The D.C. Circuit Court of Appeals on Friday upheld a FERC ruling that found a 2016 merger had left three ITC Holdings subsidiaries no longer fully independent, disqualifying them from a full return on equity incentive for standalone transmission providers.

The decision found there was “substantial evidence to support FERC’s finding that the merger had reduced ITC’s independence, thereby rendering the existing adders unjust and unreasonable” (International Transmission Company, et al. v. FERC, 19-1190).

FERC had granted International Transmission Co. and Michigan Electric Transmission Co. 100-basis-point adders in 2003 and 2005, respectively, and granted ITC Midwest a 50-point adder in 2015. But in October 2018 the commission found the companies were no longer fully independent because their parent company, ITC Holdings, had merged with Canadian and Singaporean companies (EL18-140).

FERC reduced their “transco” adders to 25 basis points each. (See FERC Reduces ITC Adders over Independence Issues.)

The commission affirmed its ruling in July 2019, saying the reduction in the adders was appropriate because the merger had reduced but not eliminated the companies’ independence. (See FERC Rebuffs ITC Call to Restore Full ROE Adders.)

The transmission companies appealed to the D.C. Circuit. They argued FERC had “arbitrarily and capriciously departed from precedent establishing a particular methodology to assess transco independence.” And they contended FERC had “exceeded its statutory authority by reducing ITC’s transco adders without first finding the adders to be unjust and unreasonable,” according to the court.

Regarding the first argument, a three-judge panel found it “fails at the outset because FERC, consistent with its stated intent in Order No. 679, never established any definitive methodology, let alone the one ITC claims it did.”

“FERC has consistently applied a case-by-case approach to determining transco independence, considering ownership and business structure as part of that inquiry since it first granted a transco adder in 2003,” the court said.

The companies’ claim that FERC had exceeded its statutory authority under Section 206 of the Federal Power Act also failed, the court found.

The law requires “FERC to show that an existing rate is unlawful before ordering a new rate,” and ITC argued that FERC had violated that mandate by failing to find the existing adders to be unjust or unreasonable before reducing them by half,” the judges wrote. FERC’s analysis, however, “clearly tracked the two-step procedure mandated by Section 206,” they said.