The DC Circuit has affirmed FERC’s application of the “cost causation” principle to prevent a public utility (the Utility) from allocating costs for facilities to customers that did not benefit from the facilities. The Utility had asked the court to overturn FERC’s order preventing the Utility from recovering transmission costs from customers located near the facilities because those facilities were built and intended to serve solely a separate group of customers located 300 miles away.
The court’s ruling upholds the “beneficiary pays” standard of review FERC uses to protect customers from paying for facilities they neither use nor benefit from and demonstrates and ensures costs are allocated based on electric benefits from those costs. The ruling also demonstrated that costs can be appropriately recovered far from the physical location of the facilities.
Background
Prior to the formation of Southwest Power Pool Inc. (SPP), the Utility invested in certain generation and transmission facilities (the Facilities) in eastern Wyoming, from which the Utility transmitted electricity across Nebraska to load in what is now SPP’s current Zone 16. The utility co-owns the Facilities with several other utilities (the Other Facility Owners).
The Utility later joined SPP in 2009, transferring functional control of all facilities in the Zone 16 area to SPP and recovering costs from Zone 16 customers. At that time, SPP’s service territory did not extend to the location of the Facilities, so the Utility transmitted electricity to the SPP border and then used the SPP network to deliver power to Zone 16.
In 2015, SPP expanded and created a new Zone 19 that encompasses the physical location of the Facilities, and some of the Other Facility Owners joined Zone 19, transferring functional control of their transmission facilities to SPP and recovering costs through rates charged to Zone 19 customers.
Proposed Cost Shift
SPP, on behalf of the Utility, filed tariff revisions in 2021 to allow the Utility to recover costs for the Facilities from Zone 19 customers and for the Utility to transfer its interests in the Facilities to SPP’s functional control. Protests were filed by two utilities, including one of the Zone 19 Other Facility Owners, alleging, among other things, that the Utility’s recovery from Zone 19 customers would be an inappropriate cost shift because Zone 19 customers do not benefit from the Facilities. FERC found that SPP and the Utility failed to demonstrate that the proposal was just and reasonable under FERC’s cost-causation principle.
Under the cost-causation principle, all filed rates must “reflect to some degree the costs actually caused by the customers who must pay them.” FERC classified the Utility’s interest in the Facilities as a “legacy facility” developed to benefit its own system and its own customers. As such, because the Utility’s investment in the Facilities was solely for the benefit of Zone 16 customers, it would violate the cost-causation principle to allocate those costs to Zone 19 customers who do not benefit from the Utility’s investment.
The court agreed that the Utility failed to provide evidence that the Facilities serve Zone 19 customers. The Utility argued that it sourced electricity from SPP’s network service and thus should not be bound by the initial motive for its investment in the Facility, but the court was not persuaded, in part because the Utility retained a “grandfathered agreement” to transmit electricity from the Facility to Zone 16.
The court also noted that the Utility’s offer to transfer control of its interest in the Facility did not alter the cost-causation analysis. The court agreed with FERC that the Utility’s Facility interest was a “legacy facility” and that no economic basis supported shifting the costs of the legacy facilities to anyone other than the originally intended customers. In addition, SPP and the Utility alleged that the Facility provided the benefit of additional transmission capacity for Zone 19 customers, but the court found no such benefit was created, as SPP already had access to capacity from the Facility.
The court also did not find as unreasonable FERC’s decision not to apply SPP’s zonal placement process for new facilities because the Utility had not newly joined SPP at the time of the proposal but instead had been a member for over a decade.