International Transmission Company v. FERC ( 2021 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 23, 2020 Decided February 19, 2021
No. 19-1190
INTERNATIONAL TRANSMISSION COMPANY , ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION ,
RESPONDENT
AMERICAN MUNICIPAL POWER, INC., ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Aaron M. Streett argued the cause for petitioners. With
him on the briefs were Jay Ryan and J. Mark Little.
Carol J. Banta, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were David L. Morenoff, Acting General
Counsel, and Robert H. Solomon, Solicitor. Lona T. Perry,
Deputy Solicitor, entered an appearance.
Gerit F. Hull, Daniel R. Simon, Omar Bustami, Robert A.
Weishaar, Jr., Kenneth R. Stark, James K. Mitchell, Deborah
2
A. Moss, Emerson J. Hilton, Steven D. Hughey, Assistant
Attorney General, Office of the Attorney General for the State
of Michigan, David E. Pomper, Cynthia S. Bogorad, Amber L.
Martin, James H. Holt, David Eugene Crawford, and Andrea
I. Sarmentero Garzon were on the brief for intervenors
American Municipal Power, Inc., et al. in support of
respondent. Spencer A. Sattler, Assistant Attorney General,
Office of the Attorney General for the State of Michigan,
entered an appearance.
Before: ROGERS and PILLARD, Circuit Judges, and
SENTELLE , Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge PILLARD.
Dissenting opinion filed by Senior Circuit Judge
SENTELLE .
PILLARD , Circuit Judge: Three electrical transmission
companies, subsidiaries of the same parent company, petition
for review of a decision by the Federal Energy Regulatory
Commission (FERC) to reduce the enhanced return on equity
FERC had previously authorized them to collect from
ratepayers due to their status as standalone transmission
companies. FERC calls such companies Transcos. Since 2003
it has granted return-on-equity “adders” to Transcos because of
what the Commission had concluded was a willingness and
ability on their part to invest in transmission infrastructure—a
policy objective that Congress endorsed in 2005 when it
required FERC to formally establish incentive-based rate
treatments for transmission companies. FERC consistently has
premised companies’ eligibility for “Transco adders” on their
standalone transmission status, which it has evaluated by
looking to the companies’ ability to maintain operational
3
independence from other participants in the electrical market,
such as companies invested in power generation.
In 2016, two foreign-based companies with holdings in
U.S. electrical markets acquired the parent company of the
three petitioners. A group of transmission customers formally
complained to FERC that the petitioners’ existing return-on-
equity adders were no longer just and reasonable because the
companies, post-merger, were no longer independent. FERC
found the merger had reduced but not eliminated the three
Transcos’ independence from other market participants and,
based on that finding, reduced the adders at issue by half.
Petitioners argue on appeal that, in so doing, FERC arbitrarily
departed from a particular methodology for determining
independence that they say FERC precedent requires. They
claim that, under that methodology, they remained materially
independent so the reductions were unjustified. They also
argue that FERC exceeded its statutory authority by not
expressly finding the existing adders unlawful before setting
them at a new level. We conclude that neither claim has merit
so deny the petition in full.
BACKGROUND
A. Regulatory Context
In 2005, Congress amended the Federal Power Act to
require FERC to take action within the year to promulgate a
rule to establish “incentive-based . . . rate treatments for the
transmission of electric energy,” that is, for the bulk movement
of electricity across electrical grids. See Energy Policy Act of
2005, Pub. L. No. 109-58, § 1241, 119 Stat. 594, 961 (codified
as amended at 16 U.S.C. § 824s). Congress’s stated purpose
was to “benefit[] consumers by ensuring reliability and
reducing the cost of delivered power by reducing transmission
congestion.” 16 U.S.C. § 824s(a). Congestion in the grid arises
4
when the demand for electricity exceeds the capacity of
existing transmission infrastructure. That results in a grid that
cannot accommodate consumer demand in certain areas
through the transmission of low-cost generation, forcing the
grid to instead draw on more expensive generation closer to the
areas of high demand, which ultimately raises costs to
consumers. Congress legislated in 2005 “against the backdrop
of declining investment in transmission infrastructure and
increasing electric load”—a combination ripe for transmission
congestion. Promoting Transmission Investment Through
Pricing Reform, Notice of Proposed Rulemaking, 113 FERC ¶
61,182 at P1 (2005). It intended the incentive-based rate
treatments to help alleviate that problem by encouraging
investments in transmission infrastructure, thereby improving
the transmission system’s capacity and reliability. See San
Diego Gas & Elec. Co. v. FERC, 913 F.3d 127, 130 (D.C. Cir.
2019).
The implementing rule FERC promulgated the following
year established a series of categories of incentive-based rate
treatments for public utilities. See 18 C.F.R. § 35.35(d). Two
of these incentives were limited to standalone transmission
companies, meaning companies that deal exclusively in the
transmission of electricity, not its generation. Id.§§ 35.35(b)(1), (d)(2). Under the incentive at issue in this case,
FERC will authorize “[a] return on equity that both encourages
Transco formation and is sufficient to attract investment” in
transmission facilities and related technologies. Id.
§ 35.35(d)(2)(i); see 16 U.S.C. § 824s(b)(2).
The 2006 rule was the first codification of that incentive,
but it reflected a preexisting FERC practice of granting
independent and standalone transmission companies “adders”
to their base return on equity. As its name suggests, a FERC-
authorized return on equity determines the extent to which a
5
utility in the highly regulated electricity sector may earn a
profit. FERC ties “adders” to certain behaviors or
characteristics of utilities, incentivizing needed actions by
bumping up their returns on equity above the base level set by
FERC. The first “Transco adders” were granted in 2003 to
International Transmission Company and Michigan Electric
Transmission Company (METC), two of the petitioners in this
case. ITC Holdings Corp., 102 FERC ¶ 61,182 (2003); METC,
105 FERC ¶ 61,214 (2003); see also METC, 113 FERC ¶
61,343 (2005).1 Each adder was worth 100 basis points, an
amount equal to a single percentage point.
