San Diego Gas & Electric Co v. FERC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 15, 2018 Decided January 15, 2019
No. 16-1433
SAN DIEGO GAS & ELECTRIC COMPANY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PACIFIC GAS AND ELECTRIC COMPANY, ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Kevin King argued the cause for petitioner. With him on
the briefs were James R. Dean Jr., Mark L. Perlis, and
Jonathan J. Newlander.
Rebecca A. Furman and Keith T. Sampson were on the
brief for intervenors Southern California Edison Company, et
al., supporting petitioner.
Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
2
were David L. Morenoff, General Counsel, Robert H. Solomon,
Solicitor, and Ross R. Fulton, Attorney.
Bonnie S. Blair, Margaret E. McNaul, Rebecca L. Shelton,
Lisa S. Gast, Peter J. Scanlon, Michael Postar, and Bhaveeta
K. Mody were on the joint brief for intervenors Cities of
Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside,
California, et al., supporting respondent.
Before: ROGERS and PILLARD, Circuit Judges, and
RANDOLPH, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge PILLARD.
Dissenting opinion filed by Senior Circuit Judge
RANDOLPH.
PILLARD, Circuit Judge: Petitioner San Diego Gas &
Electric Company (SDG&E) seeks review of a Federal Energy
Regulatory Commission (FERC or Commission) declaratory
order applying FERC’s cancelled or abandoned electricity
transmission facilities incentive, 18 C.F.R. § 35.35(d)(1)(vi)
(Abandonment Incentive), only prospectively, to investment
that had yet to occur. FERC grants the Abandonment Incentive
to qualifying transmission infrastructure projects to facilitate
financing by assuring that ratepayers may be charged for the
project if it is abandoned for reasons beyond the utility’s
control. Id. SDG&E’s application acknowledged that the
utility had already obtained needed investment and proceeded
with the project for four years “without assurance of cost
recovery for these development costs.” Pet. for Declaratory
Order of San Diego Gas & Electric Company 16 (Sept. 23,
2015), Joint App’x (J.A.) 44. Reasoning that the role of the
Abandonment Incentive is to facilitate investment by hedging
abandonment risk, rather than to reward investments that
3
would happen in any event, the Commission found that
SDG&E had failed to establish the requisite nexus between the
Abandonment Incentive and costs it already incurred before it
obtained the declaratory order. SDG&E claims that the order’s
limitation to future costs is contrary to the Abandonment
Incentive’s terms and arbitrary and capricious. For the reasons
that follow, we deny the petition.
I.
A. Regulatory Context
In an effort to bolster investment in “reliable and
economically efficient” energy transmission infrastructure,
Congress in 2005 amended the Federal Power Act (FPA), 16
U.S.C. § 792 et seq., to require FERC to promulgate a rule to
establish “incentive-based” rate treatments in order to
“promot[e] capital investment” in projects to upgrade the
electricity grid. Id. § 824s(a), (b)(1); see Energy Policy Act of
2005, Pub. L. No. 109-58, § 1241, 119 Stat. 961 (2005)
(codified as amended at 16 U.S.C. § 824s). Congress’s express
purpose in calling for such a rule was to “benefit[] consumers
by ensuring reliability and reducing the cost of delivered power
by reducing transmission congestion.” 16 U.S.C. § 824s(a). In
Congress’s view, because such a rate-treatment rule would
enable needed upgrades to infrastructure on which reliable and
efficient electric service depends, it would ultimately benefit
consumers, even as it also cost them. See id. Any rate FERC
approves under the rule, Congress stipulated, must be “just and
reasonable and not unduly discriminatory or preferential.” Id.
§ 824s(d).
The Commission adopted its Incentive Rule the following
year, see Transmission Infrastructure Investment (Incentive
Rule), 18 C.F.R. § 35.35 (2006), and refined it through two
4
rehearing orders and a policy statement, see Promoting
Transmission Investment Through Pricing Reform, Order No.
679, 116 FERC ¶ 61,057 (2006), order on reh’g, Order No.
679-A, 117 FERC ¶ 61,345 (2006), order on reh’g, Order No.
679-B, 119 FERC ¶ 61,062 (2007); Promoting Transmission
Investment Through Pricing Reform, 141 FERC ¶ 61,129
(2012) (Policy Statement).
The Incentive Rule establishes eight categories of
incentive-based rate treatments for public utilities. 18 C.F.R. §
35.35(d). Three prerequisites must be met by each applicant
seeking any of those treatments:
The applicant must demonstrate [1] that the facilities
for which it seeks incentives either ensure reliability or
reduce the cost of delivered power by reducing
transmission congestion consistent with the
requirements of section 219 [of the Federal Power
Act], [2] that the total package of incentives is tailored
to address the demonstrable risks or challenges faced
by the applicant in undertaking the project, and [3] that
resulting rates are just and reasonable.
Id. The Rule invites an applicant to request a “package of
incentives . . . tailored” to its particular needs. Id. In so doing,
the applicant must make its case for including in its rates each
of the incentive-based rate treatments it requests. The Rule
defines “incentive-based rate treatment” to mean any of the
following:
(i) A rate of return on equity sufficient to attract
new investment in transmission facilities;
(ii) 100 percent of prudently incurred Construction
Work in Progress (CWIP) in rate base;
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(iii) Recovery of prudently incurred pre-commercial
operations costs;
(iv) Hypothetical capital structure;
(v) Accelerated depreciation used for rate recovery;
(vi) Recovery of 100 percent of prudently incurred
costs of transmission facilities that are cancelled
or abandoned due to factors beyond the control
of the public utility;
(vii) Deferred cost recovery; and
(viii) Any other incentives approved by the
Commission . . . that are determined to be just
and reasonable and not unduly discriminatory or
preferential.
Id. § 35.35(d)(1). The Commission authorized each of these
incentives as a means to “encourage new infrastructure,” but
cautioned that they should be applied in a case-specific manner,
only where appropriate, to avoid “increasing rates in a manner
that has no correlation to encouraging new investment.” Order
No. 679, 116 FERC ¶ 61,057 at P6.
The incentive at issue here—the cancelled or abandoned
transmission facilities incentive, 18 C.F.R. § 35.35(d)(1)(vi)
(Abandonment Incentive)—encourages new investment in
transmission infrastructure projects by offsetting some of the
largest and least predictable downside investment risks of these
projects, “such as generation developers’ decisions to develop
or terminate the development of potential resources or
difficulty obtaining state or local siting approvals.” Order No.
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679, 116 FERC ¶ 61,057 at P155. By assuring recovery of
costs of projects abandoned for reasons beyond their
developers’ control, the Abandonment Incentive “provid[es]
companies with more certainty during the pre-construction and
construction periods,” Policy Statement, 141 FERC ¶ 61,129 at
P14, “thereby facilitating investment in these projects,” Order
No. 679, 116 FERC ¶ 61,057 at P155. An applicant for the
Abandonment Incentive must show that it faces the kinds of
known but uncontrollable cancellation risks that, without the
incentive, could impair the applicant’s ability to attract
investment to the project, or raise the utility’s—and, in turn,
ratepayers’—cost of such investment. The Commission
explained that it would evaluate applications for this incentive
on a “case-by-case basis.” Order No. 679, 116 FERC ¶ 61,057
at P164.
The Commission developed the Abandonment Incentive
against the backdrop of its standard, burden-sharing treatment
of costs of abandoned transmission infrastructure projects. An
order the Commission issued in 1988 authorized utilities to
split the costs of cancelled projects 50-50 with their consumers
through rate increases, provided the utilities demonstrated the
need to recover the investment, and that the costs at issue were
prudently incurred. See New Eng. Power Co., Op. No. 295, 42
FERC ¶ 61,016 (1988); see also New Eng. Power Co., Op. No.
