Case: 18-60575 Document: 00516843974 Page: 1 Date Filed: 08/02/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
August 2, 2023
No. 18-60575 Lyle W. Cayce
____________ Clerk
El Paso Electric Company,
Petitioner,
versus
Federal Energy Regulatory Commission,
Respondent.
______________________________
Appeal from the Federal Energy Regulatory Commission
Agency Nos. 161 FERC 61,188,
163 FERC 61,204
______________________________
Before Jones, Southwick, and Ho, Circuit Judges.
Edith H. Jones, Circuit Judge:
Seven years ago, this court vacated, as arbitrary and capricious, the
Federal Energy Regulatory Commission’s (“FERC”) cost allocation scheme
for electrical grid improvements in the WestConnect region, which covers
utility service to much of the American West. El Paso Elec. v. FERC, 832 F.3d
495, 505–06 (5th Cir. 2016) (“El Paso Elec. I”). Because FERC had not
reasonably explained how its orders, which implement the generally
applicable Order No. 1000, complied with the Federal Power Act’s
requirement that rates be “just and reasonable,” we remanded for further
proceedings. FERC was instructed to provide more complete justification
Case: 18-60575 Document: 00516843974 Page: 2 Date Filed: 08/02/2023
No. 18-60575
for its orders. The petition under review asserts that the reasons FERC gave
on remand remain insufficient. We agree. FERC’s orders violate the Federal
Power Act as a matter of law and, alternatively, the agency has again
inadequately explained its actions. The cost causation principle that binds
FERC does not authorize it to force its regulated jurisdictional utilities to
assume the costs of providing service to non-jurisdictional utilities. We
therefore GRANT the petition and REVERSE the orders.
I. Background
The court thoroughly summarized this case’s regulatory, factual, and
procedural history in El Paso Elec. I. Only the highlights and more recent
developments warrant attention here. See 832 F.3d at 499–503.
A. The Federal Power Act
The Federal Power Act (“FPA”) gives FERC “jurisdiction over all
facilities” involved in “the transmission of electric energy in interstate
commerce.” 16 U.S.C. § 824(b)(1). The FPA requires that “[a]ll rates and
charges made, demanded, or received by any public utility for or in
connection with the transmission or sale of electric energy . . . be just and
reasonable.” 16 U.S.C. § 824d(a). “For decades, the Commission and the
courts have understood this requirement to incorporate a ‘cost-causation
principle’—the rates charged for electricity should reflect the costs of
providing it.” Old Dominion Elec. Coop. v. FERC,
898 F.3d 1254, 1255 (D.C.
Cir. 2018). This principle is “foundational” and a “basic tenet” of
ratemaking. El Paso Elec. I,
832 F.3d at 505; S.C. Pub. Serv. Auth. v. FERC,
762 F.3d 41, 85 (D.C. Cir. 2014) (per curiam) (“South Carolina”).
FERC need not “utilize a particular formula” when applying this
principle, nor “allocate costs with exacting precision.” Old Dominion,
898 F.3d at 1260. FERC may even “emphasize other, competing policies and
approve measures that do not best match cost responsibility and causation.”
2
Case: 18-60575 Document: 00516843974 Page: 3 Date Filed: 08/02/2023
No. 18-60575
Carnegie Nat. Gas Co. v. FERC, 968 F.2d 1291, 1294 (D.C. Cir. 1992).
Nevertheless, “all approved rates [must] reflect to some degree the costs
actually caused by the customer who must pay them.” KN Energy, Inc. v.
FERC,
968 F.2d 1295, 1300 (D.C. Cir. 1992); see also Ill. Com. Comm’n v.
FERC,
576 F.3d 470, 477 (7th Cir. 2009) (Benefits should be “at least
roughly commensurate” with costs.). Courts have generally held that costs
“are to be allocated to those who cause the costs to be incurred and reap the
resulting benefits.” Nat’l Ass’n of Reg. Util. Comm’rs v. FERC,
475 F.3d
1277, 1285 (D.C. Cir. 2007); see also BNP Paribas Energy Trading GP v. FERC,
743 F.3d 264, 268 (D.C. Cir. 2014) (The principle is a “matter of making sure
that burden is matched with benefit.”).
B. Order No. 1000
In 2011, FERC promulgated Order No. 1000 to promote efficient and
cost-effective regional transmission planning and provide that grid
improvement costs are allocated fairly among regional beneficiaries. See
Transmission Planning and Cost Allocation by Transmission Owning and
Operating Public Utilities, Order No. 1000, 136 FERC ¶ 61,051 at PP 4, 487
(2011) (“Order No. 1000”). 1 Noting the “fundamental link” between
regional planning and “cost allocation,” FERC implemented a number of
cost allocation reforms.
Id. at P 599. These require jurisdictional utilities to
develop “a method . . . for allocating ex ante the costs of new regional
transmission facilities that complies with six regional cost allocation
principles.” El Paso Elec. I,
832 F.3d at 499 (quoting South Carolina,
762 F.3d
at 53). The first and “most pertinent” is the well-established “cost
causation” principle.
Id. Accordingly, the “cost of transmission facilities
_____________________
1
FERC responded to requests for rehearing and clarification with Order
No. 1000-A. 139 FERC ¶ 61,132 (May 17, 2012). We refer to both orders as “Order
No. 1000.”
3
Case: 18-60575 Document: 00516843974 Page: 4 Date Filed: 08/02/2023
No. 18-60575
must be allocated to those within the transmission planning region that
benefit from those facilities in a manner that is at least roughly commensurate
with estimated benefits.” Id. at 500; Order No. 1000 at PP 586, 622.
A stated purpose is “to prevent subsidization by ensuring that costs
and benefits correspond to each other.” Order No. 1000-A at P 578. “Free
ridership,” where “an entity is not required to pay for a benefit it receives,”
is the main form of subsidization combatted by the cost-causation principle.
Id. at P 573. Requiring jurisdictional utilities to “allocate the costs of their
new transmission facilities to the beneficiaries of those facilities” is one step
toward “eliminat[ing] free riders on the transmission grid.”
Id. at PP 568–
69. Further, stated Order No. 1000, if compliance with the cost causation
principle were not mandated, FERC would be unable to address free
ridership and thus “ensure that rates . . . are just and reasonable.”
Id. at 535.
Crucially, Order No. 1000 applies only to public utilities subject to
FERC jurisdiction. FERC appears to have statutory authority under § 211A
of the FPA “to require participation in these processes by non-jurisdictional
utilities,” but it “has thus far declined to exercise” it. El Paso Elec. I,
832 F.3d at 500 (emphasis omitted). Non-jurisdictional utilities may,
however, join a transmission planning region for cost allocation purposes by
“enrolling” in the region. Order No. 1000-A at PP 275, 656. But Order
No. 1000 explicitly provides that jurisdictional utilities are “not required to
plan for the transmission needs of . . . a non-[jurisdictional] utility
transmission provider that has not made the choice to join.”
Id. at P 276.
