Northern Virginia Electric Co v. FERC ( 2019 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 18, 2019 Decided December 20, 2019
No. 17-1262
NORTHERN VIRGINIA ELECTRIC COOPERATIVE, INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
Consolidated with 17-1265, 18-1230, 18-1234
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Adrienne E. Clair argued the cause for petitioners. With
her on the briefs were Rebecca L. Shelton, Alan I. Robbins, and
Debra D. Roby.
Elizabeth E. Rylander, Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Robert H. Solomon, Solicitor, and
Lona T. Perry, Deputy Solicitor. Anand Viswanathan,
Attorney, entered an appearance.
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Christopher R. Jones argued the cause for intervenor
Virginia Electric and Power Company. With him on the brief
was Miles H. Kiger.
Sean T. Beeny, Denise C. Goulet, and Phyllis G. Kimmel
were on the brief for intervenor North Carolina Electric
Membership Corporation in support of respondent.
Before: GARLAND, Chief Judge, WILKINS, Circuit Judge,
and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: In the mid to late 2000s,
the Virginia Electric and Power Company (known in this case
by its trade name, “Dominion”) sought to construct three
projects to upgrade its electricity transmission grid. The state
of Virginia required Dominion to place the new transmission
wires underground rather than use cheaper overhead wiring,
thereby increasing the cost of the three projects from about $84
million to $233 million in total. Dominion serves customers in
both Virginia and North Carolina. This case involves a simple
question: How should the cost of undergrounding be allocated
among Dominion’s customers?
In a series of proceedings, the Federal Energy Regulatory
Commission concluded that Dominion’s Virginia customers,
but not its North Carolina customers, should bear those costs;
the evidence showed that Virginia customers benefited from
the undergrounding, while no evidence showed that North
Carolina customers benefited. In the Commission’s words, this
decision represented “a limited exception” to a general
principle that all of a utility’s customers should share the costs
of upgrading the grid. Old Dominion Elec. Coop., 146 FERC
61,200 ¶ 52 (2014) (“Allocation Order”), reh’g denied, 161
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FERC 61,055 (2017) (“First Order on Rehearing”); see also
Old Dominion Elec. Coop., 161 FERC 61,054 (2016), reh’g
denied, 164 FERC 61,006 (2018) (“Second Order on
Rehearing”).
In this petition, Virginia power wholesalers who buy
electricity from Dominion challenge the Commission’s
decision on procedural and substantive grounds. None of them
persuades us. We tackle first the procedural theories, then the
substantive ones.
I.
The petitioners argue: (1) that the Commission did not
properly invoke its power under § 206 of the Federal Power
Act, 16 U.S.C. § 824e; (2) that the Commission failed to
provide adequate notice of its intent to modify Dominion’s filed
rate; and (3) that the Commission’s administrative law judge
misinterpreted a Commission order and thereby improperly
cabined the scope of an evidentiary hearing.
1. The claim that a proper § 206 proceeding was missing
turns on special rules relating to Commission supervision of
formula rates—the sort used by Dominion. The formula rate,
filed as a tariff with the Commission, identifies the categories
into which Dominion’s costs fall. With the formula in place,
Dominion files an annual update informing the Commission
and its customers of the projected costs for each category in the
formula. Unless modified by the Commission, Dominion
recovers the costs under the formula rate, subject to a later true-
up procedure. See Virginia Elec. & Power Co., 123 FERC
61,098 ¶ 6 (2008) (“Order Approving Formula”).
At least in Dominion’s case, the tariff creates a procedure,
known as a “Formal Challenge,” through which a customer can
challenge the legitimacy of inputs. See id. ¶ 16 (describing the
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Formal Challenge process). (We use initial capitals for the
name, to emphasize that it is a word of art and not, so far as we
can determine, based on any especially high level of formality.)
Although the parties here have spoken and written as if such a
Formal Challenge were located under § 206, see, e.g., Oral
Argument at 8:23, it seems more accurately akin to a
continuation of the § 205 proceeding in which the utility files
its formula rate. See 16 U.S.C. § 824d. That’s because the
annual update supplements the utility’s initial § 205 filing,
which is simply a formula without the necessary inputs.
