Illinois Commerce Commission v. Federal Energy Regulatory Commission

Court of Appeals for the Seventh Circuit
721 F.3d 764 (2013)

ELI5:

Rule of Law:

Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) may approve a regional tariff that socializes the costs of new transmission infrastructure across all users based on their total energy consumption, provided there is a plausible, articulated reason to believe the system-wide benefits are roughly commensurate with the costs, even if a precise cost-benefit analysis for each individual utility is not possible.

Facts:

Midwest Independent Transmission System Operator, Inc. (MISO), a Regional Transmission Organization (RTO), operates the electrical grid for a large portion of the Midwest and Great Plains states.
Most states within MISO's territory have policies encouraging or mandating that utilities acquire a percentage of their electricity from renewable sources, primarily wind power.
The most efficient sites for large-scale wind farms are in remote, sparsely populated areas of the Great Plains, far from the urban centers that have the highest demand for electricity.
To connect these remote wind farms to the grid, MISO proposed constructing new high-voltage power lines, termed 'multi-value projects' (MVPs).
To fund the MVPs, MISO proposed a new tariff that allocates costs to all its member utilities in proportion to their share of the region's total wholesale electricity consumption.
This cost allocation method was a departure from MISO's prior practice of assigning the costs of grid upgrades primarily to the utilities located nearest to the new infrastructure.
The state of Michigan had enacted a law that prohibited its utilities from counting renewable energy generated outside of Michigan toward satisfying the state's renewable energy mandates.

Procedural Posture:

Midwest Independent Transmission System Operator, Inc. (MISO) sought approval from the Federal Energy Regulatory Commission (FERC) for its 'multi-value projects' tariff.
The Illinois Commerce Commission, Michigan utilities, and other state regulators (petitioners) intervened and objected to MISO's proposal during the FERC proceedings.
FERC issued two orders approving MISO's tariff and the initial MVP projects, finding the cost allocation method to be just and reasonable.
The petitioners filed petitions for review of FERC's final orders with the U.S. Court of Appeals for the Seventh Circuit.

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Issue:

Does a tariff approved by FERC, which allocates the costs of new high-voltage transmission lines across all member utilities of a Regional Transmission Organization based on their wholesale energy consumption, violate the Federal Power Act's requirement that rates be 'just and reasonable' when the benefits to individual utilities cannot be precisely quantified?

Opinions:

Majority - Posner, Circuit Judge

No, the tariff does not violate the Federal Power Act. The cost-allocation method is 'just and reasonable' because it is permissible for FERC to approve a pricing scheme based on a plausible reason to believe that the benefits are at least roughly commensurate with the costs, even without precise quantification. The court reasoned that the MVPs provide broad, system-wide benefits—such as increased grid reliability and access to cheaper, renewable energy—that will be shared by all MISO members. Therefore, socializing the costs across the entire region based on usage is a valid approach. The court also dismissed the petitioners' Tenth Amendment claim as 'frivolous,' stating the tariff was a permissible financial incentive ('a carrot') and not unconstitutional federal coercion. Furthermore, the court held that Michigan's law discriminating against out-of-state renewable energy violates the Commerce Clause and cannot be used as a basis to evade its share of the costs.

Analysis:

This decision grants significant deference to FERC's authority and technical expertise in approving complex, regional cost-allocation plans for major energy infrastructure. It establishes that for large-scale projects with diffuse, system-wide benefits, a 'just and reasonable' rate does not require a granular, utility-by-utility accounting of costs and benefits. This precedent facilitates the development of renewable energy by allowing the high costs of necessary transmission infrastructure to be socialized across a wide base of users, thereby overcoming a major financial hurdle. The ruling also strongly affirms the supremacy of the dormant Commerce Clause in preventing states from enacting protectionist energy policies that interfere with interstate markets.

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