On April 30, 2020, the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) denied Nebraska Public Power District’s (“NPPD”) petition for review of FERC’s approval of the Southwest Power Pool, Inc.’s (“SPP”) placement of Tri-State Generation & Transmission Association’s (“Tri-State”) transmission facilities in SPP Zone 17. NPPD challenged FERC’s approval on cost causation grounds, arguing that FERC’s ruling was arbitrary and capricious because it failed to find that the benefits accruing to NPPD are roughly commensurate with the costs. The Eighth Circuit denied NPPD’s petition, concluding that FERC provided plausible and articulable reasons for why the costs and benefits of placing Tri-State’s transmission facilities in Zone 17 were comparable, and that FERC’s cost-causation analysis was not arbitrary and capricious.

NPPD and Tri-State have a commercial relationship involving joint-use transmission facilities dating back decades. When NPPD joined SPP in 2009, Tri-State was not a member, although its jointly operated facilities with NPPD fell under the functional control of SPP in Zone 17. Subsequently, three other entities also joined SPP, effectively surrounding Tri-State’s facilities by SPP controlled facilities. For this reason, and seeing an opportunity to lower its costs and terminate its relationship with NPPD, Tri-State sought to join SPP. In 2015, SPP revised its tariff to accommodate Tri-State’s integration into SPP as a transmission owner (“TO”) in Zone 17. As the dominant TO in Zone 17, NPPD challenged Tri-State’s placement there, emphasizing the cost impact to NPPD of adding Tri-State’s transmission facilities. Despite some cost shift evidence presented by NPPD, FERC found that the benefits to NPPD were at least roughly commensurate with the costs being allocated to Zone 17, pointing to the long-standing relationship between NPPD and Tri-State and the integrated nature of their joint-use facilities as record evidence of mutual benefits.

On review, the Eighth Circuit concluded that FERC’s decision to place Tri-State in Zone 17 satisfied cost-causation principles, which require FERC to provide an articulable and plausible reason that the benefits of placement are at least roughly commensurate with the cost.  Though FERC was unable to articulate all the benefits of placing Tri-State in Zone 17, largely because it is difficult to quantify the value to interconnections and the ability to service customers, the Eighth Circuit concluded that FERC sufficiently provided articulable and plausible reasons for its decisions.  The court explained that FERC was not required to calculate benefits with precision, and further described the benefits that FERC did identify, such as the integrated nature of the facilities. The court further noted that NPPD used Tri-State’s facilities, that the joint-use facilities were operated as a single entity, and that both could not reach their customers without the use of the other’s facilities.  Despite NPPD’s arguments that FERC failed to sufficiently identify required benefits, the Eighth Circuit held that the benefits of placing Tri-State in Zone 17 were at least roughly commensurate with the costs and thus affirmed FERC’s decision.

In response to NPPD’s other argument that FERC’s decision was arbitrary and capricious because it did not consider the effect of placing Tri-State in Zone 19 (e.g., that such placement would have resulted in minimal cost shift), the Eighth Circuit noted that the law does not require FERC to consider NPPD’s alternative suggestion because its role was simply to determine whether SPP’s proposed placement of Tri-State in Zone 17 was just and reasonable.

Click here to read the Eighth Circuit’s decision.