Court Opinion

ID: 9434885
Source: CourtListenerOpinion
Date Created: 2023-08-03 00:00:36.520787+00
Date Added: 2024-06-11T17:12:57.508967
License: Public Domain

Case: 18-60575     Document: 00516843974         Page: 1    Date Filed: 08/02/2023

           United States Court of Appeals
                for the Fifth Circuit                               United States Court of Appeals
                                                                             Fifth Circuit

                                ____________                               FILED
                                                                      August 2, 2023
                                  No. 18-60575                        Lyle W. Cayce
                                ____________                               Clerk

   El Paso Electric Company,

                                                                      Petitioner,

                                      versus

   Federal Energy Regulatory Commission,

                                                                    Respondent.
                  ______________________________

            Appeal from the Federal Energy Regulatory Commission
                        Agency Nos. 161 FERC 61,188,
                              163 FERC 61,204
                ______________________________

   Before Jones, Southwick, and Ho, Circuit Judges.
   Edith H. Jones, Circuit Judge:
          Seven years ago, this court vacated, as arbitrary and capricious, the
   Federal Energy Regulatory Commission’s (“FERC”) cost allocation scheme
   for electrical grid improvements in the WestConnect region, which covers
   utility service to much of the American West. El Paso Elec. v. FERC, 832 F.3d
   495, 505–06 (5th Cir. 2016) (“El Paso Elec. I”). Because FERC had not
   reasonably explained how its orders, which implement the generally
   applicable Order No. 1000, complied with the Federal Power Act’s
   requirement that rates be “just and reasonable,” we remanded for further
   proceedings. FERC was instructed to provide more complete justification
Case: 18-60575     Document: 00516843974          Page: 2   Date Filed: 08/02/2023

                                   No. 18-60575

   for its orders. The petition under review asserts that the reasons FERC gave
   on remand remain insufficient. We agree. FERC’s orders violate the Federal
   Power Act as a matter of law and, alternatively, the agency has again
   inadequately explained its actions. The cost causation principle that binds
   FERC does not authorize it to force its regulated jurisdictional utilities to
   assume the costs of providing service to non-jurisdictional utilities. We
   therefore GRANT the petition and REVERSE the orders.
                               I. Background
          The court thoroughly summarized this case’s regulatory, factual, and
   procedural history in El Paso Elec. I. Only the highlights and more recent
   developments warrant attention here. See 832 F.3d at 499–503.
                           A. The Federal Power Act
          The Federal Power Act (“FPA”) gives FERC “jurisdiction over all
   facilities” involved in “the transmission of electric energy in interstate
   commerce.” 16 U.S.C. § 824(b)(1). The FPA requires that “[a]ll rates and
   charges made, demanded, or received by any public utility for or in
   connection with the transmission or sale of electric energy . . . be just and
   reasonable.” 16 U.S.C. § 824d(a). “For decades, the Commission and the
   courts have understood this requirement to incorporate a ‘cost-causation
   principle’—the rates charged for electricity should reflect the costs of
   providing it.” Old Dominion Elec. Coop. v. FERC, 898 F.3d 1254, 1255 (D.C.
   Cir. 2018).   This principle is “foundational” and a “basic tenet” of
   ratemaking. El Paso Elec. I, 832 F.3d at 505; S.C. Pub. Serv. Auth. v. FERC,
   762 F.3d 41, 85 (D.C. Cir. 2014) (per curiam) (“South Carolina”).
         FERC need not “utilize a particular formula” when applying this
   principle, nor “allocate costs with exacting precision.” Old Dominion,
   898 F.3d at 1260. FERC may even “emphasize other, competing policies and
   approve measures that do not best match cost responsibility and causation.”

                                        2
Case: 18-60575      Document: 00516843974           Page: 3   Date Filed: 08/02/2023

                                     No. 18-60575

   Carnegie Nat. Gas Co. v. FERC, 968 F.2d 1291, 1294 (D.C. Cir. 1992).
   Nevertheless, “all approved rates [must] 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); see also Ill. Com. Comm’n v.
   FERC, 576 F.3d 470, 477 (7th Cir. 2009) (Benefits should be “at least
   roughly commensurate” with costs.). Courts have generally held that costs
   “are to be allocated to those who cause the costs to be incurred and reap the
   resulting benefits.” Nat’l Ass’n of Reg. Util. Comm’rs v. FERC, 475 F.3d
   1277, 1285 (D.C. Cir. 2007); see also BNP Paribas Energy Trading GP v. FERC,
   743 F.3d 264, 268 (D.C. Cir. 2014) (The principle is a “matter of making sure
   that burden is matched with benefit.”).
                                B. Order No. 1000
          In 2011, FERC promulgated Order No. 1000 to promote efficient and
   cost-effective regional transmission planning and provide that grid
   improvement costs are allocated fairly among regional beneficiaries. See
   Transmission Planning and Cost Allocation by Transmission Owning and
   Operating Public Utilities, Order No. 1000, 136 FERC ¶ 61,051 at PP 4, 487
   (2011) (“Order No. 1000”). 1      Noting the “fundamental link” between
   regional planning and “cost allocation,” FERC implemented a number of
   cost allocation reforms. Id. at P 599. These require jurisdictional utilities to
   develop “a method . . . for allocating ex ante the costs of new regional
   transmission facilities that complies with six regional cost allocation
   principles.” El Paso Elec. I, 832 F.3d at 499 (quoting South Carolina, 762 F.3d
   at 53).    The first and “most pertinent” is the well-established “cost
   causation” principle. Id. Accordingly, the “cost of transmission facilities
          _____________________
          1
            FERC responded to requests for rehearing and clarification with Order
   No. 1000-A. 139 FERC ¶ 61,132 (May 17, 2012). We refer to both orders as “Order
   No. 1000.”

                                          3
Case: 18-60575      Document: 00516843974           Page: 4    Date Filed: 08/02/2023

                                     No. 18-60575

   must be allocated to those within the transmission planning region that
   benefit from those facilities in a manner that is at least roughly commensurate
   with estimated benefits.” Id. at 500; Order No. 1000 at PP 586, 622.
          A stated purpose is “to prevent subsidization by ensuring that costs
   and benefits correspond to each other.” Order No. 1000-A at P 578. “Free
   ridership,” where “an entity is not required to pay for a benefit it receives,”
   is the main form of subsidization combatted by the cost-causation principle.
   Id. at P 573. Requiring jurisdictional utilities to “allocate the costs of their
   new transmission facilities to the beneficiaries of those facilities” is one step
   toward “eliminat[ing] free riders on the transmission grid.” Id. at PP 568–
   69. Further, stated Order No. 1000, if compliance with the cost causation
   principle were not mandated, FERC would be unable to address free
   ridership and thus “ensure that rates . . . are just and reasonable.” Id. at 535.
          Crucially, Order No. 1000 applies only to public utilities subject to
   FERC jurisdiction. FERC appears to have statutory authority under § 211A
   of the FPA “to require participation in these processes by non-jurisdictional
   utilities,” but it “has thus far declined to exercise” it. El Paso Elec. I,
   832 F.3d at 500 (emphasis omitted).          Non-jurisdictional utilities may,
   however, join a transmission planning region for cost allocation purposes by
   “enrolling” in the region. Order No. 1000-A at PP 275, 656. But Order
   No. 1000 explicitly provides that jurisdictional utilities are “not required to
   plan for the transmission needs of . . . a non-[jurisdictional] utility
   transmission provider that has not made the choice to join.” Id. at P 276.
                        C. Factual and Procedural History
          In the WestConnect transmission planning region, jurisdictional and
   non-jurisdictional electric utility transmission providers are roughly equal in
   number and are interspersed throughout the vast geographic region. El Paso
   Elec. I, 832 F.3d at 501. According to FERC, the jurisdictional and non-

