Illinois Commerce Commission v. FERC , 721 F.3d 764 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 11-3421, 11-3430, 11-3584, 11-3585, 11-3586,
11-3620, 11-3787, 11-3795, 11-3806, 12-1027
ILLINOIS C OMMERCE C OMMISSION, et al.,
Petitioners,
v.
F EDERAL E NERGY R EGULATORY C OMMISSION,
Respondent.
Petitions to Review Orders of the
Federal Energy Regulatory Commission.
Nos. ER10-1791-000, ER10-1791-001, ER10-1791-002
A RGUED A PRIL 10, 2013—D ECIDED JUNE 7, 2013
Before P OSNER, W OOD , and W ILLIAMS, Circuit Judges.
P OSNER, Circuit Judge. Control of more than half the
nation’s electrical grid is divided among seven Regional
Transmission Organizations, as shown in Figure 1. These
are voluntary associations of utilities that own electrical
transmission lines interconnected to form a regional grid
and that agree to delegate operational control of the
grid to the association. See 18 C.F.R. §§ 35.34(j), (k)(1)(i);
Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361,
2 Nos.11-3421, 11-3430, 11-3584, et al.
1363-65 (D.C. Cir. 2004). Power plants that do not own
any part of the grid but generate electricity transmitted
by it are also members of these associations, as are other
electrical companies involved in one way or another
with the regional grid.
F IGURE 1
R EGIONAL T RANSMISSION O RGANIZATIONS
The RTOs play a key role in the effort by the Federal
Energy Regulatory Commission “to promote competition
in those areas of the industry amenable to competition,
such as the segment that generates electric power, while
ensuring that the segment of the industry characterized
Nos. 11-3421, 11-3430, 11-3584, et al. 3
by natural monopoly—namely, the transmission grid
that conveys the generated electricity—cannot exert
monopolistic influence over other areas . . . . To further
pry open the wholesale-electricity market and to
reduce technical inefficiencies caused when different
utilities operate different portions of the grid independ-
ently, the Commission has encouraged transmission
providers to establish ‘Regional Transmission Organiza-
tions’—entities to which transmission providers would
transfer operational control of their facilities for the
purpose of efficient coordination . . . [and] has en-
couraged the management of those entities by ‘Independ-
ent System Operators,’ not-for-profit entities that operate
transmission facilities in a nondiscriminatory manner.”
Morgan Stanley Capital Group, Inc. v. Public Utility
District No. 1, 554 U.S. 527, 536-37 (2008).
Two Regional Transmission Organizations are involved
in this case—Midwest Independent Transmission System
Operator, Inc. (MISO) and PJM Interconnection, LLC
(PJM). As shown in Figure 1, MISO operates in the mid-
west and in the Great Plains states while PJM
operates in the mid-Atlantic region but has midwestern
enclaves in and surrounding Chicago and in southwestern
Michigan.
Each RTO is responsible for planning and directing
expansions and upgrades of its grid. It finances these
activities by adding a fee to the price of wholesale elec-
tricity transmitted on the grid. 18 C.F.R. §§ 35.34 (k)(1), (7).
The Federal Power Act requires that the fee be “just and
reasonable,” 16 U.S.C. § 824d(a), and therefore at least
4 Nos.11-3421, 11-3430, 11-3584, et al.
roughly proportionate to the anticipated benefits to a
utility of being able to use the grid. Illinois Commerce
Commission v. FERC, 576 F.3d 470, 476 (7th Cir. 2009);
Pacific Gas & Electric Co. v. FERC, 373 F.3d 1315, 1320-21
(D.C. Cir. 2004). Thus “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). Courts “evaluate compliance
[with this principle, which is called ‘cost causation’] by
comparing the costs assessed against a party to the bur-
dens imposed or benefits drawn by that party.” Midwest
ISO Transmission Owners v. FERC, supra, 373 F.3d at 1368.
MISO began operating in 2002 and soon grew to have
130 members. (Unfortunately, the voluminous briefs
say little about the association’s governance structure.) In
2010 it sought FERC’s approval to impose a tariff on its
members to fund the construction of new high-voltage
power lines that it calls “multi-value projects” (MVPs),
beginning with 16 pilot projects. The tariff is mainly
intended to finance the construction of transmission
lines for electricity generated by remote wind farms.
