Nebraska Public Power District v. FERC ( 2020 )

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 19-1553
___________________________
Nebraska Public Power District
lllllllllllllllllllllPetitioner
v.
Federal Energy Regulatory Commission
lllllllllllllllllllllRespondent
GridLiance High Plains LLC; Southwest Power Pool; Tri-State Generation &
Transmission Assn.
lllllllllllllllllllllIntervenors
------------------------------
Edison Electric Institute
lllllllllllllllllllllAmicus on Behalf of Petitioner
____________
Petition for Review of an Order of the
Federal Energy Regulatory Commission
____________
Submitted: January 15, 2020
Filed: April 30, 2020
____________
Before SMITH, Chief Judge, LOKEN and GRUENDER, Circuit Judges.
____________
SMITH, Chief Judge.
Southwest Power Pool (SPP) is a Regional Transmission Organization (RTO)
authorized by the Federal Energy Regulatory Commission (FERC) to provide electric
transmission services across a multi-state region. Under SPP’s license-plate rate
design,1 SPP is divided into different zones, and customers in each zone pay rates
based on the cost of transmission facilities in that zone.
In 2018, FERC approved SPP’s placement of Tri-State Generation &
Transmission Association (“Tri-State”) into Zone 17. Nebraska Public Power District
(NPPD), as a member of Zone 17, challenges FERC’s decision, arguing that FERC
erred in concluding that the proposed placement was just and reasonable.
Specifically, NPPD alleges that FERC failed to conclude, based on substantial
evidence, that the benefits that NPPD and other Zone 17 facilities receive from
Tri-State’s transmission facilities are at least roughly commensurate with the costs
allocated to Zone 17 as a result of Tri-State’s placement in Zone 17. We deny the
petition and affirm FERC’s decision.
I. Background
A. Statutory and Regulatory Framework
This case arises out of Section 205 of the Federal Power Act (FPA). Under
Section 205 of the FPA, “[a]ll rates and charges made, demanded, or received by any
1
In a license-plate rate design, transmission service in the RTO is “priced
according to the power’s destination.” Ala. Mun. Elec. Auth. v. FERC, 662 F.3d 571,
573–74 (D.C. Cir. 2011). Explained another way, every transmission owner in that
particular area, or zone, is charged the same rate. Id. at 574.
-2-
public utility for or in connection with the transmission or sale of electric energy
subject to the jurisdiction of [FERC], . . . shall be just and reasonable.” 16 U.S.C.
§ 824d(a). “Section 205(d) provides that unless [FERC] otherwise orders, ‘no change
shall be made by any public utility in any such rate, charge, classification, or service,
or in any rule, regulation, or contract relating thereto, except after sixty days’ notice
to [FERC] and to the public.’” Xcel Energy Servs. Inc. v. FERC, 815 F.3d 947, 949
(D.C. Cir. 2016) (quoting id. § 824d(d)).
To eliminate free market barriers in wholesale electricity and to reduce
technical inefficiency, FERC promulgated regulations to encourage transmission
providers to establish RTOs. See Morgan Stanley Capital Grp. v. Pub. Util. Dist. No.
1 of Snohomish Cty., 554 U.S. 527, 536–37 (2008); see also Order No. 2000, 65 Fed.
Reg. 810, 810–12 (Jan. 6, 2000) (codified at 18 C.F.R. § 35.34). RTOs are entities,
independent of any market participant, that exercise operational control over
transmission facilities owned by the RTO’s members. Morgan Stanley, 554 U.S. at
536. To that end, FERC encouraged Independent System Operators (ISOs), “not-for-
profit entities that operate transmission facilities in a nondiscriminatory manner,” to
manage the RTOs. Id. at 536–37.
