By Rich Heidorn Jr.

WASHINGTON ­– An appellate court panel last week grilled attorneys seeking to overturn FERC’s Order 1000, expressing skepticism over challenges to the agency’s jurisdiction and claims that allowing competition in transmission development will harm reliability.

The three-judge panel for the D.C. Circuit Court of Appeals was less aggressive in questioning FERC’s attorneys, interrupting them less frequently than they did in sparring with lawyers seeking to overturn the order.

“I’m having trouble understanding where this steps on your prerogatives,” Judge Nina Pillard said in response to the attorney for the Alabama Public Service Commission, who contended the order would render state transmission planning “meaningless.”

“It doesn’t require much of you,” she said earlier, in response to objections from Southern Co., citing what she called the order’s “very flexible and open-ended requirements.”

Judge Thomas B. Griffith questioned the South Carolina Public Service Authority’s contention that the commission lacked authority to allow non-incumbent transmission developers equal footing with incumbents in obtaining funding through regional cost allocation processes.

“It seems to be in the wheelhouse of [FPA section] 206,” Griffith said.

Judge Judith Ann Wilson Rogers also seemed unpersuaded by the challengers.

John L. Shepherd Jr., representing Public Service Electric and Gas, noted that Congress has resisted efforts to extend FERC’s natural gas pipeline siting and construction-approval authority to electric transmission. FERC’s removal of incumbents’ right of first refusal (ROFR), he said, was “a radical mandate that Congress did not authorize FERC to impose.”

Judge Rogers responded that nothing in the order gives FERC authority to decide what gets built or who does it.

Rogers and her colleagues frequently cited a Brattle Group report commissioned by Edison Electric Institute that estimated a need for nearly $300 billion in new transmission facilities by 2030. Brattle found that more than $180 billion in transmission would not be built due to shortcomings in pre-Order 1000 transmission planning and cost allocation rules.

Faced with such evidence, Rogers said, “I’m trying to understand why Congress would tell FERC to … sit on its hands.”

Judge Pillard agreed: “It would be, arguably, irresponsible for a regulator not to require planning in advance,” she said.

Attentive Audience

The three-hour oral argument drew a rapt crowd of about 100 spectators — including numerous FERC officials, PJM Assistant General Counsel Pauline Foley and LS Power’s Sharon Segner — to the grand, wood-paneled courtroom at the E. Barrett Prettyman U.S. Courthouse a few blocks from the Capitol.

Order 1000, issued in July 2011, changes the process for planning and paying for new regional and interregional transmission lines. It also allows independent developers to compete with traditional utilities in building new lines.

The court is considering complaints from those who allege the commission overstepped its authority and those who say it didn’t go far enough in ensuring that transmission will be sufficient to satisfy public policy initiatives, such as state renewable portfolio standards.

The main threat to the order comes from challengers in the Southeast and West who allege the commission exceeded its authority under the Federal Power Act in requiring public utility transmission providers to participate in regional transmission planning, and eliminating incumbent transmission providers’ monopoly on building and running transmission.

The order is also being challenged for its cost allocation provisions, which require that those who benefit from new regional transmission facilities share in their costs while ensuring that the costs of interregional projects not be assigned involuntarily.

Repeated Interruptions

Harvey L. Reiter, of Stinson Leonard Street, spoke first on behalf of the Sacramento Municipal Utilities District, South Carolina Public Service Authority and the Large Public Power Council, which are among those challenging FERC’s jurisdiction.

Reiter was repeatedly interrupted by the panel, which featured appointees from the last three administrations: Rogers (Clinton), Griffith (George W. Bush) and Pillard (Obama).

The pattern was repeated with Andrew W. Tunnell of Balch & Bingham, the Birmingham, Ala., law firm for Southern Co.

Tunnell said the order is “based on speculation” and not on any proof that the current rules are harming transmission. “If there really was a problem it would have come out in the rulemaking process.”

He cited a Department of Energy study praising the Southeast’s transmission planning.

“FERC is going to break what works … and replace it with a very bureaucratic and litigious process,” Tunnell said. “That means you’re not going to have a more efficient transmission planning process, you’re going to have less.”

Public Policy

The judges seemed to show a bit more sympathy for the arguments of the American Public Power Association and the National Rural Electric Cooperative Association (NRECA), who contend Order 1000 didn’t go far enough to protect public policy interests.