FERC’s stated reason for codifying the Transco adder as
one of several available incentives was Transcos’ positive track
record of investing in transmission infrastructure. It explained
that the three Transcos to which it had previously granted such
adders, including petitioners International Transmission and
METC, had “demonstrated the capability to invest, on a timely
basis, significant amounts of capital in transmission projects
and in efforts to reduce congestion.” Promoting Transmission
Investment Through Pricing Reform, Notice of Proposed
Rulemaking, 113 FERC ¶ 61182 at P38. FERC concluded that
their positive investment record was “related to the stand-alone
nature of these entities,” explaining that “[b]y eliminating
competition for capital between generation and transmission
functions and thereby maintaining a singular focus on
transmission investment, the Transco model responds more
rapidly and precisely to market signals indicating when and
where transmission is needed.” Promoting Transmission
Investment Through Pricing Reform, Order No. 679, 116
FERC ¶ 61,057 at P224 (2006) (Order No. 679). In addition,
because Transcos deal only in transmission, they “provide non-
1
International Transmission Company is a subsidiary of ITC
Holdings, which owns all three petitioners in this case.
6
discriminatory access to all grid users.” Id. Independent
Transcos “have no incentive to maintain congestion in order to
protect their owned generation”—a situation that might arise,
for example, with an integrated utility whose highest-cost
generation is brought on line when congestion impedes access
to lower-cost power. Id. FERC was careful to note that a
Transco would be allowed an adder over the long term only if
it “continue[d] to provide the benefits which we are trying to
incentivize.” Id. at P226.
Since 2003, FERC has weighed a Transco’s ownership and
business structure in the course of deciding whether to grant a
requested Transco adder. FERC emphasized from the outset
that “[i]ndependent ownership and operation of transmission is
an important policy objective of the Commission,” citing
among the benefits of independence the “lessened potential for
discrimination, improved access to capital markets for
transmission investment, improved asset management, and
development of innovative services.” METC, 105 FERC ¶
61,214 at P20; see also ITC Holdings Corp., 102 FERC ¶
61,182 at P68. FERC assessed the Transcos’ ability to operate
independently from market participants—entities that sell
generation or other services that could be affected by a
Transco’s actions and thus might bear on investment decisions.
In 2003, International Transmission was indirectly owned
by a limited partnership, so in assessing International
Transmission’s independence FERC considered the roles and
affiliations of the owner’s general and limited partners. See
ITC Holdings Corp., 102 FERC ¶ 61,182 at PP39-44. The
Commission determined the general partners were of little
concern because they lacked financial ties to market
participants and that, while the limited partners had interests in
generation holdings, they would nonetheless not affect
International Transmission’s operational independence on
7
account of their limited voting rights in those other interests.
Id. When International Transmission went public two years
later, FERC continued to permit its adder on the condition that
no market participant acquire more than five percent of the
company’s stock. See ITC Holdings Corp., 111 FERC ¶ 61,149at PP18-26 (2005).
Soon after that decision, FERC issued a policy statement
clarifying its policy on Transco independence. The
Commission announced that Transcos with “market
participants as passive minority equity owners” were
permissible. Policy Statement Regarding Evaluation of
Independent Ownership & Operation of Transmission, 111
FERC ¶ 61,473 at PP1-2 (2005). It underscored, however, that
it would evaluate rate proposals “to ensure that passive
ownership does not affect the independent operation, planning
and construction of their transmission system.” Id.FERC continued its practice of evaluating Transco
independence when it codified the Transco adder in 2006.
FERC defined a Transco as simply a standalone transmission
company, “regardless of whether it is affiliated with another
public utility.” Order No. 679, 116 FERC ¶ 61,057 at P201. In
so doing, the Commission declined to “exclude affiliated
Transcos with active ownership by market participants.” Id. at
P202. But the preamble to FERC’s 2006 rule stressed that their
independence remained “an important component of the
positive contribution of Transcos [to] investment in needed
transmission infrastructure,” noting specifically that
International Transmission and METC were “totally
independent of market participants.” Id. at P240; see also id.at P202. FERC thus determined that it would “consider the
level of independence of a Transco as part of [its] analysis” in
determining “appropriate incentives.” Id. at P239. It stated
that a Transco with active ownership by market participants
8
could receive the adder “to the extent it can show, for example,
why active ownership by an affiliate does not affect the
integrity of its investment planning, capital formation, and
investment processes or how its business structure provides
support for transmission investments in a way similar to the
structure of non-affiliated Transcos or Transcos with only
passive ownership by market participants.” Id. at P240.
Since codifying the Transco adder in 2006, FERC has
granted it to twelve entities. See Electric Transmission
Incentives Policy Under Section 219 of the Federal Power Act,
Notice of Proposed Rulemaking, 170 FERC ¶ 61,204 at P90 &
n.106 (2020). One of the twelve is the third petitioner in this
case, ITC Midwest. See Midcontinent Indep. Sys. Operator,
Inc., 150 FERC ¶ 61,252 (2015). FERC found ITC Midwest
to be “fully independent” but, unlike in earlier cases, granted
the Transco a 50—instead of 100—basis point adder. Id. at
P45. It concluded that its earlier decisions granting 100 basis
points were “based on the specific circumstances of the
applicants and market conditions at the time of their
applications” and determined that 100 basis points was
“excessive for the Transco Adder at this time.” Id. FERC has
since recognized 50 basis points to be presumptively the
appropriate size for a Transco adder.2
2
In a notice of proposed rulemaking published in 2020, FERC
proposes eliminating the Transco adder entirely. See Electric
Transmission Incentives Policy Under Section 219 of the Federal
Power Act, Notice of Proposed Rulemaking, 170 FERC ¶ 61,204. It
states “that the circumstances have changed significantly since Order
No. 679,” that “the key reasoning underpinning [FERC’s] policy . . .
no longer appl[ies],” and that “the Transco business model has not
enhanced the deployment of transmission infrastructure sufficiently
to justify incentives based on this business model beyond those
9
B. Administrative Proceedings
ITC Holdings is the parent company of the three
petitioners in this case.3 All three are members of the
Midcontinent Independent System Operator, Inc.
(Midcontinent Region), a regional transmission organization.
A regional transmission organization is a FERC-approved
non-profit, independent organization that administers the grid
on a regional basis on behalf of transmission-owning member
utilities. The Midcontinent Region operates in the Eastern
Interconnection, one of the three major electrical grids in the
continental United States. The Midcontinent Region’s
geographic footprint encompasses Manitoba, Canada, and
extends south across fifteen U.S. states, most of which are in
the Midwest, with a few in the South.
