On January 24, 2014, the United States Court of Appeals for the Fourth Circuit (“Fourth Circuit”) published an opinion upholding FERC’s decision to grant incentive-based rate treatment to Virginia Electric Power Company (“VEPCO”) to spur investment in transmission infrastructure. The North Carolina Utilities Commission (“NCUC”) argued that FERC violated section 219 of the Federal Power Act (“FPA”) and abused its discretion by granting incentives to five of VEPCO’s facilities and by denying NCUC’s petition for rehearing.
Order No. 679 is FERC’s landmark order on incentive-based rate treatment. To receive incentive-based treatment, a utility must pass Order No. 679’s three-prong test: (1) the utility must show its infrastructure project will increase reliability or reduce congestion; (2) the utility must demonstrate a nexus between the requested incentive and the project; and (3) the utility must prove that its resulting rates with the incentive remain “just and reasonable.”
In 2008, VEPCO, a member of PJM Interconnection, L.L.C., sought incentives for eleven transmission projects through two separate applications: (1) a bundle of new construction and improvements to existing infrastructure and (2) a bundle of larger-scale projects. The first application included four of the challenged projects, including the Lexington Tie Project, Idylwood-to-Arlington Reconductor (“Idylwood Project”), the Garrisonville Project, and the Pleasant View-to-Hamilton Project (“Pleasant View Project”). The fifth challenged project, the Proactive Transformer Replacement Project (“PTRP”), was part of VEPCO’s second application. NCUC argued that the PTRP did not increase system reliability, and thus failed to meet the first prong of Order No. 679’s three-prong test. Furthermore, NCUC argued that all five of the projects failed to meet FERC’s requirement under Order No. 679 that the utility demonstrate a nexus between the requested incentive and the project.
In 2008, FERC issued an order granting incentive-based rate treatment for VEPCO’s requested projects over NCUC’s objections, and NCUC filed a petition for rehearing later that year. In 2010, FERC changed its policy for determining whether a utility meets the nexus requirement. Previously, FERC considered each application in the aggregate to determine if the utility meets the nexus requirement, even if a single application contains multiple independent projects. Subsequent to the policy change, FERC considers all projects separately, even if they are bundled in a single application. In 2012, FERC denied NCUC’s petition for a rehearing, applying the nexus test from prior to 2010. NCUC filed its appeal later that year.
In the January 24, 2014 opinion, the Fourth Circuit first considered FERC’s decision to apply the nexus test from prior to 2010 and found no error in FERC’s decision not to grant rehearing and apply the 2010 policy change. The Fourth Circuit found that VEPCO had a reliance interest in the pre-2010 rule and that FERC appropriately considered the regulatory uncertainty that would follow from shifting an earlier position four years after the fact. In addition to the policy change argument, the Fourth Circuit considered whether the projects merited incentives by examining whether FERC’s action was rationally connected to the relevant data. The Fourth Circuit held that FERC’s determination that the Lexington Tie and Idylwood Projects satisfied the nexus test was supported by substantial evidence because they resulted from a regional planning process, faced local opposition, and involved construction challenges. The Fourth Circuit also held that FERC’s determination that the Garrisonville and Pleasant View Projects satisfy the nexus test was supported by substantial evidence based on local opposition, construction risks, and impact on regional reliability. Finally, the Fourth Circuit found that FERC’s determination with regard to the PTRP was supported by substantial evidence because the project would increase reliability and because it was an innovative and large-scale undertaking.
A copy of the order is available here.