C. Factual and Procedural History
In the WestConnect transmission planning region, jurisdictional and
non-jurisdictional electric utility transmission providers are roughly equal in
number and are interspersed throughout the vast geographic region. El Paso
Elec. I, 832 F.3d at 501. According to FERC, the jurisdictional and non-
4
Case: 18-60575 Document: 00516843974 Page: 5 Date Filed: 08/02/2023
No. 18-60575
jurisdictional utilities’ transmission services are highly integrated.
Historically, they enjoyed a mutually beneficial relationship in which they
planned new transmission facility projects together and allocated funding
through negotiated agreement. Id. Under Order No. 1000 as implemented
by the cost allocation scheme ordered by FERC, however, the WestConnect
jurisdictional utilities must take into account the transmission needs of the
non-jurisdictional utilities when planning a new facility and the jurisdictional
utilities must pay for the facility’s development.
Id. at 501–02. The non-jurisdictional utilities may pay if they so choose.
Id. Specifically, regional
planning would proceed according to the following process:
1. WestConnect jurisdictional utilities and coordinating
transmission owners (“CTOs”) (non-jurisdictional utilities
that elect to participate in planning) identify the transmission
needs of utilities in the region.
2. They then determine whether a single project could meet
multiple utilities’ transmission needs.
3. If so, they examine whether the project satisfies the cost
allocation criteria, including a benefit-to-cost ratio of at least
1.25 to 1.
4. Cost allocations are then determined among participating
utilities, at which point CTOs choose whether to accept their
allotment. If they opt out, the benefit-to-cost ratio is
recalculated.
5. If the project continues to satisfy the ratio, then all
jurisdictional utilities and CTOs, including those that opted
out of cost allocation, vote whether to solicit bids from a
developer.
6. The selected developer can recoup costs only from
jurisdictional transmission utilities and CTOs that have
volunteered to pay, not CTOs that opt out.
5
Case: 18-60575 Document: 00516843974 Page: 6 Date Filed: 08/02/2023
No. 18-60575
In 2014, the WestConnect jurisdictional utilities, led by El Paso
Electric Company (“EPE”), petitioned this court for review of FERC’s
orders implementing Order No. 1000. 2 Id. at 502–03. The court held that
FERC’s orders were arbitrary and capricious because they failed to “apply
that foundational principle of cost causation for about half of the utilities in
the WestConnect region.” El Paso Elec. I,
832 F.3d at 505. FERC had not
“provide[d] a reasoned explanation for why the non-jurisdictional utilities
have incentive or obligation to participate in binding cost allocation when
they can get many of the same benefits at the jurisdictional utilities’
expense.”
Id. And FERC had failed to explain how the “lack of
participation” in cost allocation by those beneficiaries would “not result in
unjust and unreasonable rates.”
Id. at 507. The court concluded that FERC
had “failed to explain how the current orders satisfy its statutory mandate—
except by ignoring the benefits the non-jurisdictional utilities would
receive.”
Id. at 507 n.13 The court vacated the orders and remanded “for
further explanation and fact finding.”
Id. at 510.
Over a year later, FERC responded to our stated concerns. See
161 FERC ¶ 61,188 (2017) (“Order on Remand”). First, the agency insisted
that non-jurisdictional utilities are likely to submit to binding cost allocation
on a project-by-project basis so that important grid improvement initiatives
satisfy the benefit-to-cost threshold ratio and thus proceed toward
development.
Id. at PP 43–47. Second, because this threshold ratio ensures
that a project’s benefits substantially outweigh its costs, the cost-causation’s
requirement that benefits be “roughly commensurate” with costs will always
be met.
Id. at P 51. Finally, FERC noted that it could always reconsider its
_____________________
2
The validity of Order No. 1000 is not at issue in this appeal.
6
Case: 18-60575 Document: 00516843974 Page: 7 Date Filed: 08/02/2023
No. 18-60575
approach if free ridership turns out to be a bigger problem than anticipated.
Id. at P 54. 3
The jurisdictional utilities requested a rehearing, arguing that FERC
did not address the deficiencies in its orders previously vacated by this court.
FERC denied the request, stating that the risk of free-ridership was
acceptable because the only way to eliminate the risk would also “reduce the
effectiveness” of FERC’s other policy objectives. 163 FERC ¶ 61,204 at P 10
(2018) (“Order Denying Rehearing”).
EPE petitioned this court for review of FERC’s Order on Remand and
Order Denying Rehearing. The other WestConnect jurisdictional utilities
(“Public Utilities”) intervened in support of EPE, and the non-jurisdictional
utilities intervened in support of FERC. In December 2018, this court stayed
the appeal to give the parties a chance to settle. In late 2022, FERC rejected
the settlement agreement reached by the WestConnect jurisdictional and
non-jurisdictional utilities. The petition is now ripe for review.
II. Discussion
FERC’s orders are reviewed under the Administrative Procedure
Act’s “arbitrary and capricious” standard and will pass muster so long as the
agency has “examined the relevant considerations and articulated a
satisfactory explanation for its action, including a rational connection
between the facts found and the choice made.” FERC v. Elec. Power Supply
Ass’n, 577 U.S. 260, 292,
136 S. Ct. 760, 782 (2016) (alterations adopted).
Although FERC enjoys “great deference . . . in its rate decisions,”
id., its
_____________________
3
Additionally, FERC explained that Order No. 1000’s so-called “reciprocity
condition,” which would allow public utilities to cut off all new transmission service to non-public utilities who refuse to participate in cost allocation, provides an adequate impetus
for non-public utility enrollment. Id. at P 53. FERC now disclaims any reliance on this
argument.
7
Case: 18-60575 Document: 00516843974 Page: 8 Date Filed: 08/02/2023
No. 18-60575
orders must be set aside if “not in accordance with law.” FCC v. NextWave
Pers. Commc’ns, 537 U.S. 293, 300,
123 S. Ct. 832, 838 (2003) (citing
5 U.S.C. § 706(2)(A)). Particularly in this remand context, where FERC was
ordered to flesh out its reasoning, we observe the earlier panel’s holding that
“the deference we owe to FERC is not unlimited.” El Paso Elec. I,
832 F.3d
at 503.
EPE and the Public Utilities make two primary arguments: first, that
FERC’s cost allocation scheme violates the FPA and Order No. 1000 as a
matter of law; and second, that FERC’s orders are arbitrary and capricious
because they fail to give an adequate explanation on remand. We discuss each
argument in turn.
A. FERC’s Orders are Unlawful
FERC’s orders fail as a matter of law, argues EPE, because they
mandate for the non-jurisdictional utilities a right to free ride, violating the
FPA and contrary to Order No. 1000. 4 In the same vein, the Public Utilities
contend that the kind of free ridership permitted under FERC’s orders is a
per se violation of the requirement that rates be just and reasonable.