In 2004, FERC authorized SPP to form a RTO to provide electric transmission
services across a multi-state region using the transmission facilities of 15 different
utilities placed in 15 different zones. Under SPP’s license-plate (or zonal) rate design,
customers located in each zone pay rates based on the cost of the transmission
facilities located in that zone. Since 2004, SPP has expanded its geographical
footprint by establishing new rate zones for larger transmission providers and by
placing smaller transmission providers into existing zones. When a new transmission
owner (TO) joins SPP and is placed into an existing zone, the cost of that new TO’s
transmission facilities is added to the rates charged by SPP for transmission in that
zone. Therefore, adding a new TO affects the rate for existing customers in that zone.
-3-
B. Existing Relationship of NPPD and Tri-State
Tri-State’s and NPPD’s history as electric transmission providers informs Tri-
State’s placement into Zone 17. NPPD and Tri-State have a relationship that dates
back decades before Tri-State joined Zone 17. In 1975, NPPD and Tri-State entered
into a Memorandum of Agreement to establish principles for the joint operation and
planning of their transmission facilities in Nebraska. Later, on June 8, 1984, the two
transmission providers entered into the Western Nebraska Joint Transmission
Agreement (“Agreement”) to “establish a joint transmission system for the Parties’
mutual benefit and joint use.” Pet’r’s App. at 62.
The Agreement explained that “portions of Tri-State’s electric power
transmission facilities in Western Nebraska are interconnected with NPPD’s electric
power transmission system and are operated in synchronism with it.” Id. at 61.
Further, the Agreement provided that the facilities should use the Single-Entity
Concept, which meant that the providers should operate the systems as if they were
owned by one provider. And, the Agreement gave NPPD and Tri-State the right to use
each other’s transmission systems to serve their own customers.
The Agreement also had a Costs and Benefits section, which provided that
“[e]ach Party shall receive benefits commensurate with its actual costs. Such benefits
shall be in the form of transmission use of [the Agreement] and in the form of Annual
Equalization Payments from one Party to the other.” Id. at 66. The Annual
Equalization Payment covered interest, an estimated amount for operations and
maintenance expense, and administrative and general costs. The Agreement measured
the providers’ use of the transmission facilities under the annual coincident peak
method, which measured each provider’s use at the time the combined use of the
facilities was at its peak for the entire year. Under this method, Tri-State paid NPPD
an average of $1 million each year.
-4-
However, the payments could vary depending upon the peak method employed.
For example, using a month coincident peak method, Tri-State averages 41 percent
of the use of the facilities and NPPD averages 59 percent. This would result in a
benefit of $550,000 a year to NPPD. SPP uses the month coincident peak method to
establish transmission rates.
After over 40 years of joint use, the transmission facilities of Tri-State and
NPPD are now highly integrated. They share at least five points of interconnection.
And, NPPD would lack a transmission path to some of its customers if it could not
use Tri-State’s facilities. NPPD thus relies on its ability to use Tri-State’s facilities
to serve its customers.
C. Placement of Tri-State into Zone 17
In 2009, NPPD joined SPP, placing Tri-State’s and NPPD’s jointly operated
facilities under the functional control of SPP in Zone 17. Around this time, three other
entities (Western Area Power Administration–Upper Great Plains Region, Basin
Electric Power Cooperative, and Heartland Consumers Power District) also joined
SPP. The expansion, in effect, surrounded Tri-State’s facilities with facilities
controlled by SPP. In addition to the geographical convenience, Tri-State also saw
how joining SPP could potentially lower costs to its customers and enable it to
terminate the Agreement with NPPD.
Tri-State then decided to join SPP. On October 30, 2015, SPP revised its Open
Access Transmission Tariff2 to incorporate Tri-State’s formula rate and make other
modifications to accommodate Tri-State as a TO under the SPP Tariff. In the filing,
2
FERC “governs the rates, terms and conditions of SPP through its Open
Access Transmission Tariff” and any changes in the Open Access Transmission Tariff
“must be approved/accepted by FERC before SPP can operate under the requested
changes.” Governance, SPP.org, https://www.spp.org/governance/ (last visited Apr.