                                          4
Case: 18-60575      Document: 00516843974           Page: 5   Date Filed: 08/02/2023

                                     No. 18-60575

   jurisdictional utilities’ transmission services are highly integrated.
   Historically, they enjoyed a mutually beneficial relationship in which they
   planned new transmission facility projects together and allocated funding
   through negotiated agreement. Id. Under Order No. 1000 as implemented
   by the cost allocation scheme ordered by FERC, however, the WestConnect
   jurisdictional utilities must take into account the transmission needs of the
   non-jurisdictional utilities when planning a new facility and the jurisdictional
   utilities must pay for the facility’s development. Id. at 501–02. The non-
   jurisdictional utilities may pay if they so choose. Id. Specifically, regional
   planning would proceed according to the following process:
       1. WestConnect jurisdictional utilities and coordinating
          transmission owners (“CTOs”) (non-jurisdictional utilities
          that elect to participate in planning) identify the transmission
          needs of utilities in the region.
       2. They then determine whether a single project could meet
          multiple utilities’ transmission needs.
       3. If so, they examine whether the project satisfies the cost
          allocation criteria, including a benefit-to-cost ratio of at least
          1.25 to 1.
       4. Cost allocations are then determined among participating
          utilities, at which point CTOs choose whether to accept their
          allotment. If they opt out, the benefit-to-cost ratio is
          recalculated.
       5. If the project continues to satisfy the ratio, then all
          jurisdictional utilities and CTOs, including those that opted
          out of cost allocation, vote whether to solicit bids from a
          developer.
       6. The selected developer can recoup costs only from
          jurisdictional transmission utilities and CTOs that have
          volunteered to pay, not CTOs that opt out.

                                          5
Case: 18-60575            Document: 00516843974            Page: 6       Date Filed: 08/02/2023

                                           No. 18-60575

          In 2014, the WestConnect jurisdictional utilities, led by El Paso
   Electric Company (“EPE”), petitioned this court for review of FERC’s
   orders implementing Order No. 1000. 2 Id. at 502–03. The court held that
   FERC’s orders were arbitrary and capricious because they failed to “apply
   that foundational principle of cost causation for about half of the utilities in
   the WestConnect region.” El Paso Elec. I, 832 F.3d at 505. FERC had not
   “provide[d] a reasoned explanation for why the non-jurisdictional utilities
   have incentive or obligation to participate in binding cost allocation when
   they can get many of the same benefits at the jurisdictional utilities’
   expense.”        Id.    And FERC had failed to explain how the “lack of
   participation” in cost allocation by those beneficiaries would “not result in
   unjust and unreasonable rates.” Id. at 507. The court concluded that FERC
   had “failed to explain how the current orders satisfy its statutory mandate—
   except by ignoring the benefits the non-jurisdictional utilities would
   receive.” Id. at 507 n.13 The court vacated the orders and remanded “for
   further explanation and fact finding.” Id. at 510.
          Over a year later, FERC responded to our stated concerns. See
   161 FERC ¶ 61,188 (2017) (“Order on Remand”). First, the agency insisted
   that non-jurisdictional utilities are likely to submit to binding cost allocation
   on a project-by-project basis so that important grid improvement initiatives
   satisfy the benefit-to-cost threshold ratio and thus proceed toward
   development. Id. at PP 43–47. Second, because this threshold ratio ensures
   that a project’s benefits substantially outweigh its costs, the cost-causation’s
   requirement that benefits be “roughly commensurate” with costs will always
   be met. Id. at P 51. Finally, FERC noted that it could always reconsider its

          _____________________
          2
              The validity of Order No. 1000 is not at issue in this appeal.

                                                  6
Case: 18-60575         Document: 00516843974               Page: 7      Date Filed: 08/02/2023

                                           No. 18-60575

   approach if free ridership turns out to be a bigger problem than anticipated.
   Id. at P 54. 3
           The jurisdictional utilities requested a rehearing, arguing that FERC
   did not address the deficiencies in its orders previously vacated by this court.
   FERC denied the request, stating that the risk of free-ridership was
   acceptable because the only way to eliminate the risk would also “reduce the
   effectiveness” of FERC’s other policy objectives. 163 FERC ¶ 61,204 at P 10
   (2018) (“Order Denying Rehearing”).
           EPE petitioned this court for review of FERC’s Order on Remand and
   Order Denying Rehearing. The other WestConnect jurisdictional utilities
   (“Public Utilities”) intervened in support of EPE, and the non-jurisdictional
   utilities intervened in support of FERC. In December 2018, this court stayed
   the appeal to give the parties a chance to settle. In late 2022, FERC rejected
   the settlement agreement reached by the WestConnect jurisdictional and
   non-jurisdictional utilities. The petition is now ripe for review.
                                      II. Discussion
           FERC’s orders are reviewed under the Administrative Procedure
   Act’s “arbitrary and capricious” standard and will pass muster so long as the
   agency has “examined the relevant considerations and articulated a
   satisfactory explanation for its action, including a rational connection
   between the facts found and the choice made.” FERC v. Elec. Power Supply
   Ass’n, 577 U.S. 260, 292, 136 S. Ct. 760, 782 (2016) (alterations adopted).
   Although FERC enjoys “great deference . . . in its rate decisions,” id., its
           _____________________
           3
              Additionally, FERC explained that Order No. 1000’s so-called “reciprocity
   condition,” which would allow public utilities to cut off all new transmission service to non-
   public utilities who refuse to participate in cost allocation, provides an adequate impetus
   for non-public utility enrollment. Id. at P 53. FERC now disclaims any reliance on this
   argument.

                                                 7
Case: 18-60575        Document: 00516843974            Page: 8      Date Filed: 08/02/2023

                                        No. 18-60575

   orders must be set aside if “not in accordance with law.” FCC v. NextWave
   Pers. Commc’ns, 537 U.S. 293, 300, 123 S. Ct. 832, 838 (2003) (citing
   5 U.S.C. § 706(2)(A)). Particularly in this remand context, where FERC was
   ordered to flesh out its reasoning, we observe the earlier panel’s holding that
   “the deference we owe to FERC is not unlimited.” El Paso Elec. I, 832 F.3d
   at 503.
             EPE and the Public Utilities make two primary arguments: first, that
   FERC’s cost allocation scheme violates the FPA and Order No. 1000 as a
   matter of law; and second, that FERC’s orders are arbitrary and capricious
   because they fail to give an adequate explanation on remand. We discuss each
   argument in turn.
                           A. FERC’s Orders are Unlawful
             FERC’s orders fail as a matter of law, argues EPE, because they
   mandate for the non-jurisdictional utilities a right to free ride, violating the
   FPA and contrary to Order No. 1000. 4 In the same vein, the Public Utilities
   contend that the kind of free ridership permitted under FERC’s orders is a
   per se violation of the requirement that rates be just and reasonable.
             FERC responds that although some free ridership could
   “theoretically occur” under its orders, the cost-causation principle has never
   been so rigidly applied as to require the elimination of free ridership. Order
   on Remand at P 39. FERC asserts that courts have understood that cost-
   causation can give way to other competing policy goals. And costs need only
   be “roughly commensurate” to benefits under the cost causation principle

             _____________________
             4
             The non-public utilities call this an impermissible collateral attack on Order
   No. 1000. This court adjudicated that question in El Paso Elec. I and held that EPE’s
   challenge is not a collateral attack. 832 F.3d at 495.