FERC responds that although some free ridership could
“theoretically occur” under its orders, the cost-causation principle has never
been so rigidly applied as to require the elimination of free ridership. Order
on Remand at P 39. FERC asserts that courts have understood that cost-causation can give way to other competing policy goals. And costs need only
be “roughly commensurate” to benefits under the cost causation principle
_____________________
4
The non-public utilities call this an impermissible collateral attack on Order
No. 1000. This court adjudicated that question in El Paso Elec. I and held that EPE’s
challenge is not a collateral attack. 832 F.3d at 495.
8
Case: 18-60575 Document: 00516843974 Page: 9 Date Filed: 08/02/2023
No. 18-60575
because, given the physical flow of electricity, some free ridership within an
interconnected system is inevitable. Order Denying Rehearing at P 15.
FERC made these same arguments in El Paso Elec. I. See Brief of
Respondent at 25–32, El Paso Elec. I (No. 14–60822). There, as here, it
predicated its position on South Carolina Public Service Authority v. FERC,
762 F.3d 41 (D.C. Cir. 2014) (per curiam). Brief of Respondent at 30, El Paso
Elec. I; see also Order Denying Rehearing at PP 13–14.
In South Carolina, dozens of petitioners brought a facial challenge
against Order No. 1000. 762 F.3d at 48. One group argued that FERC lacked
the authority to adopt the cost allocation requirements.
Id. at 82. (That
argument is not raised here.) Another argued that FERC acted arbitrarily
and capriciously because the cost allocation reforms “did not go far enough.”
Id. Specifically, those petitioners complained that Principle 4 of the six
regional cost allocation principles “fails to require cost allocation to extra-regional beneficiaries.”
Id. at 87. By adopting Principle 4, FERC “limited
required cost allocation to within regions, noting that doing so, ‘may lead to
some beneficiaries of transmission facilities escaping cost responsibility
because they are not located in the same transmission planning region as the
transmission facility.’”
Id. (emphasis added) (quoting Order No. 1000 at P
660). This would permit beneficiaries to free ride, argued the petitioners,
who sit just outside the “‘rather arbitrarily’ drawn region in which the new
facility is located.”
Id. at 88.
The court acknowledged that because rates need only “reflect to some
degree the costs actually caused by the customer who must pay them,” id.
(quoting KN Energy,
968 F.2d at 1300), FERC can approve a “rate
mechanism that tracks cost-causation principles less than perfectly.”
Id.
(quoting Sithe/Indep. Power Partners v. FERC,
285 F.3d 1, 5 (D.C. Cir. 2002)).
Further, FERC “may rationally emphasize other, competing policies and
9
Case: 18-60575 Document: 00516843974 Page: 10 Date Filed: 08/02/2023
No. 18-60575
approve measures that do not best match cost responsibility and causation.”
Id. (quoting Carnegie Nat’l Gas, 968 F.2d at 1293–94). The court thus
concluded that FERC’s “balancing of the competing goals of reducing
monitoring burdens and adopting policies that ensure that cost allocation
maximally reflects cost causation is wholly reasonable.”
Id.
In El Paso Elec. I, FERC invoked the same reasoning in South Carolina
to uphold the cost allocation scheme at issue in the WestConnect region. But
the court majority in El Paso Elec. I noted that EPE’s petition differs from the
petition that “generally challenged” FERC’s regulation in South Carolina. 5
Id. at 504. FERC’s reasoning following remand does not fortify its reliance
on South Carolina.
EPE and the Public Utilities distinguish South Carolina by
emphasizing that fundamentally different kinds of free-ridership are
implicated in the two cases. The free riders contemplated in South Carolina,
they argue, comprised “unintended, residual beneficiaries outside of a
planning region”; whereas here, the non-jurisdictional utility free riders sit
within the WestConnect region and are “specifically and intentionally
designated as beneficiaries.” This distinction is indeed fundamental. Its legal
import stems from the statutory mandates served by the cost-causation
principle and the means employed to meet those ends.
The FPA’s statutory requirement is twofold: (1) rates must be “just”;
and (2) rates must be “reasonable.” 16 U.S.C. § 824d(a). The cost-causation principle, as understood by the courts and articulated in Order
No. 1000, serves this mandate in two distinct ways. First, to ensure that rates
are “just,” the principle prevents “subsidization by ensuring that costs and
_____________________
5
Judge Reavley’s dissent found South Carolina “indistinguishable.” 832 F.3d at
512 (Reavley, J., dissenting).
10
Case: 18-60575 Document: 00516843974 Page: 11 Date Filed: 08/02/2023
No. 18-60575
benefits correspond to each other.” Order No. 1000-A at P 578; see also BNP
Paribas Energy Trading GP, 743 F.3d at 268 (the “principle itself manifests a
kind of equity . . . as a matter of making sure that burden is matched with
benefit”); Nat’l Ass’n of Reg. Util. Comm’rs.,
475 F.3d at 1285 (“costs are to
be allocated to those who cause the costs to be incurred and reap the resulting
benefits”).
Second, to guarantee that rates are “reasonable,” cost-causation
“requirements help to ensure that more efficient and cost-effective
transmission solutions are implemented and that this occurs without undue
delay.” Order No. 1000-A at P 585; see also id. at P 592 (The absence of an
ex ante regional cost allocation method causes “jurisdictional rates [to be]
higher than they would otherwise be.”). As this court recognized, “Order
No. 1000 clearly linked cost causation, the elimination or reduction of free
ridership, just and reasonable rates, and more efficient transmission planning
and development.” El Paso Elec. I,
832 F.3d at 505, n. 10; see also Pub. Serv.
Elec. & Gas Co. v. FERC,
989 F.3d 10, 14 (D.C. Cir. 2021) (The promulgation
of Order No. 1000 “to foster the efficient development of the transmission
grid” was “[c]onsistent with the cost-causation principle.” (emphasis
added)).
Neither of the statutory mandates served by the cost-causation
principle can be sacrificed for the other or for some separate policy interest.
See Lincoln v. Vigil, 508 U.S. 182, 193,
113 S. Ct. 2024, 2032 (1993)
(“Of course, an agency is not free simply to disregard statutory
responsibilities . . . .”). To be sure, FERC may “emphasize other, competing
policies and approve measures that do not best match cost responsibility and
causation.” Carnegie Nat’l Gas,
968 F.2d at 1294 (emphasis added).
Additionally, FERC need not “allocate costs with exacting precision” or
according to “a particular formula.” Old Dominion,
898 F.3d at 1260. But
the agency may never approve unjust and unreasonable rates by allocating
11
Case: 18-60575 Document: 00516843974 Page: 12 Date Filed: 08/02/2023
No. 18-60575
costs to those who reap little to no benefit, see Ill. Com. Comm’n, 576 F.3d at
476, nor may it choose not to allocate costs to “those who cause the costs to
be incurred and reap the resulting benefits.” Nat’l Ass’n of Reg. Util.