Consequently, in a Formal Challenge, the utility not the
complainant bears the burden of proving the justness and
reasonableness of its inputs, just as the utility does when it first
files the formula rate under § 205. See Order Approving
Formula, 123 FERC 61,098 ¶ 47 (noting that those who launch
a Formal Challenge to Dominion’s annual update do not bear
the burden of proof); cf. Midwest Indep. Transmission Sys.
Operator, Inc., 143 FERC 61,149 ¶ 120 n.199 (2013) (citing
§ 205 on this point regarding a different tariff). In contrast, in
a conventional § 206 proceeding, the complainants or the
Commission must prove the unjustness and unreasonableness
of the utility’s rate. See 16 U.S.C. § 824e(b) (placing the
burden of proof “upon the Commission or the complainant”).
For purposes of this case, there is a further key distinction
between a Formal Challenge and a § 206 proceeding: In a
Formal Challenge proceeding, a party cannot advance “attacks
on the formula rate itself” and cannot advocate “that expenses
should be treated differently from how the formula prescribes.”
Delmarva Power & Light Co., 160 FERC 61,102 ¶ 19 (2017);
see also Ameren Ill. Co., 156 FERC 61,209 ¶ 71 (2016).
When Dominion filed its formula rate in 2008, it did not
distinguish between its Virginia and North Carolina customers.
In its 2010 annual update, Dominion proposed including the
undergrounding costs at issue here as inputs into the formula
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rate for all its customers. On March 17, 2010, Dominion’s
customers in both Virginia and North Carolina objected and
instituted a Formal Challenge to the undergrounding costs’
inclusion. By its own terms, their complaint did not “seek [] to
challenge the formula rate, but rather [to] challenge only the
inputs into the formula rate for the 2010 Annual Update.” J.A.
52.
The Virginia customers now argue that because they
launched a Formal Challenge to the annual update’s inputs—
and not a standard § 206 proceeding—the Commission lacked
the statutory authority to modify the formula rate itself so as to
saddle the Virginia but not North Carolina customers with
costs.
But in fact the Commission broadened the scope of the
complaint proceedings. On March 24, 2010, a week after
Dominion’s customers filed their Formal Challenge, Dominion
responded by filing its own proposal under § 205 to assign
those costs directly to its customers in case the Commission
determined that Dominion could not include the costs in its
existing formula rate. See Virginia Elec. & Power Co., 131
FERC 61,171 ¶¶ 1, 4, 18 (2010) (“May 20, 2010 Order”). To
make sure that there was no meaningful gap between any grant
of relief to the customers and its proposed recovery system,
Dominion asked the Commission to waive the usual 60-day
notice requirement (see § 205(d)) and establish a refund
effective date that would allow it to collect a revised rate (if
needed) as of March 25, 2010. On May 20, 2010, the
Commission “reject[ed] Dominion’s [proposal] as
unnecessary,” May 20, 2010 Order ¶ 18, explaining:
The effective date for a change in the allocation of
costs, i.e., ordering a different allocation of costs
among customers as compared to the current
allocation of costs, if required at all, will be
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determined in the Complaint proceeding [the Formal
Challenge] based on the requirements of section 206
of the FPA as applicable to these circumstances.
Id. (emphasis added).
In announcing that these proceedings would determine a
refund effective date for “a different allocation of costs among
customers as compared to the current allocation of costs,” the
Commission said that it considered the Formal Challenge
procedures too limited and sought, on its own initiative, to
invoke the broader powers of a conventional § 206 proceeding.
See 16 U.S.C. § 824e (permitting the Commission to initiate a
§ 206 proceeding “upon its own motion”). Tellingly, the
petitioners’ briefs never grapple with the language of the May
20, 2010 Order. See Appellant Br. 44 (alluding to the First
Order on Rehearing’s reference to the Commission’s rejection
of Dominion’s § 205 filing but making no mention of the
Commission’s initiation of its own proceeding under § 206 in
the May 20, 2010 Order).
At oral argument, petitioners’ counsel argued that the
Commission could not possibly have acted to initiate a § 206
proceeding, because the Commission eventually set the refund
effective date as March 17, 2010, the day that the complainants
filed their Formal Challenge, see Old Dominion Elec. Coop.,
133 FERC 61,009 ¶ 36 (2010) (“October 2010 Order”). Where
the Commission files its own § 206 proceeding, the refund
effective date may “not be earlier than the date of the
publication by the Commission of notice of its intention to
initiate such proceeding.” 16 U.S.C. § 824e(b). By contrast, in
a proceeding on a party’s complaint, the refund effective date
may be as early as the date of the complaint’s filing. See id.