49, 8 FERC ¶ 61,054 (1979). Under the new Abandonment
Incentive provision of the Incentive Rule, utilities may, on a
showing of a nexus between exposure to risk from project
abandonment and difficulty or costs of attracting needed
investment, obtain an order of eligibility to recover “100
percent of prudently incurred costs of transmission facilities
that are cancelled or abandoned due to factors beyond the
control of the public utility.” 18 C.F.R. § 35.35(d)(1)(vi); see
16 U.S.C. § 824s.
7
The Abandonment Incentive is just one of an open-ended
set of incentive rate treatments the new Incentive Rule
authorizes, entitlement to which depends on an order of
approval from the Commission. Each utility that proposes to
enhance transmission infrastructure may apply for a package of
incentives customized to its particular circumstances. The
Commission then determines whether and how the requested
incentives are warranted before it approves any corresponding
rate authority.
Transmission upgrades vary in size, complexity, and the
risks and challenges they face, so no one-size-fit-all package of
incentives is—or could be—secured by the Rule itself. The
Incentive Rule “does not grant incentive-based rate treatments
or authorize any entity to recover incentives in its rates,” but
only “informs potential applicants of incentives that the
Commission is willing to allow when justified.” Order No.
679, 116 FERC ¶ 61,057 at P20. The seven specified
incentives are themselves partially overlapping and context-
specific. And the eighth category—a catchall authorization of
“[a]ny other incentives approved by the Commission,” 18
C.F.R. § 35.35(d)(1)(viii)—underscores the Rule’s
contemplation of case-by-case applications based on
appropriate showings, and that entitlement to an incentive rate
treatment depends on an order authorizing it.
All of the incentives share the common overall objective
of facilitating improvements to transmission infrastructure, but
they do so in a range of ways. Two of the incentives encourage
investment in infrastructure projects by providing a way to ease
a developer’s cash flow in advance of the project coming on
line, which in turn can improve “the overall financial health of
a company and its ability to attract capital at reasonable prices.”
See Order No. 679, 116 FERC ¶ 61,057 at P103. The CWIP
incentive, see 18 C.F.R. § 35.35(d)(1)(ii), for example, “allows
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recovery of a return on construction costs during the
construction period rather than delaying cost recovery until the
plant is placed into service.” Policy Statement, 141 FERC ¶
61,129 at P12. Similarly, the pre-commercial operations costs
incentive, 18 C.F.R. § 35.35(d)(1)(iii), allows utilities to
recover other early project costs incurred before the facility is
up and running, such as expenditures for “preliminary surveys,
plans and investigations, made for the purpose of determining
the feasibility of utility projects and costs of studies and
analyses mandated by regulatory bodies related to the plant in
service.” See Order No. 679, 116 FERC ¶ 61,057 at P122 n.82.
Additional incentives can address the timing of cost
recovery after a project is in use. The Commission may
authorize a utility to accelerate depreciation in order to recover
costs more quickly than over the life of the project—effectively
charging ratepayers in the near term for facilities that will be in
use far into the future. See 18 C.F.R. § 35.35(d)(1)(v); Order
No. 679, 116 FERC ¶ 61,057 at P146. Or the Commission may
allow a utility to defer cost recovery where, for example, it is
under a retail rate freeze that would prevent full recovery in the
ordinary course, id. § 35.35(d)(1)(vii)—authority the
Commission has committed to exercise consistently with state
authority over retail ratemaking, see Order No. 679, 116 FERC
¶ 61,057 at P177.
An application to qualify for any of the rate treatments
authorized by the Incentive Rule must meet the Rule’s “nexus
test” by demonstrating that “the total package of incentives”
the utility seeks is “tailored to address the demonstrable risks
or challenges faced by the applicant in undertaking the
project.” 18 C.F.R. § 35.35(d). A utility must, in other words,
show a link between each requested incentive and the utility’s
ability to address the project’s risks and hurdles that correspond
to that incentive. See Order No. 679, 116 FERC ¶ 61,057 at
9
P26. The Commission underscored that, because incentives
must be “rationally tailored” to the risks presented by an
investment, “[n]ot every incentive will be available for every
new investment.” Id. The requirement of a demonstrated,
case-specific nexus tethers each authorized incentive rate
increase to a determination that granting that incentive in a
given case actually serves Congress’s objective of benefiting
consumers. To that end, the Commission assured commenters
on the Incentive Rule that it would scrutinize incentive
applications to make sure every authorized rate treatment was
tailored to its relevant objective.
The Commission identified two ways for utilities to apply
for incentive-based rate treatments. Under the one-step option,
a utility may seek a specified increase in its rates under Section
205 of the FPA. See Order No. 679, 116 FERC ¶ 61,057 at
P79. Under the two-step option, a utility may petition for a
declaratory order establishing its eligibility to increase rates
pursuant to an applicable incentive and later, armed with the
declaratory order, seek the Commission’s approval for a
specific rate increase under Section 205. See 16 U.S.C. § 824d;
Order No. 679, 116 FERC ¶ 61,057 at PP76-77, 166. A
utility’s choice between these procedural options is likely
influenced by the types of incentives it seeks. The Commission
noted that the option to apply for a declaratory order well in
advance of a rate petition would be particularly useful for
utilities “prior to commencing siting, permitting and
construction activities because such orders facilitate financing
and investment in new facilities.” Order No. 679, 116 FERC ¶
61,057 at P77.
The Commission takes the position that the Abandonment
Incentive supports recovery of 100 percent of costs prudently
incurred only insofar as those costs were incurred after the
effective date of the order approving the utility’s application.
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See PJM Interconnection, LLC, 142 FERC ¶ 61,156 (2013)
(“PJM II”). In a series of orders, it has similarly limited
recovery of the incentive to prospective costs. See, e.g., Pac.
Gas & Elec. Co., 163 FERC ¶ 61,187 at P14 (2018); Citizens
Energy Corp., 162 FERC ¶ 61,161 at P26 (2018); S. Cal.
Edison Co., 161 FERC ¶ 61,107 at P44 (2017); Republic
Transmission, LLC, 161 FERC ¶ 61,036 at P29 (2017); DCR
Transmission, LLC, 153 FERC ¶ 61,295 at P42 (2015). As
FERC frames its approach, “the date an order is issued under
Order No. 679 reflects the separating point between the period
in which an applicant is entitled to the full Abandoned Plant
Incentive authorized under Section 219 and 50 percent
recovery under Opinion No. 295’s cost-sharing policy.” Pac.
Gas & Elec. Co., 163 FERC ¶ 61,187 at P14.
B. The Declaratory Order
SDG&E is a public utility that provides energy services in
California. It brings electricity to approximately 300,000
residents in Southern Orange County through a single
substation. Around 2008, the utility grew concerned that its
customers would be at risk of service unreliability and even
prolonged power outages should the sole substation falter.
SDG&E therefore proposed the South Orange County
Reliability Enhancement (SOCRE) Project to rebuild and
upgrade the substation, and replace and relocate several
transmission and distribution line segments.
The California Independent System Operator (CAISO) is
a public entity that manages electricity transmission in
California and operates transmission facilities owned by
utilities such as SDG&E. In May 2011, the CAISO included
the SOCRE Project in its 2010-2011 Transmission Plan.
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SDG&E thereafter applied for various federal, state, and
local permits for the SOCRE Project, including a Certificate of
Public Convenience and Necessity from the state regulatory
authority, the California Public Utilities Commission (CPUC).
According to SDG&E’s Vice President, obtaining a Certificate
of Public Convenience and Necessity is “[a]s a general matter
. . . a lengthy and complex process” that includes an
environmental review of the project proposal. Test. of David
Geier, J.A. 64. SDG&E later claimed that the California Public
Utilities Commission’s approval process presented “the
greatest level of risk and uncertainty” for the SOCRE Project.
Incentive Petition 12, J.A. 40. SDG&E applied for a Certificate
of Public Convenience and Necessity in May 2012.