Every state in MISO’s region except Kentucky (which is
barely in the region, see Figure 1) encourages or even
requires utilities to obtain a specified percentage of their
electricity supply from renewable sources, mainly wind
farms. Indiana, North Dakota, and South Dakota
have aspirational goals; the rest have mandates. The
details vary but most of the states expect or require
utilities to obtain between 10 and 25 percent of their
electricity needs from renewable sources by 2025—and
by then there may be federal renewable energy require-
ments as well.
Nos. 11-3421, 11-3430, 11-3584, et al. 5
“The dirty secret of clean energy is that while
generating it is getting easier, moving it to market is
not . . . . Achieving [a 20% renewable energy quota]
would require moving large amounts of power over long
distances, from the windy, lightly populated plains in
the middle of the country to the coasts where many
people live. . . The grid’s limitations are putting a
damper on such projects already.” Matthew L. Wald,
“Wind Energy Bumps into Power Grid’s Limits,” New
York Times, Aug. 27, 2008, p. A1. MISO aims to overcome
these limitations.
To begin with, it has identified what it believes to be
the best sites in its region for wind farms that will meet
the region’s demand for wind power. They are the
shaded ovals in Figure 2. Most are in the Great Plains,
because electricity produced by wind farms there is
cheaper despite the longer transmission distance; the
wind flow is stronger and steadier and land is cheaper
because population density is low (wind farms require
significant amounts of land).
6 Nos.11-3421, 11-3430, 11-3584, et al.
F IGURE 2
W IND D EVELOPMENT Z ONES AND MVP P ROJECTS
(dashed lines are initial proposals,
solid lines approved projects)
MISO has estimated that the cost of the transmission
lines necessary both to bring electricity to its urban
centers from the Great Plains and to integrate the
existing wind farms elsewhere in its region with trans-
mission lines from the Great Plains—transmission lines
that the multi-value projects will create—will be
more than offset by the lower cost of electricity produced
by western wind farms. The new transmission lines
will also increase the reliability of the electricity
supply in the MISO region and thus reduce brownouts
Nos. 11-3421, 11-3430, 11-3584, et al. 7
and outages, and also increase the efficiency with which
electricity is distributed throughout the region.
The cost of the multi-value projects is to be allocated
among utilities drawing power from MISO’s grid in
proportion to each utility’s share of the region’s total
wholesale consumption of electricity. Before 2010, MISO
allocated the cost of expanding or upgrading the transmis-
sion grid to the utilities nearest a proposed transmission
line, on the theory that they would benefit the most
from the new line. But wind farms in the Great Plains
can generate far more power than that sparsely popu-
lated region needs. So MISO decided to allocate MVP costs
among all utilities drawing power from the grid
according to the amount of electrical energy used, thus
placing most of those costs on urban centers, where
demand for energy is greatest.
FERC approved (with a few exceptions, one discussed
later in this opinion) MISO’s rate design and pilot
projects in two orders (for simplicity we’ll pretend
they’re just one), precipitating the petitions for review
that we have consolidated.
Six issues are presented: the proportionality of benefits
to costs; the procedural adequacy of the Commission’s
treatment of proportionality; the propriety of appor-
tioning the cost of the multi-value projects among
utilities on the basis of their total power consumption
while allocating no MVP costs to the plants that generate
the power; whether MISO should be permitted to add
the MVP fee to electricity transmitted to utilities that
belong to the PJM Regional Transmission Organization
8 Nos.11-3421, 11-3430, 11-3584, et al.
rather than to MISO; whether MISO should be permitted
to assess some of the multi-value projects’ costs on depart-
ing members of MISO; and whether the Commission’s
approval of the MVP tariff—which if implemented will
influence decisions by state utility commissions re-
garding the siting of transmission lines—violates the
Tenth Amendment to the Constitution by invading state
prerogatives.
The Tenth Amendment. The last issue is frivolous, so
we dispatch it first. FERC approved the MVP tariff pursu-
ant to its statutory authority to regulate interstate
electrical rates, 16 U.S.C. § 824(a), but (unlike the reg-
ulation of natural gas, a field in which FERC has juris-
diction both over pricing and over the siting of interstate
lines, see 15 U.S.C. § 717f(c)) the states retain authority
over the location and construction of electrical trans-
mission lines. 16 U.S.C. § 824(b)(1); New York v. FERC,
535 U.S. 1, 24 (2002). Some of the petitioners complain
that FERC’s approval of the MVP tariff coerces each
state to approve all MVPs proposed within its territory.
