On August 8, 2016, the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit” or “Court”) issued a Decision on El Paso Electric Company’s (“El Paso”) petitions for review of FERC Orders addressing compliance with the requirements of Order No. 1000, et al., in the WestConnect planning region. The Decision vacated and remanded as arbitrary and capricious FERC’s decision to allow non-jurisdictional utilities to participate in the WestConnect region as Coordinating Transmission Owners (“CTOs”) not subject to binding cost allocation, thereby creating uncertainty about the future of joint transmission planning in this region.

During the process to comply with Order No. 1000, El Paso and the other WestConnect public utilities first proposed a non-binding cost-allocation approach whereby beneficiaries of projects identified in the regional planning process would enter into cost-sharing agreements. The WestConnect non-public utilities reasoned that requiring binding cost allocation would be tantamount to requiring construction of transmission projects and, as such, would be beyond FERC’s jurisdiction. The WestConnect non-jurisdictional utilities supported the public utilities’ initial proposal. FERC rejected this approach as contrary to Order No. 1000’s call for binding cost-allocation, and distinguished binding transmission cost allocation from establishing an obligation to construct transmission projects. The WestConnect public utilities filed a request for rehearing.

In a second set of compliance filings, the WestConnect public utilities proposed to allow non-public utilities to participate in the WestConnect as CTOs and submit projects for consideration in the regional planning process; however, projects electrically interconnected to CTOs and other non-enrolled transmission owners providing quantifiable benefits to those non-enrolled TOs would be excluded from regional cost allocation. The non-jurisdictional utilities again supported the cost allocation approach filed by the WestConnect public utilities. FERC rejected the WestConnect public utilities’ proposal, reasoning that such approach would “unduly restrict consideration of transmission facilities that nonetheless may have regional benefits and are determined to be more efficient or cost-effective transmission solutions to regional transmission needs.” In the same order, FERC denied rehearing on the binding cost allocation issue (“First Rehearing Order”). The WestConnect public utilities filed a request for rehearing of this order.

In a third set of compliance filings, the WestConnect public utilities proposed to allow CTOs to participate in transmission planning (including the ability to submit projects eligible for regional cost allocation and to vote in exchange for the payment of membership fees) with an option to join in and share the cost of a beneficial project but without being automatically bound to cost allocation. To avoid the free ridership concern, these compliance filings proposed to make ineligible for regional cost allocation a transmission projects benefiting a CTO if such CTO opted out of cost-allocation and the re-allocation of costs to jurisdictional utilities increased their original costs more than 10 percent. Again, the non-jurisdictional utilities supported this proposal. FERC rejected the WestConnect public utilities’ cost-allocation proposal, reasoning that “the proposal might lead to the transmission planning process rejecting regional cost allocation for a proposed transmission solution that continues to be a more efficient or cost-effective solution for the remaining beneficiaries compared to other alternatives even after a cost shift.” The same order denied rehearing on the free ridership issue raised by the WestConnect public utilities (“Second Rehearing Order”), reasoning that Order No. 1000 did not seek to eliminate all instance of free ridership and, indeed, acknowledged that some beneficiaries of transmission facilities scape cost responsibility because they are not located in the same transmission planning region as the transmission facility from which they benefit. Finally, in a fourth set of compliance filings, the WestConnect public utilities deleted the language concerning exclusion of projects when a CTO opts out and there is an increase of overall project costs above 10 percent. FERC accepted the compliance filings on this issue.

The Fifth Circuit reviewed the First Rehearing Order and the Second Rehearing Order with respect to the cost-allocation issue. El Paso argued that the WestConnect rehearing orders resulted in unjust and unreasonable rates because they purportedly allowed non-jurisdictional utilities to benefit from transmission projects without paying a share of the costs, in violation of FERC’s own precedent regarding cost allocation principles. FERC argued that the WestConnect rehearing orders would not result in unjust and unreasonable rates because public utilities could still use the reciprocity principle to encourage non-jurisdictional utilities to participate in transmission planning. While the Court recognized that Order No. 1000 declined to regulate non-jurisdictional utilities and, therefore, does not address free ridership by those utilities, it stressed that FERC still has a statutory duty to ensure just and reasonable rates. The Court found a discrepancy between how FERC described its goals in Order No. 1000 to achieve just and reasonable rates (i.e., to ensure just and reasonable rates by reducing free ridership and following cost causation principles) and how those principles were applied in the WestConnect region. Specifically, the Court found that FERC did not provide a reasoned explanation for: (1) why the non-jurisdictional utilities have incentive or obligation to participate in binding cost allocation when they can get many of the same benefits at the jurisdictional utilities’ expense; and (2) how FERC can meet its obligation to ensure just and reasonable rates when many of the costs of new development will be imposed on only half of the utilities in the WestConnect region. On this basis, it remanded FERC’s WestConnect rehearing orders.

Notably, Circuit Judge Reavley dissented from the majority decision reasoning that: (1) cost allocation determinations remain commensurate with the estimated benefits considered because if a CTO does not accept the cost allocation, the transmission planning process removes the benefits applicable to those CTOs when re-evaluating the project; (2) the free rider problem the public utilities complained of is not unique but rather is the same free rider problem that arises every time any entity not enrolled in the transmission planning region benefits from a new transmission facility; and (3) the Court should give deference to FERC’s ruling reached upon consideration of the free rider issue against other policy goals (such as expanding opportunities for identifying and proposing more efficient or cost-effective regional transmission projects) and not treat the satisfactory explanation standard as “one that actually persuades the Court as to the wisdom of FERC’s decision or that actually rebuts the Utilities’ speculative contentions regarding unintended consequences.”

The turmoil created by this Court decision may fracture the delicate balance that was struck to bring non-jurisdictional utilities into the fold of WestConnect and disrupt joint transmission planning by public and non-public utilities in the region. How FERC acts on remand also could be significant from the perspective of its precedent on the reciprocity principle and authority under Section 211A of the Federal Power Act.