Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-01341/USCOURTS-caDC-04-01341-0/pdf.json

Parties Involved:
FPL Energy Marcus Hook, L.P.
Petitioner
Federal Energy Regulatory Commission
Respondent
PJM Interconnection, L.L.C.
Intervenor

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 31, 2005 Decided December 2, 2005

No. 04-1341

FPL ENERGY MARCUS HOOK, L.P.,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

PJM INTERCONNECTION, L.L.C.,

INTERVENOR

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Stephen L. Huntoon argued the cause and filed the briefs for

petitioner.

Dennis Lane, Former Solicitor, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on the

brief was Cynthia A. Marlette, General Counsel.

Barry S. Spector argued the cause and filed the brief for

intervenor. Michael J. Thompson entered an appearance.

Before: SENTELLE, GARLAND and GRIFFITH, Circuit Judges.

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Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: FPL Energy Marcus Hook

(“Marcus Hook”) petitions for review of a Federal Energy

Regulatory Commission (“FERC” or “the Commission”) order

denying a request for a reallocation and redetermination of

Marcus Hook’s cost responsibility for a construction upgrade

resulting from its request to interconnect with an electricity

transmission grid. Marcus Hook also petitions for review of

FERC’s order denying its request for rehearing. Because we

find that FERC did not adequately explain its decision on the

upgrade’s system benefit, we grant the petition for review,

partially vacate the orders, and remand for further proceedings.

I.

A.

Formed in 1927 in the Mid-Atlantic region, intervenor PJM

Interconnection (“PJM”) has operated since 1956 as a tight

power pool, having a single control area with free-flowing

transmission lines. See Atl. City Elec. Co. v. FERC, 295 F.3d 1,

5 (D.C. Cir. 2002). In 1996, FERC initiated “sweeping

changes” in the electric utility industry, which led PJM to

reorganize itself in 1997 as an independent system operator

(“ISO”). Mich. Pub. Power Agency v. FERC, 405 F.3d 8, 10

(D.C. Cir. 2005). Adhering to FERC’s regulations for ISOs,

PJM adopted a pool-wide open access tariff and a regional bidbased energy market in 1997. Id. at 5. 

Further changes in 2002 led FERC to designate PJM as the

first regional transmission organization (“RTO”). PJM

Interconnection, LLC, 101 FERC ¶ 61,345 (2002), order on

reh’g, 104 FERC ¶ 61,124 (2003), order on reh’g, 105 FERC

¶ 61,123 (2003), order on reh’g, 109 FERC ¶ 61,067 (2004),

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reh’g pending. As an RTO, PJM acts as an “umbrella entit[y]”

that controls electricity transmission assets. Mich. Pub. Power,

405 F.3d at 10. Under FERC’s new regime, electricitygenerating plants can interconnect with transmission lines

owned by RTOs and then sell energy to one another—a result

favorable to competition. As administrative entities, RTOs and

ISOs like PJM must handle the interconnections of new

electricity generating facilities lying within the geography of

their transmission-owning members. PJM’s responsibilities

included the interconnection of petitioner, whose project resides

within the service area of PECO Energy Company, a

transmission-owning member of PJM. The Marcus Hook

project—a combined cycle, gas-fired, electric generating facility

in Marcus Hook, Pennsylvania—entered service in late 2004.

The open access tariff provides the terms and conditions for

all such interconnections under PJM’s purview. The process

begins when a new generating facility first approaches PJM and

submits an interconnection request. That request must describe

the new facility’s size and location, among other things. Tariff

Section 36.1. PJM then places all such requests into a firstcome, first-served queue. Tariff Section 36.10.

The tariff requires PJM to undertake several studies of the

queued projects. The first is a feasibility study, which

preliminarily determines what system upgrades are necessary to

accommodate the new interconnection. Tariff Section 36.2.