Comm’rs,
475 F.3d at 1285 (emphasis added); see also Consol. Edison Co. of
NY v. FERC,
45 F.4th 265, 282 (D.C. Cir. 2022) (per curiam) (vacating
portion of FERC order that exempted “de minimis” beneficiaries from cost
allocation). 6
Thus, the distinction between extra-regional unintended beneficiaries
and regional intended beneficiaries becomes critical. The former do not
“cause” any costs to be incurred in a neighboring region. The latter do. As
the Seventh Circuit put it in Illinois Commerce Commission v. FERC: “To the
extent that a utility benefits from the costs of new facilities, it may be said to
have ‘caused’ a part of those costs to be incurred, as without the expectation of
its contributions the facilities might not have been built.” 576 F.3d at 476
(emphasis added); see also Order No. 1000 at P 537 (quoting Ill. Com.
Comm’n). In South Carolina, the petitioners would not have expected the
contributions of the extra-regional beneficiaries when planning grid
improvements. Although those beneficiaries may have enjoyed some free
ridership in the technical sense, their ability to avoid binding cost allocation
did not violate the cost-causation principle. In the WestConnect region,
FERC’s orders require that the jurisdictional utilities “specifically and
intentionally” account for the needs of the non-jurisdictional utilities, which
comprise half of the utilities in that region. And the non-jurisdictional
_____________________
6
The dissent chides our citation of Nat’l. Ass’n of Reg. Util. Comm’rs, supra, with
that court’s caveat that customer interconnections to a utility grid do not violate cost
causation. 475 F.3d at 1285. This case is not about individual customer connections, but
about transmission improvements that benefit non-contributing non-jurisdictional utilities.
One cannot rationalize subsidization across transmission providers by reference to costs
incurred by adding customers to an individual utility.
12
Case: 18-60575 Document: 00516843974 Page: 13 Date Filed: 08/02/2023
No. 18-60575
utilities may not only participate in planning but also vote on new projects.
In contrast, in the era before Order No. 1000, the non-jurisdictional utilities
regularly helped pay for regional transmission projects. Moreover, in the
jurisdictional utilities’ initial attempts to comply with Order No. 1000, which
FERC rejected, the non-jurisdictional utilities would have continued to
contribute funding via negotiated agreements for projects that benefited
them.
When promulgating Order No. 1000, FERC anticipated the potential
conundrum posed by regional non-jurisdictional utilities and provided a
workable solution—which facilitates development while avoiding any cost-causation pitfalls. Non-jurisdictional utilities may elect “to become part of a
transmission planning region by enrolling in that region.” Order No. 1000-
A at P 275. They would then be subject to binding cost allocation for future
projects that benefit them. Id. But, importantly, non-jurisdictional utilities
are not required to enroll.
Id. at P 276. In that case, what must the
jurisdictional utilities, which are required to enroll, do with the unenrolled,
non-jurisdictional utilities? The answer: nothing. The regulation is clear:
the “regional transmission planning process is not required to plan for the
transmission needs of such a non-[jurisdictional] utility transmission
provider that has not made the choice to join a transmission planning
region.”
Id. (emphasis added). This is consistent with the two purposes of
the cost-causation principle: (1) ensure just rates by preventing subsidization
and (2) promote reasonable rates by incentivizing efficient and cost-effective
transmission project planning. In the challenged orders for the WestConnect
region, FERC turns this workable solution on its head, mandating that non-jurisdictional utilities need not enroll in the region, yet jurisdictional utilities
must plan for their transmission needs.
In the name of policy balancing, FERC has prohibited the
WestConnect region from imposing binding cost allocation on the non-
13
Case: 18-60575 Document: 00516843974 Page: 14 Date Filed: 08/02/2023
No. 18-60575
jurisdictional utilities although they will “cause,” in part, the costs of new
grid improvements. This scenario is entirely different from that encountered
in South Carolina. No amount of emphasizing other competing interests
permits FERC to sacrifice the foundational principle of cost-causation by
refusing to allocate costs “to those who cause the costs to be incurred and
who reap the resulting benefits.” Nat’l Ass’n of Reg. Util. Comm’rs, 475 F.3d
at 1285. Because FERC’s orders are a “wholesale departure” from the cost-causation principle, Old Dominion,
898 F.3d at 1261, they cannot be
considered “just and reasonable” and violate the Federal Power Act’s cost-causation requirement as a matter of law.
B. FERC’s Orders are Arbitrary and Capricious
But even assuming that FERC’s challenged orders theoretically lie at
the outer limits of the cost causation principle, the agency’s explanation of
how its orders work in this case is arbitrary and capricious. This court, in El
Paso Elec. I, remanded for further explanation and fact finding, holding that
“FERC’s [orders] nowhere provide a reasoned explanation for why the non-jurisdictional utilities have incentive or obligation to participate in binding
cost allocation when they can get many of the same benefits at the
jurisdictional utilities’ expense.” Id. at 505. FERC now offers four principal
arguments in support of its orders. We discuss each in turn.
1. Fact Finding
As an initial matter, FERC found it unnecessary “to order additional
proceedings to investigate the participation of non-[jurisdictional] utility
transmission providers in regional cost allocation in WestConnect.” Order
on Remand at P 29 n.62. This is because there are no new facts. Since 2015,
the WestConnect planning process has not identified any regional
transmission needs. Consequently, “there have been no opportunities for
non-[jurisdictional] utility transmission providers to participate in cost
14
Case: 18-60575 Document: 00516843974 Page: 15 Date Filed: 08/02/2023
No. 18-60575
allocation for regional transmission projects.” Id. Nonetheless, FERC
purports to have found two facts on remand. First, while WestConnect non-jurisdictional utilities do not intend to enroll and subject themselves to
binding cost allocation, FERC finds no evidence of any resulting harm. Id. at
P 36. This makes no sense: how could there be evidence of harm where there
have been no recent opportunities for non-jurisdictional utilities to opt out of
cost allocation? This is like “finding” that exposure to sun is harmless where
no one stepped outdoors.
More tellingly, FERC observes that all non-jurisdictional utility
providers have elected to participate as coordinating transmission owners in
order to have their transmission needs included in the regional transmission
planning process. Id. at P 38. But the agency denies that this fact will
instigate free-riding. FERC and the non-jurisdictional utilities insist there is
a difference between choosing not to enroll in the region and retaining the
ability to opt out of binding cost allocation on a project-by-project basis. In
other words, the fact that non-jurisdictional utilities have refused to enroll
does not mean that they will opt out of binding cost allocation in future
projects. Maybe so; but the obvious inference is that non-jurisdictional
utilities will opt out of cost allocation at least some of the time.7 At the very
least, these facts do not tend to show that impermissible free riding will not
take place.
2. Economic Theory and Expertise
Because of the sparse factual record before it, FERC contends that it
reasonably exercised its discretion to explain its actions based on economic
_____________________
7
That the non-public utilities will thus maintain the ability to free ride reinforces
our alternative holding that FERC’s orders fail under the FPA’s cost allocation principle
as a matter of law.