They argue that since the costs of each project are dis-
tributed among all MISO utilities while any local
benefits will be retained in the state in which the project
is located, a state will deprive itself of the local benefits
of a project subsidized by other utilities if it refuses to
approve an MVP project.
But this is just to say that the tariff provides a carrot
that states won’t be able to resist eating; to obtain the
benefits of the MVP program each state’s MISO mem-
bers may have to shoulder costs of some specific projects
Nos. 11-3421, 11-3430, 11-3584, et al. 9
that they’d prefer not to support. But that’s a far cry
from the federal government’s conscripting a state gov-
ernment into federal service. That it may not do. National
Federation of Independent Businesses v. Sebelius, 132 S. Ct.
2566, 2601-09 (2012); New York v. United States, 505 U.S.
144, 149 (1992); Printz v. United States, 521 U.S. 898, 935
(1997). This it may do. Cf. National Ass’n of Regulatory
Utility Commissioners v. FERC, 475 F.3d 1277, 1282-83
(D.C. Cir. 2007). It’s not as if FERC were ordering states
to build transmission lines that the federal government
wants to use for its own purposes. And to glance ahead
a bit, there is nothing to prevent a member of MISO
from withdrawing from the association and joining
another Regional Transmission Organization.
Five issues remain; we discuss them in the order in
which we listed them, beginning with—
Proportionality and Procedure (best discussed together).
MISO used to allocate the cost of an upgrade to its grid
to the local area (“pricing zone”) in which the upgrade
was located. (There are 24 pricing zones in MISO.) But
those were upgrades to low-voltage lines, which
transmit power short distances and thus benefit only
the local area served by the lines. MISO contends (and
FERC agrees) that the multi-value projects, which
involve high-voltage lines that transmit electricity over
long distances, will benefit all members of MISO and so
the projects’ costs should be shared among all members.
The petitioners’ objections fall into two groups.
One consists of objections lodged by the Michigan
utilities and their regulator (we’ll call this set of objectors
10 Nos.11-3421, 11-3430, 11-3584, et al.
“Michigan”), the other of objections by other petitioners
led by the Illinois Commerce Commission. We’ll call
these objectors “Illinois,” though they include other
state utilities and regulators; and we’ll begin with
their objections.
Illinois contends that the criteria for determining
what projects are eligible to be treated as MVPs are
too loose, and that as a result all MISO members will
be forced to contribute to the cost of projects that
benefit only a few. To qualify as an MVP a project must
have an expected cost of at least $20 million, must
consist of high-voltage transmission lines (at least 100kV),
and must help MISO members meet state renewable
energy requirements, fix reliability problems, or provide
economic benefits in multiple pricing zones. None of
these eligibility criteria ensures that every utility in
MISO’s vast region will benefit from every MVP project,
let alone in exact proportion to its share of the MVP
tariff. For example, Illinois power cooperatives are
exempt from the state’s renewable energy requirements,
83 Ill. Adm. Code 455.100; 20 ILCS 3855/1-75(c), and
so would not benefit from MVPs that help utilities
meet state renewable energy requirements. But FERC
expects them to benefit by virtue of the criteria for MVP
projects relating to reliability and to the provision of
benefits across pricing zones.
Bear in mind that every multi-value project is to be
large, is to consist of high-voltage transmission (enabling
power to be transmitted efficiently across pricing zones),
and is to help utilities satisfy renewable energy require-
Nos. 11-3421, 11-3430, 11-3584, et al. 11
ments, improve reliability (which benefits the entire
regional grid by reducing the likelihood of brownouts or
outages, which could occur anywhere on it, Illinois Com-
merce Commission v. FERC, supra, 576 F.3d at 477), facilitate
power flow to currently underserved areas in the MISO
region, or attain several of these goals at once. The 16
projects that have been authorized are just the beginning.
And FERC has required MISO to provide annual updates
on the status of those projects. Should the reports show
that the benefits anticipated by MISO and FERC are
not being realized, the Commission can modify or
rescind its approval of the MVP tariff.
Illinois also complains that MISO has failed to show
that the multi-value projects as a whole will confer
benefits greater than their costs, and it complains too
about FERC’s failure to determine the costs and benefits
of the projects subregion by subregion and utility by
utility. But Illinois’s briefs offer no estimates of costs
and benefits either, whether for the MISO region as a
whole or for particular subregions or particular utilities.