                                              8
Case: 18-60575       Document: 00516843974           Page: 9   Date Filed: 08/02/2023

                                      No. 18-60575

   because, given the physical flow of electricity, some free ridership within an
   interconnected system is inevitable. Order Denying Rehearing at P 15.
          FERC made these same arguments in El Paso Elec. I. See Brief of
   Respondent at 25–32, El Paso Elec. I (No. 14–60822). There, as here, it
   predicated its position on South Carolina Public Service Authority v. FERC,
   762 F.3d 41 (D.C. Cir. 2014) (per curiam). Brief of Respondent at 30, El Paso
   Elec. I; see also Order Denying Rehearing at PP 13–14.
          In South Carolina, dozens of petitioners brought a facial challenge
   against Order No. 1000. 762 F.3d at 48. One group argued that FERC lacked
   the authority to adopt the cost allocation requirements. Id. at 82. (That
   argument is not raised here.) Another argued that FERC acted arbitrarily
   and capriciously because the cost allocation reforms “did not go far enough.”
   Id. Specifically, those petitioners complained that Principle 4 of the six
   regional cost allocation principles “fails to require cost allocation to extra-
   regional beneficiaries.” Id. at 87. By adopting Principle 4, FERC “limited
   required cost allocation to within regions, noting that doing so, ‘may lead to
   some beneficiaries of transmission facilities escaping cost responsibility
   because they are not located in the same transmission planning region as the
   transmission facility.’” Id. (emphasis added) (quoting Order No. 1000 at P
   660). This would permit beneficiaries to free ride, argued the petitioners,
   who sit just outside the “‘rather arbitrarily’ drawn region in which the new
   facility is located.” Id. at 88.
          The court acknowledged that because rates need only “reflect to some
   degree the costs actually caused by the customer who must pay them,” id.
   (quoting KN Energy, 968 F.2d at 1300), FERC can approve a “rate
   mechanism that tracks cost-causation principles less than perfectly.” Id.
   (quoting Sithe/Indep. Power Partners v. FERC, 285 F.3d 1, 5 (D.C. Cir. 2002)).
   Further, FERC “may rationally emphasize other, competing policies and

                                           9
Case: 18-60575      Document: 00516843974             Page: 10     Date Filed: 08/02/2023

                                       No. 18-60575

   approve measures that do not best match cost responsibility and causation.”
   Id. (quoting Carnegie Nat’l Gas, 968 F.2d at 1293–94). The court thus
   concluded that FERC’s “balancing of the competing goals of reducing
   monitoring burdens and adopting policies that ensure that cost allocation
   maximally reflects cost causation is wholly reasonable.” Id.
          In El Paso Elec. I, FERC invoked the same reasoning in South Carolina
   to uphold the cost allocation scheme at issue in the WestConnect region. But
   the court majority in El Paso Elec. I noted that EPE’s petition differs from the
   petition that “generally challenged” FERC’s regulation in South Carolina. 5
   Id. at 504. FERC’s reasoning following remand does not fortify its reliance
   on South Carolina.
          EPE and the Public Utilities distinguish South Carolina by
   emphasizing that fundamentally different kinds of free-ridership are
   implicated in the two cases. The free riders contemplated in South Carolina,
   they argue, comprised “unintended, residual beneficiaries outside of a
   planning region”; whereas here, the non-jurisdictional utility free riders sit
   within the WestConnect region and are “specifically and intentionally
   designated as beneficiaries.” This distinction is indeed fundamental. Its legal
   import stems from the statutory mandates served by the cost-causation
   principle and the means employed to meet those ends.
          The FPA’s statutory requirement is twofold: (1) rates must be “just”;
   and (2) rates must be “reasonable.”            16 U.S.C. § 824d(a).       The cost-
   causation principle, as understood by the courts and articulated in Order
   No. 1000, serves this mandate in two distinct ways. First, to ensure that rates
   are “just,” the principle prevents “subsidization by ensuring that costs and

          _____________________
          5
            Judge Reavley’s dissent found South Carolina “indistinguishable.” 832 F.3d at
   512 (Reavley, J., dissenting).

                                            10
Case: 18-60575     Document: 00516843974           Page: 11   Date Filed: 08/02/2023

                                    No. 18-60575

   benefits correspond to each other.” Order No. 1000-A at P 578; see also BNP
   Paribas Energy Trading GP, 743 F.3d at 268 (the “principle itself manifests a
   kind of equity . . . as a matter of making sure that burden is matched with
   benefit”); Nat’l Ass’n of Reg. Util. Comm’rs., 475 F.3d at 1285 (“costs are to
   be allocated to those who cause the costs to be incurred and reap the resulting
   benefits”).
          Second, to guarantee that rates are “reasonable,” cost-causation
   “requirements help to ensure that more efficient and cost-effective
   transmission solutions are implemented and that this occurs without undue
   delay.” Order No. 1000-A at P 585; see also id. at P 592 (The absence of an
   ex ante regional cost allocation method causes “jurisdictional rates [to be]
   higher than they would otherwise be.”). As this court recognized, “Order
   No. 1000 clearly linked cost causation, the elimination or reduction of free
   ridership, just and reasonable rates, and more efficient transmission planning
   and development.” El Paso Elec. I, 832 F.3d at 505, n. 10; see also Pub. Serv.
   Elec. & Gas Co. v. FERC, 989 F.3d 10, 14 (D.C. Cir. 2021) (The promulgation
   of Order No. 1000 “to foster the efficient development of the transmission
   grid” was “[c]onsistent with the cost-causation principle.” (emphasis
   added)).
          Neither of the statutory mandates served by the cost-causation
   principle can be sacrificed for the other or for some separate policy interest.
   See Lincoln v. Vigil, 508 U.S. 182, 193, 113 S. Ct. 2024, 2032 (1993)
   (“Of course, an agency is not free simply to disregard statutory
   responsibilities . . . .”). To be sure, FERC may “emphasize other, competing
   policies and approve measures that do not best match cost responsibility and
   causation.” Carnegie Nat’l Gas, 968 F.2d at 1294 (emphasis added).
   Additionally, FERC need not “allocate costs with exacting precision” or
   according to “a particular formula.” Old Dominion, 898 F.3d at 1260. But
   the agency may never approve unjust and unreasonable rates by allocating