15
Case: 18-60575 Document: 00516843974 Page: 16 Date Filed: 08/02/2023
No. 18-60575
theory, its predictive judgment, and its expertise. Order Denying Rehearing
at P 33; see also FCC v. Prometheus Radio Project, 141 S. Ct. 1150, 1160 (2021)
(holding that the FCC reasonably explained its actions, which constituted its
“best estimate, based on the sparse record evidence”). The economic theory
argument is puzzling, because FERC cites no theory pursuant to which a
rational economic actor will elect to pay for some good or service that he can
get for nothing. Similarly, the argument for agency expertise and judgment
does not get FERC very far, for it merely parrots the well-established rule
that agencies need not conduct their “own empirical or statistical studies
before exercising” their discretion. Prometheus Radio, 141 S. Ct. at 1160. The
overarching standard remains firmly in place: all agency action, even
“predictive judgment[s] based on the evidence” available, must be
“reasonable and reasonably explained.” Id. at 1160. But here, the predictive
judgment runs contrary to Order No. 1000 itself, which recognized and
countered a predictive judgment of free riding by not requiring the
jurisdictional utilities to plan and include non-enrolled non-jurisdictional
ones. In other words, today’s predictive judgment is at unexplained odds
with that of yesterday. To provide an explanation that would have reconciled
these positions was the purpose of remand, a principal part of the cost
causation issue. Falling back on unexplained claims of agency expertise does
not carry the remand burden.
3. Benefit-to-Cost Threshold Ratio
The only additional explanation FERC offers to show that non-jurisdictional utilities are actually likely to participate in binding cost
allocation inheres in a generous benefit-to-cost threshold ratio every new
transmission project must satisfy. Order on Remand at PP 40–43; Order
Denying Rehearing at PP 24-25. FERC posits that a non-jurisdictional utility
that will benefit from a project will likely pay its fair share of the costs,
because if it opts out, the benefit-to-cost ratio will narrow, and the chance the
16
Case: 18-60575 Document: 00516843974 Page: 17 Date Filed: 08/02/2023
No. 18-60575
project fails to proceed increases. It is thus in the interest of non-jurisdictional utilities that projects succeed. This explanation is
unreasonable.
What is more likely to happen if FERC’s orders are implemented is
gamesmanship predicated on the non-jurisdictional utilities’ ability to reject
cost allocation. As EPE notes, because non-jurisdictional utilities participate
in regional transmission planning on the same footing as jurisdictional
utilities, the availability of a transparent cost-benefit ratio “will enable each
non-[jurisdictional] utility to predict the likelihood that a given project will
be built without its participation.” The non-jurisdictional utilities will have
an incentive to exploit this information, bluffing their way to free ride on the
backs of the jurisdictional utilities by gaming the cost-benefit calculations.
FERC’s orders provide no comparable incentive for the jurisdictional
utilities.
But there is an additional flaw in FERC’s rationalization: it contradicts
the reasoning of Order No. 1000. When promulgating Order No. 1000, the
agency understood that the potential for free ridership is “particularly high
for projects that affect multiple utilities’ transmission systems and therefore
may have multiple beneficiaries.” Order No. 1000 at P 486. The
WestConnect region “is a heavily-integrated combination of [jurisdictional]
and non-[jurisdictional] utility transmission providers,” so it stands to reason
that significant projects will benefit both jurisdictional and non-jurisdictional
utilities. Order on Remand at P 30. The non-jurisdictional utilities, thus,
have “an incentive to defer investment in the hopes that other beneficiaries
will value the project enough to fund its development.” Order No. 1000 at
P 486. This kind of free ridership leads to unjust and unreasonable rates by
delaying projects and shifting costs onto others. See id. at PP 486, 512.
FERC’s former solution to this problem, as articulated in Order No. 1000,
was to require jurisdictional utilities to submit to binding cost allocation while
17
Case: 18-60575 Document: 00516843974 Page: 18 Date Filed: 08/02/2023
No. 18-60575
not requiring them to plan for the transmission needs of non-jurisdictional
utilities. Order No. 1000-A at PP 276, 568. Now, in the name of policy
balancing, FERC has flipped. 8 Crucially, it fails to explain how the presence
of a benefit-to-cost threshold ratio not only neutralizes, but reverses the non-jurisdictional utilities’ incentive to shift costs onto the jurisdictional utilities.
In any event, even if the ratio creates some sort of impetus to pay, it is pure
speculation to assume that the ratio will be so narrow in every project that the
project will fail without the non-jurisdictional utilities’ participation. 9
Recognizing that a hypothesized incentive to pay does not guarantee
that non-jurisdictional utilities will bear their share of costs, FERC maintains
that if a non-jurisdictional utility opts out, so long as the threshold ratio is
met, the project will satisfy the cost-causation principle because the benefits
enjoyed by the jurisdictional utilities will remain “roughly commensurate”
with the costs. As we explained above, the cost-causation principle does not
test whether benefits exceed costs simpliciter, but whether benefits to
_____________________
8
The extent of FERC’s turnabout from the reasoning of Order No. 1000, which
these orders were intended to implement, is remarkable. FERC argues in this appeal that
in regard to WestConnect, it was faced with two allegedly unpalatable alternatives for
encouraging regional planning and cost allocation. Excluding non-public utilities would
“fragment” regional planning, but requiring them to opt in or out of planning and
associated costs would fail to prevent some free ridership. Thus, it chose the “middle
course,” authorizing the non-public utilities to get in on planning but avoid cost allocation.
The “middle course,” when analyzed, is a euphemism for mandating free ridership and
incentivizing gamesmanship at the expense of planning. Maybe these consequences have
played a role in the inability of WestConnect to move forward on any regional planning for
nearly a decade following FERC’s challenged orders.
9
The dissent concludes by stating that “FERC sufficiently explained why Order
No. 1000 appropriately balances those competing goals” (i.e., cost causation and other
policy objectives). Respectfully, as articulated above, the compliance orders at issue here
fundamentally conflict with the reasoning of Order No. 1000’s prescription: that non-jurisdictional utilities’ needs may not be taken account of by jurisdictional utilities in
planning unless those utilities have agreed to pay their share of the costs. FERC fails to
follow its own governing Order No. 1000 as well as the FPA.
18
Case: 18-60575 Document: 00516843974 Page: 19 Date Filed: 08/02/2023
No. 18-60575
particular utilities are linked to costs “caused” by those utilities. See Order
No. 1000 at P 724 (“there must be a demonstrated link between the costs
imposed through a cost allocation method and the benefits received by
beneficiaries that must pay those costs”). This court has already stated that
FERC’s compliance orders cannot “satisfy its statutory mandate—except by
ignoring the benefits the non-jurisdictional utilities would receive.” El Paso
Elec. I, 832 F.3d at 507 n.13. FERC’s revised explanation continues to ignore
the benefits it acknowledges could accrue to free-riding non-jurisdictional
utilities. Thus, FERC’s orders are unreasonable for peddling the benefit-tocost threshold ratio as a cure-all for the free ridership malady its new scheme
creates.
4. “Wait-and-See” Approach
As a final gesture of reasonableness, FERC assures the court that it
will intervene in the WestConnect region if things get out of hand or once
“more empirical evidence becomes available.” Order on Remand at P 36.
