Court Opinion

ID: 7863073
Source: CourtListenerOpinion
Date Created: 2022-09-08 18:12:05.405762+00
Date Added: 2024-06-11T15:56:11.487249
License: Public Domain

ROGERS, Circuit Judge,
concurring in part and dissenting in part:
It may well be, as the court concludes, see Opinion at 928, that the Commission can properly depart from its usual rate-making principles and procedures by preapproving rate incentives to encourage the building of a needed project. But the Commission has failed to provide virtually any explanation, much less an adequate one, for why the specific incentives that it approved for PG&E are appropriate for the Path 15 expansion. Accordingly, I would grant the petition and remand the case to the Commission for further explanation.
The court is in agreement regarding the general principles that must guide our review. Nothing was per se impermissible about the Commission’s decision to “preapprove” elements of PG&E’s rates for the Path 15 expansion in advance of a full rate case under 16 U.S.C. § 824d (2004). Although there has not yet been a formal rate proceeding to determine the final rates consumers will pay for transmission of energy through the expanded Path 15, an incentive-based multi-party agreement may, as counsel for the Commission argued, be a practical necessity to secure financing for some projects. Further, as a general matter, the Commission may take non-cost factors into account in setting rates. See Opinion at 4. Such factors include incentives to further other statutory policies, such as ensuring energy availability, even if those incentives create returns more generous than would result from cost-based ratemaking. See In re Permian Basin Area Rate Cases, 390 U.S. 747, 796-98, 88 S.Ct. 1344, 1375-76, 20 *308L.Ed.2d 312 (1968); Interstate Natural Gas Ass’n v. FERC, 285 F.3d 18, 33-34 (D.C.Cir.2002). Likewise, there is nothing inconsistent between the Commission’s order approving incentives for PG&E and the Removing Obstacles orders the Commission issued to encourage energy availability during California’s energy crisis. See Opinion at 5-6. While the Path 15 project would not have qualified for favorable rate treatment under the Removing Obstacles orders themselves, nothing in those orders precluded the Commission from offering similar incentives in the future.
These general principles include, however, a requirement that the Commission must ensure that rate increases that are likely to follow as a result of the incentives are “needed, and [are] no more than is needed, for the purpose.” In Farmers Union Cent. Exch. v. FERC, 734 F.2d 1486 (D.C.Cir.1984), the court rejected incentive rates the Commission had set for oil pipelines, in light of the principle that while non-cost factors can permissibly be integrated into rates, the Commission “must see to it that the increase is in fact needed, and is no more than is needed, for the purpose.” 734 F.2d at 1503 (quoting City of Detroit v. FPC, 230 F.2d 810, 817 (D.C.Cir.1955)). As petitioner, the Public Utilities Commission of the State of California (“PUCC”), points out, in Farmers Union the court “expressly rejected the argument that the FERC’s desire to increase capacity can support blanket application of ROE [i.e., return on equity] incentives in connection with an ROE incentive program,” requiring the Commission instead to “ ‘calibrate the relationship between increased rates and the attraction of new capital’ [and] ... consider ‘reasonable alternatives to its chosen policy and [ ] give a reasoned explanation for its rejection of such alternatives.’ ” Pet. Br. at 15 (quoting Farmers Union, 734 F.2d at 1503, 1511). The court recently reaffirmed this principle in Mo. Pub. Serv. Com’n v. FERC, 337 F.3d 1066, 1071 (D.C.Cir.2003).
In general, cost-based ratemaking already ensures just and reasonable rates by providing for the recovery of costs, plus a rate of return on equity commensurate with investments bearing similar risk. If the Commission wants to depart from this formula and offer additional incentives, it must carefully tailor them, lest it run afoul of the requirement that rates be “just and reasonable.” Otherwise, the “incentives” are nothing but windfalls. While the Commission’s action here is not a final rate order, the Commission does not dispute that it has established two elements of a future rate order. See Western Area Power Admin., 99 FERC ¶ 61,306, 62,277 n. 2, 2002 WL 1308653 (2002). If so, then the Commission must explain why this particular departure from cost-based ratemaking, namely, a 200 basis point increase to PG&E’s return on equity and a 10-year depreciation schedule, was necessary or appropriate for the Path 15 project. These incentives are not insignificant: in scope, they are identical to the crisis rates the Commission offered at the peak of the California energy shortage to encourage the quick completion of projects that could alleviate immediate shortages. See Removing Obstacles to Increased Electric Generation and Natural Gas Supply in the United States, 94 FERC ¶ 61,272, 61,969, 2001 WL 1842418 (2001). It is not enough to state that the Commission may offer incentives generally, see Opinion at 4: the court must ask whether it reasonably decided to offer these incentives specifically. Cf. Farmers Union, 734 F.2d at 1503.
The Commission’s only stated reason for accepting the particular incentives that PG&E requested was that the letter agreement between the Western Area Power Administration, TransElect and *309PG&E was the only bid for the Path 15 expansion project. The letter agreement was the “result of a request for proposals intended to achieve the most favorable terms possible,” and “[ajlthough a proposal for upgrades to Path 15 with lesser or no incentives would have been welcomed, no such proposal materialized,” so the letter agreement was the “best option available.” Western Area Power Admin., 100 FERC ¶ 61,331, 62,539, 2002 WL 31119062 (2002). The Commission’s only-bid explanation essentially posits that this is a take-it-or-leave-it offer: PG&E will only participate in the Path 15 project if given the rate incentives requested. But PG&E asked for three things: a 200 basis point increase to its return on equity, a ten-year depreciation schedule, and a reasonable industry target capital structure to be requested in a future rate filing. Although the Commission approved only the first two, PG&E did not withdraw from the project or request rehearing of the Commission’s rejection of its requested capital structure. If the take-it-or-leave-it nature of the letter agreement necessitated acceptance of its terms, why did the Commission consider itself free to reject one of them? And why did the Commission conclude that the target capital structure was unnecessary to induce PG&E’s participation in the project, but the return on equity and depreciation schedule were? The orders on review provide no answers to these questions because the Commission’s analysis of the need for the incentives is confined to cursory statements that “under the unique circumstances of this ease a 200 basis point incentive is appropriate,” 99 FERC ¶ 61,306 at 62,280, and that the requested incentives were the “best option available.” 100 FERC ¶ 61,331 at 62,539. The PUCC may have waived its narrow contention that the costs of the incentives could have been avoided by compelling PG&E to perform the relevant work, see Opinion at 5, but not its broader contention that the Commission — unlike the PUCC, which was in the process of conducting hearings examining the alternative ways of alleviating Path 15 congestion when the Commission issued the orders here, over PUCC’s objection — failed to compile any record evidence as to whether the incentives requested in the letter agreement were appropriate or engage in any reasoned consideration of alternatives, i.e., to correlate the size of the incentives with the need for them.
Because the Commission’s cursory and piecemeal acceptance of the requested incentives in the letter agreement based on the importance of the project and its purported cost-benefits fails to meet its obligation, when incorporating non-cost based incentives into rates, to “see to it that the increase is in fact needed, and is no more than is needed,” Farmers Union, 734 F.2d at 1503 (emphasis added), I would grant the petition and remand the case for the Commission to explain how the rate incentives are tailored to the Path 15 project.