                                         11
Case: 18-60575       Document: 00516843974              Page: 12       Date Filed: 08/02/2023

                                         No. 18-60575

   costs to those who reap little to no benefit, see Ill. Com. Comm’n, 576 F.3d at
   476, nor may it choose not to allocate costs to “those who cause the costs to
   be incurred and reap the resulting benefits.” Nat’l Ass’n of Reg. Util.
   Comm’rs, 475 F.3d at 1285 (emphasis added); see also Consol. Edison Co. of
   NY v. FERC, 45 F.4th 265, 282 (D.C. Cir. 2022) (per curiam) (vacating
   portion of FERC order that exempted “de minimis” beneficiaries from cost
   allocation). 6
           Thus, the distinction between extra-regional unintended beneficiaries
   and regional intended beneficiaries becomes critical. The former do not
   “cause” any costs to be incurred in a neighboring region. The latter do. As
   the Seventh Circuit put it in Illinois Commerce Commission v. FERC: “To the
   extent that a utility benefits from the costs of new facilities, it may be said to
   have ‘caused’ a part of those costs to be incurred, as without the expectation of
   its contributions the facilities might not have been built.” 576 F.3d at 476
   (emphasis added); see also Order No. 1000 at P 537 (quoting Ill. Com.
   Comm’n). In South Carolina, the petitioners would not have expected the
   contributions of the extra-regional beneficiaries when planning grid
   improvements. Although those beneficiaries may have enjoyed some free
   ridership in the technical sense, their ability to avoid binding cost allocation
   did not violate the cost-causation principle. In the WestConnect region,
   FERC’s orders require that the jurisdictional utilities “specifically and
   intentionally” account for the needs of the non-jurisdictional utilities, which
   comprise half of the utilities in that region. And the non-jurisdictional

           _____________________
           6
            The dissent chides our citation of Nat’l. Ass’n of Reg. Util. Comm’rs, supra, with
   that court’s caveat that customer interconnections to a utility grid do not violate cost
   causation. 475 F.3d at 1285. This case is not about individual customer connections, but
   about transmission improvements that benefit non-contributing non-jurisdictional utilities.
   One cannot rationalize subsidization across transmission providers by reference to costs
   incurred by adding customers to an individual utility.

                                               12
Case: 18-60575      Document: 00516843974            Page: 13     Date Filed: 08/02/2023

                                      No. 18-60575

   utilities may not only participate in planning but also vote on new projects.
   In contrast, in the era before Order No. 1000, the non-jurisdictional utilities
   regularly helped pay for regional transmission projects. Moreover, in the
   jurisdictional utilities’ initial attempts to comply with Order No. 1000, which
   FERC rejected, the non-jurisdictional utilities would have continued to
   contribute funding via negotiated agreements for projects that benefited
   them.
           When promulgating Order No. 1000, FERC anticipated the potential
   conundrum posed by regional non-jurisdictional utilities and provided a
   workable solution—which facilitates development while avoiding any cost-
   causation pitfalls. Non-jurisdictional utilities may elect “to become part of a
   transmission planning region by enrolling in that region.” Order No. 1000-
   A at P 275. They would then be subject to binding cost allocation for future
   projects that benefit them. Id. But, importantly, non-jurisdictional utilities
   are not required to enroll. Id. at P 276. In that case, what must the
   jurisdictional utilities, which are required to enroll, do with the unenrolled,
   non-jurisdictional utilities? The answer: nothing. The regulation is clear:
   the “regional transmission planning process is not required to plan for the
   transmission needs of such a non-[jurisdictional] utility transmission
   provider that has not made the choice to join a transmission planning
   region.” Id. (emphasis added). This is consistent with the two purposes of
   the cost-causation principle: (1) ensure just rates by preventing subsidization
   and (2) promote reasonable rates by incentivizing efficient and cost-effective
   transmission project planning. In the challenged orders for the WestConnect
   region, FERC turns this workable solution on its head, mandating that non-
   jurisdictional utilities need not enroll in the region, yet jurisdictional utilities
   must plan for their transmission needs.
           In the name of policy balancing, FERC has prohibited the
   WestConnect region from imposing binding cost allocation on the non-

                                           13
Case: 18-60575     Document: 00516843974           Page: 14   Date Filed: 08/02/2023

                                    No. 18-60575

   jurisdictional utilities although they will “cause,” in part, the costs of new
   grid improvements. This scenario is entirely different from that encountered
   in South Carolina. No amount of emphasizing other competing interests
   permits FERC to sacrifice the foundational principle of cost-causation by
   refusing to allocate costs “to those who cause the costs to be incurred and
   who reap the resulting benefits.” Nat’l Ass’n of Reg. Util. Comm’rs, 475 F.3d
   at 1285. Because FERC’s orders are a “wholesale departure” from the cost-
   causation principle, Old Dominion, 898 F.3d at 1261, they cannot be
   considered “just and reasonable” and violate the Federal Power Act’s cost-
   causation requirement as a matter of law.
                 B. FERC’s Orders are Arbitrary and Capricious
          But even assuming that FERC’s challenged orders theoretically lie at
   the outer limits of the cost causation principle, the agency’s explanation of
   how its orders work in this case is arbitrary and capricious. This court, in El
   Paso Elec. I, remanded for further explanation and fact finding, holding that
   “FERC’s [orders] nowhere provide a reasoned explanation for why the non-
   jurisdictional utilities have incentive or obligation to participate in binding
   cost allocation when they can get many of the same benefits at the
   jurisdictional utilities’ expense.” Id. at 505. FERC now offers four principal
   arguments in support of its orders. We discuss each in turn.
                                  1. Fact Finding
          As an initial matter, FERC found it unnecessary “to order additional
   proceedings to investigate the participation of non-[jurisdictional] utility
   transmission providers in regional cost allocation in WestConnect.” Order
   on Remand at P 29 n.62. This is because there are no new facts. Since 2015,
   the WestConnect planning process has not identified any regional
   transmission needs. Consequently, “there have been no opportunities for
   non-[jurisdictional] utility transmission providers to participate in cost

                                         14
Case: 18-60575        Document: 00516843974               Page: 15       Date Filed: 08/02/2023

                                           No. 18-60575

   allocation for regional transmission projects.” Id. Nonetheless, FERC
   purports to have found two facts on remand. First, while WestConnect non-
   jurisdictional utilities do not intend to enroll and subject themselves to
   binding cost allocation, FERC finds no evidence of any resulting harm. Id. at
   P 36. This makes no sense: how could there be evidence of harm where there
   have been no recent opportunities for non-jurisdictional utilities to opt out of
   cost allocation? This is like “finding” that exposure to sun is harmless where
   no one stepped outdoors.
           More tellingly, FERC observes that all non-jurisdictional utility
   providers have elected to participate as coordinating transmission owners in
   order to have their transmission needs included in the regional transmission
   planning process. Id. at P 38. But the agency denies that this fact will
   instigate free-riding. FERC and the non-jurisdictional utilities insist there is
   a difference between choosing not to enroll in the region and retaining the
   ability to opt out of binding cost allocation on a project-by-project basis. In
   other words, the fact that non-jurisdictional utilities have refused to enroll
   does not mean that they will opt out of binding cost allocation in future
   projects. Maybe so; but the obvious inference is that non-jurisdictional
   utilities will opt out of cost allocation at least some of the time.7 At the very
   least, these facts do not tend to show that impermissible free riding will not
   take place.
                             2. Economic Theory and Expertise
           Because of the sparse factual record before it, FERC contends that it
   reasonably exercised its discretion to explain its actions based on economic

           _____________________
           7
             That the non-public utilities will thus maintain the ability to free ride reinforces
   our alternative holding that FERC’s orders fail under the FPA’s cost allocation principle
   as a matter of law.

