On October 20, 2016, FERC issued an order that, among other things, rejected a refund report filed by the California Independent System Operator Corporation (“CAISO”). In so doing, FERC reiterated its discretionary authority to order refunds as well as its general policy to not exercise this discretion in situations involving cost allocation and rate design.

In May 2004, CAISO filed tariff Amendment No. 60 which, in addition to other provisions, established a three-“bucket” rate design through which must-offer generation costs were allocated depending on whether the resource was used to satisfy local, zonal, or system reliability requirements. In a series of orders from 2006 to 2011, FERC affirmed an Administrative Law Judge’s finding that these cost allocation provisions were generally just and reasonable and affirmed CAISO’s initially requested effective date of July 17, 2004. FERC also ordered CAISO to reclassify a certain transformer path as a “local” constraint and, on rehearing, as “zonal” for cost allocation purposes. A challenge to these orders from a group of California cities was ultimately rejected by the D.C. Circuit Court of Appeals in November 2013.

In December of that year, CAISO submitted a refund report setting out around $217 million in refunds that it proposed to issue in conformance with FERC’s Amendment No. 60 cost allocation orders—notwithstanding that FERC had neither ordered refunds nor requested a refund report. Several parties protested CAISO’s refund report and argued, among other things, that refunds were never ordered by FERC and that they impermissibly included interest and otherwise ran afoul of the filed rate doctrine.

In its order FERC flatly rejected CAISO’s refund report. The Commission summarized the complex procedural history of the Amendment No. 60 orders and noted at “at no point did the Commission direct CAISO to make refunds or file a report.” According to FERC, this was consistent with its general policy not to order refunds in cases involving rate design and cost allocation. As the Commission explained, its authority to order refunds is discretionary and is generally only used in circumstances when a utility has collected excess revenues to which it is not entitled under its tariff. “[I]n cases where a cost allocation or rate design has been found unjust and unreasonable, but where no over-collection of revenue has occurred, other factors come into play” which mitigate against ordering refunds. Since utilities and customers often make their decisions based on rate design and cost allocation, by the time such provisions are later deemed unjust or unreasonable, the die has already been cast and it would be most equitable to require prospective changes only.

In rejecting the refund report, FERC concluded that, because CAISO had already made prospective reallocations of must-offer generation costs in conformance with the Commission’s orders, no further action was necessary.

A copy of FERC’s October 20, 2016 order can be found here.