24, 2020).
-5-
SPP proposed to place Tri-State’s transmission facilities and the associated Annual
Transmission Revenue Requirement (ATRR)3 into Zone 17. Given Tri-State’s history
with NPPD, it was no surprise that NPPD was the dominant TO in Zone 17.
SPP followed its established criteria for determining zonal placement. These
criteria include:
(1) whether the new TO’s ATRR is less than the ATRR of an existing
pricing zone with the smallest ATRR; (2) the extent to which a new
TO’s facilities are embedded within a pre-existing zone; (3) the extent
to which a new TO’s facilities are integrated with (including number of
interconnections) an existing TO’s facilities; and, (4) the extent to which
the new TO’s facilities substantively increase the SPP footprint.
Sw. Power Pool, Inc., 158 FERC ¶ 63,004, at P 74 (2017) (Initial Decision). As
applied to Tri-State, SPP explained that:
(1) Tri-State’s ATRR is less than the smallest ATRR of an existing SPP
TO in a single owner zone; (2) Tri-State has more direct
interconnections with the NPPD system than with any other SPP TO,
and thus is more integrated with NPPD than any other SPP TO; (3)
NPPD and Tri-State have over a 40-year history of coordination
regarding the planning and operation of their two systems, due to
long-standing contractual relationships; and, (4) the inclusion of the
Tri-State facilities only minimally increases the size and scope of the
SPP footprint.
Id. at P 75. After SPP filed its proposal to place Tri-State in Zone 17 with FERC,
NPPD protested the filing. In December 2015, FERC accepted the filing and set a
hearing on the issue of whether SPP’s proposal was just and reasonable.
3
The ATRR is the amount of revenue a transmission owner must recover
annually to cover the costs associated with its transmission facilities.
-6-
D. Cost Impact Testimony
In its opposition, NPPD emphasized the cost impact of adding Tri-State to
Zone 17. NPPD asserted that a cost shift occurs when a portion of a new TO’s ATRR
associated with its transmission facilities is not paid by that new TO’s own load.
NPPD calculated that Tri-State’s ATRR would be $7.2 million and explained that the
ATRR was 11.2 percent of the combined total ATRR in Zone 17 but that Tri-State’s
load was only 4.4 percent of the total load. Therefore, NPPD concluded that adding
this ATRR to Zone 17 would increase the annual per megawatt (MW) cost of serving
the Zone 17 load by 8 percent. Further, NPPD stated, that by joining Zone 17,
Tri-State would reduce its responsibility for paying its own costs by 60 percent by
shifting $4.3 million of its $7.2 million ATRR to other Zone 17 customers.
Tri-State disputed NPPD’s calculations. Specifically, Tri-State testified that
instead of NPPD’s calculated $4.3 million cost shift, the actual cost shift to NPPD
would be between $1.2 million to $2 million per year. Tri-State adjusted NPPD’s
estimate to (1) exclude revenue associated with the Agreement, (2) add costs that
NPPD would incur if Tri-State were in another zone, and (3) adjust based on
measurable future changes. First, Tri-State noted that its termination of the
Agreement will decrease its ATRR by $1 million when the Agreement ends in 2020.
Second, the relationship between the two is not reciprocal. Tri-State explained that
while 21.5 MW of NPPD’s load is connected to Tri-State’s facilities, only 8.2 MW
of Tri-State’s load is connected to NPPD’s facilities. If Tri-State were not in Zone 17,
Tri-State estimated that NPPD would have to pay around $1.2 million in a zone other
than Zone 17. In contrast, if Tri-State remained in Zone 17, NPPD would benefit
about $200,000. Third, SPP’s data showed that Tri-State would pay future regional
costs of around $700,000 that would otherwise fall onto NPPD. In total, Tri-State
estimated a 1.8 percent increase in cost shift to NPPD.