                                                15
Case: 18-60575     Document: 00516843974            Page: 16   Date Filed: 08/02/2023

                                     No. 18-60575

   theory, its predictive judgment, and its expertise. Order Denying Rehearing
   at P 33; see also FCC v. Prometheus Radio Project, 141 S. Ct. 1150, 1160 (2021)
   (holding that the FCC reasonably explained its actions, which constituted its
   “best estimate, based on the sparse record evidence”). The economic theory
   argument is puzzling, because FERC cites no theory pursuant to which a
   rational economic actor will elect to pay for some good or service that he can
   get for nothing. Similarly, the argument for agency expertise and judgment
   does not get FERC very far, for it merely parrots the well-established rule
   that agencies need not conduct their “own empirical or statistical studies
   before exercising” their discretion. Prometheus Radio, 141 S. Ct. at 1160. The
   overarching standard remains firmly in place: all agency action, even
   “predictive judgment[s] based on the evidence” available, must be
   “reasonable and reasonably explained.” Id. at 1160. But here, the predictive
   judgment runs contrary to Order No. 1000 itself, which recognized and
   countered a predictive judgment of free riding by not requiring the
   jurisdictional utilities to plan and include non-enrolled non-jurisdictional
   ones. In other words, today’s predictive judgment is at unexplained odds
   with that of yesterday. To provide an explanation that would have reconciled
   these positions was the purpose of remand, a principal part of the cost
   causation issue. Falling back on unexplained claims of agency expertise does
   not carry the remand burden.
                         3. Benefit-to-Cost Threshold Ratio
          The only additional explanation FERC offers to show that non-
   jurisdictional utilities are actually likely to participate in binding cost
   allocation inheres in a generous benefit-to-cost threshold ratio every new
   transmission project must satisfy. Order on Remand at PP 40–43; Order
   Denying Rehearing at PP 24-25. FERC posits that a non-jurisdictional utility
   that will benefit from a project will likely pay its fair share of the costs,
   because if it opts out, the benefit-to-cost ratio will narrow, and the chance the

                                          16
Case: 18-60575      Document: 00516843974            Page: 17   Date Filed: 08/02/2023

                                     No. 18-60575

   project fails to proceed increases.          It is thus in the interest of non-
   jurisdictional utilities that projects succeed.           This explanation is
   unreasonable.
           What is more likely to happen if FERC’s orders are implemented is
   gamesmanship predicated on the non-jurisdictional utilities’ ability to reject
   cost allocation. As EPE notes, because non-jurisdictional utilities participate
   in regional transmission planning on the same footing as jurisdictional
   utilities, the availability of a transparent cost-benefit ratio “will enable each
   non-[jurisdictional] utility to predict the likelihood that a given project will
   be built without its participation.” The non-jurisdictional utilities will have
   an incentive to exploit this information, bluffing their way to free ride on the
   backs of the jurisdictional utilities by gaming the cost-benefit calculations.
   FERC’s orders provide no comparable incentive for the jurisdictional
   utilities.
           But there is an additional flaw in FERC’s rationalization: it contradicts
   the reasoning of Order No. 1000. When promulgating Order No. 1000, the
   agency understood that the potential for free ridership is “particularly high
   for projects that affect multiple utilities’ transmission systems and therefore
   may have multiple beneficiaries.”            Order No. 1000 at P 486.        The
   WestConnect region “is a heavily-integrated combination of [jurisdictional]
   and non-[jurisdictional] utility transmission providers,” so it stands to reason
   that significant projects will benefit both jurisdictional and non-jurisdictional
   utilities. Order on Remand at P 30. The non-jurisdictional utilities, thus,
   have “an incentive to defer investment in the hopes that other beneficiaries
   will value the project enough to fund its development.” Order No. 1000 at
   P 486. This kind of free ridership leads to unjust and unreasonable rates by
   delaying projects and shifting costs onto others. See id. at PP 486, 512.
   FERC’s former solution to this problem, as articulated in Order No. 1000,
   was to require jurisdictional utilities to submit to binding cost allocation while

                                           17
Case: 18-60575        Document: 00516843974               Page: 18       Date Filed: 08/02/2023

                                           No. 18-60575

   not requiring them to plan for the transmission needs of non-jurisdictional
   utilities. Order No. 1000-A at PP 276, 568. Now, in the name of policy
   balancing, FERC has flipped. 8 Crucially, it fails to explain how the presence
   of a benefit-to-cost threshold ratio not only neutralizes, but reverses the non-
   jurisdictional utilities’ incentive to shift costs onto the jurisdictional utilities.
   In any event, even if the ratio creates some sort of impetus to pay, it is pure
   speculation to assume that the ratio will be so narrow in every project that the
   project will fail without the non-jurisdictional utilities’ participation. 9
           Recognizing that a hypothesized incentive to pay does not guarantee
   that non-jurisdictional utilities will bear their share of costs, FERC maintains
   that if a non-jurisdictional utility opts out, so long as the threshold ratio is
   met, the project will satisfy the cost-causation principle because the benefits
   enjoyed by the jurisdictional utilities will remain “roughly commensurate”
   with the costs. As we explained above, the cost-causation principle does not
   test whether benefits exceed costs simpliciter, but whether benefits to
           _____________________
           8
              The extent of FERC’s turnabout from the reasoning of Order No. 1000, which
   these orders were intended to implement, is remarkable. FERC argues in this appeal that
   in regard to WestConnect, it was faced with two allegedly unpalatable alternatives for
   encouraging regional planning and cost allocation. Excluding non-public utilities would
   “fragment” regional planning, but requiring them to opt in or out of planning and
   associated costs would fail to prevent some free ridership. Thus, it chose the “middle
   course,” authorizing the non-public utilities to get in on planning but avoid cost allocation.
   The “middle course,” when analyzed, is a euphemism for mandating free ridership and
   incentivizing gamesmanship at the expense of planning. Maybe these consequences have
   played a role in the inability of WestConnect to move forward on any regional planning for
   nearly a decade following FERC’s challenged orders.
           9
              The dissent concludes by stating that “FERC sufficiently explained why Order
   No. 1000 appropriately balances those competing goals” (i.e., cost causation and other
   policy objectives). Respectfully, as articulated above, the compliance orders at issue here
   fundamentally conflict with the reasoning of Order No. 1000’s prescription: that non-
   jurisdictional utilities’ needs may not be taken account of by jurisdictional utilities in
   planning unless those utilities have agreed to pay their share of the costs. FERC fails to
   follow its own governing Order No. 1000 as well as the FPA.