In 2016, ITC Holdings was acquired by Fortis, Inc., and
GIC (Ventures) Private Limited in a merger transaction
authorized by FERC. See Fortis Inc., 156 FERC ¶ 61,219(2016). Fortis is a Canadian holding corporation whose
holdings include electric distribution and natural gas utilities in
the United States. GIC Ventures is an investment company
indirectly owned by the government of Singapore. As a result
of the merger transaction, Fortis now owns 80.1 percent of ITC
Holdings and GIC Ventures owns the remaining 19.9 percent.
incentives available to all public utilities.” Id. at P90-91. FERC
noted that “the Transco business model that the Commission
envisioned in approving Transco incentives . . . was one of robust
independence,” but that, “currently, the majority of Transcos have
started out as, or become, transmission affiliates of integrated
utilities.” Id. at P90.
3
ITC Holdings acquired METC in 2006, after METC had been
granted a Transco adder. See ITC Holdings Corp., 116 FERC
¶ 61,271 (2006).
10
Both Fortis and GIC Ventures have representatives on ITC
Holdings’ board.
After the merger, a group of ITC Holdings transmission
customers—including companies involved in the generation,
distribution, and retail sale of electricity and organizations of
municipal utilities—filed a complaint with FERC under
Section 206 of the Federal Power Act asserting that the three
adders held by the petitioners in this case, worth approximately
$24 million in annual revenues, were no longer just and
reasonable, as required by the Federal Power Act. 16 U.S.C.
§ 824d(a). As a result of the merger, the three ITC subsidiaries
(collectively, ITC) were affiliated with market participants that
generate, purchase, and/or sell electricity in the Eastern
Interconnection. The complainants argued that petitioners’
independence could be affected by ITC’s operations, so
petitioners were no longer entitled to an incentive reserved for
independent Transcos.
The complainants identified two Fortis subsidiaries that
generate, purchase, and sell electricity over the Eastern
Interconnection grid—one in Ontario, which borders the
Midcontinent Region, and the other in New York. And they
identified two GIC Ventures subsidiaries that operate in PJM,
a regional transmission organization that covers much of the
Rust Belt region and that borders the Midcontinent Region in
the Midwest. One of those GIC Ventures subsidiaries markets
and sells electricity in and around Pittsburgh, and the other
owns generation close to the Midcontinent Region, in Illinois,
Michigan, and Ohio. Explaining how the affiliates might
compromise ITC’s independence, the complainants noted that
Fortis’s subsidiaries operate on an integrated basis, raising the
risk, for example, that ITC could make transmission decisions
biased in favor of the Ontario and New York companies. They
contended that the three Transcos’ membership in the
11
Midcontinent Region, which, like all regional transmission
organizations, is itself required to be independent from market
participants and collectively oversees the transmission
operations of its members, was insufficient to guard against the
risks posed by ITC’s lack of independence. The consumers
argued that the adder’s “entire point is the belief that ratepayers
gain by placing transmission ownership in an entity that has no
reason to even wish to discriminate for or against any subset of
transmission users, in part because discrimination can take
subtle forms that are difficult to detect and remedy.”
Complaint at 10 (J.A. 69).
In its answer to the complaint, ITC claimed that the
complainants assumed the wrong level of analysis, arguing that
participants’ status is appropriately assessed at the level of an
individual regional transmission system, not across the entire
Eastern Interconnection. ITC pointed out that neither GIC nor
Fortis has subsidiaries in the Midcontinent Region’s markets.
It asserted that it accordingly remained independent of the
relevant market participants. As support, ITC cited FERC’s
recent decision in NextEra Energy Transmission N.Y., Inc., 162
FERC ¶ 61,196 (2018), which granted an adder to an Eastern
Interconnection Transco even though its parent company
owned 38,000 megawatts of generation in different regions
within the Interconnection—generation holdings that ITC
argued “dwarf[ed] the Fortis and GIC Ventures interests”
identified by complainants. Answer at 18 (J.A. 179).
Even if market-participant status were assessed on an
Interconnection-wide basis, ITC argued, it maintained
sufficient independence under criteria identified in Order No.
679, FERC’s preamble to the 2006 rule, because its affiliations
did not affect the integrity of its investment planning, capital
formation, or investment processes. The ITC companies
continued to plan their transmission operations through the
12
Midcontinent Region, free of influence from Fortis, GIC, or
any affiliates; they established capital plans independently
before they were used by Fortis management; and they
maintained their own financing, funding their programs
through debt issuances and equity infusions.
In October 2018, FERC granted the complaint in part,
finding that the merger had reduced ITC’s independence. It
stated that Order No. 679 “established criteria for use in
determining whether an entity with active ownership by a
market participant is sufficiently independent to qualify for a
Transco Adder,” including the criteria identified by ITC—an
“entity’s ‘integrity of investment planning, capital formation,
and investment processes’”—“‘as well as how its business
structure provides support for transmission investments.’”
Consumers Energy Co. v. Int’l Transmission Co., 165 FERC
¶ 61,021 at P67 (2018) (Complaint Order) (quoting Order No.
679, 116 FERC ¶ 61,057 at PP239-40). FERC drew from
Order No. 679 three specific criteria relevant to independence:
investment planning, capital formation, and business structure.
It assessed ITC’s post-merger status under each one.
