September 3, 2021
Docket No. EL21-66-000
I dissent from today’s order because it runs afoul of Commission and judicial precedent and falls short of reasoned decision making by failing to respond to evidence presented in the complaint.[1] The majority denies the New York Transmission Owners (NYTOs) complaint seeking recovery of what it deems to be “risks” that are not appropriately categorized as “costs” as contemplated by the New York Independent System Operator, Inc.’s Open Access Transmission Tariff (OATT).[2] And so the status quo thus remains in place—an unlawful and confiscatory System Upgrade funding mechanism that compels the NYTOs to own, operate, and maintain System Upgrades on a profitless basis, denying those transmission owners (TOs) the opportunity to earn the return on those assets.[3]
The majority finds that Bluefield[4] and Hope[5] require the NYTOs to show the “existing funding mechanism exposes them to uncompensated risks associated with owning, operating, and maintaining System Upgrades, and that the existing funding mechanism impedes the NYTOs’ ability to attract future capital so as to prevent the NYTOs from operating successfully or maintaining financial integrity.”[6] They go on to hold that Ameren[7] is distinguishable and does not require a change[8] and “find that the NYTOs have failed to make such a showing.”[9] Having rejected the NYTOs complaint at step one, the majority never considers the replacement rate.[10]
The NYTOs explain they do not recover a return on System Upgrades in transmission rates or retail rates.[11] They identify uncompensated risks as including regulatory, reliability, cybersecurity, environmental and operational risks.[12] Yet, in spite of their showing, the majority finds that “the NYTOs have not presented sufficient evidence to show that the existing funding mechanism results in the NYTOs facing uncompensated risks and costs associated with the System Upgrades that force the NYTOs to operate segments of their business on a non-profit basis or prevent the NYTOs from attracting needed capital.”[13] The majority goes on to hold:
We first find that the NYTOs have not shown that the existing funding mechanism exposes them to uncompensated risks associated with owning, operating, and maintaining the System Upgrades such that the existing System Upgrade funding mechanism in the OATT is unjust, unreasonable, unduly discriminatory, or preferential. The NYTOs generally assert that they face regulatory, reliability, cybersecurity, environmental, and operational risks for the System Upgrades for which they are not compensated. However, they provide no evidence that existing transmission rates do not sufficiently compensate them for such risks as part of owning, operating, and maintaining a transmission owner’s entire system, nor do they allege that rating agencies have assigned the transmission owners to higher risk categories based on these risks. Instead, again without support, the NYTOs argue that the only way to earn a return commensurate with risks on the transmission system is to include the underlying transmission property in rate base and that the approved jurisdictional rate of return must be applied to the net plant of all System Upgrades on the transmission system. Such unsubstantiated assertions are insufficient to support an FPA section 206 complaint.[14]
The NYTOs’ arguments are not, as the majority describes them, “unsubstantiated assertions.” They are a clearly stated, unadorned recitation of facts. The majority cannot properly rely upon such an out-of-hand dismissal of a well-pleaded argument.[15] The “unsubstantiated assertions:” consist of a 75-page affidavit with over 50 additional pages of exhibits that the majority alludes to in its recitation of the arguments but almost wholly fails to discuss in its order. We have to do more than recite the record evidence. We have to actually grapple with evidence before us and meaningfully respond to it.
The failure to include evidence from rating agencies or investors explicitly stating that the NYTOs face increased risk ratings that has impeded their ability to attract capital or maintain financial integrity cannot be dispositive. It is common knowledge that these entities review risk profiles as stated by the NYTOs.[16] As the majority acknowledges, the NYTOs’ evidence shows investors consider the risk profiles when making decisions and, in general, if they perceive the rate of return is not high enough to cover the investment risk, they will not invest in the company.[17] The majority’s conclusion that this does not support a finding that the existing funding mechanism impedes their ability to attract capital or maintain financial integrity is based neither on the evidence nor on sound logic.[18]
The NYTOs show that existing section 25.5.4 of Attachment S to the OATT is unjust and unreasonable because it recognizes that the NYTOs’ “obligation to implement . . . System Upgrades” entitles them to cost recovery plus a return,[19] but it provides no recovery mechanism.[20] The majority simply responds that risks are not costs under that section. Yet, a recent Commission pleading submitted to the U.S. Court of Appeals for the District of Columbia Circuit recognized that transmission owners have uncompensated risks when forced to operate network upgrades that are paid for through generator funding and that this entitles them to be compensated now for operating the upgrades.[21] Well-established Commission and judicial precedent are clear that they are entitled to recover costs and earn a return on property used to provide jurisdictional service, such as the interconnection service here, under the OATT.[22]
Independent of Ameren and its successors,[23] the majority’s order also cannot be squared with our order in April that found the NYTOs had broadly reserved their rights under the ISO-TO Agreement and possess a federal right of first refusal for upgrades to their transmission facilities. This included upgrades that are part of other developers’ proposed transmission projects which are selected in NYISO’s regional transmission plan.[24]
What this case boils down to is a basic logical flaw based on the majority’s failure to recognize a fundamental point—while it may be difficult to assess with precision the risk assumed by a transmission owner operating a System Upgrade, the one thing we do know is that it is not riskless. It cannot be. That being the case, some mechanism for compensating transmission owners for otherwise un-offset liabilities must be contemplated under the Federal Power Act. A single result is therefore logically compelled: the complaint must be heard on the merits and some replacement rate, no matter how vanishingly small, if that is what the evidence demands, must replace the current regime of uncompensated assumption of risk. And I doubt it would be negligible, the sheer number of System Upgrades for which the NYTOs are responsible subject them to ever-increasing risks for which the current regime provides no compensation.[25]
For these reasons, I respectfully dissent.[1] See 5 U.S.C. § 706(2) (“[T]he reviewing court shall . . . hold unlawful and set aside agency action, findings, and conclusions found to be—(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; . . . (E) unsupported by substantial evidence . . . .”).
