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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2004 Decided July 16, 2004

No. 02-1121

MIDWEST ISO TRANSMISSION OWNERS, ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

PUBLIC SERVICE COMMISSION OF THE

COMMONWEALTH OF KENTUCKY, ET AL.,

INTERVENORS

Consolidated with

02-1122, 03-1236, 03-1256

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Paul M. Flynn argued the cause for petitioners Midwest

ISO Transmission Owners, et al. John E. McCaffrey argued

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
2

the cause for Public Service Commission of the Commonwealth of Kentucky, et al. With them on the briefs were

David W. D’Alessandro, Michael E. Small, and Robert H.

Benna. Jeffrey G. DiSciullo and Linda S. Portasik entered

appearances.

Robert H. Solomon, Deputy Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With

him on the brief were Cynthia A. Marlette, General Counsel,

and Dennis Lane, Solicitor. Larry D. Gasteiger, Attorney,

entered an appearance.

Stephen L. Teichler argued the cause for intervenors Midwest Independent Transmission System Operator, Inc., et al.

With him on the brief were Stephen G. Kozey, David Martin

Connelly, Jeffrey L. Landsman, Christine C. Ryan, A. Hewitt

Rose, III, Gary D. Bachman, Evan Charles Reese, III,

William F. Fields, Sandra L. Hall, Susan Stevens Miller,

David W. D’Alessandro, John E. McCaffrey, Robert Campbell

McDiarmid, Larissa A. Shamraj, Denise C. Goulet, and

David J. Lynch. Richard G. Raff entered an appearance.

Before: GINSBURG, Chief Judge, and SENTELLE and ROBERTS,

Circuit Judges.

Opinion for the Court filed by Circuit Judge ROBERTS.

ROBERTS, Circuit Judge:

I.

1. In the bad old days, utilities were vertically integrated

monopolies; electricity generation, transmission, and distribution for a particular geographic area were generally provided

by and under the control of a single regulated utility. Sales

of those services were ‘‘bundled,’’ meaning consumers paid a

single price for generation, transmission, and distribution.

As the Supreme Court observed, with blithe understatement,

‘‘[c]ompetition among utilities was not prevalent.’’ New York

v. FERC, 535 U.S. 1, 5 (2002).
3

In its pathmarking Order No. 888, FERC required utilities

that owned transmission facilities to guarantee all market

participants non-discriminatory access to those facilities. See

Promoting Wholesale Competition Through Open Access

Non-Discriminatory Transmission Services by Public Utilities, FERC Stats. & Regs. ¶ 31,036, 31,635–36 (1996) (Order

No. 888). That is, FERC required all transmission-owning

utilities to provide transmission service for electricity generated by others on the same basis that they provided transmission service for the electricity they themselves generated. To

effectuate this introduction of competition, FERC required

public utilities to ‘‘functionally unbundle’’ their wholesale generation and transmission services by stating separate rates

for each service in a single tariff and offering transmission

service under that tariff on an open-access, nondiscriminatory basis. See New York, 535 U.S. at 11; see

generally California Indep. Sys. Operator Corp. v. FERC,

No. 02-1287, slip op. at 2-4 (D.C. Cir. June 22, 2004).

As the next step toward the goal of a more competitive

electricity marketplace, Order No. 888 encouraged — but did

not require — the development of multi-utility regional transmission organizations (RTOs). The concern was that the

segmentation of the transmission grid among different utilities, even if each had functionally unbundled transmission,

contributed to inefficiencies that impeded free competition in

the market for electric power. Combining the different segments and placing control of the grid in one entity — an

RTO — was expected to overcome these inefficiencies and

promote competition. Order No. 888 at 31,730–32; see also

Public Util. Dist. No. 1 of Snohomish County v. FERC, 272

F.3d 607, 610–11 (D.C. Cir. 2001). Better still if the RTO

were run by an independent system operator — an ISO. As

envisioned by FERC, an ISO would assume operational control — but not ownership — of the transmission facilities

owned by its member utilities, thereby ‘‘separat[ing] operation of the transmission grid and access to it from economic

interests in generation.’’ Order No. 888 at 31,654; see also
4

id. at 31,730–32. The ISO would then provide open access to

the regional transmission system to all electricity generators

at rates established in ‘‘a single, unbundled, grid-wide tariff

that applies to all eligible users in a non-discriminatory

manner.’’ Id. at 31,731; see also California Indep. Sys.

