In May 2012, FERC instituted an investigation and paper hearing into whether the formula rate protocols under the Midcontinent Independent System Operator, Inc.’s (MISO) Open Access Transmission, Energy, and Operating Reserve Markets Tariff (OATT) are sufficient to ensure just and reasonable transmission rates. On May 16, 2013, FERC issued an order concluding that the MISO and individual transmission owners’ formula rate protocols are not sufficient to ensure that transmission rates are just and reasonable, and ordered MISO and 37 transmission owners in MISO to file revised protocols within 60 days. While FERC did not break new ground in the kind of provisions for increased transparency, opportunity for participation and ability to challenge formula rate implementation that it has directed MISO and the transmission owners to incorporate into their formula rate protocols, the May 16 Order is notable for its requirement that previously approved protocols must be updated to conform to current "best practices," and its recognition that FPA Section 206 rights alone are not sufficient to protect ratepayers where protocols do not incorporate those best practices.

FERC first accepted MISO’s formula rate protocols in 1998, one of the first protocols accepted by FERC. As FERC recognized in the May 16 Order, modern formula rate proposals have changed significantly since then, generally permitting greater opportunities for review and participation in formula rate proceedings by a broader range of stakeholders, and also containing specific procedures for stakeholders to challenge the transmission owner’s implementation of a formula rate. These protections were not in the MISO formula rate protocols that were the subject of FERC’s investigation.

The May 16 Order requires revisions to the MISO formula rate protocols in order to (1) permit all interested parties to be eligible to participate in formula rate information exchange and review processes; (2) make revenue requirements, inputs, calculations and other information publicly available, providing interested parties with the opportunity to review that information; and (3) afford parties the opportunity to engage in informal and formal challenge processes regarding implementation of the formula rate. FERC stated that it seeks to provide a "balance between allowing timely recovery of costs incurred to provide jurisdictional transmission service through the use of formula rates, and providing open and transparent rate making to ensure that the rates ultimately charged are just and reasonable as well as consistent with the transmission owner’s filed formula rate."

The May 16 Order is noteworthy because FERC required transmission owners to revise their formula rate protocols to reflect changes in the best practices for protocols that have developed since their protocols were approved, without relying on any change specific to each transmission owner’s situation or condition as justification for such revision. FERC broadly took notice that "circumstances surrounding any approved formula rate protocol have not remained fixed" and asserted its authority under Section 206 of the FPA to ensure that formula rate protocols remain just and reasonable. In so doing, FERC rejected arguments that protocols previously approved by FERC should be immune from "further evaluation" in light of best practices and conventions adopted since such protocols were approved. Thus, all transmission owners with formula rate protocols on file with FERC should take note of the possibility that FERC may require prospective revisions to their protocols absent any changes in the transmission owners’ condition. To avoid such action, transmission owners should take proactive measures to track trends in formula rate protocols and intervene and participate in proceedings where necessary.

FERC also concluded that "[i]n failing to set forth specific challenge procedures, the MISO formula rate protocols effectively require interested parties to traverse an ad hoc system of procedures to raise issues with transmission owners’ annual updates." Certain transmission owners argued that interested parties have sufficient avenues to address concerns, including challenges to formula rates under Section 206 of the Federal Power Act (FPA), submission of questions to MISO or the relevant transmission owner, or referral of issues to FERC’s hotline or ADR service. However, FERC concluded that these procedures "alone are inadequate in this context." In particular, FERC recognized that Section 206 of the FPA "imposes significant informational and financial obstacles that interested parties must overcome in order to raise issues with a transmission owner’s implementation of its formula rate. Such a burden could be particularly onerous for smaller entities. Further, such impediments could discourage interested parties from raising issues of less financial significance, even when their concerns are valid." FERC’s recognition of the limitations and burdens to obtaining review under Section 206 of the FPA is also noteworthy; in other contexts, such as approval of market-based rates for merchant transmission providers, FERC has relied on Section 206 rights to bolster initial findings of justness and reasonableness under Section 205 of the FPA. In the formula rate protocol context, however, FERC has signaled that transmission owners have a continuing obligation to ensure that their formula rates comply with FERC requirements (transparent, stakeholder access to information and right to challenge rates) and that prior acceptance of a formula rate coupled with a lack of changed company circumstances does not discharge that obligation.