And in complaining that MISO and the Commission
failed to calculate the full financial incidence of the MVP
tariff, Illinois ignores the limitations on calculability that
the uncertainty of the future imposes. MISO did estimate
that there would be cost savings of some $297 million to
$423 million annually because western wind power
is cheaper than power from existing sources, and that
these savings would be “spread almost evenly across all
Midwest ISO Planning Regions.” Midwest Independent
Transmission System Operator, Inc., 133 F.E.R.C. 61221, ¶ 34
(2010). It also estimated that the projected high-
12 Nos.11-3421, 11-3430, 11-3584, et al.
voltage lines would reduce losses of electricity in trans-
mission by $68 to $104 million, and save another $217
to $271 million by reducing “reserve margin losses.” Id.That term refers to electricity generated in excess of
demand and therefore (because it can’t be stored)
wasted. Fewer plants will have to be kept running in
reserve to meet unexpected spikes in demand if by
virtue of longer transmission lines electricity can be sent
from elsewhere to meet those unexpected spikes. It’s
impossible to allocate these cost savings with any
precision across MISO members.
The promotion of wind power by the MVP program
deserves emphasis. Already wind power accounts for 3.5
percent of the nation’s electricity, U.S. Energy Information
Administration, “What is US Electricity Generation by
Source?” May 9, 2013, www.eia.gov/tools/faqs/faq.cfm?id=
427&t=3 (visited May 29, 2013), and it is expected to
continue growing despite the downsides of wind power
that we summarized in Muscarello v. Winnebago County
Board, 702 F.3d 909, 910-11 (7th Cir. 2012). The use of
wind power in lieu of power generated by burning
fossil fuels reduces both the nation’s dependence on
foreign oil and emissions of carbon dioxide. And its cost
is falling as technology improves. No one can know
how fast wind power will grow. But the best guess is
that it will grow fast and confer substantial benefits on
the region served by MISO by replacing more expensive
local wind power, and power plants that burn oil or coal,
with western wind power. There is no reason to think
these benefits will be denied to particular subregions of
MISO. Other benefits of MVPs, such as increasing the
Nos. 11-3421, 11-3430, 11-3584, et al. 13
reliability of the grid, also can’t be calculated in advance,
especially on a subregional basis, yet are real and will
benefit utilities and consumers in all of MISO’s subregions.
It’s not enough for Illinois to point out that MISO’s
and FERC’s attempt to match the costs and the benefits
of the MVP program is crude; if crude is all that is
possible, it will have to suffice. As we explained in
Illinois Commerce Commission v. FERC, supra, 576 F.3d at
477, if FERC “cannot quantify the benefits [to particular
utilities or a particular utility] . . . 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 [the] region, then fine; the
Commission can approve [the pricing scheme proposed
by the Regional Transmission Organization for that
region] . . . on that basis. For that matter it can presume
[as it did in this case] that new transmission lines
benefit the entire network by reducing the likelihood
or severity of outages.”
Illinois can’t counter FERC without presenting evi-
dence of imbalance of costs and benefits, which it hasn’t
done. When we pointed this out at oral argument,
Illinois’s lawyer responded that he could not obtain
the necessary evidence without pretrial discovery and
that FERC had refused to grant his request for an eviden-
tiary hearing even though the Commission’s rules
make the grant of such a hearing a precondition to dis-
covery. 18 C.F.R. § 385.504(b)(5). FERC refused because
it already had voluminous evidentiary materials,
including MISO’s elaborate quantifications of costs
14 Nos.11-3421, 11-3430, 11-3584, et al.
and benefits—and these were materials to which the
petitioners had access as well; they are, after all, members
of MISO. The only information MISO held back was
the production costs of particular power plants, which
it deemed trade secrets and anyway are only tenuously
related to the issue of proportionality. The need for dis-
covery has not been shown; and for us to order it
without a compelling reason two and a half years
after the Commission rendered its exhaustive decision
(almost 400 pages long) would create unconscionable
regulatory delay.
Michigan (which is to say Michigan utilities plus the
state’s electric power regulatory agency) argues that
unique features of the state’s power system will cause
Michigan utilities to pay a share of the MVP tariff greatly
disproportionate to the benefits they will derive from
the multi-value projects. A Michigan statute, Mich.