Operator Corp., slip op. at 3–4. FERC called this type of

separation of generation and transmission ‘‘operational unbundling,’’ a step beyond ‘‘functional unbundling.’’ Order No.

888 at 31,654. Although several parties to the 1996 rulemaking had requested that FERC require ‘‘operational unbundling’’ or even divestiture of transmission assets, it was

FERC’s considered judgment that ‘‘the less intrusive functional unbundling approach TTT is all that we must require at

this time.’’ Id. at 31,655.

By 1999, FERC had come to a less sanguine view of the

curative powers of functional unbundling. In FERC’s view,

inefficiencies in the transmission grid and lingering opportunities for transmission owners to discriminate in their own

favor remained obstacles to robust competition in the wholesale electricity market. FERC concluded that these problems could be remedied through the establishment of RTOs,

explaining that ‘‘better regional coordination in areas such as

maintenance of transmission and generation systems and

transmission planning and operation’’ was necessary to address regional reliability concerns and to foster regional

competition. See Regional Transmission Organizations, Order No. 2000, FERC Stats. & Regs. ¶ 31,089, 30,999 (1999)

(Order No. 2000) (codified at 18 C.F.R. § 35.34) (citing Staff

Report to FERC on the Causes of Wholesale Electric Pricing

Abnormalities in the Midwest During June 1998, at 5–8 (Sept.

22, 1998)). FERC concluded that RTOs would: ‘‘(1) improve

efficiencies in transmission grid management; (2) impose grid

reliability; (3) remove remaining opportunities for discriminatory transmission practices; (4) improve market performance;

and (5) facilitate lighter handed regulation.’’ Order No. 2000

at 30,993; Public Util. Dist. No. 1, 272 F.3d at 611. To

further encourage RTO development, FERC directed transmission-owning utilities either to participate in an RTO or to

explain their refusal to do so. Public Util. Dist. No. 1, 272
5

F.3d at 612. Importantly, though, Order No. 2000 still did

not require utilities to join RTOs; participation remained

voluntary. See id. at 616.

For those utilities opting to join an RTO, Order No. 2000

retained a flexible approach, allowing the RTOs to employ a

variety of ownership and operational structures, so long as

the RTO established that it had certain required characteristics and functional capabilities. Id. at 611. FERC required,

inter alia, that an RTO be regional in scope, 18 C.F.R.

§ 35.34(j)(2); ‘‘have operational authority for all transmission

facilities under its control,’’ id. § 35.34(j)(3); ‘‘be the only

provider of transmission service over the facilities under its

control,’’ id. § 35.34(k)(1)(i); and ‘‘have the sole authority to

receive, evaluate, and approve or deny all requests for transmission service,’’ id. Thus, whatever its structure, once a

utility made the decision to surrender operational control of

its transmission facilities to an RTO, any transmissions across

those facilities were subject to the control of that RTO.

2. In January 1998 (more than a year before Order No.

2000), several transmission-owning utilities in the Midwest

sought FERC’s approval for the transfer of operational control of their transmission facilities to an ISO known as

Midwest ISO (MISO), which would be organized as a nonprofit, non-stock corporation. See Midwest Indep. Transmission Sys. Operator, Inc., 84 FERC ¶ 61,231, 62,138–39 (1998)

(MISO Initial Approval). MISO would link up the transmission lines of the member transmission-owning utilities (MISO

Owners) into a single interconnected grid stretching across

the northern border of the U.S. from Michigan to eastern

Montana, and reaching as far south as Kansas City, Missouri

and Louisville, Kentucky. Under the MISO proposal, the

MISO Owners would retain ownership of and physically

operate and maintain their transmission facilities, subject to

MISO’s instructions. MISO would have functional control of

the transmission system, with responsibility for calculating

available transmission capability; receiving, approving, and

scheduling transmission service requests; and providing or

arranging for ancillary services under the tariff. MISO
6

would also serve as the system security coordinator for the

MISO Owners.