In September 2015, SDG&E sought a declaratory order
from FERC establishing its eligibility for the Abandonment
Incentive. SDG&E’s petition stated that it had “already
expended substantial resources, both direct spending and
internal labor” on the project, to the tune of approximately $31
million. See Incentive Petition 16, J.A. 44. It noted that it had
spent that much—and presumably procured whatever
financing required to do so—“without assurance of cost
recovery for these development costs.” Id. As SDG&E
described the situation, a “substantial percentage of those costs
were incurred on the preparation of the utility’s development
plan, and were incurred with no certainty that SDG&E’s
development plan would be approved by the CPUC.” Id. at 16-
17, J.A. 44-45. SDG&E does not appear to have applied for
any other incentive, such as CWIP or pre-commercial
operations cost recovery under Section 35.35(d)(1)(ii) or (iii).
The Commission filed a Federal Register notice inviting
interventions and protests regarding SDG&E’s petition for the
Abandonment Incentive. See San Diego Gas & Electric Co.;
Notice of Petition for Declaratory Order, 80 Fed. Reg. 58,729-
12
02 (2015). The California cities of Anaheim, Azusa, Banning,
Colton, Pasadena, and Riverside (Six Cities) filed a formal
protest that invoked the Commission’s decision in PJM II and
argued that here, as there, the Commission should not apply the
Abandonment Incentive to authorize SDG&E to recover from
ratepayers sunk costs SDG&E had previously incurred. See
Protest on Behalf of the Cities of Anaheim, Azusa, Banning,
Colton, Pasadena, and Riverside, California (Oct. 23, 2015),
J.A. 179, 182. SDG&E had made a voluntary business decision
to spend $31 million on the SOCRE project without any order
from the Commission declaring its eligibility for the incentive,
the Six Cities argued, so no nexus had been shown and
consumers should not be on the hook to reimburse it for those
costs in the event the project is abandoned. See id. at 3-4, J.A.
181-82.
In its March 2, 2016, declaratory order, the Commission
determined that, should the SOCRE project be cancelled or
abandoned for reasons beyond SDG&E’s control, the utility
would be eligible to recover all of its prudently incurred costs
associated with the SOCRE project going forward. See San
Diego Gas & Elec., 154 FERC ¶ 61,158 at PP17-18 (2016)
(Declaratory Order). As for the costs that SDG&E had already
incurred, the Commission held that SDG&E could share that
burden with ratepayers under FERC’s 1988 Opinion No. 295,
which granted utilities authority to charge ratepayers half the
prudently incurred costs of abandoned transmission facilities.
See id. at P18; New Eng. Power Co., Op. No. 295, 42 FERC
¶ 61,016. The Commission reasoned that, while “the risks that
may necessitate abandonment have generally been known to
SDG&E since the project was included in the CAISO 2010-
2011 Transmission Plan, [SDG&E] did not seek approval for
the Abandonment Incentive for approximately four years.”
Declaratory Order, 154 FERC ¶ 61,158 at P20. The
Commission highlighted SDG&E’s acknowledgement that it
13
had incurred the costs “without assurance of cost recovery.” Id.
(quoting Incentive Petition 16, J.A. 44). Allowing recovery of
SDG&E’s past investment under these circumstances would
therefore be “contrary to the general policy rationale that
incentives are designed to encourage future transmission
investments” and “would violate the objective of benefitting
consumers.” Id. at P20 & n.48 (quoting Incentive Ratemaking
for Interstate Natural Gas Pipelines, Oil Pipelines, and Elec.
Utils., 61 FERC ¶ 61,168, at ¶ 61,589 (1992)).
The Commission denied SDG&E’s request for rehearing.
See San Diego Gas & Elec., 157 FERC ¶ 61,056 (2016)
(Rehearing Order). In the Rehearing Order, the Commission
reiterated that, under the Incentive Rule and the PJM II order
applying it, the Abandonment Incentive covered costs incurred
after the date of the order granting the incentive. Id. at PP10-
15 (citing PJM II, 142 FERC ¶ 61,156 (2013)). The result, the
Commission reasoned, was rooted in the Incentive Rule’s
nexus test, which requires the applicant “to demonstrate that
the incentives are rationally related with the investments being
proposed.” Id. at P16 (quoting Order No. 679, 116 FERC ¶
61,057 at P48). Thus, when SDG&E asserted that it incurred
the $31 million in prior costs without assurance of recovery, “it
conceded that the Abandonment Incentive it seeks here is not
rationally related to those previously incurred costs.” Id. at
P17. The Commission determined that, for costs already
incurred, the nexus test was not met because there was no
showing that “the incentive was [] needed to encourage
SDG&E to make the investment in question.” Id. at P19.
This petition for review followed. Pacific Gas & Electric
Company and Southern California Edison Company
intervened in support of SDG&E. The Six Cities intervened in
support of the Commission.
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II.
A. Standing
We begin by assuring ourselves of jurisdiction over the
petition. See Steel Co. v. Citizens for a Better Env’t, 523 U.S.
83, 94-95 (1998). Under Section 313(b) of the FPA, we have
jurisdiction to review petitions only from parties “aggrieved”
by an order of the Commission. 16 U.S.C. § 825l(b); cf.
PNGTS Shipper’s Grp. v. FERC, 592 F.3d 132, 138-39 (D.C.
Cir. 2010) (finding a virtually identical provision in the Natural
Gas Act to be “jurisdictional”). And, under Article III, a
petitioner’s standing to pursue its claim in federal court
depends on its identification of a concrete and particularized
injury that is fairly traceable to the challenged action and would
be redressable by a favorable court decision. See Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). A party is
determined to be aggrieved within the meaning of Section
313(b) on the same showing of injury that suffices to establish
standing. See Exxon Mobil Corp. v. FERC, 571 F.3d 1208,
1219 (D.C. Cir. 2009).
The Commission’s orders concern SDG&E’s eligibility to
recover a benefit in the event of a future project cancellation or
abandonment that may or may not occur. But its claimed harm
is not speculative insofar as SDG&E suffers a concrete and
immediate economic injury stemming from the demonstrated
risk of project cancellation. The abandonment may never
occur, but there is a concrete dispute over the scope of the
current beneficial assurance due to SDG&E. In its declaratory
order, FERC recognized that SDG&E faces real and present
costs due to the risk of a future halt to the project, and FERC
determined that those costs justified application of the
Abandonment Incentive. No party disputes that determination;
all agree that project-cancellation risk makes SDG&E’s
15
SOCRE project a less attractive investment for outside funders
and partners, increasing costs to SDG&E. See Pet’r Br.
Addendum B, Decl. of David Geier ¶¶ 11-15. We have
previously held this sort of current economic injury from
identified risk of future harm sufficient to support standing, see
Great Lakes Gas Transmission v. FERC, 984 F.2d 426, 430-31
(D.C. Cir. 1993), and do so again here.
B. Analysis
In the declaratory order under review, the Commission
held that SDG&E had shown a nexus only between the
Abandonment Incentive and the utility’s expenditures on the
SOCRE project going forward. See Declaratory Order, 154
FERC ¶ 61,158 at PP17, 19. On rehearing, the Commission
reiterated that the Abandonment Incentive’s nexus test requires
a showing that authorizing the incentive will “encourage action
that has not yet occurred.” See Rehearing Order, 157 FERC ¶
61,056 at P15. No such nexus existed between the
Abandonment Incentive and SDG&E’s sunk costs, because
SDG&E admitted that it incurred those costs “without
assurance of cost recovery.” Id. at P17 (quoting Incentive
Petition 16, J.A. 44). The Commission thought it “reasonable
to conclude that if SDG&E in fact spent $31 million in
development costs over an approximately four-year period, a
significant amount of money over a significant time period, an
Abandonment Incentive was not needed to encourage that
investment.” Id. at P19. The Commission therefore held that,
in SDG&E’s case, insofar as the application sought the
Abandonment Incentive for the portion of the project that was
already financed and paid for, it lacked the requisite nexus to
the facilitation of new investment, such as by making capital
more readily and cheaply available.
