On December 20, 2019, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) denied petitions for review of a series of FERC orders that exempted certain North Carolina transmission customers of Virginia Electric and Power Company (“Dominion”) from the incremental costs to underground certain transmission lines in the Virginia portion of the Dominion’s service territory. The challenges were brought by certain Virginia transmission customers of Dominion Energy, which sought to overturn FERC’s determination that only Dominion’s Virginia wholesale customers, not its North Carolina customers, should bear the costs of undergrounding three transmission line upgrade projects.

In the challenged orders, FERC concluded that the incremental costs to underground the projects should be confined to Virginia because the decision to construct them underground was made by Virginia legislators and regulators. FERC found that the evidence showed that Virginia Customers benefitted from the undergrounding of the projects, whereas North Carolina customers did not. FERC explained that this particular ratemaking treatment represented a “limited exception” to FERC’s general policy that all of a utility’s customers should share the costs of upgrading the grid.

Petitioners Northern Virginia Electric Cooperative, Inc. and Old Dominion Electric Cooperative, filed petitions for review challenging the decisions on both procedural and substantive grounds. On process, petitioners argued that FERC improperly invoked its Federal Power Act (“FPA”) section 206 authority, failed to provide adequate notice of its intent to modify Dominion’s filed formula rate, and impermissibly limited the scope of its evidentiary hearing. The court rejected these arguments. The court found that FERC properly broadened the scope of the proceedings involving the undergrounding costs and Dominion’s formula rate under FPA section 206. The court further explained that the petitioners “not only had notice but took advantage of the opportunity to litigate the cost allocation issue before the Commission.” The court also pointed out that FERC’s order properly delineated the scope of the evidentiary hearing, to which the administrative law judge faithfully adhered.

On the merits of the decision to exempt North Carolina customers, petitioners argued that FERC acted arbitrarily by requiring them to exclusively bear the costs of undergrounding. The court, however, found nothing arbitrary in FERC’s conclusion, noting there was more than substantial evidence in the record that Virginia Customers, but not North Carolina customers, benefited from the undergrounding of the transmission upgrades. The court observed that the overwhelming majority of public support for undergrounding the projects pointed to benefits specific to Virginians, which included better aesthetics, avoidance of electromagnetic radiation, and improved property and tax values. The court further found that the undergrounding costs were a direct result of Virginia legislation intended to benefit its own citizens. Finally, the court concluded that because there was a lack of evidence that North Carolina customers benefitted in any way from the undergrounding, the court concluded that FERC’s “limited exception” to its cost sharing policy maintained consistency with the broader cost causation principle and thus was not arbitrary.

A copy of the order is available here.