Ninth Circuit Holds FERC Arbitrarily Granted a Public Utility an ROE Incentive Adder for RTO Participation
In an Opinion issued on January 8, 2018, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) granted a petition for review filed by the California Public Utilities Commission (“CPUC”) in two rate proceedings in which the Federal Energy Regulatory Commission (“FERC”) summarily approved for Pacific Gas and Electric Company (“PG&E”) a 50 basis point return on equity (“ROE”) incentive adder for its participation in the California Independent System Operator Corporation (“CAISO”). DWGP client, the Transmission Agency of Northern California, intervened in the appeal in support of the CPUC. This is a significant decision that has potential implications for other public utilities throughout the United States that receive ROE adders and thereby increase their shareholders’ return for their participation in Regional Transmission Organizations (“RTOs”) or Independent System Operators (“ISOs”).
In response to the directives of Congress in the Energy Policy Act of 2005, and specifically the requirements in section 219 of the Federal Power Act directing FERC to establish by rule, certain incentive-based rates, including incentives for electric utilities that join a RTO/ISO, FERC issued Order No. 679. Order No. 679 provided, in pertinent part, that FERC “will approve, when justified,” requests for ROE-based incentives for public utilities that join or continue membership in an RTO/ISO. Following Order No. 679, FERC has routinely granted a 50 basis point ROE adder to utilities that join or remain members of an RTO/ISO.
In a series of orders on two rate filings submitted by PG&E, CPUC argued that pursuant to California state law, PG&E is required to participate in the CAISO as ordered by the CPUC and, therefore, the FERC orders on review grant an incentive adder to PG&E for doing something it was already required to do and that the granting of an incentive for involuntary behavior is contrary to FERC policy. FERC rejected the CPUC’s claims and summarily granted PG&E the ROE adder finding that PG&E is presumed to meet the criteria required under Order No. 679 to receive the participation incentive.