From this study, PJM must estimate the requesting party’s cost

responsibility for the upgrades. Following the feasibility study,

PJM must conduct a system impact study, which refines and

more comprehensively estimates cost responsibility for

necessary system upgrades. Tariff Section 36.4.1. Defined as

“a comprehensive regional analysis of the effect” of a new

interconnection, a single impact study may include an evaluation

of multiple interconnection requests. Id. Customers may

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terminate or withdraw their interconnection requests based on

the impact study’s findings. PJM then conducts a final facilities

study on the remaining customers and allocates good faith

estimates of cost responsibility among them. Tariff Section

36.7. Upon completion of the facilities study, PJM tenders to

the interconnection customer an Interconnection Service

Agreement (“ISA”), which specifies the customer’s actual cost

responsibility. Tariff Sections 36.8, 36.8.3, 37.4.

All cost figures produced by PJM’s studies must comply

with Section 37. Interconnection customers must pay for all

necessary attachment facilities. Tariff Section 37.1. In addition,

Section 37.2 imposes on the interconnection customer “100

percent of the costs of the minimum amount of [upgrades]

necessary to accommodate its Generation Interconnection

Request and that would not have been incurred under the

Regional Transmission Expansion Plan but for such Generation

Interconnection Request, net of benefits resulting from the

construction of the upgrades . . . .” PJM prepares Regional

Transmission Expansion Plans (“RTEPs”), which forecast “the

enhancement and expansion of the Transmission System in

order to meet the demands for firm transmission service in the

PJM Region.” Tariff Section 1.37A; see also PJM

Interconnection LLC, 87 FERC ¶ 61,299, 62,202 n.40 (1999).

The costs and benefits listed in Section 37.2 include costs and

benefits “associated with accelerating, deferring, or eliminating”

planned upgrades, upgrades resulting from modifications to the

RTEP, and other upgrades that never become part of an RTEP.

Interconnecting facilities must meet milestones in order to

maintain their place within the queue. Tariff Section 36.8.4(a);

see also id. Section 36.8.5. Failure to meet a milestone or

execute an ISA could trigger termination and withdrawal of the

project. Tariff Section 36.8.4(c). Because the tariff allows PJM

to evaluate multiple interconnection requests in a single study,

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withdrawal of one request could affect the cost responsibility of

other interconnection customers. Indeed, following a

withdrawal, the tariff directs PJM to reevaluate upgrades

previously deemed necessary by a facilities study that had

evaluated multiple projects. Id. The tariff also directs PJM to

redetermine cost responsibility for, and enter into an amended

ISA with, customers remaining in the queue.

Following these tariff procedures for facilities

interconnection, Marcus Hook submitted an interconnection

request to PJM, which placed the project in queue position A21

with a queue date of August 17, 1998. It submitted another

small request to PJM on October 22, 2001, which received a

queue position of H6. PJM conducted the required feasibility,

impact, and facilities studies for Marcus Hook’s request. 

The facilities study, most important for this case, evaluated

the combined effect of Marcus Hook’s A21 project and two

other projects, queued with earlier priority at A13 and A19.

According to the study, sufficient system capacity existed to

support the A13 project, but the addition of A19 and A21 would

push the system beyond the breaking point. To alleviate the

capacity burden, PJM advised an upgrade to the

Mickleton–Monroe circuit. Towers along that circuit had been

built with a single transmission line but included unused

positions for a second line; filling the open positions with a new

transmission line would support the new interconnections,

including Marcus Hook’s. By recommending the upgrade, the

facilities study revised the prior studies.

PJM estimated the cost of the Mickleton–Monroe upgrade

at nearly $13 million. Because the upgrade was unnecessary at

the time of the A13 request, that project escaped cost

responsibility entirely. PJM therefore assigned the costs to the

later-submitted projects, A19 and Marcus Hook’s A21. On

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January 20, 2002, PJM and Marcus Hook entered into an ISA,

which saddled Marcus Hook with over $10 million of the

upgrade’s total cost. The balance fell to the A19 project.

Had the interconnections proceeded as forecasted in PJM’s

studies, this action would not have been brought. But, alas, the

best-laid plans of mice and RTOs often go awry, and project

A13 withdrew from the queue prematurely. The withdrawal

presented PJM with an unexpected question: whether to

complete the no-longer-necessary Mickleton–Monroe upgrade.

PJM’s studies of multiple interconnection requests had shown

that the transmission system could support projects A19 and

A21 without the Mickleton–Monroe upgrade. Scrapping the

upgrade would therefore not harm the remaining projects.

