On June 7, 2013, the United States Court of Appeals for the Seventh Circuit (“Seventh Circuit”) upheld the majority of a FERC order that approved the Midcontinent Independent System Operator, Inc.’s (“MISO”) cost allocation methodology for multi-value projects (“MVPs”) (see October 24, 2011 edition of the WER).  The Seventh Circuit affirmed the majority of FERC’s approval of MISO’s MVP cost allocation, dismissed one issue, and remanded another back to FERC for further analysis.

In 2010, MISO sought FERC approval for tariff changes that would allow MISO to pass through the construction costs of MVPs to utilities that draw electricity from the MISO grid, with costs allocated upon the proportion of a utility’s wholesale consumption of electricity within the region.  MVPs are high-voltage transmission lines (at least 100 kV) that assist MISO members in meeting state renewable goals, fix reliability problems, or provide economic benefits in multiple pricing zones.  FERC approved the tariff changes and the present challenge was filed.

The petitioners – a group made up of utilities, the Michigan Public Service Commission, the Illinois Commerce Commission, and other state regulators – challenged: (1) that the benefits of the MVPs are not proportionate to the costs; (2) whether FERC’s  procedure for approving the proportional cost allocation was adequate; (3) whether or not allocating MVP costs to generators is appropriate; (4) whether MISO can allocate costs to PJM members that receive MISO transmitted electricity; (5) whether MISO can allocate costs to departing members of MISO; and (6) whether the approval of the cost allocation violates the Tenth Amendment.

The Seventh Circuit affirmed all of FERC’s rulings except two; the Seventh Circuit dismissed the departing members challenge, and remanded back to FERC the issue of cost allocation to PJM members for further analysis.

  • With regard to the challenge concerning the proportionality of the costs and benefits, the Seventh Circuit held that a crude attempt at connecting costs and benefits is acceptable so long as FERC “has an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities….”  In addition, the Seventh Circuit stated that evidence must be presented that demonstrates there is an imbalance between the costs and benefits, and such evidence was not present in the case.  The Seventh Circuit continued by stating that if a utility does not agree with the MVP cost allocation, the utility can always show its displeasure by leaving MISO.
  • Next, the court held that the procedural allocation of MVP costs based on total consumption rather than peak load was appropriate because a primary goal of MVPs is to increase the total supply of wind-powered energy.  Thus, “FERC and MISO 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.”
  • In addressing the challenge of not assessing generators MVP costs, the Seventh Circuit held that the utilities benefit from the this practice because cheaper power will be generated by efficiently-sited wind farms that MVPs will stimulate, rather than more expensive inefficient wind farms that are built closer to the MISO region and whose higher costs are ultimately passed on to customers.
  • With regard to FERC rejecting MISO’s attempt to allocate costs to PJM members that consume electricity from MISO (the only issue in FERC’s order that MISO challenged), the court held that FERC was not consistent in allowing MISO to allocate these costs to other regional transmission organizations while not permitting it to allocate the same MVP costs to PJM members.  Therefore, the Seventh Circuit remanded the issue back to FERC to determine “what if any limitation on export pricing to PJM by MISO is justified.”
  • Additionally, the Seventh Circuit dismissed the challenge to assess two exiting MISO members MVP costs, holding that the issue is “premature and must therefore be dismissed for want of a final administrative review.”
  • Finally, petitioners challenged the cost allocation on Tenth Amendment grounds that the MVP process coerces states to approve all MVPs within its territory.  The Seventh Circuit rejected this argument, noting that the federal government is not requiring “states to build transmission lines that it wants to use for its own purposes” or “conscripting a state government into federal service.”  Therefore, the court ruled that a state remains free to reject any MVP within its territory.

A copy of the opinion is available here.