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San Diego Gas & Electric Co. v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

January 15, 2019

San Diego Gas & Electric Company, Petitioner
v.
Federal Energy Regulatory Commission, Respondent Pacific Gas and Electric Company, et al., Intervenors

          Argued March 15, 2018

          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 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

          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 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 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;
(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. 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.

          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 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 ...


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