                                                18
Case: 18-60575     Document: 00516843974           Page: 19   Date Filed: 08/02/2023

                                    No. 18-60575

   particular utilities are linked to costs “caused” by those utilities. See Order
   No. 1000 at P 724 (“there must be a demonstrated link between the costs
   imposed through a cost allocation method and the benefits received by
   beneficiaries that must pay those costs”). This court has already stated that
   FERC’s compliance orders cannot “satisfy its statutory mandate—except by
   ignoring the benefits the non-jurisdictional utilities would receive.” El Paso
   Elec. I, 832 F.3d at 507 n.13. FERC’s revised explanation continues to ignore
   the benefits it acknowledges could accrue to free-riding non-jurisdictional
   utilities. Thus, FERC’s orders are unreasonable for peddling the benefit-to-
   cost threshold ratio as a cure-all for the free ridership malady its new scheme
   creates.
                           4. “Wait-and-See” Approach
          As a final gesture of reasonableness, FERC assures the court that it
   will intervene in the WestConnect region if things get out of hand or once
   “more empirical evidence becomes available.” Order on Remand at P 36.
   EPE and the Public Utilities respond that by then it will be too late. Under
   the “filed-rate doctrine,” “once a rate is in place with ostensibly full legal
   effect and is not made provisional, it can then be changed only
   prospectively.” Tex. E. Transmission Corp. v. FERC, 102 F.3d 174, 183 (5th
   Cir. 1996).   Thus, the injuries suffered as a result of any unjust and
   unreasonable rate will be irreparable. Further, agencies cannot play the
   “administrative law shell-game” of offering “future rulemaking as a
   response to a claim of agency illegality.” Ameren Servs. Co. v. FERC,
   880 F.3d 571, 584 (D.C. Cir. 2018) (citing Am. Tel. & Tel. Co. v. FCC,
   978 F.2d 727, 732 (D.C. Cir. 1992)). A “wait-and-see suggestion confuses
   adjudication—which is retroactive . . .—with rulemaking, which is of only
   future effect.” Id. This court ordered FERC to provide adequate reasons in
   support of its actions. It is unreasonable for FERC now to tell the court to
   stay tuned.

                                         19
Case: 18-60575    Document: 00516843974          Page: 20   Date Filed: 08/02/2023

                                  No. 18-60575

                              III. Conclusion
         For the foregoing reasons, we conclude that FERC’s orders
   implementing Order No. 1000 for the WestConnect region are incompatible
   with the FPA’s mandate for just and reasonable rates and with Order
   No. 1000’s application of the cost causation principle; and in addition,
   FERC’s attempt to provide a reasoned explanation for its abnegation of cost
   causation on remand is inadequate and unreasonable.         Therefore, we
   GRANT the petition for review and REVERSE the orders.

                                       20
Case: 18-60575     Document: 00516843974             Page: 21   Date Filed: 08/02/2023

                                      No. 18-60575

   Leslie H. Southwick, Circuit Judge, dissenting:
          In 2016, we remanded three agency orders to the Federal Energy
   Regulatory Commission (“Commission” or “FERC”). Those orders had
   modified and approved a regional electric transmission planning and cost
   allocation program for WestConnect, a voluntary association of western
   electric utilities. El Paso Elec. Co. v. FERC, 832 F.3d 495 (5th Cir. 2016). We
   found that FERC’s orders did not fully explain why the agency would permit
   the non-jurisdictional members of WestConnect to benefit from new high-
   voltage transmission facilities without requiring them to share in the costs of
   those facilities. Id. at 504–08.
          In that opinion, we concluded FERC had not explained how rates
   could be just and reasonable if the agency orders “effectively assur[ed]” that
   only the jurisdictional utilities would bear the costs of transmission
   development in the region. Id. at 505. We held that FERC had not
   articulated why the non-jurisdictional utilities would participate in binding
   project cost allocation when they could opt out and “get many of the same
   benefits at the jurisdictional utilities’ expense.” Id. We remanded the issue
   of the non-jurisdictional utilities’ role in transmission planning and cost
   allocation for FERC to offer “further explanation and fact finding consistent
   with this opinion.” Id. at 510–11. We did not provide more specific
   instructions.
          On remand, in the orders now on review, FERC reaffirmed its prior
   determinations and elaborated on its prior findings. See 161 FERC ¶ 61,188
   (2017) (“Order on Remand”); 163 FERC ¶ 61,204 (2018) (“Order Denying
   Rehearing”). I agree with FERC and the Respondent-Intervenors that
   FERC’s fact findings on remand suffice to support that its compliance orders
   are structured to minimize any potential free ridership by the non-
   jurisdictional utilities and do not violate the cost-causation principle.

                                          21
Case: 18-60575        Document: 00516843974              Page: 22       Date Filed: 08/02/2023

                                          No. 18-60575

   Further, I find an adequate explanation of why the public utilities would not
   bear the costs for the region in transmission planning.
           El Paso argues that FERC’s conclusions on remand are not supported
   by substantial evidence and contends that it is “sheer speculation” that the
   non-jurisdictional utilities would voluntarily accept binding cost allocation.
   El Paso dismisses FERC’s assertion in the Order on Remand that the
   Compliance Orders protect against free ridership by implementing the 1.25x
   benefit-cost ratio, claiming there is “no evidentiary basis in the record to
   support FERC’s assumptions, only guesswork.” El Paso argues, with aid of
   a numerical example, that a non-jurisdictional utility can decline cost
   allocation and still reap the benefits of a hypothetical WestConnect project. 1
   FERC and the Respondent-Intervenors counter that FERC’s determinations
   “reasonably relied on economic theory, the Commission’s reasonable
   predictive judgment, and its expertise.”
           A reviewing court’s duty under both the Federal Power Act and the
   Administrative Procedure Act is to ascertain whether the agency has offered
   a reasonable explanation for its actions, not whether its “decision is the best
   one possible.” FERC v. Elec. Power Supply Ass’n, 577 U.S. 260, 292 (2016).
   “[N]owhere is this more true than in a technical area like electricity rate
   design.” Id. “Indeed, the agency’s decision need not be ideal, so long as it
   is not arbitrary or capricious, and so long as the agency gave at least minimal
   consideration to the relevant facts contained in the record.” State of La. Ex
   rel. Guste v. Verity, 853 F.2d 322, 327 (5th Cir. 1988). In such a case, the court

           _____________________
           1
             El Paso also provided a hypothetical in its Rehearing Request. Order Denying
   Rehearing at ¶ 23 & n.69. FERC did not find the hypothetical “compelling.” Id. at ¶ 23.
   It found that the hypothetical presented was highly unlikely because the only reason such a
   project would be able to move forward was if the benefits to the paying utilities were still
   significant enough to satisfy the 1.25x cost-benefit ratio. Id. at ¶ 24.

                                               22
Case: 18-60575     Document: 00516843974            Page: 23    Date Filed: 08/02/2023

                                     No. 18-60575

   must uphold the decision even if it is “of less than ideal clarity if the agency’s
   path may reasonably be discerned.” Motor Vehicle Mfrs. Ass’n v. State Farm
   Mutual Auto Ins. Co., 463 U.S. 29, 43 (1983) (quotation marks and citation
   omitted).
          Importantly for the case before us, “an agency’s predictive judgment
   regarding a matter within its sphere of expertise is entitled to particularly
   deferential review.” Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 (D.C.
   Cir. 1999) (quotation marks and citation omitted). An agency is “not
   required to support its analysis with hard data where it reasonably relied on
   difficult-to-quantify, intangible benefits.” Huawei Technologies USA v. FCC,
   2 F.4th 421, 454 (5th Cir. 2021). A reviewing court is accordingly “limited
   to considering whether the [agency] made a reasonable predictive judgment
   based on the evidence it had.”       Id. at 545 (quotation marks and citation
   omitted). This means that a court “cannot demand the agency perform its
   own empirical or statistical studies, especially when it relies on unquantifiable
   benefits.” Id. (quotation marks and citation omitted).
          As mentioned earlier, our 2016 El Paso decision returned the matter
   to FERC because it had not articulated why the non-jurisdictional utilities
   would participate in binding project cost allocation when they could opt out
   and “get many of the same benefits at the jurisdictional utilities’ expense.”
   El Paso, 832 F.3d at 505. In its later Order Denying Rehearing, FERC
   acknowledged that its explanation in the Third Compliance Order “stated,
   without further elaboration, that the transmission planning process removes
   the benefits of non-public [utilities] that do not accept cost allocation, and
   therefore the resulting cost allocation determinations are commensurate with
   the estimated benefits considered.” Order Denying Rehearing at ¶ 15. It
   then explained how “[t]he Order on Remand, in contrast, provided a more
   detailed explanation of the reevaluation process, and, unlike the Third
   Compliance Order, explained that a crucial part of the reevaluation process