[2] See Cent. Hudson Gas & Elec. Corp. v. N.Y. Indep. Sys. Operator, Inc., 176 FERC ¶ 61,149, at PP 57-58, 62 (2021) (September 3 Order). The terms System Upgrade Facilities (SUFs), System Deliverability Upgrades (SDUs) and System Upgrades are used interchangeably herein.
[3] See NYTOs April 9, 2021 Complaint at 1-3 (Complaint).
[4] Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n, 262 U.S. 679 (1923) (Bluefield).
[5] Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591 (1944) (Hope).
[6] September 3 Order, 176 FERC ¶ 61,149 at P 32.
[7] Ameren Servs. Co. v. FERC, 880 F.3d 571 (D.C. Cir. 2018) (Ameren).
[8] See September 3 Order, 176 FERC ¶ 61,149 at P 31.
[9] Id. P 32; see also id. PP 21, 57.
[10] Id. P 21.
[11] See, e.g., Complaint at 12 (“The NYISO OATT does not provide the TOs a means to recover a reasonable rate of return for the capital costs associated with the SUF/SDU, nor do the TOs include such assets in their rate base as a capital asset for recovery from customers (the operation and maintenance (“O&M”) associated with SUFs/SDUs are generally recovered from native load customers through retail rates).”); see also NYTOs August 13, 2021 Answer to Comments at 4 (“[T]he capital costs of the SUFs and SDUs are not added to the NYTOs’ retail rate-base on which a return is earned. As such, retail rates do not compensate the TOs for all the risks and costs associated with the SUFs/SDUs (which is what is encompassed by what an ROE compensates), nor does it satisfy the Constitutional standard that a utility is to be provided an opportunity to earn a return for the value of its property used to render jurisdictional service.”) (citations omitted); Complaint at 3 (“The Existing Funding Approach compels the Complainants to construct, own, and operate the SUFs/SDUs on a non-profit basis by not allowing them to earn a return on those assets . . . such a result is per se confiscatory and unlawful.”).
[12] See Complaint at 6 (“Specifically, the TOs face regulatory risks, reliability risks, cybersecurity risks, environmental risks, and operational risks for the SUFs/SDUs, but for which the TOs currently recover no return.”).
[13] September 3 Order, 176 FERC ¶ 61,149 at P 21; see also id. P 32.
[14] Id. P 58.
[15] See, e.g., Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (holding agency “must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made’”) (citation omitted); KeySpan-Ravenswood, LLC v. FERC, 348 F.3d 1053, 1054 (D.C. Cir. 2003) (requiring Commission to “adequately explain its decision”).
[16] See Complaint at 20-27.
[17] September 3 Order, 176 FERC ¶ 61,149 at P 59.
[18] See id.
[19] OATT, Attach. S, § 25.4 (emphasis added).
[20] See September 3 Order, 176 FERC ¶ 61,149 at PP 57, 62.
[21] See NYTOs August 13, 2021 Answer to Comments at 5 & n.19 (citing Brief of Respondent Federal Energy Regulatory Commission, ACPA v. FERC, D.C. Cir. Case No. 20-1453, p. 43 (May 3, 2021)). The majority seems to imply I am unfamiliar with the legal import of statements made in appellate briefs submitted by Commission counsel. September 3 Order, 176 FERC ¶ 61,149 at P 31 n.64. Having overseen the Commission’s appellate litigation program for several years, I am aware that the Commission only acts through its orders. I cite to the brief to point out the apparent inconsistencies.
[22] See, e.g., Hope, 320 U.S. at 603; Bluefield, 262 U.S. at 690; Ameren, 880 F.3d at 579-80.
[23] See, e.g., Midcontinent Indep. Sys. Operator, Inc., 171 FERC ¶ 61,075, at P 33 (“the rate of return available to transmission owners when they provide initial funding for network upgrades compensates them for business risk, such as lawsuits, reliability compliance obligations, and environmental and construction risks; in addition, it prevents transmission owners from operating a significant portion of their business on a non-profit basis and ensures that future capital can be attracted”) (citations omitted), reh’g order, 173 FERC ¶ 61,037 (2020).
[24] N.Y. Indep. Sys. Operator, Inc., 175 FERC ¶ 61,038, at P 34 (2021); see also ISO-TO Agreement, § 3.10(d) (right to recover costs plus a return associated with constructing and owning or financing expansions or modifications to its facilities); id., § 3.11 (any rights not specifically transferred to NYISO remain with the NYTOs); id., § 6.09 (in relevant part, in the event of a conflict with the OATT, the ISO-TO Agreement “shall prevail.”).
[25] See Complaint at 5 (“[W]hile for Class Year 2011 NYISO studied six interconnection requests resulting in the identification of approximately $320 million of [System Upgrades], for Class Year 2019 NYISO studied 78 interconnection requests resulting in the identification of over $1.2 billion in [System Upgrades], a nearly four-fold increase in terms of costs”). The NYTOs “currently are prevented from recovering a rate of return for that increasingly significant portion of their business.” Id. Interconnection Customers have accepted responsibility for $248,797,424 of the System Upgrade Facilities and associated headroom identified for Class Year 2019. Id. at 5 n.18.