On August 15, 2014, the U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit) issued an opinion in South Carolina Public Service Authority v. FERC, Case Nos. 12-1232, et al. (consolidated), upholding the Federal Energy Regulatory Commission’s (FERC) Order No. 1000 in its entirety, giving FERC a major win in a case involving 45 petitioners and 16 intervenors.

Authority to Require Participation:  In Order No. 888 in 1996, FERC required public utility transmission providers to functionally unbundle their wholesale generation and transmission services and file open-access transmission tariffs to provide non-discriminatory transmission service and to provide the benefits of competitively priced generation.  Previously, the D.C. Circuit upheld Order No. 888 in nearly all respects.  In this opinion, the D.C. Circuit affirmed FERC’s conclusion that transmission planning affects transmission rates and that FERC has authority under Section 206 of the Federal Power Act (FPA) to require transmission providers to participate in a regional planning process.  The Court expressed its view that such a requirement is simply the next step in reforms that began with Order No. 888.  The Court also concluded that the statutory directive for “voluntary interconnection and coordination” found in Section 202(a) of the FPA does not bar FERC from requiring regional planning and that Order No. 1000 does not interfere with traditional state authority.

Theoretical Threat: The Court accepted FERC’s argument that Order No. 1000’s planning and cost allocation requirements are necessary to prevent the theoretical threat of inefficient and costly transmission development in the absence of Order No. 1000 reforms.   In 2007, FERC issued Order No. 890, concluding that transmission providers lacked incentives to plan and develop new transmission facilities.  Order No. 890 required each transmission provider to establish an open, transparent, and coordinated transmission planning process that complied with nine planning principles.  In this case, the Court explained that FERC’s decision to anticipate theoretical failures of FERC’s prior Order No. 890 was not unreasonably speculative because FERC’s remedial findings in this case are based on “well-established general principles,” in particular the principle that that competition facilitated by regional planning in transmission development will normally lead to lower prices.

Rights of First Refusal:  This opinion by the D.C. Circuit firmly establishes FERC’s authority under the FPA to require transmission providers to remove from FERC tariffs and agreements any federal rights of first refusal (ROFRs) that would allow an incumbent transmission developer to construct and own new transmission facilities included in a regional transmission plan, regardless of whether the proposed project originated with a non-incumbent developer.  The Court concluded that ROFRs affect transmission rates and ROFRs are likely to have a direct effect on the costs of transmission facilities because they erect barriers to the participation of non-incumbent developers in the transmission development market.  The Court also accepted that eliminating ROFRs will increase competition to help ensure just and reasonable rates.

However, the Court refrained from deciding whether and how Mobile-Sierra provisions might affect ROFRs found in tariffs or agreements.  Under the Mobile-Sierra doctrine, freely-negotiated wholesale-energy contracts or tariff provisions are presumed to be just and reasonable unless the contracts or provisions are separately found to harm the public interest.  In this case, the Court avoided the substance of previous Mobile-Sierra arguments that freely-negotiated ROFR tariff provisions are just and reasonable until FERC makes an independent finding to rebut the Mobile-Sierra presumption.  Rather, the Court held that FERC will hear the Mobile-Sierra arguments when it reviews the new OATTs that utilities must file to comply with Order No. 1000.  The Court declined to weigh in on whether or how Mobile-Sierra will ultimately apply to particular contracts or tariff provisions.

Although this opinion affirms FERC’s authority to eliminate federal ROFRs, the Court does not discuss FERC’s more recent determination (from May 15, 2014 orders) that, under Order No. 1000, regional transmission planning processes can acknowledge the operation of state laws on the planning process, including state ROFR laws.  In the May 15, 2014 order, FERC recognized that some state or local laws may independently prohibit a non-incumbent transmission developer from developing a particular transmission project, regardless of the regional transmission planning process.  For example, some state ROFR laws provide the incumbent transmission owner the right to construct and own projects that are proposed on the transmission owner’s existing right of way and where the project would alter the transmission owner’s use and control of its right of way.  Thus, FERC concluded in its May 15, 2014 orders that ignoring the operation of such state laws at the outset of the regional planning process would be inefficient because such state ROFR laws dictate that certain projects ultimately must be assigned to the incumbent transmission developer.

Cost Allocation:  The Court rejected challenges to Order No. 1000’s requirement that regional planning processes allocate costs of new transmission facilities to beneficiaries of those projects.  Under Section 206 of the FPA, FERC may regulate practices affecting rates, and the Court agreed with FERC that beneficiary-based cost allocation—or its absence— affects rates.

Public Policy Requirements:  The Court rejected challenges to the requirement that planning processes account for the impact of federal, state, and local laws and regulations (i.e., public policy requirements) on transmission systems.  According to the Court, Order No. 1000 simply recognizes that state and federal policies, e.g., environmental policies, might affect the transmission market, and the Court affirmed the requirement that transmission providers consider the impact of such public policies in their planning decisions.

Reciprocity: The Court agreed with FERC that non-public utilities must participate in transmission planning and cost allocation in exchange for open access under reciprocity conditions.  According to the Court, Order No. 1000 broadened the scope of regional planning requirements found in Order No. 1000.  The Court also affirmed FERC’s decision not to mandate under Section 211A of the FPA that non-public utilities participate in regional transmission planning.