The MISO Owners concurrently applied for approval of

MISO’s open access transmission tariff. See id. at 62,166.

Under the tariff, all customers would pay a single rate to use

the entire MISO transmission system, based on the volume of

power the customer carried on the system. The MISO

Owners did not, however, propose to bring all of their own

transmission loads immediately under that new open access

tariff. Several of the MISO Owners were required to provide

bundled retail service (generation and transmission) to consumers at rates frozen by state legislation, state regulatory

agencies, or legal settlements. The MISO Owners proposed

that such bundled retail loads be brought under the MISO

tariff at the end of a six-year transition period, unless the

state regulatory authorities unbundled those loads sooner.

See id. at 62,167. Also, some MISO Owners had pre-existing

bilateral agreements with other utilities to provide wholesale

transmission service at fixed rates. The MISO Owners proposed that loads under such grandfathered agreements also

remain outside of the tariff until the end of the transition

period. Thus, only new wholesale and unbundled retail transmission loads would be immediately subject to the MISO

tariff.

The MISO tariff included several mechanisms to recover

the costs associated with running MISO. Relevant to this

proceeding are Schedule 1 and Schedule 10. Under Schedule

1 of the tariff, MISO customers paid a charge for ‘‘Scheduling, System Control and Dispatch Service.’’ MISO Open

Access Transmission Tariff, Original Sheet No. 117. This

charge covers MISO’s primary value-added service — management of the transmission grid. This Scheduling, System

Control and Dispatch Service charge, though, was to be paid

by the transmission customer directly to the MISO Owner

providing transmission service; at least at first, it was not to

be paid to MISO. Id.

Schedule 10 of the MISO tariff, the ISO Cost Adder, was

designed to recover MISO administrative costs — the ‘‘costs
7

associated with running the ISO that are not recovered under

Schedule 1.’’ MISO Open Access Transmission Tariff, Original Sheet No. 136. Those costs included ‘‘costs associated

with the Security Center, including capital costs and expenses, and administering the Tariff.’’ Id. The Cost Adder

was to be levied on a per megawatt basis and was calculated

monthly by dividing MISO’s eligible budgeted costs by the

expected eligible transmission load. So, for example, if

MISO’s expected eligible costs for June 2004 were $100,000,

and MISO anticipated one million megawatts of eligible load

for that same month, under Schedule 10, MISO would levy a

Cost Adder of 10 cents per megawatt on the eligible transmission load. The Cost Adder, though, was capped at 15 cents

per megawatt,1

 with any unrecovered costs to be financed by

MISO and deferred to the end of the six-year transition

period, when the debt would be repaid on a five-year amortization schedule through a surcharge to all MISO customers.

Id. Sheet Nos. 136–37.

Critically, the MISO tariff provided that only those transmission loads subject to the tariff rates would pay the ISO

Cost Adder. Transmissions under state-mandated bundled

retail plans and grandfathered agreements thus were not

subject to the Cost Adder; only new wholesale loads and

unbundled retail loads would pay the Cost Adder.

3. The Commission conditionally approved the establishment of MISO and conditionally accepted the proposed MISO

tariff for filing. But having found that ‘‘[f]or the most part,

these rate terms have not been shown to be just and reasonable and may be unjust, unreasonable, or unduly discriminatory,’’ FERC suspended the MISO tariff, and set it for a

hearing. See MISO Initial Approval, 84 FERC at 62,167,

62,181–82. Among the issues set for a hearing was the ISO

Cost Adder. Id. at 62,167.

1 As a point of comparison, in Order No. 888, FERC found that

the delivered cost of electricity to retail customers was up to $110

per megawatt in some regions of the country. See Order No. 888 at

31,651–52.
8

Following a public hearing, the ALJ determined that the

proposed ISO Cost Adder was not just and reasonable because, inter alia, it did not apply to bundled retail loads or

grandfathered loads during the six-year transition period.