NPPD responded to Tri-State’s calculation by stating that the cost shift should
be based on the effective date of Tri-State’s membership in SPP and not account for
-7-
future elements. Further, NPPD contended that cost impacts that would occur if
Tri-State were in another zone should not be taken into account. Finally, NPPD stated
that Tri-State would be a better fit in Zone 19 because there would only be a .2
percent increase in cost shift in Zone 19.
E. FERC Proceedings
Following the hearing, the administrative law judge (ALJ) determined that
SPP’s proposal to place Tri-State into Zone 17 was just and reasonable. In a 140-page
opinion, the ALJ discussed, in considerable detail, the parties’ testimonies and SPP’s
four zonal placement criteria. The ALJ placed great emphasis on the 40-year history
of NPPD and Tri-State, discussed the integration of the two entities’s facilities,
pointed out that neither had a physical path to its loads without using the transmission
facilities of the other, and pointed out that the two used a Single-Entity Concept.
Concerning the cost shift, the ALJ first noted that NPPD did not argue that
SPP’s current license-plate rate structure was inappropriate and that FERC had
already approved nine multi-TO zones in SPP despite cost shifts. In addition, the ALJ
pointed out that the narrow issue of zonal placement in the present case differed from
RTO-wide rate design. The ALJ then discussed how the integrated nature of Tri-State
and NPPD lessened cost-causation concerns because Zone 17 benefitted and would
continue to benefit from Tri-State’s facilities in Zone 17. The ALJ also determined
that year-to-year adjustments affected cost-causation principles. The ALJ concluded:
Based on the findings that the cost shift at issue here is not per se unjust
and unreasonable, does not violate cost causation principles, and its
impact on Zone 17 customers will be reduced over the next five to seven
years, I find that the cost shift at issue here does not render Tri-State’s
proposed placement into Zone 17 unjust and unreasonable.
Sw. Power Pool, 158 FERC ¶ 63,004, at P 360. Finally, the ALJ rejected NPPD’s
proposal to place Tri-State into Zone 19 because the interconnections in Zone 17
-8-
outweighed the interconnections in Zone 19 and there was no evidence to suggest that
Tri-State could reliably serve its load without causing a cost shift in Zone 19.
On March 26, 2017, NPPD filed exceptions to the ALJ’s decision, arguing that
SPP’s proposed placement of Tri-State’s facilities into Zone 17 was unjust and
unreasonable. However, in an 108-page opinion, FERC agreed with the ALJ. When
considering SPP’s criteria, FERC explained that Tri-State’s geographical scope filled
in gaps instead of expanding SPP’s footprint, noted the substantial evidence of
Tri-State’s integration with existing Zone 17 facilities, and pointed out that NPPD
and Tri-State treated their systems as a joint system owned by a single entity.
Considering the cost shift, FERC explained that the Agreement showed both
parties would benefit from the joint use of the facilities and access to each other’s
facilities. Further, FERC rejected NPPD’s argument that Tri-State was the beneficiary
of the Agreement because a different methodology calculated NPPD being the net
beneficiary. And, FERC stated that NPPD acknowledged that it benefitted from the
joint system. Finally, FERC considered the Seventh Circuit’s case of Illinois
Commerce Commission v. FERC and concluded that the record provided “‘an
articulable and plausible reason to believe that the benefits are at least roughly
commensurate’ with the costs that are being allocated to Zone 17 customers.” Sw.
Power Pool Inc., 163 FERC ¶ 61,109, at P 207 (May 17, 2018) (quoting Illinois
Commerce Comm’n v. FERC (Illinois Commerce I), 576 F.3d 470, 477 (7th Cir.
2009)). FERC further stated:
Although there may not be a specific quantification of the benefits that
NPPD received and will continue to receive from the Tri-State
transmission facilities, this is unsurprising because the entities treated
their transmission facilities under the . . . Agreement as if they were a
single system owned by a single entity. The . . . Agreement detailed the
benefits that the parties would realize, and the parties continued that
-9-
agreement for over 30 years, indicating that they were in fact benefitting
from the agreement.