16
SDG&E challenges the order, claiming that the Incentive
Rule itself makes an “offer” of incentive treatment, Pet’r. Br.
12, and that any utility’s qualifying application thus constitutes
binding acceptance entitling it to all prudently incurred costs.
SDG&E insists that, for the Abandonment Incentive, the rule
establishes a “fixed 100 percent recovery rate” of costs of the
entire “transmission facilities” subject to abandonment. Pet’r
Br. 13, 23, 34. It thus claims a right, in the event the SOCRE
project should in the future be abandoned for reasons beyond
SDG&E’s control, to recover all development costs from the
Project’s inception, including those costs incurred before the
Commission deemed it eligible for the Abandonment
Incentive. Pet’r Br. 31.
The Commission responds that the Rule sets the general
terms, but a utility’s entitlement depends on FERC’s approval.
It could hardly be otherwise. Electricity transmission
development projects tend to be complex, varied, and
expensive—costing many millions or even billions of dollars
and taking years to complete. The Incentive Rule provides for
an array of incentive rate treatments, including a catchall “other
incentives” category, see 18 C.F.R. § 35.53(d)(1)(viii),
available for customization into an application package that
FERC approves to the extent it meets a utility’s demonstrated
need. An applicant must show a nexus between each incentive
it seeks and that incentive’s role in financing reliable and
economically efficient transmission infrastructure. The
Commission found that nexus to the Abandonment Incentive
lacking with respect to SDG&E’s investments already made.
The Commission’s approach comports with both the
Federal Power Act and the Incentive Rule. When Congress
amended the Act in 2005, it called on FERC to promulgate a
rule to “benefit[] consumers by ensuring reliability and
reducing the cost of delivered power by reducing transmission
17
congestion.” 16 U.S.C. § 824s(a); see 18 C.F.R. § 35.35(a)
(same). The Commission in the preamble to the Incentive Rule
elaborated that it would not authorize incentives that “simply
increas[e] rates in a manner that has no correlation to
encouraging new investment.” Order No. 679, 116 FERC ¶
61,057 at P6. Instead, incentives must be “rationally tailored”
to the relevant investment and will not function as a “bonus for
good behavior.” Id. at P26. The Commission has underscored
the key role of the nexus requirement “to ensure that incentives
are not provided in circumstances where they do not materially
affect investment decisions.” Order No. 679-A, 117 FERC ¶
61,345 at P25. We stressed in Connecticut Department of
Public Utility Control v. FERC that the nexus test is not merely
“fig leaf for accepting any link, however nominal or trivial,”
but must be shown to “affect the transmission owners’ conduct
or benefit consumers.” 593 F.3d 30, 33-34 (D.C. Cir. 2010).
The Commission’s order aligns with its “longstanding
policy that rate incentives must be prospective and that there
must be a connection between the incentive and the conduct
meant to be induced.” Cal. Pub. Utils. Comm’n v. FERC, 879
F.3d 966, 977 (9th Cir. 2018) (citing S. Cal. Edison, 114 FERC
¶ 61,018 (2006); ISO New Eng., 96 FERC ¶ 61,359 (2001);
New Eng. Power Pool, 97 FERC ¶ 61,093 (2001)). Indeed, the
Commission made clear in a policy statement nearly three
decades ago that “[i]ncentive rate plans must be prospective.”
See Incentive Rate Making for Interstate Natural Gas
Pipelines, Oil Pipelines, and Elec. Utils., 61 FERC ¶ 61,168,
at ¶ 61,599. Presaging the very reasoning it invoked in the
order under review, the Commission declared: “A ‘reward’ for
past behavior,” after all, “does not induce future efficiency and
benefit consumers.” Id. Our review of rate-based incentive
programs has never questioned the “obvious proposition” that
the Commission “will not, and cannot, create incentives to
18
motivate conduct that has already occurred.” Me. Pub. Utils.
Comm’n v. FERC, 454 F.3d 278, 289 (D.C. Cir. 2006); see
Conn. Dep’t of Pub. Util. Control, 593 F.3d at 34-35.
The Incentive Rule makes a palette of incentive rate
treatments available to utilities. Transmission infrastructure
investment projects may be eligible for one or more of the
seven types of incentives the Rule describes, 18 C.F.R. §
35.35(d)(1)(i)-(vii), or for some needed “other incentive” not
within the Rule’s stated categories, id. § 35.35(d)(1)(viii). The
burden is on the utility to show that it qualifies for each
requested incentive rate. The Rule’s incentives must be sought
by application and secured by a FERC order. While the utility
need not demonstrate “but for” causation between a particular
investment and the incentive it seeks, see Order No. 679, 116
FERC ¶ 61,057 at P48, the Commission must ensure that
“incentives are not provided in circumstances where they do
not materially affect investment decisions,” Order No. 679-A,
117 FERC ¶ 61,345 at P25. To that end, the nexus test requires
an applicant to show “that there is a relationship between the
rate treatments sought and the attraction of new capital.” Id. at
P17.
The logic of the incentive rate treatment at issue here—the
Abandonment Incentive—supports the Commission treating it
as unwarranted for SDG&E’s pre-order costs. In the ordinary
course, utilities recover costs through the rates they charge for
delivered power. A transmission infrastructure project that is
abandoned never delivers power, so its costs might not
ordinarily be chargeable to ratepayers. Project-abandonment
risk can, however, impede major, cost-effective transmission
upgrades that are in ratepayers’ interests. Investors hesitate to
invest in large, expensive projects that may fail before they
ever earn a dime. And developers of projects facing
abandonment risk—a kind of risk that, by definition, is major
19
and uncontrollable—will pay more for capital. FERC’s
Abandonment Incentive reflects the recognition that that, given
the elevated capital costs ratepayers shoulder for all
infrastructure investment projects at risk of abandonment,
ratepayers benefit by, in effect, paying to insure potential
investors against such risk. Specifically, the Abandonment
Incentive serves ratepayers’ interests when the aggregate
savings (from all qualifying projects’ lower ex ante capital
costs, producing more needed reliability improvements) more
than offset losses (from projects that must be abandoned and
billed to ratepayers). In other words, the logic of authorizing
utilities to charge ratepayers for the occasional abandoned
project is that ratepayers enjoy offsetting benefits from
improved access to capital on better terms for all other qualified
transmission infrastructure upgrades.
SDG&E acknowledges that it incurred substantial costs on
the SOCRE project before it secured eligibility for the
Abandonment Incentive. Where, as here, a project faces
abandonment risk, investors would ordinarily charge risk
premiums unless they had assurance of abandoned-plant rate
recovery. Yet there is no evidence that SDG&E’s four years’
worth of investment in the project was beneficially affected by
any assurance provided through the Abandonment Incentive.
Indeed, as FERC recognized, SDG&E’s claim that the
Incentive Rule facilitated its $31 million in expenditures before
FERC authorized it to charge incentive rates is belied by
SDG&E’s own acknowledgement that it incurred those costs
“without assurance of cost recovery.” Incentive Petition 16,
J.A. 44; Declaratory Order, 154 FERC ¶ 61,158 at P20. The
utility’s Vice President repeatedly emphasized in the future
tense that the incentive “will reduce the financial and
regulatory risks associated with” transmission investment in
the SOCRE Project. Test. of David Geier, J.A. 74 (emphasis
added); accord id. J.A. 75 (“As a general matter, assurance that
20
prudently incurred costs can be recovered should abandonment
be required for a reason beyond the developer’s control,
supports investment of significant equity capital on project
development.”). But SDG&E made no showing how future
risk-reduction from the Abandonment Incentive affected its
investments already made.