See Midwest Indep. Transmission Sys. Operator, Inc., 89

FERC ¶ 63,008, 65,045 (1999). The ALJ concluded:

All of the Midwest ISO Participants’ transmission customers will benefit from Midwest ISO’s operational and

planning responsibilities for the Midwest ISO transmission system, as well as increased grid reliability of the

transmission system. Therefore, to ensure that retail

load will properly bear a fair [share] of the Midwest

ISO’s costs, all long-term firm, bundled retail, and grandfathered load should be included in the divisor in developing the Cost Adder.

Id.

Several utilities filed exceptions to the ALJ’s decision,

arguing that (1) the Cost Adder should not apply to bundled

loads because such loads were not obtaining benefits commensurate with the costs imposed by the Cost Adder; and (2)

applying the Cost Adder to bundled and grandfathered loads

would unlawfully trap costs with transmission owners.

FERC affirmed the ALJ’s findings and conclusions concerning the Cost Adder, agreeing with the ALJ that ‘‘all users of

the grid operated by the Midwest ISO will benefit from the

Midwest ISO’s operational and planning responsibilities for

the Midwest ISO transmission system, as well as increased

grid reliability of the transmission system.’’ Midwest Indep.

Transmission Sys. Operator, Inc., 97 FERC ¶ 61,033, 61,169

(2001). The Commission concluded that it was appropriate

for the bundled and grandfathered loads to pay the Cost

Adder ‘‘to ensure that loads will properly bear a fair share of

the Midwest ISO’s costs.’’ Id. The Commission denied

rehearing, rejecting the MISO Owners’ cost-trapping claim

and explaining that any trapping of costs at the retail level

‘‘should be taken up with the appropriate state commissions.’’

Midwest Indep. Transmission Sys. Operator, Inc., 98 FERC

¶ 61,141, 61,414 (2002) (MISO II).
9

The MISO Owners then sought judicial review in this court.

FERC moved for a voluntary remand, which we granted. In

its order on remand, FERC adhered to its prior ruling that

the bundled retail and grandfathered loads must pay the Cost

Adder on the same basis as new wholesale and unbundled

retail loads. See Midwest Indep. Transmission Sys. Operator, Inc., 102 FERC ¶ 61,192, 61,531–32 (2003) (MISO III).

After the Commission denied rehearing from its order on

remand, see Midwest Indep. Transmission Sys. Operator,

Inc., 104 FERC ¶ 61,012 (2003) (MISO IV), the MISO Owners again sought review in this court.

II.

‘‘As a court of limited jurisdiction, we take seriously any

suggestion that we lack the authority to act.’’ Consumer

Elecs. Ass’n v. FCC, 347 F.3d 291, 296 (D.C. Cir. 2003). That

does not mean, however, that all such suggestions are serious.

FERC devotes 14 pages of its brief to arguing that the MISO

Owners lack standing to challenge the FERC orders compelling them to pay the ISO Cost Adder, because the MISO

Owners have not shown that they will not be able to recoup

the Cost Adder charges at some point down the road. See

FERC Br. 17–31.

FERC’s argument is tantamount to contending that a

homeowner whose house is destroyed by arson has not been

injured by the arsonist, if the house was adequately insured.

The challenged orders impose tangible costs on the MISO

Owners, who accordingly have standing to seek judicial review.

FERC also raises a related ripeness challenge, contending

that ‘‘[t]he availability of untested cost recovery mechanisms

makes this case unripe for judicial review at this juncture.’’

Id. at 30. Again, the fact that the MISO Owners might be

able to recoup the increased charges does not make the

challenge to their assessment unripe.2

2 As explained below, see infra 16–17, that is not to say that the

MISO Owners may now bring a challenge based on their assumed

inability to recoup the charges in the future.
10

The jurisdictional speed bumps thus cleared, we can reach

the merits of FERC’s orders, which we review under the

familiar arbitrary and capricious standard. See 5 U.S.C.

