On June 7, 2013, the Seventh Circuit Court of Appeals upheld the Federal Energy Regulatory Commission’s approval of a Midwest ISO (MISO) tariff revision that allocates transmission costs for certain projects in the ISO’s service area. The court also remanded a separate issue to FERC for further consideration — the following blog posts from Troutman Sanders and Davis Wright Tremaine breakdown this and some of the other questions addressed by the court in Illinois Commerce Commission v. FERC, Case Nos. 11-3421 (7th Cir. 2013), so this post will look more closely at the primary issue: cost allocation.

The case centers around two sets of plaintiffs: regulators and utilities from Illinois and Michigan, referred to simply as “Illinois” and “Michigan,” respectively. Both groups took issue with how MISO calculated and allocated the transmission costs for the 16 “multi-value projects” (MVPs) that are proposed for construction in the ISO. These projects consist of extensive high-voltage transmission lines and are designed to improve overall transmission system reliability, help MISO utilities meet state renewable portfolio standards, and provide other economic benefits to transmission users. Illinois and Michigan argued that they should be exempt from the MVP surcharge because the projects would only benefit a few utilities. Furthermore, they asserted that even if they benefited from a particular project, MISO’s cost allocation scheme (the basis for its MVP surcharge) is too “crude” to fairly calculate these benefits and assign costs accordingly.

Both FERC — and later, the Seventh Circuit — disagreed. First, the court noted that MISO allocated the costs for the MVPs not based on proximity to the transmission project (as was the ISO’s practice prior to 2010), but rather to all utilities on the grid in proportion to their wholesale use. MISO and FERC argue that the MVPs will be primarily transmitting renewable energy from sparsely populated rural areas in amounts that vastly exceed the consumption needs and financial wherewithal of these areas. This renewable energy will be ferried across the entire MISO grid, relieving congestion and stabilizing the system in the process. Second, in recognition of these system-wide benefits, FERC felt justified in allowing MISO to impose the surcharge against each MISO utility according to how much energy they take from the entire grid. Although “crude,” this cost allocation scheme was nonetheless sufficient to warrant approval from FERC and the Seventh Circuit.

This second point requires further discussion because it has wider implications for other entities looking to challenge transmission cost allocation schemes. The Seventh Circuit is no stranger to cost allocation issues. In fact, it was the court’s decision in Illinois Commerce Commission v. FERC, 576 F.3d 470, 476 (7th Cir. 2009) that set out the standard FERC adopted for its landmark Order 1000. In that decision, the court rejected FERC’s approval of a PJM cost allocation scheme for want of a more equitable cost-benefit ratio. Recognizing that precise cost and benefit determinations for transmission projects are difficult to calculate, the court simply required FERC to have “articulable and plausible reasons to believe that the benefits [that a utility receives from a transmission project] are at least roughly commensurate” with the costs allocated to the utility.

By recognizing that MISO and FERC’s “crude” cost-benefit analysis was enough to pass the “roughly commensurate” standard, this case suggests that other courts (certainly the Seventh circuit) will give FERC similar deference. The court also puts the onus on challengers to show proof that cost-benefit analyses do not meet the “roughly commensurate” standard. It is not enough to simply say that the cost allocation mechanism is unfair; rather, the court said that the Illinois and Michigan parties needed to present “evidence of [an] imbalance of costs and benefits.” Parties challenging cost allocation schemes would be wise to heed this warning and come armed with data and other allocation alternatives for FERC and the courts to consider.

Dicta:

In dispatching one of Michigan’s arguments against the MVP, the court alluded to potential constitutional deficiencies with Michigan’s renewable portfolio standard (RPS). Michigan’s RPS requires utilities to acquire ten percent of their energy procurement from renewable sources by 2015. The court noted that by prohibiting in-state utilities from crediting out of state wind energy toward their RPS requirement, Michigan’s RPS law discriminates against interstate commerce in violation of the commerce clause. Although this constitutional aside can be safely relegated as dicta for purposes of the court’s decision, it nonetheless could add fodder to the pending constitutional challenges to RPS’s around the country. For more information on brewing dormant commerce clause challenges to state RPS laws see Daniel K. Lee & Timothy P. Duane, Putting the Dormant Commerce Clause Back to Sleep: Adapting the Doctrine to Support State Renewable Portfolio Standards, 43 Envtl. L. 295 (2013); Steven Ferrey, Threading the Constitutional Needle with Care: The Commerce Clause Threat to the New Infrastructure of Renewable Power, 7 Texas J. Oil, Gas & Energy Law 59 (2012).

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