                                          23
Case: 18-60575        Document: 00516843974               Page: 24        Date Filed: 08/02/2023

                                           No. 18-60575

   is that transmission projects may fail to meet the cost-benefit threshold upon
   reevaluation if non-public [utilities] do not agree to cost allocation (such that
   the projects will no longer be eligible for regional cost allocation and are less
   likely to be ultimately developed).” Id.
           The Order on Remand explains how and why the 1.25x benefit-cost
   ratio requirement will discourage free ridership by incentivizing regional cost
   allocation. 2 See Order on Remand at ¶ ¶ 40–52. FERC found that if a
   substantial number of non-jurisdictional utilities — hoping for a free ride —
   chose to decline cost allocation for a project that benefitted them, there is a
   good chance the project would then fail the required 1.25x benefit-cost ratio
   and not proceed. Id. at ¶ 47. As a result, FERC concluded that free riding
   could theoretically only occur for a “limited subset of transmission projects.”
   Id. at ¶ 39. Because the non-public utilities are subject to the same reliability
   regulations as public utilities, FERC found that they therefore “have an
   incentive to accept regional cost allocation for reliability transmission
   projects because their transmission facilities must adhere to NERC
   Reliability Standards.”         Id. at ¶ 48.        In other words, because of the
   interconnectedness of the region, if the non-public utilities consistently
   refused to participate in cost allocation, their own ability to build transmission

           _____________________
           2
               “Specifically, for each transmission project proposed for selection in the regional
   transmission plan for purposes of cost allocation, the WestConnect Planning Management
   Committee (the Committee) performs cost-benefit analysis to determine whether the
   transmission project is eligible for regional cost allocation.” Order on Remand at ¶ 40. If
   a non-public utility declines cost allocation, WestConnect re-runs the cost-benefit analysis,
   removing the benefits the declining utility would have received. Id. at ¶ 41. This means
   there would be fewer benefits in a re-run, and so the ratio of project benefits to costs would
   decrease. See id. at ¶ 42. The project would not proceed for remaining participants unless
   the estimated benefits to those utilities still exceeded their allocated costs by 25 percent
   (i.e., the 1.25x benefit-cost ratio). Id. at ¶ 46.

                                                 24
Case: 18-60575      Document: 00516843974           Page: 25   Date Filed: 08/02/2023

                                     No. 18-60575

   projects that require the public utilities’ cooperation would suffer too. Id. at
   ¶ 30, JA.1285.
           In that vein, the Order on Remand discusses how, in this region, the
   service territories of the public utilities are often “physically separated” by
   the non-public utilities, and there are few interconnections between only
   public utilities. Id. As a result, the WestConnect region is “uniquely
   integrated” between public and non-public utilities. Id. at ¶ 31. We wrote in
   our 2016 opinion that the region has historically depended on “voluntary
   coordination” in planning projects in the region that resulted in “shared
   costs and many jointly owned projects.” El Paso, 832 F.3d at 501. FERC
   relied upon this “history of significant joint transmission planning” between
   the non-public and public utilities in its decision. Order on Remand at ¶ 30.
           El Paso contends that the historic cooperation between the utilities is
   irrelevant because, in the past, no one had been required to pay for projects.
   Thus, cooperation was essential. It further asserts that this explanation
   regarding the benefit-cost ratio is unsatisfying because the record contains
   “no evidentiary basis” or “empirical evidence” to support FERC’s
   assumptions of its effectiveness, “only guesswork.” To some degree, this is
   true.   FERC stated in its orders on remand that there have been no
   WestConnect projects to date, so there is no direct, empirical evidence to
   support or to contradict El Paso’s claim that non-public utilities could decline
   cost allocation even if presented with a project that benefitted them. Order
   Denying Rehearing at ¶ 33 & n.92; Order on Remand at ¶ 29 & n.62.
           I disagree with El Paso’s assertion, though, that this uncertainty is
   fatal to FERC’s explanation on remand. “Agencies do not need to conduct
   experiments in order to rely on the prediction that an unsupported stone will
   fall; nor need they do so for predictions that competition will normally lead
   to lower prices.” Associated Gas Distribs. v. FERC, 824 F.2d 981, 1008-09

                                         25
Case: 18-60575     Document: 00516843974            Page: 26     Date Filed: 08/02/2023

                                     No. 18-60575

   (D.C. Cir. 1987). When no empirical evidence is available, agencies are
   permitted to make “reasonable predictions rooted in basic economic
   principles.” South Carolina Pub. Serv. Auth. v. FERC, 762 F.3d 41, 76 (D.C.
   Cir. 2014) (“South Carolina”). Moreover, FERC may make findings based
   on predictions derived from economic research and theory, as long as it
   explains and applies those principles in a “reasonable manner.” Sacramento
   Mun. Util. Dist. v. FERC, 616 F.3d 520, 531 (D.C. Cir. 2010).
          FERC has provided a logical predictive economic explanation that
   non-public utilities will typically be incentivized to ensure transmission
   projects are advanced when benefits to them exceed the costs. Order
   Denying Rehearing at ¶ 32-33, citing Order on Remand at ¶ 39-49. FERC
   has explained that even if non-public utilities occasionally refuse cost
   allocation, public utilities cannot be forced to pay for projects that do not
   provide them net benefits. Order on Remand at ¶ 42. Finally, FERC has also
   explained that even if non-public utilities refuse cost allocation, the project
   will likely fail because it cannot satisfy the benefit-cost ratio. FERC posits
   that non-public utilities, therefore, will be incentivized to accept the sharing
   of costs most of the time because they, too, need these projects. Id. at ¶ 47–
   48. FERC is allowed to act in appropriate circumstance on such predictive
   assumptions. Its prediction could well be wrong, but our contrary predictions
   should not be injected into the analysis.
          Most of the foregoing concerns the reasonableness of FERC’s factual
   determinations. To the extent there is an argument that FERC’s orders fail
   as a matter of law, that possibility needs to be addressed.
          El Paso’s chief remaining argument is that FERC’s explanation on
   remand fails because, even assuming its 1.25x benefit-cost ratio is successful
   in deterring some free ridership, it will not eliminate it. According to El Paso,
   FERC’s Order would violate the cost-causation principle as a matter of law

                                          26
Case: 18-60575          Document: 00516843974             Page: 27      Date Filed: 08/02/2023

                                           No. 18-60575

   because it would permit “certain utilities to push their share of a regional
   transmission project’s costs onto other utilities,” which is “not just and
   reasonable as a matter of law.”
           This assessment of the cost-causation principle is unconvincing.
   FERC reasonably explained why it disagreed with those arguments. The
   cost-causation principle stems from the Federal Power Act’s (“FPA”)
   requirement of “just and reasonable rates.” 16 U.S.C. § 824d(a)–(b). 3 When
   it comes to cost allocation for transmission enhancements, FERC must have
   “an articulable and plausible reason” to believe that the benefits of a new
   project “are at least roughly commensurate” with the costs assessed. Illinois
   Comm. Comm’n. v. FERC, 576 F.3d 470, 477 (7th Cir. 2009). The agency
   does not have to “calculate benefits to the last penny.” Id.
           We remanded this matter in 2016 for “further explanation and fact
   finding consistent with this opinion.” El Paso, 832 F.3d at 510–11. Were
   reallocation of costs and benefits under Order No. 1000 a per se violation of
   the cost causation principle as a matter of law, no explanation from FERC
   could have sufficed. We recognized that “[i]t is [] certainly within FERC’s