§ 706(2)(A); Entergy Servs., Inc. v. FERC, 319 F.3d 536, 541

(D.C. Cir. 2003). We abide by the Commission’s factual

findings if they are supported by substantial evidence, see 16

U.S.C. § 825l(b), and we will affirm the Commission’s orders

so long as FERC ‘‘examine[d] the relevant data and articulate[d] a TTT rational connection between the facts found and

the choice made.’’ Motor Vehicle Mfrs. Ass’n v. State Farm

Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see also Public

Serv. Comm’n of New York v. FERC, 813 F.2d 448, 451 (D.C.

Cir. 1987). When FERC’s orders concern ratemaking, we

are ‘‘particularly deferential to the Commission’s expertise.’’

Association of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1431

(D.C. Cir. 1996). Here we conclude that FERC’s order that

all MISO transmission loads must share in the ISO Cost

Adder comports with reasoned decisionmaking and therefore

deny the petitions for review.

1. As a threshold matter, the MISO Owners argue that

FERC has switched course in these proceedings: FERC

originally approved MISO with bundled retail and grandfathered loads excluded from the MISO tariff, but now has

ruled that these loads must share in the ISO Cost Adder.

The MISO Owners phrase this switch as a failure to comply

with Section 206 of the Federal Power Act, 16 U.S.C. § 824e.

That provision ‘‘permits the Commission TTT to initiate

changes to existing utility rates and practices.’’ Atlantic City

Elec. Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002). Under

Section 206, however, ‘‘FERC must first prove that the

existing rates TTT are ‘unjust, unreasonable, unduly discriminatory or preferential.’ ’’ Id. (quoting 16 U.S.C. § 824e(a)).

That, the Owners contend, FERC has failed to do.

Section 206, however, is not implicated here because the

Cost Adder was never unconditionally accepted. In its decision that conditionally established MISO and conditionally

accepted the MISO tariff for filing, the Commission specifically set the issue of the ISO Cost Adder for a hearing pursuant

to its authority under Section 205 of the Federal Power Act,
11

16 U.S.C. 824d(e). See MISO Initial Approval, 84 FERC at

62,167. In considering the ISO Cost Adder, FERC was not

addressing an existing rate or practice, and so did not have to

make the findings required under Section 206.

2. We can thus turn to the MISO Owners’ primary contention — that FERC’s order does not comport with the ‘‘cost

causation principle.’’ We have described this principle as

‘‘requir[ing] that all approved rates reflect to some degree the

costs actually caused by the customer who must pay them.’’

KN Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C. Cir.

1992); Transmission Access Policy Study Group v. FERC,

225 F.3d 667, 708 (D.C. Cir. 2000); Pacific Gas & Elec. Co. v.

FERC, No. 03-1025, slip op. at 8–9 (D.C. Cir. July 9, 2004).

Not surprisingly, we evaluate compliance with this unremarkable principle by comparing the costs assessed against a

party to the burdens imposed or benefits drawn by that

party. KN Energy, 968 F.2d at 1300–01 (citing Alabama

Elec. Coop., Inc. v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982)).

Also not surprisingly, we have never required a ratemaking

agency to allocate costs with exacting precision. See

Sithe/Independence Power Partners, L.P. v. FERC, 285 F.3d

1, 5 (D.C. Cir. 2002) (‘‘FERC is not bound to reject any rate

mechanism that tracks the cost-causation principle less than

perfectly’’). It is enough, given the standard of review under

the APA, that the cost allocation mechanism not be ‘‘arbitrary

or capricious’’ in light of the burdens imposed or benefits

received.