Comp. L. 460.1029(1), forbids Michigan utilities to count
renewable energy generated outside the state toward
satisfying the requirement in the state’s “Clean, Renew-
able, and Efficient Energy Act” of 2008 that they obtain
at least 10 percent of their electrical power needs from
renewable sources by 2015. Michigan further argues
that it won’t benefit from any multi-value projects con-
structed in other states because its utilities draw very
little power from the rest of the MISO grid, as a conse-
quence of the limited capacity to transmit electricity
from Indiana to Michigan. It argues that for these
reasons it should be required to contribute only to the
costs of multi-value projects built in Michigan.
Nos. 11-3421, 11-3430, 11-3584, et al. 15
The second argument founders on the fact that the
construction of high-voltage lines from Indiana to Michi-
gan is one of the multi-value projects and will enable
more electricity to be transmitted to Michigan at lower
cost. Michigan’s first argument—that its law forbids it to
credit wind power from out of state against the state’s
required use of renewable energy by its utilities—trips
over an insurmountable constitutional objection. Michigan
cannot, without violating the commerce clause of Article I
of the Constitution, discriminate against out-of-state
renewable energy. See Oregon Waste Systems, Inc. v. Depart-
ment of Environmental Quality, 511 U.S. 93, 100-01 (1994);
Wyoming v. Oklahoma, 502 U.S. 437, 454-55 (1992); Alliance
for Clean Coal v. Miller, 44 F.3d 591, 595-96 (7th Cir. 1995);
Steven Ferrey, “Threading the Constitutional Needle
with Care: The Commerce Clause Threat to the New
Infrastructure of Renewable Power,” 7 Texas J. Oil, Gas
& Energy Law 59, 69, 106-07 (2012).
Like Illinois, Michigan objects to the Commission’s
refusal to conduct an evidentiary hearing. It wants
an opportunity to present evidence in a trial-type pro-
ceeding involving cross-examination of expert wit-
nesses. (All direct testimony at FERC’s evidentiary hear-
ings is presented in writing; only cross-examination
is oral.) It also wants pretrial discovery, like Illinois.
But unlike Illinois it didn’t raise the issue until its reply
brief, which is too late.
FERC need not conduct an oral hearing if it can ade-
quately resolve factual disputes on the basis of written
submissions. Blumenthal v. FERC, 613 F.3d 1142, 1144-45
16 Nos.11-3421, 11-3430, 11-3584, et al.
(D.C. Cir. 2010); California ex rel. Lockyer v. FERC, 329 F.3d
700, 713 (9th Cir. 2003); Pacific Gas & Electric Co. v.
FERC, 306 F.3d 1112, 1119 (D.C. Cir. 2002); Cajun Electric
Power Co-op., Inc. v. FERC, 28 F.3d 173, 176-77 (D.C. Cir
1994) (per curiam); Moreau v. FERC, 982 F.2d 556, 568
(D.C. Cir. 1993). Considering the highly technical
character of the data and analysis required to match
costs and benefits of transmission projects, the technical
knowledge and experience of FERC’s members and staff,
and the petitioners’ access to MISO’s studies, we would
be creating gratuitous delay to insist at this late date
on the Commission’s resorting to litigation procedures
designed long ago for run-of-the-mine legal disputes.
Michigan has failed to indicate what evidence that it
might present in an evidentiary hearing would contribute
to the data and analysis in the record already before
the Commission.
A further answer to both the substantive and procedural
questions about proportionality is that MISO members
who think they’re being mistreated by the MVP tariff
can vote with their feet. Membership in an RTO is volun-
tary and though there’s a “departure fee” (discussed
later in this opinion), it is an unexceptionable feature of
membership in a voluntary association, designed to
prevent a departing member from reaping a windfall
by leaving costs for which it is properly liable to be
borne by the remaining members. A departure fee,
which if properly calculated just deters windfalls, will
not prevent a discontented MISO member from
decamping to an adjacent RTO. As shown in the right-
hand panel of Figure 3, Michigan abuts the border
Nos. 11-3421, 11-3430, 11-3584, et al. 17
between MISO (light gray) and PJM (dark gray) and has
claimed that 96.5 percent of its external grid connections
are with PJM. It should therefore be able without great
difficulty to quit MISO and join PJM. It doesn’t want to
do that; so far as appears, it is objecting to the MVP
program only in the hope of getting better terms.