EPE and the Public Utilities respond that by then it will be too late. Under
the “filed-rate doctrine,” “once a rate is in place with ostensibly full legal
effect and is not made provisional, it can then be changed only
prospectively.” Tex. E. Transmission Corp. v. FERC, 102 F.3d 174, 183 (5th
Cir. 1996). Thus, the injuries suffered as a result of any unjust and
unreasonable rate will be irreparable. Further, agencies cannot play the
“administrative law shell-game” of offering “future rulemaking as a
response to a claim of agency illegality.” Ameren Servs. Co. v. FERC,
880 F.3d 571, 584 (D.C. Cir. 2018) (citing Am. Tel. & Tel. Co. v. FCC,
978 F.2d 727, 732 (D.C. Cir. 1992)). A “wait-and-see suggestion confuses
adjudication—which is retroactive . . .—with rulemaking, which is of only
future effect.”
Id. This court ordered FERC to provide adequate reasons in
support of its actions. It is unreasonable for FERC now to tell the court to
stay tuned.
19
Case: 18-60575 Document: 00516843974 Page: 20 Date Filed: 08/02/2023
No. 18-60575
III. Conclusion
For the foregoing reasons, we conclude that FERC’s orders
implementing Order No. 1000 for the WestConnect region are incompatible
with the FPA’s mandate for just and reasonable rates and with Order
No. 1000’s application of the cost causation principle; and in addition,
FERC’s attempt to provide a reasoned explanation for its abnegation of cost
causation on remand is inadequate and unreasonable. Therefore, we
GRANT the petition for review and REVERSE the orders.
20
Case: 18-60575 Document: 00516843974 Page: 21 Date Filed: 08/02/2023
No. 18-60575
Leslie H. Southwick, Circuit Judge, dissenting:
In 2016, we remanded three agency orders to the Federal Energy
Regulatory Commission (“Commission” or “FERC”). Those orders had
modified and approved a regional electric transmission planning and cost
allocation program for WestConnect, a voluntary association of western
electric utilities. El Paso Elec. Co. v. FERC, 832 F.3d 495 (5th Cir. 2016). We
found that FERC’s orders did not fully explain why the agency would permit
the non-jurisdictional members of WestConnect to benefit from new highvoltage transmission facilities without requiring them to share in the costs of
those facilities.
Id. at 504–08.
In that opinion, we concluded FERC had not explained how rates
could be just and reasonable if the agency orders “effectively assur[ed]” that
only the jurisdictional utilities would bear the costs of transmission
development in the region. Id. at 505. We held that FERC had not
articulated why the non-jurisdictional utilities would participate in binding
project cost allocation when they could opt out and “get many of the same
benefits at the jurisdictional utilities’ expense.”
Id. We remanded the issue
of the non-jurisdictional utilities’ role in transmission planning and cost
allocation for FERC to offer “further explanation and fact finding consistent
with this opinion.”
Id. at 510–11. We did not provide more specific
instructions.
On remand, in the orders now on review, FERC reaffirmed its prior
determinations and elaborated on its prior findings. See 161 FERC ¶ 61,188
(2017) (“Order on Remand”);
163 FERC ¶ 61,204 (2018) (“Order Denying
Rehearing”). I agree with FERC and the Respondent-Intervenors that
FERC’s fact findings on remand suffice to support that its compliance orders
are structured to minimize any potential free ridership by the non-jurisdictional utilities and do not violate the cost-causation principle.
21
Case: 18-60575 Document: 00516843974 Page: 22 Date Filed: 08/02/2023
No. 18-60575
Further, I find an adequate explanation of why the public utilities would not
bear the costs for the region in transmission planning.
El Paso argues that FERC’s conclusions on remand are not supported
by substantial evidence and contends that it is “sheer speculation” that the
non-jurisdictional utilities would voluntarily accept binding cost allocation.
El Paso dismisses FERC’s assertion in the Order on Remand that the
Compliance Orders protect against free ridership by implementing the 1.25x
benefit-cost ratio, claiming there is “no evidentiary basis in the record to
support FERC’s assumptions, only guesswork.” El Paso argues, with aid of
a numerical example, that a non-jurisdictional utility can decline cost
allocation and still reap the benefits of a hypothetical WestConnect project. 1
FERC and the Respondent-Intervenors counter that FERC’s determinations
“reasonably relied on economic theory, the Commission’s reasonable
predictive judgment, and its expertise.”
A reviewing court’s duty under both the Federal Power Act and the
Administrative Procedure Act is to ascertain whether the agency has offered
a reasonable explanation for its actions, not whether its “decision is the best
one possible.” FERC v. Elec. Power Supply Ass’n, 577 U.S. 260, 292 (2016).
“[N]owhere is this more true than in a technical area like electricity rate
design.”
Id. “Indeed, the agency’s decision need not be ideal, so long as it
is not arbitrary or capricious, and so long as the agency gave at least minimal
consideration to the relevant facts contained in the record.” State of La. Ex
rel. Guste v. Verity,
853 F.2d 322, 327 (5th Cir. 1988). In such a case, the court
_____________________
1
El Paso also provided a hypothetical in its Rehearing Request. Order Denying
Rehearing at ¶ 23 & n.69. FERC did not find the hypothetical “compelling.” Id. at ¶ 23.
It found that the hypothetical presented was highly unlikely because the only reason such a
project would be able to move forward was if the benefits to the paying utilities were still
significant enough to satisfy the 1.25x cost-benefit ratio. Id. at ¶ 24.
22
Case: 18-60575 Document: 00516843974 Page: 23 Date Filed: 08/02/2023
No. 18-60575
must uphold the decision even if it is “of less than ideal clarity if the agency’s
path may reasonably be discerned.” Motor Vehicle Mfrs. Ass’n v. State Farm
Mutual Auto Ins. Co., 463 U.S. 29, 43 (1983) (quotation marks and citation
omitted).
Importantly for the case before us, “an agency’s predictive judgment
regarding a matter within its sphere of expertise is entitled to particularly
deferential review.” Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 (D.C.
Cir. 1999) (quotation marks and citation omitted). An agency is “not
required to support its analysis with hard data where it reasonably relied on
difficult-to-quantify, intangible benefits.” Huawei Technologies USA v. FCC,
2 F.4th 421, 454 (5th Cir. 2021). A reviewing court is accordingly “limited
to considering whether the [agency] made a reasonable predictive judgment
based on the evidence it had.”
Id. at 545 (quotation marks and citation
omitted). This means that a court “cannot demand the agency perform its
own empirical or statistical studies, especially when it relies on unquantifiable
benefits.”
Id. (quotation marks and citation omitted).
As mentioned earlier, our 2016 El Paso decision returned the matter
to FERC because it had not articulated why the non-jurisdictional utilities
would participate in binding project cost allocation when they could opt out
and “get many of the same benefits at the jurisdictional utilities’ expense.”