Here, the Commission’s May 20, 2010 Order post-dated the
complaint by about three months, and the Commission chose
the earlier date of the complaint as the refund effective date.
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From the Commission’s use of this earlier date, the petitioners
would have us infer that the Commission never initiated its own
§ 206 proceeding.
Whatever merit may lie in this argument, the petitioners
advanced it far too late. It does not appear in their briefs before
us. See Davis v. District of Columbia, 793 F.3d 120, 127 (D.C.
Cir. 2015) (“Generally, arguments raised for the first time at
oral argument are forfeited.”). Nor, as far as we can tell, does
it appear in an application for rehearing before the
Commission. See 16 U.S.C. § 825l(b) (limiting judicial review,
absent “reasonable ground,” to objections “urged before the
Commission in the application for rehearing”); Save Our
Sebasticook v. FERC, 431 F.3d 379, 382 (D.C. Cir. 2005)
(noting that 16 U.S.C. § 825l(b)’s exhaustion requirement
ensures that “a reviewing court” gains “the benefit of the
agency’s expert view of why it thought the petitioner’s
arguments failed”). We thus decline to address it.
2. Petitioners next advance a related objection: As they
see it, the Commission failed to provide the parties and the
public adequate notice that it would consider requiring some,
but not all, of Dominion’s customers to pay for the
undergrounding. See Pub. Serv. Comm’n v. FERC, 397 F.3d
1004, 1012 (D.C. Cir. 2005) (noting that the Due Process
Clause, the Administrative Procedures Act, and the Federal
Power Act all require the Commission to provide notice). But
the Commission’s May 20, 2010 Order placed everyone on
notice from the very beginning that the Commission might
allocate the costs differently between Dominion’s customers.
See supra. That makes this case very different from Public
Service Commission, the case on which petitioners principally
rely. See Appellant Br. 40; Reply Br. 11–13. There, the
Commission actively disclaimed its intention to adopt a
particular policy, refused to develop a necessary factual record
about the policy, but later reversed course and adopted the
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policy anyway. See id. at 1012. Here, by contrast, from May
20, 2010 onward the Commission consistently contemplated
ordering an allocation of costs different from the allocation in
the filed formula rate.
What’s more, the petitioners not only had notice but took
advantage of the opportunity to litigate the cost allocation issue
before the Commission. Consider the course of proceedings
after the May 20, 2010 Order. In October 2010, the
Commission issued an order concluding that the
undergrounding costs “[do] not raise material issues of disputed
fact.” October 2010 Order, 133 FERC 61,009 ¶ 35. As a result,
the Commission “reserved” the “determination” for itself and
directed the parties to brief the issue if they could not settle. Id.
They couldn’t.
At this point, Dominion’s North Carolina customers
argued they should not bear any of the costs of undergrounding,
because the state of Virginia mandated undergrounding for
“local aesthetic reasons” which did not benefit anyone in North
Carolina. J.A. 659; see infra Part II. The Virginia customers
responded, urging the Commission to reject the North Carolina
proposal. The Commission concluded that it would not be just
and reasonable to stick the North Carolina customers with the
costs and sent the matter to an administrative law judge to
determine the appropriate amount of costs for the Virginia
customers to bear. See Allocation Order, 146 FERC 61,200
¶¶ 48–52.
This sequence of events provided the petitioners adequate
notice and process.
3. This leads us to the third and final procedural objection.
The petitioners argue that the Commission’s order instructed
the ALJ to decide whether Dominion’s Virginia and North
Carolina customers should bear the costs and to select a method
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for assigning percentages of those costs to whoever would
ultimately bear them. Thus, they say, it was error for the ALJ,
approved by the Commission, to read the order as merely
empowering the ALJ to determine the precise amount of costs
to be born. See Old Dominion Elec. Coop., 154 FERC 63,014
¶ 36 (concluding “that the Commission has already decided the
allocation issue”); Second Order on Rehearing, 164 FERC
61,006 ¶¶ 45, 63 (affirming the ALJ’s interpretation of the
order).
