On July 18, 2019, FERC affirmed on remand its prior approval of Pacific Gas and Electric Company’s (“PG&E”) request for a return-on-equity (“ROE”) incentive adder to its transmission rates (“RTO-Participation Incentive”) for its ongoing membership in the California Independent System Operator Corporation (“CAISO”). In its decision, which followed from a 2018 remand from the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”), FERC reasserted its jurisdiction over such transmission incentive questions and determined that, absent a relevant mandate under California law requiring PG&E’s participation in CAISO, the RTO-Participation Incentive was warranted because it induces PG&E to continue its CAISO membership.

In 2006, FERC issued Order No. 679, establishing the RTO-Participation Incentive, which allows utilities remaining in a Regional Transmission Organization (“RTO”) or Independent System Operator (“ISO”) to receive the ROE-based adder. Since 2007, PG&E has requested, and FERC has continuously granted the RTO-Participation Incentive. In 2014 however, the California Public Utilities Commission (“CPUC”) began challenging FERC’s continual RTO-Participation Incentive grants on the basis that PG&E’s participation in CAISO is required under California law, and therefore not voluntary. CPUC has argued that given PG&E’s required participation in CAISO, the RTO-Participation Incentive does not encourage PG&E’s continuing membership and therefore, should not be awarded to PG&E. Despite the CPUC’s protests, FERC granted PG&E’s request for the RTO-Participation Incentive after determining that FERC holds authority to grant the incentive whether or not participation in CAISO is voluntary. Additionally, FERC pointed to Order No. 679 as containing no limitations on FERC’s decision to grant the RTO-Participation Incentive under the circumstances.

On appeal, the Ninth Circuit rejected FERC’s grant of the RTO-Participation Incentive largely on procedural grounds. The Ninth Circuit determined that FERC unreasonably interpreted Order No. 679 as justifying summary grants of adders for RTO membership and thus, acted arbitrarily and capriciously in granting the PG&E the RTO-Participation Incentives without reasoned decision-making. The Ninth Circuit remanded the proceeding back to FERC and ordered FERC to make a case-specific inquiry of PG&E’s circumstances—that is, whether PG&E could unilaterally leave CAISO and whether the RTO-Participation Incentive could induce PG&E to remain in CAISO.

On remand, the CPUC (joined by the Sacramento Municipal Utility District, and the Transmission Agency of Northern California, jointly, “California Parties”) renewed earlier jurisdictional arguments that California law governed and mandated CAISO participation, thereby defeating PG&E’s incentive eligibility. PG&E, joined by fellow California investor-owned utilities, responded that no such mandate existed and that in any event, the responsibility for approving operational transfers of transmission facilities, and ultimately CAISO’s formation, rested solely with FERC.

In its order on remand, FERC quickly rejected the California Parties’ jurisdiction argument, determining that, because the underlying issue involved transmission and wholesale sales of electricity, the Commission retained exclusive jurisdiction. Next, FERC turned to a case-specific analysis of PG&E’s entitlement to the RTO-Participation Incentive. FERC concluded that California law and regulations neither mandated participation in CAISO nor prohibited PG&E from unilaterally withdrawing from CAISO. Rather, the proffered California authorities simply encouraged and facilitated CAISO participation, and moreover did not address transfers of operational control. Furthermore, FERC found that, consistent with FERC precedent and policy, PG&E’s participation in CAISO is voluntary. In light of the voluntary nature if RTO/ISO membership, combined with the absence of a requirement for RTO/ISO participation in California Code, FERC determined that the RTO-Participation Incentive induces PG&E to continue its membership. Therefore, FERC affirmed its prior grant of PG&E’s request for the RTO-Participation Incentive.

FERC’s order can be found here.