By insisting that the timing of a declaratory order matters
in granting the Abandonment Incentive, FERC reasonably
accounts for ratepayers’ interests. Where FERC commits
ratepayers to cover costs of abandoned projects, it should at
least demand that utilities maximize ratepayers’ benefits from
those commitments. The longer a utility waits to secure
abandoned-plant rate authority and the more it spends before
doing so, the higher its costs of capital in constructing
successful projects—costs that ultimately are passed on to
ratepayers. Nothing in the statute or Rule requires that FERC
authorize charging ratepayers ex post (via rate-recovery for
failed projects) in the name of generating ex ante benefits
(capital availability at lower cost) for a portion of those ex ante
benefits (superior investment terms during the first four years
of the project) that they never enjoyed. Put differently,
ratepayers who stand to be billed for risk premiums paid over
several years should not also be called on to pay for a
retroactive hedge against the very same risk.
SDG&E raises several objections, none of which we find
persuasive.
First, SDG&E asserts that the regulation itself, rather than
the Commission’s project-specific declaratory order, amounts
to a legally binding “offer” of rate treatment. See Pet’r Br. 43-
46; Pet’r Int. Br. 3. Insisting that “[t]he text of Order No. 679
could not be clearer,” Pet’r Br. at 44, SDG&E quotes the
preamble’s assertion that “this [Incentive] Rule . . . provides
21
incentives for transmission infrastructure,” Order No. 679, 116
FERC ¶ 61,057 at P1. SDG&E observes that “a utility can look
to 18 C.F.R. § 35.35(d)(1)(vi), determine that its project is
likely to meet the eligibility criteria, and rely on that
expectation as motivation to proceed with the project.” Pet’r
Br. 45. Of course, broadly speaking, SDG&E is correct that
the mere existence of the Incentive Rule is a general
inducement to investment in transmission infrastructure. So,
too, low home-mortgage rates generally encourage
homebuyers. But not every applicant is automatically entitled
to every generally available deal.
SDG&E is simply wrong that the Incentive Rule by itself
“guarantees” any rate treatment or entitles a utility to any
specific incentive. As the Rule’s preamble squarely
announces: “The Final Rule does not grant incentive-based
rate treatments or authorize any entity to recover incentives in
its rates. Rather, it informs potential applicants of incentives
that the Commission is willing to allow when justified.” Order
No. 679, 116 FERC ¶ 61,057 at P20. The Commission
expressly cautioned utilities that “not every incentive identified
herein will be necessary or appropriate for every new
transmission investment.” Id. at P6; see Pac. Gas & Elec. Co.,
163 FERC ¶ 61,187 (recognizing Abandonment Incentive
eligibility of some projects but not others).
Second, SDG&E argues that the Incentive Rule’s
recognition of two distinct procedural pathways for seeking
Commission authorization for incentive rates means that the
timing of a declaratory order that a utility seeks under the two-
step option cannot affect the scope of eligibility for the
Abandonment Incentive. As described above, a utility may
apply for at least some of the incentives in a one-step process,
by seeking a rate adjustment under Section 205 of the FPA. Or,
the utility may follow a two-step procedure by first seeking a
22
declaratory order establishing its eligibility for one or more
incentives, and later seeking a corresponding rate adjustment.
See Order No. 679, 116 FERC ¶ 61,057 at PP76-79. SDG&E
contends that the Commission’s application of the nexus test
conflicts with the Rule by effectively foreclosing applicants
from seeking the Abandonment Incentive through a Section
205 rate order alone, thereby “nullifying that one-step
procedural pathway.” Pet’r Br. at 39. SDG&E observes that a
utility could only conceivably apply for a determinate rate
increase under Section 205 pursuant to the Abandonment
Incentive after abandonment had in fact occurred, by which
time it would have necessarily already gone ahead with the
project without the hedge provided by that incentive. Thus, if
the one-step procedural pathway means anything, SDG&E
contends, it must—contrary to the challenged approach—
assure recovery in the absence of any declaratory order and, a
fortiori, cover pre-declaratory order costs.
Not so. Nothing in the Rule requires that both one-step
and two-step pathways be equally appropriate for every type of
incentive. SDG&E appears to be correct that the Abandonment
Incentive is only available through the two-step pathway,
which involves securing a declaratory order in advance and
later, after project abandonment, petitioning for a rate under
Section 205. That is because, in order to justify it as a spur to
investment, the Abandonment Incentive will ordinarily need to
be in place at the relevant time, when uncontrollable future
risks would otherwise deter potential investors and put a risk
premium on capital—i.e., before the relevant costs have been
successfully financed. See Policy Statement, 141 FERC
¶ 61,129 at P14. That reality does not, however, render the
Incentive Rule’s “one-step ‘option’ . . . no option at all.” Pet’r
Br. at 38. The one-step pathway can alone suffice where an
applicant seeks rate treatment under the Accelerated
Depreciation or Deferred Cost Recovery Incentive provisions,
23
see 18 C.F.R. § 35.35(d)(1)(v), (vii). And perhaps a Section
205 petition would suffice to enable an incumbent utility to
recover CWIP or pre-commercial operations costs for its new
construction. See 18 C.F.R. § 35.35(d)(1)(ii), (iii). While those
incentives might also be secured by a declaratory order in
advance of a Section 205 petition, they differ from the
Abandonment Incentive to the extent that they do not operate
as hedges against future risk followed by rate-based recovery
only when and if that risk materializes.
Third, SDG&E contends that we must reject the
Commission’s approach because the Incentive Rule requires a
showing of a nexus to “the project” as a whole, or the entire
“transmission facilities” under development, rather than
separately to the utilities’ costs incurred before and after the
declaratory order. See Pet’r Reply Br. 11-12. SDG&E points
to the Incentive Rule’s introductory language directing
applicants to demonstrate how the package of incentives they
seek is “tailored to address the demonstrable risks or challenges
faced by the applicant in undertaking the project,” 18 C.F.R. §
35.35(d) (emphasis added), and to the Abandonment Incentive
subsection of the Rule, which refers to “transmission
facilities,” id. § 35.35(d)(vi) (emphasis added); see Pet’r Reply
Br. 11. But SDG&E takes that language out of context. There
is no conflict between the Rule’s requirement that an applicant
identify risks faced by its project or facilities as a whole, and
the Commission’s determination that the potential public
benefit of the Abandonment Incentive supports applying it only
prospectively. The Commission here did nothing at odds with
the Incentive Rule’s references to entire projects or facilities.
It considered the full scope of SDG&E’s request, assessed risks
that the SOCRE project as a whole would have to be
abandoned, and determined that further investment in the
project would be encouraged by authorizing SDG&E, in the
24
event of such abandonment, to recover from ratepayers
SDG&E’s investments after the effective date of the order.
Fourth, SDG&E similarly contends that the declaratory
order conflicts with the Incentive Rule by authorizing less than
the “100 percent” recovery stated in 18 C.F.R. § 35.35(d)(vi).
Despite the Rule’s two references to “100 percent,” however,
it is obvious that the relevant subsections do not require an all-
or-nothing approach. As already discussed, applicants often
obtain packages of more than one incentive. If the Commission
were to find a project eligible for rate-based reimbursement for
CWIP, and for the Abandonment Incentive—each of which
authorizes recovery of “100 percent of prudently incurred”
costs, see 18 C.F.R. § 35.35(d)(1)(ii), (vi)—the Rule would not
support a rate pursuant to the Abandonment Incentive that
included 100 percent of the costs ratepayers had already been
charged pursuant to the CWIP allowance. See Order No. 679,
116 FERC ¶ 61,057 at P166. The Rule’s reference to the
availability of rate authority for “100 percent” of costs simply
cannot be read to demand all-or-nothing approvals, foreclosing
authorization for something less where circumstances so
demand.