First, with regard to investment planning, FERC found that
ITC “demonstrate[s] some level of independence by
developing [its] own capital expansion plans.” Id. at P69. But
it also found that Fortis’s evaluation of “capital expenditures
on a consolidated basis for its entire corporate family . . .
indicate[s] . . . some level of coordination [with] and control”
over ITC. Id.Second, with regard to capital formation, FERC again
noted that ITC “demonstrate[s] some level of independence in
that [it] can issue [its] own debt independently from Fortis and
GIC.” Id. at P70. But Fortis’s annual report revealed that “ITC
13
Holdings can no longer issue its own common stock, and, to
some degree, [ITC] rel[ies] on Fortis for financing.” Id.Third, with regard to business structure, FERC yet again
found that ITC “demonstrate[s] some level of independence”
because the majority of ITC Holdings’ board of directors “is
unaffiliated with Fortis and GIC.” Id. at P71. But its
independence was materially decreased because the
representatives of Fortis and GIC on ITC Holdings’ Board
“provide some oversight,” and executives across all of Fortis’s
utility subsidiaries “meet[] regularly to discuss business
operations.” Id.In addition to those three criteria, FERC noted “certain
minor potential conflicts of interest associated with other assets
owned by Fortis and GIC.” Id. at P72. But it concluded that
“such concerns are largely attenuated by the location of such
assets and the fact that they are largely subject to small
ownership shares by Fortis and GIC.” Id. It did not respond
directly to ITC’s suggestion that, under NextEra, the location
of those interests outside of the regional transmission
organization by itself required a finding of continued
independence. In the order’s recitals, however, FERC did note
complainants’ efforts to distinguish NextEra. See id. at P58.
Complainants had argued that the ITC Transcos—“incumbent
transmission owners of virtually all of the transmission
facilities in their respective zones”—are materially different
from the Transco in NextEra—“a new entrant to the relevant
region, with ‘no transmission plant in service,’ and no
established financial history to support external financing.”
Reply at 13-14 (J.A. 274-75) (quoting NextEra, 162 FERC
¶ 61,196 at P22). The NextEra Transco “sought a transco
incentive for a single project, for which it was the non-
incumbent developer selected through a competitive
solicitation,” whereas the ITC companies were granted adders
14
“on the basis of their promised full independence from market
participants.” Id. at 14 (J.A. 275).
Considering the independence criteria in combination,
FERC concluded that ITC’s independence had been materially
reduced by the merger. Based on the reduced level of
independence, it determined it was “appropriate to revisit the
appropriate level” of its Transco adders. Complaint Order, 165
FERC ¶ 61,021 at P73. Citing its decision granting ITC
Midwest an adder in 2015, FERC stated that current policy was
for “a fully independent transmission company” to receive a 50
basis point adder. Id. And “[b]ecause the merger ha[d]
reduced, but not eliminated, [ITC’s] level of independence,”
the Commission determined that a 25 basis point adder
“appropriately encourages the Transco business model in these
circumstances and promotes corresponding consumer
benefits.” Id.One Commissioner dissented, stating that he would have
eliminated the adder entirely because ITC was no longer
“sufficiently independent to justify” an adder at any level. Id.(Glick, Comm’r, dissenting).
ITC filed a request for rehearing before the Commission.
It argued that FERC had failed to identify the applicable legal
standard for independence, and had not explained whether the
Fortis and GIC subsidiaries that its order suggested present
“minor potential conflicts of interest” were properly considered
market affiliates. Request for Rehearing at 7 (J.A. 293). It also
argued that FERC departed without explanation from its most
recent precedent granting Transco adders, NextEra and
GridLiance West Transco LLC, 164 FERC ¶ 61,049 (2018).
ITC noted again the NextEra Transco’s generation holdings in
the Eastern Interconnection, and added that the GridLiance
Transco was controlled by a limited partnership whose
15
majority partner owned generation throughout the country. See
Request for Rehearing at 10-11 (J.A. 296-97). ITC claimed
that FERC had “offer[ed] no basis for treating [ITC] differently
from” those Transcos. Id. at 10 (J.A. 296).
FERC denied ITC’s request for rehearing in July 2019.
Consumers Energy Co. v. Int’l Transmission Co., 168 FERC
¶ 61,035 at PP 16-20 (2019) (Rehearing Order). The
Commission first held that it had applied the appropriate
independence standard, which it identified as the criteria
described in Order No. 679. It disagreed with ITC’s suggestion
that market affiliates outside the relevant regional transmission
organization should not be considered at all, noting that Order
No. 679 “places no geographic limitation on the scope of
relevant affiliate relationships.” Id. at P12. And it explained
that its conclusion was consistent with NextEra, in which
FERC deemed the Transco independent despite affiliates
“located inside and outside” the relevant region. Id. at P13
(emphasis in original) (quoting NextEra, 162 FERC ¶ 61,196at P51).
FERC then affirmed its conclusion that ITC was no longer
fully independent after the merger, disagreeing with ITC that
NextEra and GridLiance required a contrary conclusion.
FERC noted that it found on the facts of both of those cases
that those Transcos’ market affiliates “did not ‘affect the
integrity of [the Transcos’] investment planning, capital
formation, and investment processes.’” Id. at P17 (quoting
NextEra, 162 FERC ¶ 61,196 at P51). ITC claimed it was more
independent than the Transco in NextEra, the Commission
noted, but failed to explain “how [it is] more independent.” Id.at P20. “The Commission evaluates the independence of each
Transco on a case-by-case basis based on each proceeding,”
FERC explained, and “evidence in this record specifically
demonstrate[d] that [ITC’s] affiliate relationships reduced the
16
independence of its invest[ment] planning, capital formation,
investment processes, and business structure.” Id.ITC petitioned us for review.
DISCUSSION
We uphold FERC’s final orders unless they are arbitrary
or capricious, an abuse of discretion, or otherwise not in
accordance with the law. FERC v. Elec. Power Supply Ass’n,
136 S. Ct. 760, 782 (2016); NextEra Energy Res., LLC v.
FERC, 898 F.3d 14, 20 (D.C. Cir. 2018). We review the
Commission’s factual findings for substantial evidence. 16
U.S.C. § 825l(b). “[I]n rate-related matters, the court’s review
of the Commission’s determinations is particularly deferential
because such matters are either fairly technical or ‘involve
policy judgments that lie at the core of the regulatory
mission.’” S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41, 54
(D.C. Cir. 2014) (quoting Alcoa Inc. v. FERC, 564 F.3d 1342,
1347 (D.C. Cir. 2009)).
ITC’s petition raises two claims. First, it argues that FERC
arbitrarily and capriciously departed from precedent
establishing a particular methodology to assess Transco
independence. Second, it argues that FERC exceeded its
statutory authority by reducing ITC’s Transco adders without
first finding the adders to be unjust and unreasonable. We
consider each challenge in turn.
