FERC Upholds Denial of Full Retroactive Abandonment Costs for SDG&E

On October 26, FERC denied a rehearing request from San Diego Gas & Electric Company (“SDG&E”) following a March 2, 2016 order allowing only a 50 percent cost recovery in the event that a certain construction project is abandoned or canceled.  As the Commission reiterated, utilities are generally allowed 100 percent cost recovery only after a determination of eligibility for “Abandonment Incentives,” whereas only 50 percent cost recovery is typically allowed before such determination.  Thus, the Commission noted, “it would be reasonable to infer” the requirement for utilities to request eligibility for “Abandonment Incentives” before significant expenditures are incurred.

In September 2015, SDG&E filed a petition for a declaratory order seeking authorization to recover 100 percent of all prudently-incurred costs associated with its South Orange County Reliability Enhancement (“SOCRE”) project should that project be abandoned or cancelled for reasons beyond SDG&E’s control.  At the time of the petition, the SOCRE project was four years into construction and SDG&E had already spent roughly $31 million.  In its March 2 order, FERC granted SDG&E’s request for 100 percent of the so-called “Abandonment Incentives” but only after the effective date of the order.  All costs prudently incurred prior to March 2, 2016 were entitled to only 50 percent cost recovery.  As the Commission asserted, such a result was consistent with prior precedent and longstanding policies to ensure that Abandonment Incentives be “rationally related with the investments being proposed” and overall “designed to encourage future transmission investments.”

SDG&E filed a request for rehearing, arguing, among other things, that prior FERC precedent does support allowing full retroactive cost recovery, and that the March 2 order essentially elevates a procedural option into a necessity by requiring utilities to seek declaratory orders on Abandonment Incentive eligibility.  The utility also took issue with FERC’s assertion that granting full retroactive recovery would run counter to its policy that incentives be designed to “encourage future transmission investments.”  As SDG&E argued, FERC’s March 2 order read “encourage” to essentially require a “but-for” analysis, which the Commission had rejected in previous orders.

In its October 26 order denying rehearing, FERC distinguished the cases SDG&E relied on to establish a trend of allowing retroactive recovery of Abandonment Incentives.  As the Commission noted, these cases either never confronted the question of retroactive recovery, were silent on the matter, or were explicitly identified as “atypical” by the Commission when issuing the order.   These cases, FERC noted, do in fact reinforce the policy of only allowing Abandonment Incentives that are “designed to encourage future transmission investments” and are otherwise “rationally related” to those incentives.  As the Commission explained, the policy purpose and definition of “incentive” is to encourage or motivate behavior.  Although the Commission does not require utilities to establish that “but for” the Abandonment Incentive, they would not proceed with a project, they must at least “demonstrate that the incentives are rationally related with the investments being proposed.”

Finally, FERC also rejected SDG&E’s contention that utilities are now required exercise a discretionary procedural mechanism—request for declaratory order—to secure eligibility for Abandonment Incentives.  According to the Commission, although utilities are not required to request Abandonment Incentives before significant expenditures are incurred, “it is reasonable to infer such a requirement, as incentives cease to be incentives if the action that they are intended to promote has already occurred.”

A copy of the Commission’s order can be found here. A more detailed version of this article first appeared in the Washington Energy Report, made available by Troutman Sanders LLP.

 

 

 

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