Economic concerns operated on the other side of the coin,

however. At the time of A13’s withdrawal, the upgrade was

over ninety percent complete; removing the largely completed

upgrade would not be an inexpensive undertaking. Judging

completion to be the least costly alternative, PJM trudged

forward and completed the upgrade.

B.

Marcus Hook disputed its cost responsibility for what it

considered to be an unnecessary project. Claiming that PJM had

infringed Sections 36.8.4(c) and 37.2 of its tariff, Marcus Hook

filed a complaint with FERC. As a remedy, Marcus Hook

sought recompense from PJM for over $9 million, the sum total

of its payments in support of the Mickleton–Monroe upgrade.

To obtain its relief, Marcus Hook asked FERC to direct PJM to

draw up a new, revised ISA with reduced cost responsibility for

Marcus Hook. The complaint suggested that a favorable ruling

would also require PJM to refund the difference between the

original and amended ISAs, which Marcus Hook argued should

be the entirety of the payments already made.

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Marcus Hook grounded its complaint—and grounds its

petition for review—in the language of PJM’s tariff.

Specifically, petitioner pointed to Section 36.8.4(c) of the tariff,

the provision covering withdrawn interconnection requests.

That section, in pertinent part, states:

In the event that a terminated and withdrawn

Interconnection Request was included in a [facilities study]

that evaluated more than one Interconnection Request . . .

[PJM] shall reevaluate the need for the facilities and

upgrades indicated by the [facilities study], shall

redetermine the cost responsibility of each remaining

Interconnection Customer for the necessary facilities and

upgrades based on its assigned priority . . . and shall enter

into an amended [ISA] with each remaining Interconnection

Customer setting forth its revised cost obligation.

Tariff Section 36.8.4(c). From this language, petitioner argued

that, upon project A13’s withdrawal, PJM was required to

reevaluate the necessity of the Mickleton–Monroe upgrade,

redetermine Marcus Hook’s responsibility for the upgrade, and

enter into an amended ISA with Marcus Hook based on the

redetermination. Because PJM failed to perform any of these

actions, petitioner asked FERC to order PJM to do so.

Petitioner Marcus Hook asserted that the upgrade is now

unnecessary and that a reevaluation would so demonstrate.

Indeed, Marcus Hook’s complaint pointed to evidence that PJM

itself considered the upgrade unnecessary in the absence of the

A13 project. If the project is no longer necessary, Marcus Hook

argued, then Section 37.2 of the tariff absolves it of cost

responsibility. The section imposes “100 percent of the costs of

the minimum amount of [upgrades] necessary to accommodate

its Generation Interconnection Request and that would not have

been incurred under the Regional Transmission Expansion Plan

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but for such Generation Interconnection Request, net of benefits

resulting from the construction of the upgrades . . . .” Tariff

Section 37.2. Petitioner found here two textual hooks for its

claim for relief: first, that it should not be responsible for

unnecessary upgrades; second, that the upgrade’s benefit to the

system justifies shifting cost responsibility to another entity or

entities.

FERC issued an order denying petitioner’s request for

relief. The Commission characterized the issue before it rather

abstractly as “which entity bears the risk” of cost responsibility

for upgrades made unnecessary by an earlier project’s

withdrawal. Concluding that the tariff places the risk on the

interconnecting customer, FERC interpreted Section 36.8.4(c)

to require PJM to redetermine necessity only for “as yet to be

constructed” upgrades. FERC explained its interpretation by

finding that PJM “could not” reallocate the costs to any other

entity even if it reevaluated the necessity. The Commission

suggested that Marcus Hook should have hedged its risk by

negotiating safeguards into its ISA.

Having dispensed with PJM’s ability to reevaluate and

reallocate, FERC then rejected Marcus Hook’s system benefit

argument. Specifically, the Commission concluded that the

Mickleton–Monroe upgrade lacked system benefit. FERC

focused on language from Section 37.2, imposing on the

customer costs “that would not have been incurred under the

Regional Transmission Expansion Plan but for” the

interconnection request. The Commission reasoned that the

additional Mickleton–Monroe line had not been included in

PJM’s RTEP prior to Marcus Hook’s interconnection request,

and therefore lacked system benefit. FERC suggested that

Marcus Hook would not have been responsible for any costs if

the upgrade had appeared in the RTEP.