A. Independence Analysis
FERC expressly declined in Order No. 679 to “establish a
specific methodology to factor the level of independence into
any request for [return on equity]-based incentives for
Transcos,” stating that it would instead “evaluate the specific
attributes of a particular proposal, including the level of
17
independence, to determine appropriate incentives.” 116
FERC ¶ 61,057 at P239. ITC nonetheless suggests that FERC
established just such a methodology in two orders decided
before this case: NextEra and GridLiance. In those cases,
FERC granted the Transco adder after finding that the Transco
at issue could operate independently of market affiliates inside
and outside its transmission region. The analysis was similar
in both: FERC noted that affiliates outside the relevant region
“[were] distant from . . . and [did] not participate in [the
regional system’s] markets” and that affiliated holdings inside
the region were small and had the sale of their generation
output committed under long-term contracts. GridLiance, 164
FERC ¶ 61,049 at P43; accord NextEra, 162 FERC ¶ 61,196 at
P51. From these two cases ITC argues that FERC “established
its methodology for applying Order No. 679’s general guidance
to assess the independence of transmission subsidiaries that are
part of corporate families that include some generation
holdings.” Pet’rs Br. 21. According to ITC, under the
NextEra/GridLiance methodology, FERC first categorizes
affiliated holdings based on whether they are inside or outside
the transmission region: Those outside have no effect on a
Transco’s independence because they are geographically
distant and outside the regional system’s markets, and those
inside do not affect a Transco’s independence if they are small
and their output is committed under long-term contracts. ITC
claims FERC “departed without acknowledgment or
explanation from its geographically focused methodology” in
this case, instead applying “a new corporate-structure test.”
Pet’rs Br. 22.
ITC’s argument that FERC departed from an established
methodology fails at the outset because FERC, consistent with
its stated intent in Order No. 679, never established any
definitive methodology, let alone the one ITC claims it did.
FERC has consistently applied a case-by-case approach to
18
determining Transco independence, considering ownership
and business structure as part of that inquiry since it first
granted a Transco adder in 2003. When the adder was codified
in 2006, Order No. 679 built on prior practice by identifying
certain criteria that ITC now mistakenly claims constitute “a
new corporate-structure test.”
In Order No. 679, FERC extended eligibility for a Transco
adder to “[a] transco with active ownership by a market
participant . . . to the extent it can show, for example, why
active ownership by an affiliate does not affect the integrity of
its investment planning, capital formation, and investment
processes or how its business structure provides support for
transmission investments in a way similar to the structure of
non-affiliated Transcos or Transcos with only passive
ownership by market participants.” Order No. 679, 116 FERC
¶ 61,057 at P240. FERC considered precisely those criteria in
its order reducing ITC’s adders. It found that ITC was no
longer fully independent based on a multi-factored assessment
of its investment planning, capital formation, and business
structure.
The precedents that ITC argues established a different
methodology in fact concluded that the Transcos were
independent according to the Order No. 679 criteria. In
NextEra, FERC held in the same paragraph from which ITC
draws its test that, “[b]ased on the record here . . . [the Transco]
has demonstrated that its relationship to its affiliated market
participants will not affect the integrity of [its] investment
planning, capital formation, and investment processes.” 162
FERC ¶ 61,196 at P51. FERC then turned to the geographical
facts presented on the NextEra record to inform that bottom-
line finding. Id. Its analysis in GridLiance was similar. FERC
began there by noting it “found [the Transco] ha[d]
demonstrated that its relationship to its affiliates will not affect
19
the integrity of [its] investment planning, capital formation, and
investment processes.” 164 FERC ¶ 61,049 at P43. Only then
did it go on to consider the location and details of the Transco’s
affiliated holdings. Id. Nowhere in either decision did FERC
suggest that the geographical factors it weighed in concluding
that the Transcos at issue were independent were the only
criteria to be considered under Order No. 679. Based on a plain
reading of NextEra and GridLiance, and bolstered by the
deference that we owe FERC in the interpretation of its own
precedent, see Mo. Pub. Serv. Comm’n v. FERC, 783 F.3d 310,
316 (D.C. Cir. 2015), we conclude those decisions do not
establish a methodology for assessing independence.
ITC argues that our cases requiring that an agency provide
a reasoned explanation when it departs from precedent demand
vacatur here. But because FERC adopted no exclusively
“geographically focused methodology” from which to depart,
FERC had no obligation to explain specifically why its inquiry
here was broader. West Deptford Energy, LLC v. FERC, 766
F.3d 10 (D.C. Cir. 2014), one of the cases on which ITC relies,
illustrates the difference. The issue in West Deptford was
which tariff governs an “interconnection agreement” between
a generator and a regional transmission organization when the
organization’s tariff is amended in the course of a generator
seeking access to the organization’s network—the tariff in
place when the generator’s request is first made, or the tariff in
place when the “interconnection agreement” is executed or
filed. Id. at 12. FERC decided in that case that the earlier tariff
governs, despite what “appeared to be an unbroken
Commission practice of holding that interconnection
agreements filed after the designated effective date of an
amended tariff are governed by the amended tariff.” Id. at 21.
We held that the “one-off decision in this case to deviate” from
settled agency practice was arbitrary. Id. FERC claimed a right
to employ a case-by-case approach in making the timing
20
decision, but we dismissed the commission’s “paean to
administrative flexibility” as unreasoned. Id. at 20. ITC argues
FERC made the same mistake here, claiming a right to assess
Transco independence case-by-case but failing to support its
decision to do so with adequate reasoning or explanation.
What ITC overlooks is that the regulatory background and
established commission precedent here support a case-by-case
approach in a way they did not in West Deptford. In West
Deptford, the practice at issue was uniform, and FERC’s
claimed adoption of a case-by-case approach arrived in the
single decision in which it deviated from that uniform practice.