F IGURE 3:
MISO-PJM B ORDER R EGION
(MISO to left, PJM to right)
2004 2013
18 Nos.11-3421, 11-3430, 11-3584, et al.
Allocation of cost on the basis of peak load versus total
electricity consumption. Because a power grid must be
built to handle peak loads (the amount of electricity
transmitted when demand is greatest, as on hot summer
days), some of the petitioners argue that the MVP sur-
charge should be allocated according to each utility’s
contribution to peak demand. The peak demanders
would be paying for facilities built to accommodate that
demand and thus minimize brownouts and outages.
Instead MISO allocates the surcharge by the total amount
of electricity that each utility receives over the MISO
grid. A higher share of MVP costs is thus allocated
to utilities receiving electricity to meet continuous de-
mands, such as the demand by a factory for electricity
much of which it uses in off-peak periods.
The objection to MISO’s allocating costs by total rather
than peak demand is refuted by the fact that a primary
goal of the MVPs is to increase the supply of wind-pow-
ered energy. The electricity generated by wind farms
varies with the amount of wind rather than with demand
and therefore is not a reliable source of energy to meet
peak demand. That is why the states’ renewable energy
standards are couched in terms of total energy rather
than peak load. See, e.g., 20 ILCS 3855/1-75(c)(2); Wis. Stat.
§ 196.378(1)(fm); Minn. Stat. § 216B.1691 subd. 2a(a).
Furthermore, long-distance power transmission will
enable fewer power plants to serve the grid’s off-peak
demand. True, the projects are also intended to increase
the grid’s reliability, which is challenged mainly by
peak load (which is why outages are more frequent on
hot summer days, when everyone is running his air
Nos. 11-3421, 11-3430, 11-3584, et al. 19
conditioner at the same time). But MISO and FERC were
entitled to conclude that the benefits of more and cheaper
wind power predominate over the benefits of greater
reliability brought about by improvement in meeting
peak demand.
Allocation of cost between power plants and the wholesale
buyers of the power. Petitioners complain about MISO’s
decision to allocate all MVP costs to the utilities that buy
electricity from its grid and none to the power plants that
generate that electricity. Because the power plants are
required to pay for connecting to the grid and the multi-
value projects will shorten the interconnection distance
and thus reduce the cost to the power plants of
connecting, the petitioners argue that the power plants
should pay part of the MVP tariff. But the utilities benefit
from cheaper power generated by efficiently sited wind
farms whose development the multi-value projects will
stimulate. The MVP tariff allocates to the wholesale
buyers some of the costs of conferring these benefits on
those buyers, though competition might do the same
thing without the tariff because the power plants would
pass some of their higher costs on to their customers,
the wholesale buyers.
An important consideration is that when wind farms
are built in remote areas (which are the best places to
site them), the costs of connecting them to the grid are
very high, and by reducing those costs the multi-value
projects, financed by the MVP tariff, facilitate siting
wind farms at the best locations in MISO’s region rather
than at inefficient ones that are however closer to the
20 Nos.11-3421, 11-3430, 11-3584, et al.
existing grid and so would be preferred by the wind-farm
developers if they had to pay for the connection. See
California Independent System Operator Corp., 119 F.E.R.C.
61061, ¶¶ 64-67 (2007); Southwest Power Pool, Inc., 127
F.E.R.C. 61283, ¶¶ 5, 11, 28 (2009).
Export charges to PJM. An issue that unlike the
previous ones finds MISO and FERC at loggerheads
is whether the Commission is unreasonable in pro-
hibiting MISO from adding the MVP surcharge to electric-
ity transmitted from its grid to the grid of PJM, an adjoin-
ing Regional Transmission Organization. The Commis-
sion permits MISO to charge for transmission to
other RTOs.