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Marcus Hook filed for rehearing, challenging FERC’s

interpretation of the tariff and submitting additional evidence of

the upgrade’s system benefit. FERC denied the request for

rehearing and issued another order. The Commission applied its

own evidentiary rules to reject the additional evidence as

untimely. See 18 C.F.R. § 385.206(8). According to FERC, the

evidence should have appeared in Marcus Hook’s original

filings.

Revisiting its initial analysis of Section 36.8.4(c), FERC

found that the tariff only allowed PJM to redetermine cost

responsibility for “each remaining Interconnection Customer”

whose interconnection request was included in the facilities

study. The Commission concluded that there were no such

remaining customers—that is, no projects remained in the queue

to which PJM could reallocate any costs of the

Mickleton–Monroe upgrade. Accordingly, as between Marcus

Hook—the only relevant, remaining interconnection customer

in the queue—and PJM, FERC affirmed its initial decision to

allocate the risk to Marcus Hook. Necessity or the lack thereof,

according to FERC, “does not change the allocation of risk

under PJM’s tariff.”

The Commission also revisited the question of system

benefit but relied on a different ground to reject Marcus Hook’s

rehearing argument. Rather than reach the merits as it had

initially, FERC considered system benefit irrelevant to its

analysis. The Commission reduced the issue to an either/or

proposition: If the upgrade had been included in PJM’s RTEP

at the time of the interconnection request, the interconnecting

customer would have no cost responsibility. If the upgrade did

not appear in the RTEP, however, the customer would have sole

responsibility for the costs. Because the Mickleton–Monroe

upgrade did not appear in PJM’s RTEP at the time Marcus Hook

submitted its interconnection request, FERC concluded that

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Marcus Hook retained its cost responsibility following A13’s

withdrawal.

Marcus Hook now petitions this court for review of FERC’s

initial order and the order denying rehearing.

II.

This court reviews FERC’s orders under the arbitrary and

capricious standard. 5 U.S.C. § 706(2)(A); see also PSEG

Energy Res. & Trade LLC v. FERC, 360 F.3d 200, 203 (D.C.

Cir. 2004). Factual findings by FERC must be supported by

substantial evidence. Florida Mun. Power Agency v. FERC, 411

F.3d 287, 291 (D.C. Cir. 2005). We “generally ‘give[ ]

substantial deference to [FERC’s] interpretation of filed tariffs,

even where the issue simply involves the proper construction of

language.’” S. Cal. Edison Co. v. FERC, 415 F.3d 17, 21 (D.C.

Cir. 2005) (quoting Koch Gateway Pipeline Co. v. FERC, 136

F.3d 810, 814 (D.C. Cir. 1998)) (second alteration in original).

We need not defer, however, when the tariff is not ambiguous.

Id. (citation omitted). Accordingly, the deference we apply is

“Chevron-like” in nature. Consol. Edison Co. of New York v.

FERC, 347 F.3d 964, 972 (D.C. Cir. 2003).

III.

Petitioner’s complaint essentially raises a single issue:

What are PJM’s duties under the tariff when a queued project

withdraws and makes a previously necessary upgrade

unnecessary? That single issue breaks down into several

subparts: (1) whether PJM had a duty to reevaluate the

completed Mickleton–Monroe upgrade at all; (2) to whom could

PJM have reallocated costs should such a reallocation have been

required; and (3) whether system benefit obviated Marcus

Hook’s cost responsibility even if reallocation to other

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customers was not an option.

On the first question, FERC seems to have concluded that

PJM has no duty at all to reevaluate the necessity of the

Mickleton–Monroe upgrade. In its initial order, the Commission

limited PJM’s duty to reevaluate to “as yet to be constructed”

upgrades. The parties have agreed that, as a “virtually

completed” upgrade, the Mickleton–Monroe upgrade was no

longer “as yet to be constructed.” FERC’s statements therefore

suggest that PJM had no duty to reevaluate the need for the

upgrade. Marcus Hook certainly interprets the order that way

and spends considerable space in its briefs refuting what it

believes to be FERC’s holding.