Rather, the Commission grants incentive rate authority
“when justified” on a “case-by-case basis” in orders tailored to
the demonstrated needs of each project. See Order No. 679,
116 FERC ¶ 61,057 at P20; Order No. 679-B, 119 FERC ¶
61,062 at P18. Indeed, the Incentive Rule “requires applicants
to tailor their proposals to fit the facts of their particular case,”
Order No. 679, 116 FERC ¶ 61,057 at P5, such that “the
incentive package as a whole results in [the] just and reasonable
rate” mandated by the Rule, id. at P2. See 18 C.F.R. § 35.35(d)
(requiring that the incentives be “tailored to address the
demonstrable risks” of each project). These overarching
requirements necessarily call on applicants to demonstrate
25
need, and they afford some flexibility to the Commission to
limit the incentive-rate authority it grants to match that need.
Just as the Incentive Rule’s text permits the Commission to
grant less than 100 per cent rate authority in order to reconcile
multiple incentives, and to devise “other,” case-specific
incentives for worthy projects, see 18 C.F.R. §
35.35(d)(1)(viii), it contemplates that the Commission will
tailor its grants of rate authority to particular features of an
applicant’s demonstrated needs.
Finally, we see no merit to SDG&E’s argument that the
Commission’s treatment of the Abandonment Incentive in
prior cases renders the orders below arbitrary and capricious.
The dissent objects that FERC twice granted pre-order costs
“without imposing the limitation it applied to San Diego.”
Diss. Op. 10 (citing Pac. Gas & Elec. Co., 137 FERC ¶ 61,193
(2011), and S. Cal. Edison Co., 137 FERC ¶ 61,252 (2011)).
In those early Abandonment Incentive cases, the declaratory
orders made no express determination regarding effective
dates, and no party objected to the utility’s recovery for the
period at issue. See Pac. Gas & Elec. Co., 123 FERC ¶ 61,067
(2008); S. Cal. Edison Co., 121 FERC ¶ 61,168 (2007).
Although it drew a slightly different line in Pacific Gas &
Electric—at the application for rather than grant of the
Abandonment Incentive declaratory order—FERC ultimately
relied on the same basic logic it employed here to hold that
costs already incurred were not recoverable. See 137 FERC ¶
61,193 at PP 2, 19.
SDG&E also contends that several other cases in fact
granted pre-order costs pursuant to the Abandonment
Incentive. But in most of its cited cases, no party filed a protest
objecting on this ground, as the Six Cities did here. See, e.g.,
NextEra Energy Transmission W., LLC, 154 FERC ¶ 61,009
(2016); ALLETE, Inc., 153 FERC ¶ 61,296 (2015); S. Cal.
26
Edison, 137 FERC ¶ 61,252; Pac. Gas & Elec., 137 FERC ¶
61,193. We have previously held that, “[i]n the absence of
protests,” the Commission’s decision to approve rate increases
does not amount to “policy or precedent.” Gas Transmission
Nw. Corp. v. FERC, 504 F.3d 1318, 1320 (D.C. Cir. 2007); see
generally Cooper Industries, Inc. v. Aviall Services, Inc., 543
U.S. 157, 170 (2004) (“Questions which merely lurk in the
record, neither brought to the attention of the court nor ruled
upon, are not to be considered as having been so decided as to
constitute precedents.”) (quoting Webster v. Fall, 266 U.S. 507,
510 (1925)). The dissent’s citation to ANR Storage Co. v.
FERC, 904 F.3d 1020 (D.C. Cir. 2018), is not to the contrary.
Diss. Op. 11. In ANR Storage, the Commission had attempted
to distinguish its conflicting market-power determinations
regarding two natural gas storage providers, each with
“virtually indistinguishable” market power in the same market.
Id. at 1025. The sole underlying issue was squarely presented
and necessarily resolved by the agency. Id. at 1025-26. In the
FERC cases cited by SDG&E, in contrast, the question whether
pre-order costs were categorically available was neither
contested nor necessarily resolved. What is more, in NextEra
Energy, ALLETE, and Southern California Edison, the
Commission did not discuss the pre-order cost issue in granting
the Abandonment Incentive. See NextEra Energy, 154 FERC
¶ 61,009 at P27; ALLETE, 153 FERC ¶ 61,296 at P29; S. Cal.
Edison, 121 FERC ¶ 61,168 at P71.
***
Because the Commission’s application of the
Abandonment Incentive is consistent with the Rule and
supported by substantial evidence, SDG&E’s petition is
denied.
So ordered.
RANDOLPH, Senior Circuit Judge, dissenting:
I will begin with a hypothetical.
The Federal Energy Regulatory Commission at the
beginning of the year announces that any employee who
provides exceptional service will be eligible for a cash award at
year’s end. During the year several employees provide what the
agency deems exceptional service: these employees manage to
convince a panel majority of the D.C. Circuit of a quite dubious
proposition – namely, that the prospect of recovering 100
percent of an investment even if the project fails is not an
incentive to invest.
In its annual awards ceremony, FERC adopts the reasoning
it employed in the case before us. And so it passes over these
employees although they have rendered exceptional service.
Why? Because the employees have already performed. No
need to provide them with a cash award. After all, the
employees went the extra mile with no assurance of being
deemed exceptional and receiving any award. See Maj.
Op. 19–20.
There is no difference between this hypothetical and
FERC’s decision here and the treatment of this case in the
lengthy majority opinion, an opinion confirming the adage that
sometimes the more you explain it the less anyone can
understand it.
The regulation at the center of this case is not complicated.
A utility is entitled to recover “100 percent of prudently incurred
costs of transmission facilities that are cancelled or abandoned
due to factors beyond the control of the public utility.” 18
C.F.R. § 35.35(d)(1)(vi).
Although the regulation provides for the recovery of all
prudently incurred costs, FERC decided that San Diego Gas &
2
Electric could only recover some of those costs. According to
FERC, the “Abandonment Incentive” applies only to costs the
utility incurs after FERC has issued an order declaring the utility
eligible for the incentive.
I will discuss three basic problems with FERC’s decision.
These are that the theory on which FERC relies is invalid; that
the language of the regulation does not support the decision; and
that FERC’s ruling is an unexplained departure from its
precedents. I will begin with the theory.
FERC’s idea is that “incentives cease to be incentives if the
action they are intended to promote has already occurred.” San
Diego Gas & Elec. Co., 157 FERC ¶ 61,056, at P. 22 (Oct. 26,
2016) [hereinafter Rehearing Order]. The majority’s opinion
echoes this theme, citing “the ‘obvious proposition’ that the
Commission ‘will not, and cannot, create incentives to motivate
conduct that has already occurred.’” Maj. Op. 17–18 (quoting
Me. Pub. Utils. Comm’n v. FERC, 454 F.3d 278, 289 (D.C. Cir.
2006)).1 And so according to this theory San Diego did not need
the Abandonment Incentive for the costs it incurred before
FERC declared the utility eligible for the incentive.
The fallacy in this theory is its failure to recognize that
FERC created the incentive when it promulgated the regulation
1
In the case the majority quotes, the court recognized that
incentive awards can apply to conduct that both pre- and post-dates the
award. See Me. Pub. Utils. Comm’n, 454 F.3d at 288 (emphasis
added) (“FERC reasonably concluded the adder does not only reward
past action.”); id. at 289 (emphasis added) (“Here, the RTO has yet to
be approved and the adder does not reward only past conduct . . ..”).
3
in 2006,2 well before San Diego began incurring costs for its
transmission project. As any economist knows, although
incentives “must be known to the agent in advance of his
choice,” they need not be awarded in advance of the choice;
rather, they function as “an offer” and “a discrete prompt
expected to elicit a particular response.” Kristen Underhill,
When Extrinsic Incentives Displace Intrinsic Motivation, 33
Yale J. on Reg. 213, 223 (2016) (quoting Ruth W. Grant, Strings
Attached: Untangling the Ethics of Incentives 43 (2012)); see
also Aaron L. Nielson, Sticky Regulations, 85 U. Chi. L. Rev.