The prohibition arises from a concern with what in
FERC-speak is called “rate pancaking” but is more trans-
parently described as exploiting a locational monopoly
by charging a toll. It is illustrated by Henrich von
Kleist’s classic German novella Michael Kohlhaas. When the
book was published in 1810, what is now Germany was
divided into hundreds of independent states. A road from
Munich to Berlin, say, would cross many boundaries, and
each state that the road entered could charge a toll as a
condition for allowing entry. The toll would be limited
not by the cost imposed on the state by the traveler, in
wear and tear on the road or traffic congestion, but by
the cost to the traveler of using a less direct alternative
route. See also Diginet, Inc. v. Western Union ATS, Inc., 958
F.2d 1388, 1400 (7th Cir. 1995); cf. Goulding v. Cook, 661
N.E.2d 1322, 1325 (Mass. 1996). Like early nineteenth-
century Germany, the American electric grid used to be
Nos. 11-3421, 11-3430, 11-3584, et al. 21
divided among hundreds of independent utilities, each
charging a separate toll for the right to send electricity
over its portion of the grid. The multiple charges
imposed on long-distance transmission discouraged
such transmission. FERC promoted the creation of the
Regional Transmission Organizations as a way of eli-
minating these locational monopolies. Wabash Valley
Power Ass’n v. FERC, 268 F.3d 1105, 1116 (D.C. Cir.
2001). For it required that the RTOs embrace coherent
geographic regions and that each RTO charge a single fee
for use of its entire grid. 18 C.F.R. §§ 35.34(j)(2), (k)(1)(ii).
In the early 2000s Commonwealth Edison and American
Electric Power had requested FERC’s permission to join
PJM despite being inside MISO’s region (around Chicago
and in southwestern Michigan, respectively). The Com-
mission approved their requests yet was concerned that
the irregular border (seen in the left-hand panel of
Figure 3) between the two regions, by creating PJM en-
claves in MISO’s region, violated the requirement that
RTOs embrace coherent regions. The Commission was
concerned for example with Michigan utilities’ having
to pay PJM charges on power sent from elsewhere in
MISO (such as Wisconsin), because those transmissions,
though beginning and ending in MISO territory,
traversed a PJM enclave—the area served by Common-
wealth Edison.
The Commission had another concern with the
irregular border, what we’ll call the “power routing”
concern. Notice in the left-hand panel of Figure 3 the
MISO utilities that lie (or rather lay, as of 2004) on a south
22 Nos.11-3421, 11-3430, 11-3584, et al.
to north diagonal in Kentucky and Ohio. Imagine a whole-
sale buyer of electricity located on the diagonal. It would
be more efficient for it to draw electricity from the
PJM transmission lines to its immediate west or east
than from the MISO lines that snake to the northeast and
thus bring electricity from a great distance. But the
buyer might be deflected from the most efficient
routing option because buying from PJM would cross
both MISO and PJM territory and thus require paying
a double toll.
So in 2003 FERC forbade export charges between MISO
and PJM and ordered the two RTOs to negotiate a joint
rate that would divide the costs of the cross-border trans-
missions between them, much as with “divisions” of
railroad rates for shipments in which more than one
railroad participates. The Commission didn’t require a
similar negotiation between MISO and the other RTOs
that MISO abuts because no enclave or power-routing
problem was created by transmission to those RTOs;
there were no enclaves or highly irregular borders.
The two RTOs negotiated a joint rate designed to
share the costs of some transmission upgrades with cross-
border benefits—but have not negotiated a joint rate for
multi-value projects. MISO argues that the Commission
should have reconsidered its 2003 prohibition of export
charges to PJM and permitted such charges for multi-value
projects that benefit electricity customers in PJM, in light
of the changes (seen in the right-hand panel of Figure 3)
in the MISO-PJM border between 2003-2004 and 2013.
Those changes have straightened out the border and by
Nos. 11-3421, 11-3430, 11-3584, et al. 23
doing so should have lessened the Commission’s concern
that “the elongated and highly irregular seam between
MISO and PJM. . ..would subject a large number of trans-
actions in the region to continued rate pancaking.”
Midwest Independent Transmission System Operating, Inc.,
137 F.E.R.C 61074, ¶ 264 (2011). No longer are any parts
of Ohio in MISO, though there still are PJM enclaves. For
example, a transmission from a PJM enclave in northern
Illinois or southwestern Michigan to Ohio or Pennsylvania
runs through MISO lines in Indiana. But with the disap-
pearance of the MISO diagonal that we mentioned, the
power-routing problem, at least, appears to have been
solved, though FERC wants more data from MISO to
demonstrate this.
A further concern about the continued validity of the
2003 order prohibiting tolls on transmissions between
MISO and PJM is that the order was issued at a time
when all of MISO’s transmission projects were local and
therefore provided only local benefits, so that an export
charge would have shifted costs to PJM utilities that
derived few or even no benefits from the projects. A
related consideration behind the 2003 order was that
export charges would not finance projects, but would
merely operate as a toll exploiting a locational advantage.