Confusingly, though, FERC does not appear to have rested

its decision on PJM’s lack of duty. Rather, the Commission’s

initial order immediately ties PJM’s duty to reevaluate to PJM’s

ability to reallocate costs following a reevaluation. Furthermore,

the Commission’s rehearing order does not even obliquely

discuss PJM’s basic duty to reevaluate the need for upgrades, a

rather conspicuous omission. The rehearing order instead

focuses exclusively on PJM’s ability to reallocate. However

unclear FERC’s orders may otherwise be, it is certainly clear

from such omissions that FERC did not hold that PJM had no

duty to reevaluate the necessity of the upgrade. Accordingly, if

we were to uphold the Commission’s orders, it could not be on

this basis. See Missouri Pub. Serv. Comm’n v. FERC, 234 F.3d

36, 41 (D.C. Cir. 2000) (stating court can only uphold agency

action on “the grounds invoked by the agency” (citation and

internal quotation marks omitted)). We note also that the

Commission has not refashioned its holding before this court.

FERC’s brief barely addresses the “as yet to be constructed”

language, which it says “merely characterize[s] how the Tariff’s

interconnection procedures work.” This language confirms our

conclusion that the Commission’s orders assume a duty to

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reevaluate under Section 36.8.4(c).

As to the second question, the Commission’s orders

question PJM’s ability to reallocate the costs of the

Mickleton–Monroe upgrade. Section 36.8.4(c) states that PJM

“shall redetermine the cost responsibility of each remaining

Interconnection Customer for the necessary facilities and

upgrades based on” queue position. FERC concluded that,

under this language, PJM could not have reallocated costs to any

other customer. The initial order suggests that the upgrade’s

costs could have been reallocated only had the upgrade been “of

value to other parties seeking capacity.” The rehearing order

clarifies this reasoning and states that upgrade costs could “be

reallocated among the projects lower down in the queue” that

would also use the upgrade’s additional capacity. Applying this

interpretation, the Commission concluded that the queue held no

lower projects to which PJM could reallocate the upgrade’s

costs. Because of Marcus Hook’s position in the queue, FERC

found that it continues to bear the cost responsibility for the

Mickleton–Monroe upgrade.

Marcus Hook apparently does not challenge the

Commission’s findings or reasoning on PJM’s ability to

reallocate to other interconnection customers. Petitioner instead

focuses on the initial order’s apparent limitation on PJM’s duty

to reevaluate to “as yet to be constructed” upgrades. Beyond its

reevaluation argument, petitioner dedicates only one paragraph

in its initial brief to the reallocation of costs among remaining

customers. That paragraph, though, centers on which costs must

be reallocated, not which customers remain in the queue.

Petitioner’s reply brief merely mimics its opening brief. As we

have determined, FERC’s orders assume that PJM had a duty to

reevaluate; therefore, Marcus Hook’s silence on the issue of

reallocation does not aid our analysis.

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Although the tariff’s language is somewhat ambiguous, the

text of Section 36.8.4(c) reasonably supports the Commission’s

holding. PJM must “redetermine the cost responsibility of each

remaining Interconnection Customer” for necessary upgrades

based on queue position. Tariff Section 36.8.4(c) (emphasis

added). The Section reiterates the same language in the next

clause, requiring amended ISAs for “each remaining

Interconnection Customer.” Several other tariff provisions,

listed in FERC’s rehearing order, also require a reallocation of

costs among “remaining” customers. Other than Marcus Hook’s

meager references in its briefs, it offers no counter-interpretation

of these provisions. Given the tariff’s consistent focus on

remaining customers and their queue positions—and Marcus

Hook’s lack of argument to the contrary—we cannot say the

Commission unreasonably interpreted the tariff. Consol.

Edison, 347 F.3d at 975.

With respect to the third question, FERC’s two orders reach

the same conclusion by two different routes. In its initial order,

the Commission found that the Mickleton–Monroe upgrade

lacked system benefit because it had not been included in PJM’s

RTEP. The rehearing order took a different tack, concluding

that FERC “need not reach the merits.” The Commission stated

that Section 37.2 of the tariff makes Marcus Hook responsible

for all of the costs of upgrades not part of the RTEP and none of

the costs of upgrades included in the RTEP. Thus, according to

FERC, actual benefit provided to the system is “irrelevant” to

Marcus Hook’s cost responsibility.