85, 93 (2018) (“Basic economics suggests that in evaluating a
potential investment opportunity, a regulated party considers
how likely it is that incentives will remain in place.”).
The prompting effect is generated by the announcement of
the incentive even if the ultimate award is conditioned on some
later showing and paid after some or all of the performance. See
Pub. Serv. Comm’n of N.Y. v. FERC, 589 F.2d 542, 553 (D.C.
Cir. 1978) (emphasis added) (“In its programs to provide
incentive for new expenditures the FPC has long been concerned
with avoiding payment for expenditures ‘sunk’ before the
2
In the years leading up to the Energy Policy Act of 2005, Pub.
L. No. 109-58, 119 Stat. 594, investment in electric transmission
projects declined “while the electric load using the nation’s grid more
than doubled,” Promoting Transmission Investment Through Pricing
Reform, 116 FERC ¶ 61,057, at P. 10 (July 20, 2006) [hereinafter
Order No. 679], order on reh’g, 117 FERC ¶ 61,345 (Dec. 22, 2006),
order on reh’g, 119 FERC ¶ 61,062 (Apr. 19, 2007). Utility
companies constructing new transmission facilities faced substantial
risks, not the least of which was that after expending considerable
funds, the company would have to abandon the project for reasons
beyond its control and could not recover its investment. The Energy
Policy Act directed the Federal Energy Regulatory Commission to
establish incentive-based rules in order to reduce such risks and
encourage investment in transmission facilities. See id. at PP. 1–14.
4
announcement of the incentive . . ..”); Louis Kaplow, An
Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509,
551 (1986) (discussing retroactivity in relationship to “the
announcement date” of incentives).3
The majority opinion tries to skirt this problem. It points
out that San Diego never offered evidence showing that it relied
on the Abandonment Incentive in deciding to build its
transmission facility. Maj. Op. 19–20. This is a red herring.
Under the regulatory regime FERC established, San Diego had
no obligation to provide such evidence. In the 2006 rulemaking
on the incentive rules, FERC “reject[ed] arguments that an
applicant must show that, but for the incentives, the expansion
would not occur.” Order No. 679, 116 FERC ¶ 61,057, at P. 48.
FERC’s final rule was instead “based on a clear directive from
Congress that does not require an applicant to show that it would
not build the facilities but for the incentives.” Id. That directive
in section 219 of the Federal Power Act, 16 U.S.C. § 824s, does
not require “an individual showing of need by incentive
applicants,” Order No. 679, 116 FERC ¶ 61,057, at P. 53.
The majority opinion also relies on San Diego’s statement
that some of its pre-order costs were expended “without
assurance of cost recovery.” Maj. Op. 19. FERC went even
further. It decided that San Diego’s project was not “rationally
related” to the incentive because the utility had no guarantee of
recovering its costs. Rehearing Order, 157 FERC ¶ 61,056, at
P. 17. There is irrationality here, but it is on the part of FERC
3
Consider a common federal incentive: the tax deduction for
charitable contributions. Announced decades ago by Congress, that
incentive encourages contributions made before the taxpayer applies
for the deduction in that year’s return. See 26 U.S.C. § 170(a)(1);
Stanley S. Surrey, Tax Incentives as a Device for Implementing
Government Policy, 83 Harv. L. Rev. 705 (1970).
5
and the majority opinion. Lack of certain recovery does not
render the regulation something other than an incentive. Even
with respect to costs incurred after a FERC declaratory order, a
utility cannot be certain that it will ultimately qualify for the 100
percent Abandonment Incentive. After all, the project may or
may not be abandoned. Even then, there will still be the
questions whether post-order costs were prudent and whether the
later termination of the project resulted from factors beyond the
utility’s control.
The Abandonment Incentive grew out of a preexisting
system under which FERC generally awarded 50 percent of all
prudently incurred costs for abandoned facilities. See New Eng.
Power Co., 42 FERC ¶ 61,016, 1988 WL 243523 (Jan. 15,
1988), reh’g granted in part on other grounds, 43 FERC
¶ 61,285 (May 19, 1988). That system rested on FERC’s
longstanding policy of ensuring that utility investors are at least
partially “shielded against risk of losses resulting from aborted
projects,” thereby decreasing their “cost of capital.” Id. at *10
(quoting New Eng. Power Co., 8 FERC ¶ 61,054, at P. 61,177
(July 19, 1979), order on remand, 10 FERC ¶ 61,279 (Mar. 26,
1980), modified in part on other grounds, NEPCO Mun. Rate
Comm. v. FERC, 668 F.2d 1327 (D.C. Cir. 1981)). In other
words, the prior system also operated as an incentive. It was,
moreover, an incentive routinely awarded with respect to pre-
order costs. FERC extended this incentive to cover 100 percent
of costs for much the same reason, that is, “[t]o reduce the
uncertainty associated with higher risk projects, thereby
facilitating investment in these projects.” Order No. 679, 116
FERC ¶ 61,057, at P. 155. FERC offers no reason to distinguish
between these two incentives with respect to pre-order costs. To
the contrary, at the time it promulgated the regulation in this
case, FERC specifically called for its incentives to apply to costs
that predated the rule itself by up to roughly one year. Id. at
6
P. 34. Such costs would, of course, have occurred entirely in
advance of any order issued under the rule.
Tying eligibility for the Abandonment Incentive to the date
of FERC’s order is particularly arbitrary, given that the date of
the order is untethered to the development of the transmission
facility in question. The result is that the amount of an
applicant’s recovery will depend on FERC’s caseload and its
efficiency in issuing declaratory orders. Here, San Diego lost
out on more than five months’ worth of Abandonment Incentive
costs for the period during which its petition was pending before
the Commission. See Rehearing Order, 157 FERC ¶ 61,056, at
PP. 1–3.
This brings me to the text of the regulation. The majority
defers to FERC’s interpretation. See Maj. Op. 17–18, 20. It
presumably grants this deference pursuant to Auer v. Robbins,
519 U.S. 452, 461–63 (1997), without taking the necessary first
step of identifying an ambiguity in the regulation.4 The majority
4
The Supreme Court recently granted certiorari to consider
whether to overrule Auer’s rule of deference to agency interpretations
of ambiguous regulations. See Kisor v. Wilkie, No. 18-15, 2018 WL
6439837 (U.S. Dec. 10, 2018). This case demonstrates the perils of
deferring to an agency’s wayward interpretation of its own regulation.
Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155–56
(2012); see also Garco Constr., Inc. v. Speer, 138 S. Ct. 1052,
1052–53 (2018) (Thomas, J., dissenting from the denial of certiorari);
Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1210–11 (2015)
(Alito, J., concurring in part and concurring in the judgment); id. at
1211–13 (Scalia, J., concurring in the judgment); id. at 1213–25
(Thomas, J., concurring in the judgment); Decker v. Nw. Envtl. Def.
Ctr., 568 U.S. 597, 615–16 (2013) (Roberts, C.J., concurring); id. at
616–26 (Scalia, J., concurring in part and dissenting in part). See
generally John F. Manning, Constitutional Structure and Judicial
Deference to Agency Interpretations of Agency Rules, 96 Colum. L.
7
does not take this step because the regulation is not in the least
bit unclear.
