountaineer “would bring about substantial congestion relief
and reliability improvements increasing Midwest-to-east
transfers by 5,000 MW.” Id. at *3.
18 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
order to share the costs. Indeed, the cases the majority
cites support the opposite conclusion. Most notably, in
Midwest ISO, the panel was quite clear that utilities that
draw benefits from being a part of a power pool should
share the cost of having a power pool. Id. at 1371. As then-
Judge Roberts explained, “upgrades designed to preserve
the grid’s reliability constitute system enhancements
that are presumed to benefit the entire system.” Id. at 1369
(internal quotation marks, citations and alterations omit-
ted, and emphasis added); see also Entergy Servs., Inc. v.
FERC, 319 F.3d 536, 543 (D.C. Cir. 2003); Western Massachu-
setts Elec. Co. v. FERC, 165 F.3d 922, 927 (D.C. Cir. 1999).
Since there is a presumption that enhanced reliability
benefits all of the systems members, Commonwealth
Edison (ComEd) can be required to bear a proportional
share of an improvement’s costs even where it is not
possible to determine precisely how much it benefits.
Put otherwise, the burden is on ComEd to show that it
would not benefit from the newly planned transmission
facilities; the burden is not on FERC to estimate how
much ComEd would benefit from a more reliable grid.
Indeed, in Midwest ISO, the panel rejected the objecting
utility’s argument that it could not be made to pay sixty
to seventy percent of an investment’s costs because it
would obtain only five percent of the benefits. 373 F.3d
at 1370. As the majority notes, the panel found no
record support for the utility’s claim that its benefits
would be so low. (Maj. Op. at 12.) However, the panel
also held that cost causation principles do not require
the costs of a new facility to be apportioned based on the
objecting utility’s actual use of that facility. To the
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 19
contrary, the “benefits” of system enhancements must be
understood more broadly than this. Again, then-Judge
Roberts:
even if they are not in some sense using the ISO
[roughly a term for a power pool], the MISO Owners
still benefit from having an ISO. In this sense, MISO is
somewhat like the federal court system. It costs a
considerable amount to set up and maintain a court
system, and these costs—the costs of having a court
system—are borne by the taxpayers, even though the
vast majority of them will have no contact with that
system (will not use that system) in any given year . . .
The MISO Owners’ position is tantamount to saying
that if they are not a litigant, they should not be
made to pay for any of the costs of having a court
system. Since the MISO Owners do, in fact, draw
benefits from being a part of the MISO regional trans-
mission system, FERC correctly determined that they
should share the cost of having an ISO.
Id. at 1371. I fear that the majority has lost sight of this
basic principle.8
8
The other cases on which the majority relies also do not hold
that FERC is required to explain the benefits of reliability. For
instance, in Algonquin Gas Transmission Co. v. FERC, 948 F.2d
1305 (D.C. Cir. 1991), the court rejected FERC’s proposal to
share the costs of a new gas pipeline because FERC had not
provided any evidence that the pipeline would provide system-
wide benefits. Id. at 1313. In the present case, by contrast, there
(continued...)
20 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
Because the majority’s decision is based on an
unusually narrow conception of cost-causation, its char-
acterizations of FERC’s and the intervenor’s arguments
as “insouciant” (Maj. Op. at 5) and “desperate” (Maj. Op.
at 11) strike me as conspicuously misplaced. FERC re-
sponded to ComEd’s objections by indicating that the
proposed projects would improve reliability and reduce
congestion. See PJM Interconnection, 2008 WL 276596, at *16.
It did not explain how PJM’s members benefit from a
reliable network because no court had hitherto re-
quired it to do so. Until now, it went without saying
that network reliability benefits the network’s members.
This is not insouciance; “[e]xplanations come to an end
somewhere.” Ludwig Wittgenstein, Philosophical Investiga-
tions §1 (G.E.M. Anscombe trans., 1968).
The big picture here is that FERC’s proposal to spread
the cost of very high voltage transmission on a uniform
8
(...continued)
is no dispute that the transmission facilities at issue would
increase network transfer capacity and improve network
reliability.
Along the same lines, Alcoa Inc. v. FERC, 564 F.3d 1342 (D.C.
Cir. 2009), provides no support at all for the majority’s robust
understanding of the requirements of cost causation. In that
case, the D.C. Circuit rejected Alcoa’s claim that it was
being asked to pay more than its fair share of the costs of
maintaining network reliability, holding instead that because
rate design rests on technical issues and policy judgments
that lie at the core of the regulatory mission, FERC’s explanation
for its rate scheme “although admittedly spare, is nonetheless
adequate.” Id. at 1347-48.
Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239 21
basis seems to me in the interest of efficient, high-capacity
transfer capability and of the closely linked improve-
ment of reliability, which affects the system generally.9
Deregulation created a demand for competitive sources of
power, often at a distance. Because 500 kV and above lines
satisfy these new systemic needs, their separate treat-
ment for rate-making purposes is both sensible and
innovative. While an effort to identify specific benefits to
9
Indeed, the majority concedes that reliability problems affect
all of the system’s users when it acknowledges that failures
in one part of an integrated network can affect the supply of
electricity in other parts of the network. (Maj. Op. at 8). So-called
“cascading outages” have occurred on a number of occasions
in the recent past. Most notably, in 2003 a power failure that
started in Ohio spread through eight states, including parts of
PJM’s footprint, leaving 50 million people without power and
causing an estimated $12 billion in economic losses. E.g., Peter
Fox-Penner, A Year Later, Lessons From the Blackout, N.Y. Times,
Aug. 15, 2004, at 14WC. As the majority notes, FERC has not
estimated the probability that degraded reliability in Eastern
PJM could affect Midwestern PJM. However, even if this
probability is vanishingly small, a very low number multiplied
by billions of dollars may still yield a very high number.
Further, there is no reason to suppose that ComEd’s customers
are unaffected by problems with the reliability of the PJM grid.
By one estimate, power outages and disturbances cause $4
to $7 billion in damages per year in Illinois alone. See Primen,
The Cost of Power Disturbances to Industrial & Digital
Economy Companies (June 29, 2001), at D-1, available at
http://www. onpower.com/pdf/EPRICostOfPowerProblems.pdf
(visited 7/8/09).
22 Nos. 08-1306, 08-1780, 08-2071, 08-2124, 08-2239
specific utilities is a traditional rate design approach and
may be appropriate for most electric plant facilities, it
may miss the forest and focus on the trees when applied
to very high voltage “backbone” facilities having a gen-
eralized role in supporting reliability and high capacity
power transfer. Perhaps as important in this picture is the
urgency of the need to build transmission and the need
for incentives to that end. Pro rata assignment of costs
eliminates not only lawsuits but nitpicking controversies
of every sort and delays standing in the path of action.
From that point of view, I think FERC may be in a better
position to implement a policy leading to prompt im-
provement in a deficient transmission grid than this court,
focused as it is on the inevitable complaints of utilities
demanding more for their money. I therefore respectfully
dissent from the majority’s unfortunate rejection of
FERC’s rate scheme for new transmission lines carrying
500 kV or higher.
8-6-09