Faced with FERC’s dual findings, Marcus Hook asserts

both that system benefit is relevant to its complaint and that the

Mickleton–Monroe upgrade had system benefit. Indeed,

petitioner expressed confusion over whether the Commission’s

relevance rationale was “evidentiary” or legal in nature. At least

partly because of the shifting rationales, we too are uncertain as

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to how FERC reached its decision here. It is clear the two

orders share one common element, a stress on the importance of

PJM’s RTEP to the issue of system benefit. The orders differ,

however, on why the RTEP was important. In its rehearing

order, the Commission changed its analysis from a merits

inquiry to a relevance inquiry.

The inability to settle on a single rationale casts doubt on

FERC’s disposition of the action. The Commission’s failure to

explain the reason for its differing rationales raises more serious

questions. We hold that FERC’s failure to provide an

intelligible explanation for adopting its new rationale amounts

to a failure to engage in reasoned decisionmaking. See Pub.

Utils. Comm’n of Cal. v. FERC, 988 F.2d 154, 167 (D.C. Cir.

1993) (agency determination must be result of reasoned

decisionmaking).

We also doubt seriously whether either order’s reasoning,

standing alone, would withstand scrutiny. In addition to

conflicting with each other, neither order adequately explains

the link between PJM’s RTEP and the question of system

benefit. In its rehearing order, FERC did not even cite to

Section 37.2—or any other tariff provision—in its discussion of

system benefit. It is not clear on what part of the tariff the

Commission hangs its reasoning. And though we grant the

Commission considerable deference in its interpretation of

ambiguous tariff language, we can only uphold the

Commission’s interpretation if we can “discern a reasoned path”

to the decision. E. Tex. Elec. Coop. v. FERC, 218 F.3d 750, 755

(D.C. Cir. 2000) (quoting K N Energy, Inc. v. FERC, 968 F.2d

1295, 1303-04 (D.C. Cir. 1992)). We can discern no such

reasoned path.

In addition, FERC’s interpretation of the tariff also appears

flawed. In its analysis of the role of system benefit to cost

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allocation, FERC failed to consider the full text of Section 37.2.

The Commission correctly recognized that necessity and “but

for” causation are two essential elements of the cost

responsibility calculus under Section 37.2; it failed, however, to

acknowledge the remainder of the section. It is true that the

tariff imposes on interconnection customers “100 percent of the

costs” of upgrades meeting those two elements, but the tariff

also reduces the customer’s cost responsibility by the amount of

“benefits resulting from the . . . upgrades.” Tariff Section 37.2.

Accordingly, this key language requires PJM to subtract system

benefit from the interconnection customer’s cost responsibility.

The Commission inexplicably ignored this language and did not

explain why PJM’s RTEP should apply on the benefit side of the

equation. 

Section 37.2 also provides examples of costs and benefits

that may be considered when assigning cost responsibility.

According to the language of the section, applicable benefits

may include those in an RTEP, those placed in a modified

RTEP, and those that never become part of an RTEP. From this

provision, we find it difficult to conclude that system benefit is

the either/or proposition that FERC makes it out to be, and

FERC’s minimalist explanation does not allow us to defer to its

expertise. Nothing in its orders adequately explains why PJM’s

RTEP should be the sole dispositive factor for Marcus Hook’s

cost responsibility in this case. Accordingly, “we remand to

FERC for further consideration . . . in light of the entire” tariff

section. Office of Consumers’ Counsel v. FERC, 783 F.2d 206,

223 (D.C. Cir. 1986).

Because we find that FERC has not adequately explained its

reasoning on the system benefit issue, we need not address

Marcus Hook’s further challenge to the Commission’s rejection

of its additional evidence.

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IV.

Because we find that FERC did not adequately explain its

decision on system benefit, we grant the petition for review,

partially vacate FERC’s orders, and remand for further

proceedings.

It is so ordered.

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