We explained that a case-by-case approach as applied to that
issue was in tension with the Federal Power Act’s prioritization
of predictability and uniformity in tariff terms, and that FERC
had entirely failed to “identify[] the relevant factors that would
govern a case-by-case analysis.” Id. at 21. Here, by contrast,
FERC expressly adopted a case-by-case approach to
transmission incentives generally, and the Transco adder
specifically, in Order No. 679. See 116 FERC ¶ 61,057 at P43,
P239. It explained that a “case-by-case approach ensures that
the incentives granted will be tailored to particular
circumstances.” Id. at P43. With regard to the adder, FERC
stressed that it would “evaluate the specific attributes of a
particular proposal, including the level of independence,” in
granting any adder. Id. at P239. And FERC identified factors
relevant to determining independence in the case of a Transco
with active market affiliates—the factors applied in the case at
hand—even as it declined to identify any particular
methodology for weighing them. Id. at P240. Unlike in West
Deptford, then, FERC’s multi-factored assessment of ITC’s
independence was not a departure from established precedent
but a continuation of it.
21
At bottom, ITC’s claim is that FERC’s case-by-case
determinations cannot be reconciled with one another on their
facts, and that FERC failed to acknowledge or justify those
inconsistencies. ITC argues that, whatever the ultimate finding
as to the Order No. 679 criteria in NextEra and GridLiance, the
only facts FERC actually considered in making those findings
were the location and nature of the affiliated holdings. And in
those analyses, the only market affiliates that FERC concluded
could affect independence were those operating in the same
regional markets as the Transcos at issue; affiliates or holdings
outside those markets were found to have no effect on a
Transco’s independence. ITC argues that if FERC had limited
itself to those same geographical considerations in this case, it
would have found ITC to be independent even after the merger,
as neither GIC nor Fortis has subsidiaries operating in the
Midcontinent Region. Additionally, ITC insists that, even if
the Order No. 679 criteria FERC assessed were determinative,
ITC has “at least as much independence from a corporate-
structure perspective” as did the Transcos at issue in NextEra
and GridLiance. Pet’rs Br. 33-34. Like ITC, those Transcos
were reliant on parent companies for financial support, and,
unlike ITC, neither was governed by its own board of majority-
independent directors, but each was subject to the direction of
its parent company’s board.
The complainants below, now intervenors on appeal, have
offered a possible rejoinder to ITC’s claim that the cases cannot
be reconciled under a geographical analysis. They note that,
while the market affiliates in this case are outside the
Midcontinent Region, they are located in bordering areas close
enough to be affected by ITC’s decisions. Whatever the merit
of that argument, ITC’s first claim fails for a simpler reason:
because, as discussed, FERC has never used a “geographically
focused methodology” to determine independence, it was
22
under no obligation to reconcile the cases under the terms of
such a test.
ITC’s second claim—that FERC failed to analyze ITC’s
structural independence relative to NextEra and GridLiance—
is more clearly on point. As context for assessing that claim, it
is worth considering the distinct procedural postures in which
the cases arrived before FERC. Both NextEra and GridLiance
involved proceedings under Section 205 of the Federal Power
Act. See 16 U.S.C. § 824d. “Section 205 enables a utility to
propose changes in its own rates.” Emera Me. v. FERC, 854
F.3d 9, 24 (D.C. Cir. 2017). Ratepayers can then challenge
filed rates before they go into effect. See 16 U.S.C. § 824d(d)-
(e). When a utility seeks to increase its rate, it bears the burden
of demonstrating that the increase is just and reasonable. Id.
§ 824d(e). Under FERC’s 2006 rule implementing
transmission incentives, a utility’s request for incentive-based
rate treatments must be made in a section 205 filing. 18 C.F.R.
§ 35.35(d).
This case, on the other hand, arose in response to a
complaint filed pursuant to Section 206 of the Federal Power
Act. See 16 U.S.C. § 824e. “Section 206 empowers FERC to
modify existing rates upon complaint or on FERC’s own
initiative.” Emera Me., 854 F.3d at 24. Its procedures “are
‘entirely different’ and ‘stricter’ than those of section 205.” Id.
(quoting City of Anaheim v. FERC, 558 F.3d 521, 525 (D.C.
Cir. 2009)). Unlike in a Section 205 proceeding, the proponent
of a rate change under Section 206 “bears ‘the burden of
proving that the existing rate is unlawful.’” Id. (quoting Ala.
Power Co. v. FERC, 993 F.2d 1557, 1571 (D.C. Cir. 1993)).
Against this procedural backdrop, the reason for FERC’s
assertedly inconsistent analyses comes into sharper relief.
Unlike in the case at hand, which arose entirely in response to
23
a Section 206 complaint that ITC was no longer independent,
the issue of independence was not central in NextEra or
GridLiance. The utilities in those cases requested several
incentives in their Section 205 filings, only one of which was
the Transco adder. NextEra, 162 FERC ¶ 61,196 at P1;
GridLiance, 164 FERC ¶ 61,049 at P1. In both cases, several
parties intervened to challenge elements of the Transcos’
requests, but in neither did a party challenge the standard for
assessing a Transco’s independence.
In GridLiance, the only challenge raised to granting a
Transco adder was based on the adder’s interaction with the
overall return on equity and other incentives at issue. 164
FERC ¶ 61,049 at PP33-36. No party even questioned the
Transco’s decisional independence.
In NextEra, the closest that any party got to an
independence-centered challenge was the claim by an
intervenor representing ratepayers that the Transco should not
be treated as a standalone entity because it was supported by
the financial strength of a parent company. See Notice of
Intervention and Protest of the N.Y. State Public Service
Comm’n at 6-7, NextEra, 162 FERC ¶ 61,196. That intervenor
argued that the proposed base return on equity was sufficient
to compensate investors for the project’s risks, rendering other
incentives redundant. At no point did any party challenge or
even discuss the criteria by which FERC assesses
independence, and FERC’s order reflects as much. The
Commission merely noted that “a Transco adder under Order
No. 679 is not based on the specific risks of an applicant’s
project, but based upon whether the applicant qualifies under
the independence standard for a Transco and ‘continues to
provide the benefits which we are trying to incentiv[ize].’” 162
FERC ¶ 61,196 at P52 (quoting Order No. 679, 116 FERC
¶ 61,057 at P226).