We begin by recognizing that MISO is, of its Owners’ own

volition, a Commission-approved, Order No. 2000-compliant

RTO. See generally Midwest Indep. Transmission Sys. Operator, Inc., 97 FERC ¶ 61,326 (2001) (concluding MISO met

the standards for RTO status under Order No. 2000). MISO

thus must have operational authority over all of the transmission loads wheeled across the MISO Owners’ transmission

facilities. See 18 C.F.R. § 35.34(j)(3) (‘‘The [RTO] must have

operational authority for all transmission facilities under its

control.’’); id. § 35.34(k)(1)(i) (‘‘The [RTO] must be the only

provider of transmission service over the facilities under its

control’’). This authority reaches even the bundled and
12

grandfathered loads that are not subject to MISO’s openaccess tariff transmission rates during the six-year transition

period. See MISO II, 98 FERC at 61,411, aff’d as modified

on remand, MISO III, 102 FERC at 61,532–33. This means

that the MISO Owners ‘‘must take all transmission services,

including transmission used to deliver power to bundled retail

customers, from Midwest ISO.’’ MISO III, 102 FERC at

61,532. The Owners therefore gain no traction in their

argument by portraying those loads as somehow not ‘‘on’’ the

MISO system.

The MISO Owners nevertheless maintain that bundled and

grandfathered loads ‘‘will obtain only limited benefits from

the MISO’’ and the services bought with the Cost Adder.

Pet. Br. 27. To evaluate this claim, we start by reviewing the

services funded by the Cost Adder. According to the MISO

tariff, the ISO Cost Adder is set aside to pay for the ‘‘costs

associated with the Security Center, including capital costs

and expenses, and administering the Tariff.’’ MISO Open

Access Transmission Tariff, Original Sheet No. 136. The ISO

Cost Adder does not pay for ‘‘Scheduling, System Control and

Dispatch Service’’ — those costs are covered by a charge paid

directly to MISO Owners pursuant to Schedule 1 of the MISO

tariff. See id. (‘‘The costs associated with running the ISO

that are not recovered under Schedule 1 shall be recovered

through [the ISO Cost Adder].’’); see also Prepared Direct

Test. of Alan C. Heintz on behalf of the Midwest ISO

Participants, at 25 (‘‘Schedule 10 will recover the actual costs

associated with running the Midwest ISO that are not recovered under Schedule 1. These costs will include the costs

associated with the Midwest ISO Security Center, including

capital costs and expenses, and the costs of administering the

Tariff.’’). It thus seems that the costs allocated by the Cost

Adder are primarily MISO’s startup expenses — particularly

those pertaining to the MISO Security Center — and certain

expenses pertaining to the creation and administration of

MISO’s open-access tariff.

In Entergy Services, we recently observed that ‘‘upgrades

designed to ‘preserve the grid’s reliability’ constitute ‘system

enhancements [that] are presumed to benefit the entire sys-
13

tem.’ ’’ 319 F.3d at 543 (quoting Western Massachusetts

Elec. Co. v. FERC, 165 F.3d 922, 923, 927 (D.C. Cir. 1999)).

For their part, the MISO Owners do not contest this presumption. They readily concede that all transmission customers — bundled, unbundled, grandfathered, whatever —

benefit from the enhanced reliability and security MISO

brings to the transmission grid. See Pet. Br. 36 (‘‘There is no

disagreement that bundled retail load receives some benefit

from the MISO’’); Oral Arg. Tr. of Paul M. Flynn, Counsel

for Petitioners MISO Owners, at 9 (Question: ‘‘[FERC]

determined that the ISO improved that reliability for those

with bundled loads as well, right?’’ Answer: ‘‘Oh, absolutely.

And we have no argument with that.’’); Prepared Rebuttal

Test. of Alan C. Heintz on behalf of the Midwest ISO

Participants, at 7 (Heintz Rebuttal Test.) (‘‘[T]he Midwest

ISO’s fulfillment of its responsibilities as a Security Coordinator will also benefit other parties that are not directly receiving transmission service from the ISO.’’).

The MISO Owners nevertheless contend that these benefits

account for only a small fraction of the Cost Adder expense.

Citing the testimony of their expert, the MISO Owners claim

that only five percent of the Cost Adder pays for MISO’s role

as regional reliability coordinator. Pet. Br. 36 (citing Heintz

Rebuttal Test. 7). Pointing to the facts that 60 to 70 percent

of the transmission load on the MISO system is bundled or

grandfathered load and that the Cost Adder is allocated

according to transmission load, the MISO Owners complain,

essentially, that bundled and grandfathered loads are not

getting their money’s worth from the Cost Adder. The

MISO Owners allege that, under FERC’s decision, they end

up paying 60 to 70 percent of the freight for five percent of

the benefits. MISO Owners argue that FERC should have

unbundled the expenses under Schedule 10, and charged

bundled loads only those costs incurred for their benefit.

