Illinois Commerce Commission v. Federal Energy Regulatory Commission
576 F.3d 470 (2009)
Rule of Law:
Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) may not approve a rate scheme that allocates costs for new facilities without substantial evidence on the record showing that the costs assessed against a party are at least roughly commensurate with the benefits that party receives. Generalized claims of system-wide benefits are insufficient to justify a cost allocation that appears grossly disproportionate to any discernible benefits.
Facts:
- PJM Interconnection is a Regional Transmission Organization (RTO) that operates the electrical grid across a region stretching from the Midwest to the East Coast.
- Historically, the costs for new transmission facilities within PJM's region were allocated to utilities based on the benefits each utility received from the new facility.
- PJM proposed a new method for financing new high-capacity transmission facilities of 500 kilovolts (kV) or more.
- Under the new proposal, the costs of these 500kV+ facilities would be shared pro rata by all utilities in the PJM region, regardless of their location or the direct benefits they receive.
- Electrical generating plants in the western part of PJM's region (Midwest) are generally close to customers, making lower-voltage (e.g., 345kV) lines preferable.
- In the eastern part of the region, power plants are farther from customers, making higher-voltage (500kV+) lines more efficient and necessary for long-distance transmission.
- Consequently, most, if not all, new 500kV+ facilities were expected to be built in the eastern part of the region.
- Midwestern utilities, such as Commonwealth Edison, objected that the pro rata plan would force them to pay hundreds of millions of dollars for facilities that would be built in the East and from which they would derive little to no benefit.
Procedural Posture:
- PJM Interconnection, L.L.C. submitted a rate proposal to the Federal Energy Regulatory Commission (FERC).
- American Electric Power Service Corporation, the Public Utilities Commission of Ohio, and the Illinois Commerce Commission filed objections to parts of the proposal with FERC.
- FERC, as the court of first instance for these regulatory matters, issued an order approving PJM's proposed rate design.
- The objecting parties filed a request for rehearing with FERC, which FERC denied in a subsequent order.
- The objecting parties (petitioners) then filed petitions for review of FERC's final agency action in the United States Court of Appeals for the Seventh Circuit.
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Issue:
Does the Federal Energy Regulatory Commission's approval of a pro rata cost allocation for new 500kV transmission facilities, without quantifying or providing a plausible basis to estimate the benefits to a subset of utilities, violate the Federal Power Act's requirement that rates be just and reasonable?
Opinions:
Majority - Posner, Circuit Judge.
Yes. FERC's approval violates the Federal Power Act because an agency's ratemaking decision must be supported by substantial evidence. FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which they derive no benefits, or benefits that are trivial in relation to the costs. The core principle of cost causation requires that approved rates reflect the costs actually caused by the customer paying them, which is evaluated by comparing the costs assessed to the benefits drawn. Here, FERC provided no data, estimates, or specifics to support its conclusion that Midwestern utilities would benefit from new 500kV lines in the East. Vague references to network reliability and calling the lines a 'backbone' are insufficient to justify forcing Midwestern utilities to subsidize projects that primarily benefit the East. Without an articulable and plausible reason to believe the benefits are at least roughly commensurate with the costs, the agency's order is arbitrary and not supported by substantial evidence.
Concurring-in-part-and-dissenting-in-part - Cudahy, Circuit Judge.
No. FERC's approval should have been upheld because the majority employs an overly narrow and rigid conception of the cost-causation principle. Upgrades that enhance grid reliability are presumed to benefit the entire system, and all members of a power pool benefit from having a more robust and reliable network. The burden should be on the objecting utility to prove it receives no benefit, not on FERC to monetize the benefits of increased reliability. The urgent national need to upgrade the electrical grid requires simplified, pro rata cost-sharing for 'backbone' facilities to avoid the endless litigation and delays that come with trying to trace every benefit to a specific utility. FERC's expert judgment that these high-voltage lines provide system-wide benefits should be given deference.
Analysis:
This decision significantly reinforces the 'cost causation' principle in FERC ratemaking and sets a higher evidentiary standard for approving regional cost allocation plans. It curtails FERC's ability to rely on generalized assertions of 'system-wide benefits' to justify spreading costs across all members of a transmission organization. The ruling requires FERC to provide concrete evidence on the record demonstrating that the costs imposed on any group of utilities are not grossly disproportionate to the benefits they receive. This precedent forces a more rigorous, evidence-based analysis for future infrastructure projects, potentially making it harder to fund large-scale regional transmission lines where benefits are heavily concentrated in one sub-region.
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