El Paso, 832 F.3d at 505. In its later Order Denying Rehearing, FERC
acknowledged that its explanation in the Third Compliance Order “stated,
without further elaboration, that the transmission planning process removes
the benefits of non-public [utilities] that do not accept cost allocation, and
therefore the resulting cost allocation determinations are commensurate with
the estimated benefits considered.” Order Denying Rehearing at ¶ 15. It
then explained how “[t]he Order on Remand, in contrast, provided a more
detailed explanation of the reevaluation process, and, unlike the Third
Compliance Order, explained that a crucial part of the reevaluation process
23
Case: 18-60575 Document: 00516843974 Page: 24 Date Filed: 08/02/2023
No. 18-60575
is that transmission projects may fail to meet the cost-benefit threshold upon
reevaluation if non-public [utilities] do not agree to cost allocation (such that
the projects will no longer be eligible for regional cost allocation and are less
likely to be ultimately developed).” Id.
The Order on Remand explains how and why the 1.25x benefit-cost
ratio requirement will discourage free ridership by incentivizing regional cost
allocation. 2 See Order on Remand at ¶ ¶ 40–52. FERC found that if a
substantial number of non-jurisdictional utilities — hoping for a free ride —
chose to decline cost allocation for a project that benefitted them, there is a
good chance the project would then fail the required 1.25x benefit-cost ratio
and not proceed. Id. at ¶ 47. As a result, FERC concluded that free riding
could theoretically only occur for a “limited subset of transmission projects.”
Id. at ¶ 39. Because the non-public utilities are subject to the same reliability
regulations as public utilities, FERC found that they therefore “have an
incentive to accept regional cost allocation for reliability transmission
projects because their transmission facilities must adhere to NERC
Reliability Standards.” Id. at ¶ 48. In other words, because of the
interconnectedness of the region, if the non-public utilities consistently
refused to participate in cost allocation, their own ability to build transmission
_____________________
2
“Specifically, for each transmission project proposed for selection in the regional
transmission plan for purposes of cost allocation, the WestConnect Planning Management
Committee (the Committee) performs cost-benefit analysis to determine whether the
transmission project is eligible for regional cost allocation.” Order on Remand at ¶ 40. If
a non-public utility declines cost allocation, WestConnect re-runs the cost-benefit analysis,
removing the benefits the declining utility would have received. Id. at ¶ 41. This means
there would be fewer benefits in a re-run, and so the ratio of project benefits to costs would
decrease. See id. at ¶ 42. The project would not proceed for remaining participants unless
the estimated benefits to those utilities still exceeded their allocated costs by 25 percent
(i.e., the 1.25x benefit-cost ratio). Id. at ¶ 46.
24
Case: 18-60575 Document: 00516843974 Page: 25 Date Filed: 08/02/2023
No. 18-60575
projects that require the public utilities’ cooperation would suffer too. Id. at
¶ 30, JA.1285.
In that vein, the Order on Remand discusses how, in this region, the
service territories of the public utilities are often “physically separated” by
the non-public utilities, and there are few interconnections between only
public utilities. Id. As a result, the WestConnect region is “uniquely
integrated” between public and non-public utilities. Id. at ¶ 31. We wrote in
our 2016 opinion that the region has historically depended on “voluntary
coordination” in planning projects in the region that resulted in “shared
costs and many jointly owned projects.” El Paso, 832 F.3d at 501. FERC
relied upon this “history of significant joint transmission planning” between
the non-public and public utilities in its decision. Order on Remand at ¶ 30.
El Paso contends that the historic cooperation between the utilities is
irrelevant because, in the past, no one had been required to pay for projects.
Thus, cooperation was essential. It further asserts that this explanation
regarding the benefit-cost ratio is unsatisfying because the record contains
“no evidentiary basis” or “empirical evidence” to support FERC’s
assumptions of its effectiveness, “only guesswork.” To some degree, this is
true. FERC stated in its orders on remand that there have been no
WestConnect projects to date, so there is no direct, empirical evidence to
support or to contradict El Paso’s claim that non-public utilities could decline
cost allocation even if presented with a project that benefitted them. Order
Denying Rehearing at ¶ 33 & n.92; Order on Remand at ¶ 29 & n.62.
I disagree with El Paso’s assertion, though, that this uncertainty is
fatal to FERC’s explanation on remand. “Agencies do not need to conduct
experiments in order to rely on the prediction that an unsupported stone will
fall; nor need they do so for predictions that competition will normally lead
to lower prices.” Associated Gas Distribs. v. FERC, 824 F.2d 981, 1008-09
25
Case: 18-60575 Document: 00516843974 Page: 26 Date Filed: 08/02/2023
No. 18-60575
(D.C. Cir. 1987). When no empirical evidence is available, agencies are
permitted to make “reasonable predictions rooted in basic economic
principles.” South Carolina Pub. Serv. Auth. v. FERC, 762 F.3d 41, 76 (D.C.
Cir. 2014) (“South Carolina”). Moreover, FERC may make findings based
on predictions derived from economic research and theory, as long as it
explains and applies those principles in a “reasonable manner.” Sacramento
Mun. Util. Dist. v. FERC,
616 F.3d 520, 531 (D.C. Cir. 2010).
FERC has provided a logical predictive economic explanation that
non-public utilities will typically be incentivized to ensure transmission
projects are advanced when benefits to them exceed the costs. Order
Denying Rehearing at ¶ 32-33, citing Order on Remand at ¶ 39-49. FERC
has explained that even if non-public utilities occasionally refuse cost
allocation, public utilities cannot be forced to pay for projects that do not
provide them net benefits. Order on Remand at ¶ 42. Finally, FERC has also
explained that even if non-public utilities refuse cost allocation, the project
will likely fail because it cannot satisfy the benefit-cost ratio. FERC posits
that non-public utilities, therefore, will be incentivized to accept the sharing
of costs most of the time because they, too, need these projects. Id. at ¶ 47–
48. FERC is allowed to act in appropriate circumstance on such predictive
assumptions. Its prediction could well be wrong, but our contrary predictions
should not be injected into the analysis.
Most of the foregoing concerns the reasonableness of FERC’s factual
determinations. To the extent there is an argument that FERC’s orders fail
as a matter of law, that possibility needs to be addressed.
El Paso’s chief remaining argument is that FERC’s explanation on
remand fails because, even assuming its 1.25x benefit-cost ratio is successful
in deterring some free ridership, it will not eliminate it. According to El Paso,
FERC’s Order would violate the cost-causation principle as a matter of law
26
Case: 18-60575 Document: 00516843974 Page: 27 Date Filed: 08/02/2023
No. 18-60575
because it would permit “certain utilities to push their share of a regional
transmission project’s costs onto other utilities,” which is “not just and
reasonable as a matter of law.”
This assessment of the cost-causation principle is unconvincing.
FERC reasonably explained why it disagreed with those arguments. The
cost-causation principle stems from the Federal Power Act’s (“FPA”)
requirement of “just and reasonable rates.” 16 U.S.C. § 824d(a)–(b). 3 When
it comes to cost allocation for transmission enhancements, FERC must have
“an articulable and plausible reason” to believe that the benefits of a new
project “are at least roughly commensurate” with the costs assessed. Illinois
Comm. Comm’n. v. FERC, 576 F.3d 470, 477 (7th Cir. 2009). The agency
does not have to “calculate benefits to the last penny.”