Pet. Br. 39.

Upon review of the record in this case, we conclude that

FERC reasonably allocated the Cost Adder to all loads using

the MISO transmission system, rather than just the unbundled retail and new wholesale loads. The MISO Owners’
14

assertion that only five percent of the Cost Adder is attributable to MISO’s regional reliability function misrepresents the

record evidence. Their expert witness said no such thing.

Rather, he testified:

Although the expected infrastructure requirements for

the Security Coordinator function are intertwined with

those expected for the ISO’s other functions, it is my

understanding that elimination of the Security Coordinator function might eliminate less than 5 percent of the

Midwest ISO’s expected capital costs, and would eliminate little of the expected staffing requirements. This is

because much of the staff and systems that are needed in

any event to support the other functions will also support

the Security Coordinator function.

Heintz Rebuttal Test. 7–8 (emphasis added).

The MISO Owners’ conclusion that only five percent of the

Cost Adder is used to fund regional reliability logically does

not follow from their witness’s testimony that eliminating

security operations would reduce MISO’s capital expenditures

by less than five percent. Even accepting the MISO Owners’

implicit (but false) premise that the Cost Adder funds only

capital expenditures, capital expenditures — real estate, fixtures, furniture, etc. — almost always serve multiple purposes; they are, in the words of the MISO Owners’ witness,

‘‘intertwined.’’ Id. at 7. Therefore, when a company eliminates a particular function, that company will not necessarily

be able to reduce much in the way of its capital expenditures;

those capital expenditures may still be required to support

the company’s other functions. It is thus quite wrong to

assert, as the MISO Owners do, that only five percent of the

Cost Adder is devoted to security operations, simply because

eliminating that function would only reduce costs by that

amount. Far from demonstrating how little of the Cost

Adder is needed to fund MISO’s reliability and security

operations, the testimony elicited by the MISO Owners establishes the ‘‘intertwined’’ nature of capital expenditures, and

the corresponding difficulty of unbundling them. This is why,

among other very good reasons, the cost causation principle
15

does not require exacting precision in a ratemaking agency’s

allocation decisions. See Sithe/Independence Power Partners, 285 F.3d at 5.

In addition, the bundled and grandfathered loads draw

more benefits from MISO than simply enhanced transmission

security and reliability. As the MISO Owners themselves

recognized in their application to FERC to establish MISO,

benefits such as ‘‘an overall reduction in the costs of transmitting energy within the region’’ and ‘‘large scale regional

coordination and planning of transmission’’ would redound to

all users of the transmission grid. See MISO Initial Approval, 84 FERC at 62,140.

Indeed, the costs covered by the ISO Cost Adder under

Schedule 10 are the administrative costs of having an ISO.

Transmission costs — the costs of using the system — are

allocated to users under Schedule 1. And even if they are not

in some sense using the ISO, the MISO Owners still benefit

from having an ISO. In this sense, MISO is somewhat like

the federal court system. It costs a considerable amount to

set up and maintain a court system, and these costs — the

costs of having a court system — are borne by the taxpayers,

even though the vast majority of them will have no contact

with that system (will not use that system) in any given year.

The public nevertheless benefits from having a system for the

prompt adjudication of criminal offenses and the orderly

resolution of civil disputes. Litigants bear some of the costs

of using this system through the payment of filing fees and

court costs. They, like utilities transmitting power under the

MISO open access tariff who pay according to Schedule 1, are

paying for the specific benefit of using the court system.

The MISO Owners’ position is tantamount to saying that if

they are not a litigant, they should not be made to pay for

any of the costs of having a court system. Since the MISO

Owners do, in fact, draw benefits from being a part of the

MISO regional transmission system, FERC correctly determined that they should share the cost of having an ISO.

