On July 18, 2014, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued a decision denying petitions for review of FERC’s orders related to Regional Transmission Organization (“RTO”) transmission expansion cost allocation for FirstEnergy Service Company (“FirstEnergy”) after it transitioned between two RTOs.  Specifically, the D.C. Circuit affirmed FERC’s rejection of FirstEnergy’s request for relief from the PJM Interconnection L.L.C.’s (“PJM”) annual allocation of transmission expansion plan costs for any project approved before FirstEnergy transitioned to that RTO. 

FirstEnergy, through its affiliate American Transmission Systems, Inc. (“ATSI”) and several ATSI utilities, had company operations in both the Midcontinent Independent System Operator, Inc. (“MISO”) and PJM for several years.  Seeking to simplify its regulatory framework, in 2009 FirstEnergy filed a “Realignment Request” with FERC, requesting approval to move all of its operations to PJM alone.  One point of concern for FirstEnergy in this transition was the allocation of costs for transmission projects within the RTOs.

MISO and PJM allocate the cost of new transmission projects in different ways.  MISO allocates total costs among members at the time the projects are approved, with members who later leave MISO remaining liable for their allocated share of the costs (see March 5, 2012 edition of the WER).  PJM, on the other hand, allocates project costs annually based on each transmission owner’s share of the total load.   If a transmission owner later leaves PJM, it is no longer included in the yearly reallocation and is not responsible for a share of the transmission costs.  Thus, in a scenario similar to FirstEnergy’s, where a transmission owner leaves MISO and joins PJM, the transmission owner would be responsible for both its prior allocation of MISO transmission project costs and its new annual allocation of PJM transmission project costs.

In its Realignment Request, FirstEnergy asked FERC for an exemption from PJM’s yearly reallocation of transmission project costs as they relate to costs that occurred prior to FirstEnergy’s integration with PJM.  FirstEnergy represented that it would continue to pay the prior MISO transmission project costs it had been allocated, as well as any future PJM transmission project costs that occurred after realigning with PJM.  Shortly after filing the Realignment Request, FirstEnergy also filed a complaint with FERC, arguing that should FERC fail to exempt FirstEnergy from PJM’s allocation of transmission project costs for pre-existing projects, that PJM’s tariff assessing such costs was unjust and unreasonable.

In December 2009, FERC denied the requested exemption and the complaint, explaining that the costs associated with the transition between RTOs was a factor to be considered when FirstEnergy was making that business decision.  FirstEnergy subsequently sought rehearing of that decision, and nearly three years later in September 2012, FERC issued an order denying rehearing and reaffirming its original order.  During that time, the transition of FirstEnergy from MISO to PJM was completed.  FirstEnergy sought appellate review of FERC’s orders.

The D.C. Circuit denied FirstEnergy’s petition for review, holding that FERC correctly determined that FirstEnergy had failed to show that PJM’s cost allocation rules, as applied to FirstEnergy, were unjust and unreasonable.  The court agreed with the Commission’s finding that the payment structures for MISO and PJM are wholly distinct from each other, and that ATSI’s voluntary choice to move from one RTO to another does not render either of those individual structures unjust or unreasonable simply because they produce different results.  The court also noted that FirstEnergy could have negotiated with PJM for its desired terms of entry into the RTO and filed such terms with the Commission, which may have resulted in FirstEnergy avoiding its burden under the existing PJM cost allocation tariff provisions, but it chose not to do so.  Finally, the court accepted the Commission’s explanation that allocating to a new member a share of the costs of transmission expansion projects that were planned before that member joined the RTO is reasonable because the new member will use and benefit from the new facilities.

To view the D.C. Circuit order, click here.