Nothing supports FERC’s distinction between pre- and
post-order spending. The regulation and the preamble to it in
the rulemaking are unambiguous. The text of the Abandonment
Incentive shows that it applies on a project-to-project basis,
regardless of when or how a utility seeks authorization from
FERC. Thus, FERC “will authorize” a utility to recover “100
percent of prudently incurred costs of transmission facilities that
are cancelled or abandoned due to factors beyond the control of
the public utility,” 18 C.F.R. § 35.35(d)(1)(vi), subject to the
“facilities” satisfying the reliability test and the “project”
satisfying the nexus test, id. § 35.35(d).5
In the face of this unambiguous directive – 100 percent –
FERC granted San Diego some $15 million less than 100
percent of the costs of the project. FERC explained that it had
a “policy that a public utility may only recover up to 50 percent
of prudently incurred abandonment costs for costs that are
incurred before the date of the order granting the incentives.”
Rehearing Order, 157 FERC ¶ 61,056, at P. 10. Except that is
not the policy FERC promulgated in its regulation. Nothing in
the text of the Abandonment Incentive suggests that “100
percent” means anything less than just that. And nothing in the
Rev. 612 (1996).
5
The applicant must show (1) that “the facilities for which it
seeks incentives either ensure reliability or reduce the cost of delivered
power by reducing transmission congestion consistent with the
requirements of section 219 [of the Federal Power Act]” and (2) that
“the total package of incentives is tailored to address the demonstrable
risks or challenges faced by the applicant in undertaking the project.”
Id.
8
text of the regulation gives FERC discretion to award something
less than the full incentive once the requirements are met.
Indeed, in response to comments during its rulemaking, FERC
expressly declined to revise the regulation to include “gradations
regarding . . . the amount of incentive approved.” Order
No. 679, 116 FERC ¶ 61,057, at P. 49. The Commission is
bound by that choice unless and until it revises the Rule through
additional notice-and-comment rulemaking. E.g., United States
v. Nixon, 418 U.S. 683, 695–96 (1974); Clean Air Council v.
Pruitt, 862 F.3d 1, 8–9 (D.C. Cir. 2017) (per curiam).
The structure of the regulation also cuts against FERC’s
view. An applicant may seek a determination of its eligibility
for incentives in two ways. As San Diego did here, an applicant
may seek a pre-abandonment declaratory order, followed by a
post-abandonment filing for a rate adjustment under section 205
of the Federal Power Act. 18 C.F.R. § 35.35(d). The regulation
alternatively allows an applicant to forgo the declaratory-order
step and instead seek eligibility and rate determinations
simultaneously after abandonment. Id. An applicant who opts
for this second procedural route by making only a post-
abandonment filing would have incurred all of its costs in
advance of FERC’s order. Under FERC’s policy of denying
pre-order costs, then, the Abandonment Incentive would entitle
such an applicant to 0 rather than 100 percent of its costs.
Even for those applicants seeking a declaratory order in
advance of abandonment, under FERC’s policy few if any will
obtain the elusive 100 percent of costs called for by the
Abandonment Incentive. In order to show that its project meets
the regulation’s substantive requirements of reliability and
nexus, an applicant must necessarily have expended funds in
planning and development. Those costs would pre-date the
declaratory order and would therefore be excluded from the
9
Abandonment Incentive according to FERC’s decision in this
case.
FERC’s counsel tries to escape the consequences of the
administrative decision here by asserting that the agency is
merely proceeding on a “case-by-case basis.”6 The assertion is
either meaningless or capricious, even though the majority
opinion seems to endorse it. If all it is intended to describe is
the process of deciding cases, we already have a word for it –
adjudication. On the other hand, it may signify that FERC has
discretion to treat other applicants seeking pre-order costs
differently than it treated San Diego. But an agency’s discretion
is not “inclination,” but its “judgment; and its judgment is to be
guided by sound legal principles.” United States v. Burr, 25 F.
Cas. 30, 35 (C.C.D. Va. 1807) (No. 14,692d) (Marshall, C.J.);
see also Henry J. Friendly, Indiscretion About Discretion, 31
Emory L.J. 747 (1982). So what are the “sound legal principles”
for FERC to allow or disallow 100 percent recovery of pre-order
costs? FERC provided none in its adjudication of this case and
neither has agency counsel.7
6
Auer deference is especially unwarranted where, as here, the
agency’s interpretation is adopted post hoc as a litigating position and
conflicts with its prior reasoning. Christopher, 567 U.S. at 155–56.
7
The majority’s recitation of FERC’s rule adopts the categorical
approach. See Maj. Op. 9–10 (noting that the Abandonment Incentive
is available for costs “only insofar as those costs were incurred after
the effective date of the order” and identifying that date as “the
separating point between” eligible and ineligible costs). It ignores that
FERC repeatedly renounced that position in this appeal. See, e.g.,
Resp’t Br. 12–13 (“But the Commission did no such thing. . . . [S]uch
[pre-order] costs could be recovered if the applicant established the
requisite nexus.”); id. at 28 (“The Commission Did Not Bar All
Retroactive Recovery”); id. at 30, 37.
10
In short, FERC’s policy runs contrary to the text, structure,
and purpose of the regulation. FERC’s interpretation is not
“fairly supported by the text of the regulation itself,” and
applicants lack “adequate notice of that interpretation . . . within
the rule itself.” Drake v. FAA, 291 F.3d 59, 68 (D.C. Cir. 2002);
accord Mellow Partners v. Comm’r, 890 F.3d 1070, 1079 (D.C.
Cir. 2018).
FERC’s policy also departs from the agency’s precedent.
The majority’s attempt to write off FERC’s prior orders is
contrary to the law of this circuit.
In NextEra, for example, the utility sought to recover an
Abandonment Incentive of 100 percent of its prudently incurred
costs, “including costs related to the Projects that have been
incurred prior to the date of filing.” NextEra Energy
Transmission W., LLC, 154 FERC ¶ 61,009, at P. 13 (Jan. 8,
2016). FERC granted that request without any limitation with
respect to pre-order costs. Id. at P. 26. FERC so ruled without
engaging in any so-called case-by-case analysis of whether to
award pre-order costs. Id. The majority opinion hypothesizes
that FERC did not resolve the question of NextEra’s pre-order
costs. Maj. Op. 25–26. There is no indication in FERC’s order
to support that hypothesis: NextEra expressly sought an order
with respect to those costs, and its request was granted without
any relevant limitation. Still less was any explanation in
FERC’s order in this case about why it did not take such an
approach with respect to San Diego. In at least two cases of
actual abandonment, FERC has gone on to grant pre-order costs
without imposing the limitation it applied to San Diego. See S.
Cal. Edison Co., 137 FERC ¶ 61,252, PP. 10, 24 (Dec. 30,
2011); Pac. Gas & Elec. Co., 137 FERC ¶ 61,193, at PP. 4–5, 19
(Dec. 12, 2011).
11
The majority discounts these prior orders because “no party
filed a protest objecting on this ground, as the Six Cities did
here” and because the issue of pre-order costs was not
specifically discussed. Maj. Op. 25–26. Our court has rejected
this very argument. In ANR Storage, FERC attempted to
distinguish its prior orders from the one under review on the
basis that the former had been unopposed and lacked a reasoned
discussion. ANR Storage Co. v. FERC, 904 F.3d 1020, 1025
(D.C. Cir. 2018). We held that FERC had failed to “satisfy [its]
burden to provide some reasonable justification for treating [the
utilities] differently.” Id. FERC has a “statutory duty—imposed
by the APA and owed to all other regulated parties—to provide
some reasonable justification for any adverse treatment relative
to similarly situated competitors.” Id. FERC breached that
duty here by imposing a new policy on San Diego without
explaining its departure from prior orders.8
8
Gas Transmission, cited by the majority, is not to the contrary.
See Gas Transmission Nw. Co. v. FERC, 504 F.3d 1318, 1319–20
(D.C. Cir. 2007). In that case, we observed that FERC’s acceptance
of unopposed tariff sheets “does not turn every provision of the tariff
into ‘policy’ or ‘precedent.’” Id. at 1320. That narrow statement – not
every provision – does not license FERC to apply its own rules
inconsistently so long as it avoids explaining its actions.