24
Here, by contrast, ratepayers came forward with evidence
central to their claim that ITC’s independence had been
reduced by the merger. FERC weighed that evidence against
the Order No. 679 criteria and found that ITC’s independence
had been reduced but not eliminated. In its request for
rehearing ITC argued that FERC “offer[ed] no basis for”
treating ITC differently from the Transcos in NextEra and
GridLiance, but its only support for that assertion concerned
the location of market affiliates, Request for Rehearing at 10-
11 (J.A. 296-97), which FERC’s initial order made clear was
not decisive in this case. As to the Order No. 679 criteria, ITC
explained in its request for rehearing why it thought that FERC
had gotten the analysis wrong, but it did not compare its
decisional independence to that of the Transcos in those earlier
cases. It asserted it was more independent than the NextEra
Transco, but ITC did not even support that conclusory claim
with any comparison of the factors that it contends demonstrate
its greater independence, as it has sought to do here. For
instance, ITC asserted its board was majority-independent
without discussing how that compared to the board
composition of the other Transcos; it does that for the first time
in its petition to this court.
None of this is to suggest ITC bore a burden of
demonstrating it was more independent that the Transcos at
issue in NextEra and GridLiance. It is simply to underscore as
we consider how its precedents fit together that FERC was not
confronted with any “significant showing that analogous
cases” under Order No. 679 had “been decided differently.”
LeMoyne-Owen Coll. v. NLRB, 357 F.3d 55, 61 (D.C. Cir.
2004). Based on the evidence before FERC on rehearing and
the case-by-case analysis Order No. 679 requires, it was
reasonable for FERC to stand by its initial finding
notwithstanding ITC’s standalone assertion of greater
independence. FERC concluded that, while it “determined that
25
the integrity of [the NextEra Transco’s] investment planning,
capital formation, and investment processes were unaffected by
its affiliate relationships,” the “evidence in this record
specifically demonstrate[d] that [ITC’s] affiliate relationships
reduced the independence of its investment planning, capital
formation, investment processes, and business structure.”
Rehearing Order, 168 FERC ¶ 61,035 at P20.
FERC surely could have more extensively investigated
investment planning, business structure, and capital formation
in NextEra and GridLiance. It acknowledged as much in a
recent decision raising the same issue as the one presented here.
See Kansas Corp. Comm’n v. ITC Great Plains, LLC, 173
FERC ¶ 61,160 at P8 (2020). FERC’s failure to address the
Order No. 679 criteria more clearly in earlier cases, however,
did not prevent it from considering all relevant evidence
brought to its attention in this case.
It is FERC’s duty under Section 206 to assess a
complaint’s allegations that a utility’s existing rate is unjust or
unreasonable. If FERC finds such allegations to be supported,
it is then required to “determine the just and reasonable rate . . .
[and] fix the same by order.” 16 U.S.C. § 824e. Here, FERC
determined that ITC’s adders—then set at a level reserved for
fully independent Transcos—were no longer appropriate. That
finding triggered section 206’s requirement that it set a new just
and reasonable rate. In view of the deference that we owe
FERC in rate-related matters, we cannot conclude that this
finding was undermined by other cases in which it faced
different claims in procedurally distinct proceedings and
reached different results based on distinct records.
B. Section 206 Finding
ITC also argues that FERC exceeded its statutory authority
in the manner that it reduced the adders. Section 206 requires
26
“FERC to show that an existing rate is unlawful before ordering
a new rate.” Emera Me., 854 F.3d at 24. ITC argues that FERC
violated that mandate by failing to find the existing adders to
be unjust or unreasonable before reducing them by half. See
id. at 21.
ITC’s claim fails, however, as FERC’s analysis clearly
tracked “the two-step procedure mandated by section 206.” Id.
at 22. In response to a complaint that expressly alleged the
Transco adders had “been rendered unjust and unreasonable”
as a result of the merger, FERC reassessed ITC’s
independence. Complaint Order, 165 FERC ¶ 61,021 at P1.
Finding that the merger had reduced ITC’s independence,
FERC reasonably concluded that the existing 50 basis point
adder—a level reserved for “fully independent” Transcos—
was no longer appropriate. Complaint Order, 165 FERC
¶ 61,021 at P73; see also Rehearing Order, 168 FERC ¶ 61,035(Glick, Comm’r, dissenting in part) (concurring in the holding
that “the Commission did not err in concluding that the then-
existing ROE adder was unjust and unreasonable”). Only then
did it proceed to set a new rate. Because the merger had
reduced “but not eliminated” ITC’s independence, FERC
concluded that a 25 basis point adder “appropriately
encourages the Transco business model in these circumstances
and promotes corresponding consumer benefits.” Id.ITC’s challenge to that conclusion seems to rest primarily
on FERC’s failure to use the words “unjust and unreasonable”
at the first step. But because FERC granted a complaint that
itself explicitly alleged the existing adders were unjust and
unreasonable and its analysis tracked the two-step procedure of
Section 206, its failure to “use the magic words . . . did not
reflect a fatal flaw in its decision.” TransCanada Power Mktg.
Ltd. v. FERC, 811 F.3d 1, 10 (D.C. Cir. 2015); see also
Interstate Nat. Gas Ass’n v. FERC, 285 F.3d 18, 47 (D.C. Cir.
27
2002); R.I. Consumers’ Council v. Fed. Power Comm’n, 504
F.2d 203, 213 n.19 (D.C. Cir. 1974).
This case is not like Emera Maine, our precedent on which
ITC relies in claiming that FERC’s unjust-and-unreasonable
finding must be expressed in those exact terms. See 854 F.3d
at 24. In Emera Maine, FERC began by applying a
methodology that identified a new just and reasonable rate.
Based only on the fact that the newly identified rate was
numerically lower than the existing rate, FERC concluded the
existing rate was unjust and unreasonable, despite the fact that
the existing rate also remained within a broader zone of
reasonableness. Id. at 26. FERC in Emera Maine thus “never
actually explained how the existing [rate] was unjust and
unreasonable.” Id. It instead skipped to Section 206’s second
step and reasoned backward from there, claiming that its
analysis “generating a new just and reasonable [rate]
necessarily proved that Transmission Owners’ existing [rate]
was unjust and unreasonable.” Emera Me., 854 F.3d at 26; see
also id. at 18-19 (contending that “both of the burdens of proof
under . . . Section 206 can be satisfied using a single [return-
on-equity] analysis” (quoting Coakley v. Bangor Hydro-Elec.