           _____________________
           3
               We explained the origin story this way:
           In the Federal Power Act (“FPA”), Congress gave FERC jurisdiction “over all
           facilities” for “the transmission of electric energy in interstate commerce and . . .
           the sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. §
           824(b)(1). Section 205 of the FPA prohibited “unreasonable rates and undue
           discrimination ‘with respect to any transmission or sale subject to the jurisdiction
           of the Commission,’” New York v. FERC, 535 U.S. 1, 7, 122 S.Ct. 1012, 152
           L.Ed.2d 47 (2002) (quoting 16 U.S.C. § 824d(a)–(b)), and Section 206 of the FPA
           gave FERC’s predecessor “the power to correct such unlawful practices,” id.
           (citing 16 U.S.C. § 824e(a)), including on its own motion, S.C. Pub. Serv. Auth. v.
           FERC (South Carolina), 762 F.3d 41, 49 (D.C. Cir. 2014).
   El Paso, 832 F.3d at 499.

                                                 27
Case: 18-60575     Document: 00516843974             Page: 28   Date Filed: 08/02/2023

                                      No. 18-60575

   discretion to balance competing objectives, and FERC’s regulations need
   only roughly correlate costs to benefits.” Id. at 505. That is still true today.
          The opinons cited as support by El Paso and the Public Utilities to
   support the idea that FERC’s orders fail as a matter of law are also
   unconvincing. For example, they argue that a utility who “‘cause[s]’ a
   portion of the costs for that project, but will not bear any costs,” violates the
   cost-causation principle as a matter of law. They cite a D.C. Circuit opinion
   that summarized the petitioners’ argument as “contend[ing] that the [] rule
   violates the basic ‘cost causation’ principle, under which costs are to be
   allocated to those who cause the costs to be incurred and reap the resulting
   benefits.” Nat’l Ass’n of Reg. Util. Com’rs v. FERC, 475 F.3d 1277, 1285
   (D.C. Cir. 2007). In fact, though, the D.C. Circuit rejected the petitioners’
   argument. Id. The court reasoned that “FERC has long taken the view that
   customer ‘but-for’ causation isn’t dispositive of this issue,” and that “[e]ven
   if a customer can be said to have caused the addition of a grid facility, the
   addition represents a system expansion used by and benefitting all users due
   to the integrated nature of the grid.” Id. (quotation marks and citation
   omitted) (emphasis in original). That opinion supports that FERC can
   consider system-wide benefits as a competing policy goal, even when
   potential free riding may occur.
          We are also urged to consider a Seventh Circuit opinion that rejected
   FERC’s requirement that a utility pay for facilities when “the likely benefit”
   to the utility was “zero,” and, in addition, “[n]othing in [FERC’s] opinions
   enable[d] an answer to [the] question” of whether there was “enough of a
   benefit to justify the costs that FERC wants shifted to those utilities.” See
   Illinois Com. Comm’n, 576 F.3d at 477. That is not the problem here. A
   calculable benefit for the public utilities is required under these Orders,
   namely, a 1.25x benefit-cost ratio per project, which applies before and after
   cost reallocation for the public utilities. Order on Remand at ¶¶ 42, 50, JA

                                          28
Case: 18-60575       Document: 00516843974           Page: 29   Date Filed: 08/02/2023

                                     No. 18-60575

   1293, 1296–97. If all the non-public utilities refuse cost allocation for a
   particular project, FERC predicted that the project was unlikely to be built;
   so the non-public utilities do have an incentive to contribute to costs. The
   “likely benefit” is, by definition, not “zero.”
          Finally, I disagree that another D.C. Circuit opinion stands for the
   proposition that any potential for intra-regional free ridership is
   unequivocally violative of the cost-causation principle. See South Carolina,
   762 F.3d at 87–88. The Public Utilities argue that the limited free ridership
   the court permitted in South Carolina was solely for “unintended
   beneficiaries outside of a region,” and therefore not comparable to free
   ridership of the known project beneficiaries within the WestConnect region at
   issue here.
          The potential for free-riding beneficiaries may have been extra-
   regional in South Carolina, but there is no binding precedent that would
   mandate a different result solely because the potential for occasional free-
   riding beneficiaries is intra-regional in this case.    When the D.C. Circuit
   rejected the challenges to the cost allocation reforms in South Carolina, the
   court was clear to “recognize that feasibility concerns play a role in approving
   rates, such that [FERC] is not bound to reject any rate mechanism that tracks
   the cost-causation principle less than perfectly.” Id. at 88 (quotation marks
   and citation omitted). The court confirmed that FERC “may rationally
   emphasize other, competing policies and approve measures that do not best
   match cost responsibility and causation.” Id. (quoting Carnegie Nat. Gas Co. v.
   FERC, 969 F.2d 1291, 1293–94 (D.C. Cir. 1992)) (emphasis added).
   Moreover, “nothing requires the Commission to ensure full or perfect cost
   causation.” Id.
          The D.C. Circuit explained that we grant FERC this latitude to
   “balance[] . . . competing goals” because of the “deferential review we

                                         29
Case: 18-60575     Document: 00516843974            Page: 30   Date Filed: 08/02/2023

                                     No. 18-60575

   accord in rate-related matters.” Id. FERC’s solution may not be the one that
   we think the most fair, or even the most effective. Nevertheless, it is not our
   role to “ask whether a regulatory decision is the best one possible or even
   whether it is better than the alternatives.” Elec. Power Supply Ass’n, 577 U.S.
   at 292. Instead, reviewing courts “afford great deference to the Commission
   in its rate decisions,” and do “not substitute [their] own judgment for that of
   the Commission. Id. (quotation marks and citation omitted). This is partly
   because “issues of rate design are fairly technical and, insofar as they are not
   technical, involve policy judgments that lie at the core of the regulatory
   mission.” La. Pub. Serv. Comm’n v. FERC, 771 F.3d 903, 910 (5th Cir. 2014)
   (quotation marks and citation omitted).
          In summary, we know that some free ridership may be tolerated.
   Order No. 1000 acknowledges that some free ridership is “inherent in
   transmission services, given the nature of power flows over an
   interconnected transmission system.” Order No. 1000 at ¶ 10, 136 FERC
   61,051, 76 Fed reg. 49,842 (2011). FERC balanced policy goals with a cost
   allocation scheme that considered the net benefits to the public utilities of
   building new facilities with the unique integration of public and non-public
   utilities in the WestConnect region. See Order on Remand at ¶ 30.
          I would hold that FERC has sufficiently explained why Order No.
   1000 appropriately balances those competing goals and that it has
   demonstrated how the costs for transmission planning would be roughly
   commensurate with the benefits for the utilities in the region. I respectfully
   dissent from the opinion of my colleagues.

                                         30