Id. FERC then rejected NPPD’s arguments that Tri-State was more connected with
Zone 19. It stated that the record showed that Tri-State’s placement in Zone 17 was
just and reasonable, and FERC did not need to consider arguments about alternative
placements. Therefore, FERC affirmed the ALJ’s decision.
On June 15, 2018, NPPD filed a request for rehearing, but FERC denied the
request. Specifically, FERC noted that it continued to find “that the benefits that
NPPD and its customers receive from Tri-State’s transmission facilities are at least
roughly commensurate with the costs allocated to NPPD as a result of the placement
of those facilities in Zone 17.” Sw. Power Pool, Inc., 166 FERC ¶ 61,019, at P 21
(Jan. 17, 2019). FERC further emphasized that cost allocation is not an exact science
and requires fact-intensive judgments to assure that rates reflect the costs caused by
customers. Id. at P 22 (citing Colo. Interstate Gas Co. v. FPC, 324 U.S. 581, 589
(1945); Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1369 (D.C. Cir.
2004)).
Finally, FERC rejected NPPD’s argument that Tri-State should have been
placed in Zone 19. FERC further stated that because its role is to decide whether a
proposal is just and reasonable, it is not required to determine whether other
alternatives might be superior. NPPD seeks review of FERC’s decision.
II. Discussion
Section 205’s requirement that rates be just and reasonable does not have a
“precise judicial definition, and we afford great deference to [FERC] in its rate
decisions.” Morgan Stanley, 554 U.S. at 532. We review FERC’s decision under an
arbitrary and capricious standard. FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760,
782 (2016). “[W]e are required to accept as conclusive the ‘findings of [FERC] as to
-10-
facts, if supported by substantial evidence.’” Minnesota v. FERC, 734 F.2d 1286,
1288 (8th Cir. 1984) (quoting 16 U.S.C. § 825l(b)). In addition, we must uphold the
decision “if 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.” Elec. Power, 136 S. Ct. at 782 (cleaned up).
NPPD argues that substantial evidence does not support FERC’s finding that
Tri-State’s placement into Zone 17 was just and reasonable. Specifically, NPPD
argues (1) that FERC’s order approving Tri-State’s placement in Zone 17 does not
comport with cost-causation principles and (2) that FERC erred by refusing to
consider placement in Zone 19 as an alternative to placement in Zone 17.
A. Cost-Causation Principles
At base, the FPA requires that rates be just and reasonable. 16 U.S.C.
§ 824d(a). But, beyond that, “FERC and the courts have added flesh to these bare
statutory bones, establishing what has become known in Commission parlance as the
‘cost-causation’ principle.” K N Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C.
Cir. 1992). FERC acknowledges that it must have “an articulable and plausible reason
to believe that the benefits” of placing Tri-State in Zone 17 “are at least roughly
commensurate with” the costs allocated to NPPD and its customers. Illinois
Commerce I, 576 F.3d at 477. Consequently, courts must “evaluate compliance with
this unremarkable principle by comparing the costs assessed against a party to the
burdens imposed or benefits drawn by that party.” Midwest ISO, 373 F.3d at 1368.
But, that does not mean that FERC must “allocate costs with exacting precision.” Id.
at 1369. Further, we should not grant NPPD’s petition unless we find that the cost-
allocation determination of FERC is arbitrary and capricious “in light of the burdens
imposed or benefits received.” Id.
NPPD argues that FERC acted arbitrarily and capriciously because its decision
ignores the large imbalance between the minimal benefits and major costs of placing
-11-
Tri-State into Zone 17. In support of its argument, NPPD mainly focuses on the
Seventh Circuit’s decisions in Illinois Commerce I; Illinois Commerce Commission
v. FERC (Illinois Commerce II), 756 F.3d 556 (7th Cir. 2014); and Illinois Commerce
Commission v. FERC (Illinois Commerce III), 721 F.3d 764 (7th Cir. 2013).