For all these reasons, we conclude that FERC’s allocation

of the Cost Adder to all users of the MISO grid, according to
16

transmission volume, meets the minimum standards for reasoned decisionmaking required by the APA.3

3. The MISO Owners alternatively contend that FERC,

by levying the Cost Adder on bundled retail and grandfathered loads, created an ‘‘unnecessary risk of an unlawful

trapping of costs.’’ Pet. Br. 44 (citing, inter alia, Nantahala

Power & Light Co. v. Thornburg, 476 U.S. 953, 971–72

(1986)). Specifically, the MISO Owners complain that their

bundled retail rates and grandfathered contracts are essentially immutable, so that when the Cost Adder increases their

cost of transmission under those contracts, those new costs

are trapped with utilities, rather than passed on to consumers.

We have recognized that a ‘‘cost-trapping’’ claim can accrue

when ‘‘a state exercises its ‘jurisdiction over retail sales to

prevent the wholesaler-as-seller from recovering the costs of

paying the FERC-approved rate.’ ’’ Louisiana Public Serv.

Comm’n v. FERC, 184 F.3d 892, 899 (D.C. Cir. 1999) (quoting

Nantahala Power & Light, 476 U.S. at 970). The MISO

Owners here make something of a reverse cost-trapping

argument — FERC has trapped costs under rates that are

set by states or other contractual partners and has thereby

3 We have also considered the contention of MISO Owners Louisville Gas & Electric Company and Kentucky Utilities Company

(LG&E/KU) that FERC failed to meaningfully address their argument that application of the ISO Cost Adder to them ‘‘is especially

arbitrary and egregious’’ because they bring low-cost power to

MISO, Pet. Br. 59, and they regarded the transition period —

including exemption of their bundled retail and grandfathered loads

from the Cost Adder — as a fair trade for this benefit, see id. at 59–

69. This is simply a variation on the MISO Owners’ general

argument, and FERC rejected it by ‘‘reiterat[ing] that bundled

retail and grandfathered wholesale loads, including LG&E/KU’s,

benefit from the services provided by Midwest ISO, and, therefore

TTT must be included in the calculation of the ISO Cost Adder.’’

MISO IV, 104 FERC at 61,030 (footnote omitted); see also id. at

61,029 (FERC ‘‘cannot be bound by the unreasonable assumption

that it will approve a proposed tariff provision as just and reasonable simply because an entity relied on that provision.’’).
17

diminished the MISO Owners’ return. This claim fails for at

least two reasons.

First, the ‘‘risk’’ the MISO Owners complain about is just

that — a risk. It is an essential element of any cost-trapping

claim that real costs actually be trapped — stuck with the

regulated entity — resulting in reduced profits. The MISO

Owners cannot presently point to any loss resulting from

FERC’s alleged cost-trapping, because it is not known what

action will be taken by state regulators in response to the

imposition of the ISO Cost Adder.

More fundamentally, whatever the fate of any future costtrapping claim raised in response to prospective state regulatory action, the reverse cost-trapping argument the Owners

now seek to raise fails as a legal theory. The decision that

first approved cost-trapping claims, Nantahala Power &

Light, was based on the Supremacy Clause and principles of

federal preemption; the Court held that the state regulatory

authority, by increasing the utility’s cost of service after

FERC had established a cost-based rate for the utility,

impermissibly interfered with FERC’s authority to set just

and reasonable rates. See 476 U.S. at 970–72. We have

never, though, recognized as valid a reverse cost-trapping

claim of the variety brought by the MISO Owners — where it

is a federal regulatory action that is purportedly interfering

with a state’s regulatory scheme. Federal preemption and

the Supremacy Clause do not circumscribe FERC’s authority;

those principles operate to prevent the states from taking

regulatory action in derogation of federal regulatory objectives. If, as the MISO Owners fear, the FERC-approved

application of the Cost Adder to bundled and grandfathered

loads results in ‘‘trapped’’ costs, their initial recourse is to

their state regulators and contractual partners armed with

principles of federal preemption and the Supremacy

Clause — not to FERC.

* * *

The petition for review is denied.