The Commission’s order clearly refutes the claim. It stated
that the North Carolina customers “have shown that it is not
just and reasonable for wholesale transmission customers
outside the Commonwealth of Virginia . . . to be allocated the
incremental costs of undergrounding the Projects,” and
provided three pages of explanation. Allocation Order, 146
FERC 61,200 ¶¶ 48, 49–59. At the end of this discussion, the
Commission then announced that “[t]he determination of the
appropriate amount of undergrounding costs to be allocated to
each [] customer for their Virginia loads in the Dominion Zone
is a factual matter that cannot be properly calculated based on
the filings made to date. The Commission will therefore
establish a hearing, before an [ALJ], for the limited purpose of
determining the appropriate assignment of those costs.” Id.
¶ 56. The ALJ proceeded in full accord with this mandate.
II.
Finally, petitioners claim that the Commission acted
arbitrarily by requiring Dominion’s Virginia customers to bear
the costs of undergrounding. We see nothing arbitrary in its
conclusion.
The Commission has long adhered to the cost causation
principle, under which a utility should assign costs to those
customers who caused them or benefit from them. But “[w]hen
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a system is integrated, any system enhancements are presumed
to benefit the entire system.” W. Mass. Elec. Co. v. FERC, 165
F.3d 922, 927 (D.C. Cir. 1999). Thus, in the mine run of cases,
all customers on a grid benefit from—and share in—the costs
of upgrading the grid. See id.
Here the Commission concluded that only Dominion’s
Virginia customers benefited from the incremental cost of
undergrounding the three projects. As a result, only the
Virginia customers should bear those costs. This created “a
limited exception to [the Commission’s] general policy that
utilities do not directly assign individual cost items that are
included in projects that have system-wide benefits.”
Allocation Order, 146 FERC 61,200 ¶ 52; Second Order on
Rehearing, 164 FERC 61,006 ¶ 17 (affirming, a second time on
rehearing, the “narrowly-crafted exception”).
Indeed, as the Commission recognized, its departure from
its policy of having all customers pay for upgrading a grid here
maintained consistency with the broader cost causation
principle: Though the benefits of conventional grid
enhancement are shared throughout the grid, here Virginians
uniquely caused and benefited from the undergrounding. See
Second Order on Rehearing, 164 FERC 61,006 ¶ 28.
Under § 206, the Commission of course bore the burden of
proving that the existing cost allocation was unjust and
unreasonable, see 16 U.S.C. § 824e(b), as it expressly
acknowledged, see First Order on Rehearing, 161 FERC 61,055
¶ 30 n.75. Indeed, more than substantial evidence in the record
supports the Commission’s conclusion that Virginians but not
North Carolinians benefited from undergrounding the three
projects—all located in Virginia. For instance, according to a
report by a hearing officer for a Virginia body which heard
testimony regarding undergrounding, “one hundred sixty-seven
public witnesses” testified at a hearing in Leesburg, Virginia,
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“the overwhelming majority” speaking in favor of
undergrounding one of the three projects. J.A. 226. The
witnesses pointed to benefits they believed undergrounding
would afford them, including better aesthetics and avoidance of
electromagnetic radiation. A second report recounted similar
testimony regarding a different project from dozens of Virginia
residents and public officials, including their statements of
belief that undergrounding would lessen the negative impact on
local property values and the tax base.
The Commission also rested on the insistence of the
Virginia legislature that Dominion underground all three
projects. It noted that the costs were “a direct result of
legislation [adopted by the Commonwealth of Virginia]. . .
intended to benefit citizens of the Commonwealth of Virginia.”
Allocation Order, 146 FERC 61,200 ¶ 50.
The petitioners mainly contend that the Commission
lacked affirmative evidence that North Carolinians didn’t
benefit from the undergrounding. See, e.g., Reply Br. 22. But
this ignores (1) the mountain of evidence that Virginians
clamored for the undergrounding; (2) the Virginia legislature’s
apparent intent to act for the benefit of its citizens; (3) the
absence of any evidence that North Carolina customers caused
or benefited from the undergrounding. Put it all together, and
it adds up to substantial evidence that Virginians benefited from
the undergrounding but North Carolinians did not.
Finally, the petitioners—Dominion’s wholesale power
customers—also complain that the Commission should have
placed the cost on Dominion’s retail customers and not on the
wholesale power companies who purchase service from
Dominion. See Appellant Br. 62. But they offer no evidence
that their Virginia retail customers benefit any less than
Dominion’s Virginia retail customers, nor is there any obvious
reason to think so.
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* * *
The petitions for review are
Denied.