In Illinois Commerce I, PJM Interconnection, a RTO, proposed to change the
pricing method for new transmission facilities with a capacity of 500 kilovolts (kV)
from being calculated on the basis of the benefits each utility received from the new
facilities to a pro rata contribution between all transmission facilities no matter the
benefits. 576 F.3d at 474. The new pricing method created a large disparity between
the eastern and western regions of the RTO. Id. at 475. Although the eastern facilities
often used 500 kV facilities, the western facilities almost never did and there was no
plan to build any in the foreseeable future. Id. Because of this, the new pricing
method would require western facilities to contribute an estimated $480 million to the
cost of facilities that they would not have paid any money for under the original
pricing method. Id. at 474–76. FERC authorized the pricing method, but the Seventh
Circuit remanded for further proceedings, explaining that “FERC is not authorized
to approve a pricing scheme that requires a group of utilities to pay for facilities from
which its members derive no benefits, or benefits that are trivial in relation to the
costs sought to be shifted to its members.” Id. at 476–78. FERC only listed benefits
such as avoiding litigation and benefitting the network as a whole, but “a claim of
generalized system benefits is not enough.” Id. at 475–76 (internal quotation omitted).
In Illinois Commerce II, the Seventh Circuit again considered the same pricing
method after FERC re-approved the pro rata cost allocation without any attempt at
empirical justification. 756 F.3d at 561. Because of this, the Seventh Circuit
remanded to FERC. Id. at 565. It explained that FERC “assumes—it does not
demonstrate—that the benefits of the eastern 500–kV lines are proportionate to the
total electric-power output of each utility, no matter how remote the utility is from the
eastern projects that the utility is to be made to contribute to the costs of.” Id. at 561.
-12-
The Seventh Circuit directed FERC to attempt to quantify the benefits because “the
lines at issue [we]re all located in PJM’s eastern region, primarily benefit[ted] that
region, and should not [have] be[en] allowed to shift a grossly disproportionate share
of their costs to western utilities on which the eastern projects will confer only future,
speculative, and limited benefits.” Id. at 565.
We first note that the scenario in Illinois Commerce I and Illinois II differs
substantially from this case. That case involved an RTO-wide rate change. Here, we
address only the narrow issue of whether Tri-State’s placement in one particular zone
was reasonable with respect to those already in that zone. There, the rate change
involved a change for every transmission provider member in the RTO, no matter the
location. Illinois Commerce I, 576 F.3d at 474. In contrast, the present case revolves
around SPP’s placement of Tri-State into a specific zone with NPPD. Because of the
very nature of zones, NPPD will receive more benefits from being in close proximity
to Tri-State than the western facilities of Illinois Commerce I would have received
from distant facilities.
Despite those differences, FERC’s decision satisfies the cost-causation
principles set out in Illinois Commerce I. To satisfy cost-causation principles, there
must be “an articulable and plausible reason to believe that the benefits are at least
roughly commensurate with” the costs of placing Tri-State into Zone 17. Id. at 477.
Further, FERC should examine “how much use or how much benefit” NPPD would
get from Tri-State’s placement in Zone 17. Illinois Commerce II, 756 F.3d at 562.
NPPD emphasizes that neither FERC nor Tri-State attempted to numerically
quantify the benefits of placing Tri-State into Zone 17. However, Illinois Commerce I
does not support the proposition that FERC must articulate a precise numerical value
of benefits. The Seventh Circuit did “not suggest that [FERC] has to calculate
benefits to the last penny, or for that matter to the last million or ten million or
perhaps hundred million dollars.” 576 F.3d at 477. Rather, FERC must articulate
-13-
more benefits than the “no benefits” or trivial benefits in Illinois Commerce I. See id.
at 476–77.