Id.
We remanded this matter in 2016 for “further explanation and fact
finding consistent with this opinion.” El Paso, 832 F.3d at 510–11. Were
reallocation of costs and benefits under Order No. 1000 a per se violation of
the cost causation principle as a matter of law, no explanation from FERC
could have sufficed. We recognized that “[i]t is [] certainly within FERC’s
_____________________
3
We explained the origin story this way:
In the Federal Power Act (“FPA”), Congress gave FERC jurisdiction “over all
facilities” for “the transmission of electric energy in interstate commerce and . . .
the sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. §
824(b)(1). Section 205 of the FPA prohibited “unreasonable rates and undue
discrimination ‘with respect to any transmission or sale subject to the jurisdiction
of the Commission,’” New York v. FERC, 535 U.S. 1, 7,
122 S.Ct. 1012,
152
L.Ed.2d 47 (2002) (quoting 16 U.S.C. § 824d(a)–(b)), and Section 206 of the FPA
gave FERC’s predecessor “the power to correct such unlawful practices,” id.
(citing 16 U.S.C. § 824e(a)), including on its own motion, S.C. Pub. Serv. Auth. v.
FERC (South Carolina), 762 F.3d 41, 49 (D.C. Cir. 2014).
El Paso,
832 F.3d at 499.
27
Case: 18-60575 Document: 00516843974 Page: 28 Date Filed: 08/02/2023
No. 18-60575
discretion to balance competing objectives, and FERC’s regulations need
only roughly correlate costs to benefits.” Id. at 505. That is still true today.
The opinons cited as support by El Paso and the Public Utilities to
support the idea that FERC’s orders fail as a matter of law are also
unconvincing. For example, they argue that a utility who “‘cause[s]’ a
portion of the costs for that project, but will not bear any costs,” violates the
cost-causation principle as a matter of law. They cite a D.C. Circuit opinion
that summarized the petitioners’ argument as “contend[ing] that the [] rule
violates the basic ‘cost causation’ principle, under which costs are to be
allocated to those who cause the costs to be incurred and reap the resulting
benefits.” Nat’l Ass’n of Reg. Util. Com’rs v. FERC, 475 F.3d 1277, 1285
(D.C. Cir. 2007). In fact, though, the D.C. Circuit rejected the petitioners’
argument.
Id. The court reasoned that “FERC has long taken the view that
customer ‘but-for’ causation isn’t dispositive of this issue,” and that “[e]ven
if a customer can be said to have caused the addition of a grid facility, the
addition represents a system expansion used by and benefitting all users due
to the integrated nature of the grid.”
Id. (quotation marks and citation
omitted) (emphasis in original). That opinion supports that FERC can
consider system-wide benefits as a competing policy goal, even when
potential free riding may occur.
We are also urged to consider a Seventh Circuit opinion that rejected
FERC’s requirement that a utility pay for facilities when “the likely benefit”
to the utility was “zero,” and, in addition, “[n]othing in [FERC’s] opinions
enable[d] an answer to [the] question” of whether there was “enough of a
benefit to justify the costs that FERC wants shifted to those utilities.” See
Illinois Com. Comm’n, 576 F.3d at 477. That is not the problem here. A
calculable benefit for the public utilities is required under these Orders,
namely, a 1.25x benefit-cost ratio per project, which applies before and after
cost reallocation for the public utilities. Order on Remand at ¶¶ 42, 50, JA
28
Case: 18-60575 Document: 00516843974 Page: 29 Date Filed: 08/02/2023
No. 18-60575
1293, 1296–97. If all the non-public utilities refuse cost allocation for a
particular project, FERC predicted that the project was unlikely to be built;
so the non-public utilities do have an incentive to contribute to costs. The
“likely benefit” is, by definition, not “zero.”
Finally, I disagree that another D.C. Circuit opinion stands for the
proposition that any potential for intra-regional free ridership is
unequivocally violative of the cost-causation principle. See South Carolina,
762 F.3d at 87–88. The Public Utilities argue that the limited free ridership
the court permitted in South Carolina was solely for “unintended
beneficiaries outside of a region,” and therefore not comparable to free
ridership of the known project beneficiaries within the WestConnect region at
issue here.
The potential for free-riding beneficiaries may have been extra-regional in South Carolina, but there is no binding precedent that would
mandate a different result solely because the potential for occasional free-riding beneficiaries is intra-regional in this case. When the D.C. Circuit
rejected the challenges to the cost allocation reforms in South Carolina, the
court was clear to “recognize that feasibility concerns play a role in approving
rates, such that [FERC] is not bound to reject any rate mechanism that tracks
the cost-causation principle less than perfectly.” Id. at 88 (quotation marks
and citation omitted). The court confirmed that FERC “may rationally
emphasize other, competing policies and approve measures that do not best
match cost responsibility and causation.” Id. (quoting Carnegie Nat. Gas Co. v.
FERC, 969 F.2d 1291, 1293–94 (D.C. Cir. 1992)) (emphasis added).
Moreover, “nothing requires the Commission to ensure full or perfect cost
causation.”
Id.
The D.C. Circuit explained that we grant FERC this latitude to
“balance[] . . . competing goals” because of the “deferential review we
29
Case: 18-60575 Document: 00516843974 Page: 30 Date Filed: 08/02/2023
No. 18-60575
accord in rate-related matters.” Id. FERC’s solution may not be the one that
we think the most fair, or even the most effective. Nevertheless, it is not our
role to “ask whether a regulatory decision is the best one possible or even
whether it is better than the alternatives.” Elec. Power Supply Ass’n,
577 U.S.
at 292. Instead, reviewing courts “afford great deference to the Commission
in its rate decisions,” and do “not substitute [their] own judgment for that of
the Commission.
Id. (quotation marks and citation omitted). This is partly
because “issues of rate design are fairly technical and, insofar as they are not
technical, involve policy judgments that lie at the core of the regulatory
mission.” La. Pub. Serv. Comm’n v. FERC,
771 F.3d 903, 910 (5th Cir. 2014)
(quotation marks and citation omitted).
In summary, we know that some free ridership may be tolerated.
Order No. 1000 acknowledges that some free ridership is “inherent in
transmission services, given the nature of power flows over an
interconnected transmission system.” Order No. 1000 at ¶ 10, 136 FERC
61,051, 76 Fed reg. 49,842 (2011). FERC balanced policy goals with a cost
allocation scheme that considered the net benefits to the public utilities of
building new facilities with the unique integration of public and non-public
utilities in the WestConnect region. See Order on Remand at ¶ 30.
I would hold that FERC has sufficiently explained why Order No.
1000 appropriately balances those competing goals and that it has
demonstrated how the costs for transmission planning would be roughly
commensurate with the benefits for the utilities in the region. I respectfully
dissent from the opinion of my colleagues.
30
