Law360 (February 19, 2021, 8:01 PM EST) -- A divided D.C. Circuit on Friday backed the
Federal Energy Regulatory Commission's decision to slash incentives from units of transmission company
ITC Holdings Inc. following a 2016 merger, rejecting arguments that FERC unlawfully performed a policy about-face.
The ITC units — International Transmission Co., Michigan Electric Transmission Co. LLC and ITC Midwest LLC —
argued FERC had no legal basis to conclude that incentives they received needed to be halved because they had a reduced level of independence after ITC Holdings' merger with utility Fortis Inc., which also owns electricity generation facilities.
But a D.C. Circuit panel said in a 2-1 ruling that there was no merit to ITC's claims that FERC created a new test to determine whether transmission subsidiaries are sufficiently independent from their generation-owning corporate parents to earn the transmission-only incentives without explaining why it was ditching a previous test that the ITC units would have passed.
The majority also rejected ITC's argument that FERC failed to first show that the existing incentives were unjust and unreasonable before determining what the new incentives should be, as required by Section 206 of the Federal Power Act.
The case has its roots in challenges to the ITC units' transmission-only incentive on its so-called return on equity, or ROE, which is how much of a return investors can get on their investment in a transmission company and is baked into the company's rate.
ITC argued that FERC had established a geographic test for determining whether the business of a generation-owning utility's transmission subsidiary is sufficiently independent to warrant the transmission-only ROE incentive. But faced with complaints that the ITC units were no longer sufficiently independent following the Fortis merger, FERC created a new test that examined the companies' internal governance and structural relationship with its corporate parents, rather than their geographical proximity.
As a result, FERC said in July 2018 that the ITC units were no longer fully independent and directed their transmission-only ROE to be cut in half, ITC told the D.C. Circuit.
Writing for the majority Friday, U.S. Circuit Judge Cornelia T.L. Pillard said that FERC's geographic test was not broadly applicable and that the agency expressly adopted a case-by-case approach to transmission incentives, especially the ones earned by the ITC units.
In ITC's case, FERC determined that the transmission incentives the company's units enjoyed were no longer appropriate post-merger, which triggered the Section 206 requirement that the agency set a new just and reasonable rate, Judge Pillard wrote.
"In view of the deference that we owe FERC in rate-related matters, we cannot conclude that this finding was undermined by other cases in which it faced different claims in procedurally distinct proceedings and reached different results based on distinct records," Judge Pillard wrote.
The D.C. Circuit majority said that ITC's argument that FERC failed to formally conclude that the existing incentives were unjust and unreasonable appears to boil down to the agency's failure to use the words "unjust and unreasonable" in the first step of the Section 206 review process.
But FERC granted a complaint that explicitly alleged the existing incentives were unjust and unreasonable and the agency's analysis followed Section 206's two-step procedure, so its failure to "use the magic words ... did not reflect a fatal flaw in its decision,"Judge Pillard wrote.
"All but a single paragraph of FERC's analysis here concerned the first-step issue of whether the merger reduced ITC's independence such that an [incentive] reserved for fully independent [transmission companies] could no longer be considered just and reasonable as applied to ITC," Judge Pillard wrote for the majority.
In dissent, Circuit Judge David B. Sentelle said the majority's conclusion contradicts the appeals court's 2017 decision in
Emera Maine et al. v. FERC that said the agency didn't justify how an old ROE for New England transmission companies was unjust and unreasonable and why a new one was just and reasonable.
In ITC's case, FERC only concluded that the new incentives were more appropriate than the old ones, eroding the limits Congress placed on FERC's ability to change rates in Section 206 of the Federal Power Act, Judge Sentelle said in his dissent.
"FERC dismisses those congressional limits as 'magic words,' alluding to Hanna Diyab's Ali Baba and the Forty Thieves," Judge Sentelle said in his dissent. "Yet FERC would do well to remember that when Ali Baba's brother forgot the magic words, he could not escape the thieves' cave. Although 'unjust' or 'unreasonable' are congressional requirements rather than magic words, I would likewise refuse to allow FERC to escape a trap of its own making."
But the D.C. Circuit majority said the Emera decision doesn't apply because FERC actually determined that the ITC-Fortis merger reduced the independence of ITC's transmission subsidiaries to the point where their incentives were no longer just and reasonable.
A FERC spokesperson declined comment Friday. An ITC representative couldn't be immediately reached for comment Friday.
Circuit Judges Judith W. Rogers, Cornelia T.L. Pillard and David B. Sentelle sat on the panel for the D.C. Circuit.
The ITC entities are represented by Aaron Streett, Jay Ryan and Jonathan Mark Little of
Baker Botts LLP.
FERC is represented in-house by senior attorney Carol J. Banta, deputy solicitor Lona T. Perry, solicitor Robert H. Solomon and deputy general counsel David L. Morenoff.
The case is International Transmission Co. et al. v. FERC, case number
19-1190, in the
U.S. Court of Appeals for the District of Columbia Circuit.