FERC expressed several benefits of placing Tri-State into Zone 17 with NPPD.
Given the 40-year history between NPPD and Tri-State, it is unsurprising that the two
are extremely connected. Taking into account SPP’s criteria, FERC continually
articulated the benefits to NPPD of placing Tri-State in Zone 17: NPPD and
Tri-State’s facilities were already integrated, NPPD used Tri-State’s facilities to serve
its customers, the two entered into an Agreement to operate as a single entity, and
both could not reach their customers without using the other’s facilities. Further, the
Agreement between Tri-State and NPPD called for mutual benefit and joint use.
To be sure, the benefits cannot be calculated with precision. NPPD and
Tri-State disagree about the costs of placing Tri-State into Zone 17. NPPD estimates
an immediate shift of $4.3 million and $3.5 million in the future. In contrast, Tri-State
reduces the cost to around $2 million given the cancellation of the Agreement, costs
NPPD would incur if Tri-State were in another zone, and future measurable changes.
But, it is certain that “[t]o 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.” Id. at
476. Because NPPD has greatly benefitted from Tri-State’s facilities, it is likely that
some of the costs have been caused by NPPD.
Given these disputed costs and benefits, this case more closely resembles
Illinois Commerce III. There, Midwest Independent Transmission System Operator,
Inc. (MISO), a TRO, sought approval to impose a tariff on its members to fund
construction of new power lines for electricity generated by wind farms. Illinois
Commerce III, 721 F.3d at 771. MISO explained that, as a whole system, the RTO
might benefit several hundred million dollars from the switch to wind energy, but it
was impossible to allocate the savings to each member of MISO. Id. at 774. The
-14-
Seventh Circuit noted that although some benefits could not be calculated in advance,
there was no doubt that there would be real benefits to the members. Id. at 775.
As the Seventh Circuit stated, FERC’s attempt to match costs and benefits
might have been crude, but “if crude is all that is possible, it will have to suffice.” Id.
Similar to Illinois Commerce III, FERC could not calculate all of the benefits because
of the difficulty in assigning value to benefits such as interconnections and the ability
to service customers. But, FERC gave “articulable and plausible reason[s] to believe
that the benefits are at least roughly commensurate with” the costs. Id. (quoting
Illinois Commerce I, 576 F.3d at 477).
In an effort to account for the listed benefits, NPPD argues that the Agreement
already accounted for all of the benefits between NPPD and Tri-State. Specifically,
NPPD argues that the Annual Equalization Payment in the Agreement reveals that
Tri-State is the net beneficiary of the Agreement in the amount of $1 million. In
addition, NPPD acknowledges that under a month coincident peak method, it benefits
$550,000 per year. However, NPPD argues that this still shows that the benefits are
not “roughly commensurate” to the costs. NPPD attempts to expand the Annual
Equalization Payment to include all benefits, but this overstates the purposes of the
payment. The Agreement states that benefits consist of joint transmission use in
addition to the Annual Equalization Payment. The equalization payment is money.
The joint transmission use is a valuable but non-monetary benefit. The Agreement
does not attempt to quantify the benefits from joint use. Instead, one party to the
Agreement pays the other if the party’s usage of the facilities exceeds its share of the
expenses. This is so because “the benefits each Party receives from using [the
Agreement] will not equal its costs to own, operate, and maintain its facilities.”
Pet’r’s App. at 67.