Cf. Illinois Commerce Commission v. FERC, supra, 576 F.3d
at 473-74. The multi-value projects are new projects, not
yet paid for, and since they will benefit electricity users
in PJM, those users should contribute to the costs.
The MVPs also are not local. They will “support all uses
of the system, including transmission on the system that
is ultimately used to deliver to an external load,” and
24 Nos.11-3421, 11-3430, 11-3584, et al.
“benefit all users of the integrated transmission system,
regardless of whether the ultimate point of delivery is to
an internal or external load.” Midwest Independent Trans-
mission System Operating, Inc., 133 F.E.R.C. 61221, ¶ 439
(2010). (By “external” read PJM or any other recipient
of electricity that is outside MISO.) That is an argu-
ment for shifting some of the costs of the system to PJM
utilities. The requirement of proportionality between
costs and benefits requires that all beneficiaries—which
the Commission has determined include all users of the
MISO grid, including users in PJM—shoulder a rea-
sonable portion of MVP costs.
MISO and PJM may eventually negotiate an allocation
agreement, as they did in the pre-MVP era, but the rest of
the grid is left to pay for PJM’s share unless and until they
do so. So far as we can tell, the Commission is being
arbitrary in continuing to prohibit MISO from charging
anything for exports of energy to PJM enabled by the
multi-value projects while permitting it to charge for
exports of energy to all the other RTOs. The Commission
must determine in light of current conditions what if
any limitation on export pricing to PJM by MISO is justi-
fied. This part of the Commission’s decision must
therefore be vacated.
The departers. Two former members of MISO, FirstEnergy
and Duke Energy, which lie on the diagonal that had
created the power-routing problem, announced their
intention to quit MISO before the MVP tariff was an-
nounced. MISO wants nevertheless to allocate some
MVP costs to them. FERC has ruled that allocation to
Nos. 11-3421, 11-3430, 11-3584, et al. 25
departing utilities is proper in principle, but has not yet
determined which if any costs may be allocated to the
two utilities in particular. That determination FERC has
ruled to be outside the scope of the present proceeding,
the proceeding before us. Midwest Independent Transmis-
sion System Operating, Inc., 133 F.E.R.C. 61221, ¶ 472 (2010).
FirstEnergy and Duke respond that they can’t be made
liable for any such costs because their membership
contract with MISO does not provide for the imposition
of such costs.
When a firm withdraws from an association owing
money to it, its withdrawal does not terminate its
liability; an example is an employer who withdraws from
a multiemployer ERISA plan. See, e.g., Concrete Pipe &
Products v. Construction Laborers Pension Trust for
Southern California, 508 U.S. 602, 608-09 (1993); Chicago
Truck Drivers, Helpers & Warehouse Workers Union (Inde-
pendent) Pension Fund v. CPC Logistics, Inc., 698 F.3d 346,
347-48 (7th Cir. 2012). The same may be true of
withdrawal from a Regional Transmission Organization.
If MISO began to incur costs relating to the MVPs (in-
cluding the pilot projects) before the departing members
announced their departure, those utilities may be liable
for some of those costs. MISO contends that they are
liable, but the Commission has reserved the question for
a separate proceeding, see First Energy Service Co. v.
Midwest Independent Transmission System Operating, Inc.,
138 F.E.R.C. 61140, ¶ 74 (2012), as it is authorized to do.
Mobil Oil Exploration & Producing Southeast Inc. v. United
Distribution Cos., 498 U.S. 211, 230 (1991). That proceeding
is pending.
26 Nos.11-3421, 11-3430, 11-3584, et al.
The departing members’ attack on an order that
amounts to a truism—that amounts to saying that if
they’re liable they’re liable—is premature, and must
therefore be dismissed for want of a final administrative
decision on the matter. California Department of Water
Resources v. FERC, 341 F.3d 906, 909 (9th Cir. 2003); Fourth
Branch Associates v. FERC, 253 F.3d 741, 746 (D.C. Cir. 2001).
In summary, the challenged orders are affirmed, except
that the challenge by the departing MISO members
is dismissed as premature and the determination re-
garding export pricing to PJM is remanded for further
analysis by the Commission in light of the discussion of
the issue in this opinion.
6-7-13