Co., 150 FERC ¶ 61,165 at P32 (2015))). The opinion under
review is markedly different: All but a single paragraph of
FERC’s analysis here concerned the first-step issue of whether
the merger reduced ITC’s independence such that an adder
level reserved for fully independent Transcos could no longer
be considered just and reasonable as applied to ITC.
ITC also claims that, “even if FERC had paid lip service
to Section 206’s requirements,” its analysis could not support
its finding that the existing adders were unjust or unreasonable.
Pet’rs Br. 42. ITC argues that FERC’s analysis “rests on
speculation rather than facts and evidence,” specifically
criticizing FERC’s reliance on what ITC calls two
28
“unremarkable fact[s]”: (1) Fortis’s consolidated reporting of
capital expenditures and (2) regular meetings of executives
across Fortis’s regulated utilities. Id. 42-43. But ITC simply
asserts without explanation that FERC was wrong in finding
the consolidated planning “indicates some level of
coordination and control.” Rehearing Order, 168 FERC
¶ 61,035 at P19. ITC also does not challenge FERC’s finding
that the ITC companies are dependent on Fortis for financing
or that Fortis and GIC have members on ITC Holdings’ board
who can “provide some oversight to ITC Holdings’
executives.” Complaint Order, 165 FERC ¶ 61,021 at PP70-
71. FERC’s analysis was thus not “based on sheer
speculation,” as ITC contends. City of Centralia v. FERC, 213
F.3d 742, 749 (D.C. Cir. 2000). There was instead substantial
evidence to support FERC’s finding that the merger had
reduced ITC’s independence, thereby rendering the existing
adders unjust and unreasonable.
* * *
For the foregoing reasons, we deny the petition for review
filed by International Transmission Company, ITC Midwest,
LLC, and Michigan Electric Transmission Company, LLC.
So ordered.
SENTELLE, Senior Circuit Judge, dissenting: Federal agencies
are creatures of statute. They have no power to act except as
directed by Congress. See Michigan v. EPA, 268 F.3d 1075, 1081
(D.C. Cir. 2001). In the Federal Power Act, Congress directed
FERC to set “just and reasonable” rates for electric transmission.
16 U.S.C. §§ 824d(a), 824e. Section 205 applies when a utility
company proposes a new rate; the company must show that the
proposal is just and reasonable. See § 824d(a). Section 206 applies
when FERC alters an existing rate, either sua sponte or at a third
party’s request. See § 824e. To alter an existing rate under § 206,
FERC must first find that the existing rate is unjust or unreasonable.
See § 824e(a); Fed. Power Comm’n v. Sierra Pac. Power, 350 U.S.
348, 353 (1956) (describing this finding as a “condition precedent”
to FERC’s § 206 authority).
Here, FERC altered ITC’s rate under § 206 without finding the
existing rate unjust or unreasonable. Put differently, FERC acted
outside its statutory authorization. The majority affirms FERC’s
action by assuming that because FERC deemed the new rate more
“appropriate,” it must have considered the old rate unjust or
unreasonable. See ante at 26; accord Consumers Energy Co. v.
Int’l Transmission Co., 165 FERC ¶ 61,021 at P73, 2018 WL
5267539 at *16 (2018). Yet under SEC v. Chenery Corp., we can
only affirm for the reasons FERC offered, without assuming
alternative conclusions FERC did not provide. See 318 U.S. 80, 87-
88 (1943). So although I agree that FERC did not arbitrarily or
capriciously depart from its precedent, I disagree with the decision
to deny ITC’s petition for review. I would vacate and remand for
FERC to consider whether ITC’s original rate was unjust or
unreasonable.
In my judgment, this case is governed by Emera Maine v.
FERC, 854 F.3d 9 (D.C. Cir. 2017). In that case, consumer-side
stakeholders filed a complaint under § 206 of the Federal Power
Act, alleging that a transmission company’s rates had become
unjust and unreasonable. In response, FERC reduced the rates to a
level it deemed more just and more reasonable without expressly
2
finding the prior rate unjust or unreasonable. When the
transmission company appealed to this Court, FERC argued “that
by setting a new just and reasonable [rate], it necessarily found that
[the transmission company’s] existing [rate] was unjust and
unreasonable.” 854 F.3d at 15. The Emera Maine court rejected
FERC’s argument, concluding that “[w]ithout a showing that the
existing rate is unlawful, FERC has no authority to impose a new
rate.” Id. at 25. Today’s decision resurrects what Emera Maine laid
to rest nearly four years ago.
The majority attempts to distinguish Emera Maine because, in
that case, FERC “never actually explained how the existing [rate]
was unjust and unreasonable,” as Congress requires. Ante at 27
(alteration in original) (quoting 854 F.3d at 26). Yet the same could
be said about FERC’s decision here. FERC explains only why the
new rate is more “appropriate.” Int'l Transmission Co., 165
FERC ¶ 61,021 at P73. Explaining why the new rate is more
appropriate does not explain whether the original rate was unjust or
unreasonable.
The majority’s distinction-without-a-difference gives short
shrift to Emera Maine and to our other decisions holding that
“section 206 mandates a two-step procedure that requires FERC to
make an explicit finding that the existing rate is unlawful before
setting a new rate.” 854 F.3d at 24; see also Am. Gas Ass’n v.
FERC, 912 F.2d 1496, 1504 (D.C. Cir. 1990) (“[T]he directive to
impose a just and reasonable rate . . . is triggered only by the
Commission’s finding that the existing one is ‘unjust[ or]
unreasonable . . . .’” (quoting § 824e(a))); City of Bethany v. FERC,
727 F.2d 1131, 1143 (D.C. Cir. 1984) (“[U]nder section 206,
FERC itself may establish the just and reasonable rate, provided
that it first determines that a rate set by a public utility is unjust[ or]
unreasonable . . . .”). By retreating from that well-reasoned and
workable rule, we invite FERC to further erode congressional
limits on its delegated power.
3
FERC dismisses those congressional limits as “magic words,”
alluding to Hanna Diyab’s Ali Baba and the Forty Thieves.
Respondent Br. 26, 36. Yet FERC would do well to remember that
when Ali Baba’s brother forgot the magic words, he could not
escape the thieves’ cave. Although “unjust” or “unreasonable” are
congressional requirements rather than magic words, I would
likewise refuse to allow FERC to escape a trap of its own making.
I respectfully dissent.