Further, NPPD’s argument that the Agreement shows it is a negative
beneficiary fails because NPPD benefits from the joint use and operation established
-15-
in the Agreement. For example, in Midwest ISO, MISO owners challenged a cost
adder expense to recover administrative costs for running the ISO, stating that they
would pay 60 to 70 percent of the costs for only 5 percent of the benefits. 373 F.3d
at 1370. However, the D.C. Circuit explained that the low benefit number resulted
from the “intertwined” nature of the expenses “and the corresponding difficulty of
unbundling them.” Id. at 1371. The court compared MISO to the federal court system
and the MISO owners’ complaint to taxpayers complaining about having to pay to
fund the court system. Id. In particular, it was similar to taxpayers arguing “that if
they are not a litigant, they should not be made to pay for any of the costs of having
a court system.” Id. Similarly, because MISO owners obviously received benefits for
participating in the ISO, “FERC correctly determined that they should share the cost
of having an ISO.” Id.
As this example shows, it is disingenuous for NPPD to argue that it gains no
benefits nor incurs any costs from its relationship with Tri-State when it has chosen
to maintain a relationship with Tri-State for over 40 years. As it did in Midwest ISO,
FERC, in this case, correctly determined that the costs associated with the benefits
were comparable given the relationship between the two parties and the intertwined
nature of NPPD and Tri-State’s facilities. Even if there is a net increase in costs, such
costs “can be ‘just and reasonable’ if the costs are warranted.” Advanced Energy
Mgmt. All. v. FERC, 860 F.3d 656, 662 (D.C. Cir. 2017) (per curiam) (quoting
16 U.S.C. § 824d(e)). When FERC explains “important non-cost reasons” for
approving a proposal, “[i]t does not have to find net savings.” Id. Because FERC
stated plausible and articulable reasons for why the costs and benefits were
comparable in this case, we cannot say that its cost-causation analysis was arbitrary
and capricious.
B. Placement in Zone 19
NPPD argues that FERC acted in an arbitrary and capricious manner because
it did not consider the effects of placing Tri-State in Zone 19. Specifically, NPPD
-16-
argues that had FERC considered Zone 19, it would have seen that Tri-State’s
placement in Zone 19 would have resulted in minimal cost shift.
However, FERC did not err by failing to consider evidence of Zone 19. “FERC
has interpreted its authority to review rates under [Section 205] as limited to an
inquiry into whether the rates proposed by a utility are reasonable—and not to extend
to determining whether a proposed rate schedule is more or less reasonable than
alternative rate designs.” Cities of Bethany v. FERC, 727 F.2d 1131, 1136 (D.C. Cir.
1984). In Cities of Bethany, the D.C. Circuit explained that the standard in rate
decisions is “not whether [one] method is more appropriate than [another] method,
but rather whether the [proposed] method is reasonable and adequate.” Id. (internal
quotation omitted). In addition, courts have made it clear that FERC “restricts itself
to evaluating the confined proposal.” Advanced Energy, 860 F.3d at 662. Therefore,
FERC “need only find the proposed rates to be just and reasonable.” City of Winnfield
v. FERC, 744 F.2d 871, 875 (D.C. Cir. 1984) (Scalia, J.).
The law does not require FERC to consider NPPD’s alternative suggestion of
Tri-State’s placement in Zone 19 because its role was simply to decide whether SPP’s
proposed placement of Tri-State was just and reasonable. Here, FERC “examine[d]
the relevant [considerations] and articulate[d] a satisfactory explanation for its action
including a ‘rational connection between the facts found and the choice made.’”
Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins., 463 U.S. 29, 43
(1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168
(1962)). Therefore, FERC did not act arbitrarily and capriciously in deciding that Tri-
State’s placement into Zone 17 was just and reasonable.4
4
NPPD also argues that FERC erred because it ignored SPP’s new criterion
established after FERC’s decision: the nature of transmission service used to serve
the load of a new TO prior to its expected date of transfer to SPP. NPPD states that
this would have shown that Tri-State belonged in Zone 19. However, as explained in
this section, FERC did not have to consider NPPD’s alternative evidence of the
benefits of placing Tri-State into Zone 19. See Advanced Energy, 860 F.3d at 662.
-17-
III. Conclusion
Accordingly, we deny NPPD’s petition for review.
______________________________
-18-