While the order requires that load serving entities (LSEs) have input into transmission planning, it “doesn’t require that their advice be heeded,” said the group’s attorney Randolph Lee Elliott, of McCarter & English.

Judge Pillard questioned FERC about the groups’ concerns. “If the parade of horribles came to pass, that’s tough luck?” she asked FERC attorney Beth G. Pacella.

Judge Griffith joined in. “Doesn’t the law require more than that they be part of the process? To meet their needs, not just talk about their needs? It’s not just process. It’s process that leads to a certain result.”

Pacella acknowledged that the order “doesn’t require that [public power] needs be met.” But, she said, parties whose needs are not met by the planning process can file a section 206 complaint to seek a FERC finding that the planning process “is no longer just and reasonable.”

Rebuttal

On rebuttal, Tunnell said FERC should have stopped in 2007, when it issued Order 890, which created a process of voluntary regional transmission planning. “FERC didn’t give voluntary transmission planning a chance,” he said. FERC began the Order 1000 rulemaking while “the ink was still wet” from Order 890 and the commission was considering Southern’s 890 compliance filing, he said.

Tunnell said Order 1000 will “undermine our vertical integration” and with it, its benefits: quicker storm restoration and economies of scale in operations and maintenance. “Transmission planning doesn’t address that,” he said.

“I think we’re all surprised to hear that,” shot back Judge Rogers.

“It’s changing the whole paradigm,” Tunnell insisted. “Transmission is a natural monopoly.”

State Jurisdiction on Planning

Luke D. Bentley IV, attorney for the Alabama Public Service Commission, led off the second of three sessions, this on cost allocation.

Bentley cited a list of state statutes governing transmission planning. FERC did not respond in their brief, “because they can’t,” Bentley said. Order 1000, he continued, would “relegate states to mere stakeholders in the planning process.”

“Yes for interstate transmission,” responded Judge Pillard. “That’s Con[stitutional] Law 101.” FERC balanced federal and state interests, she said, “in a relatively flexible way.”

FERC attorney Lona T. Perry said the commission’s order stops at the state border: “Any project that gets approved in the regional planning process that doesn’t get the requisite state approvals for construction and siting doesn’t get built,” she said.

Jonathan D. Schneider of Stinson Leonard Street, and attorney for the South Carolina Public Service Authority and the Large Public Power Council, said the case isn’t about cost allocation but “about a new funding mechanism that the commission thinks is better,” and that it would force utilities to fund independent transmission developers.

Judge Griffith, questioning FERC Attorney Robert M. Kennedy, observed, “There’s a significant difference between inducement and coercion.”

Kennedy said the commission was simply enforcing “long-standing, well established” principles that assign transmission costs to beneficiaries.

“We’re not imposing a relationship. We’re recognizing a relationship that exists” because of the physics of the transmission system, Kennedy said.

Right of First Refusal

The final session focused on the order’s reversal of previous FERC policy that allowed incumbent utilities rights of first refusal to add new transmission in their franchised territories.

Shepherd, of Skadden Arps, said the ruling unfairly gives non-incumbents the rights to cherry pick transmission projects they’d like to build without the obligation to serve all customers that public utilities face. “It’s not competition, it’s predation,” he said.

FERC’s Perry said that if ROFR prevails, independent developers would only be allowed to participate as merchants, without utilities’ ability to build cost of service projects. She said the commission found no reason to believe that transmission run by independents will be less reliable than that of incumbents.

Comic Relief

The intensity of the argument was briefly broken at the end of the three-hour session, when FERC relinquished some time on rebuttal to Patton Boggs’ Mike Engleman, attorney for LS Power, an independent transmission developer with much at stake in the ROFR battle.

Engleman’s move to the podium surprised one of the judges, who began addressing a different lawyer.

“That’s OK, much of the room doesn’t want me here,” Engleman said, prompting the courtroom to burst into laughter.

Engleman said LS Power spends tens of thousands of dollars on every project but often walks away empty-handed.

“There are rules in multiple regions that say, ‘You can’t play in our sandbox,’” Engleman said.

Shepherd had the last word, picking up on Southern’s claim that non-incumbent transmission developers pose a reliability risk.

“If these guys [attach to] your system and break it, you [the incumbent] have to fix it.”

[Editor’s Note: As a member of the FERC Office of Enforcement, the author of this story testified against Southern Co. in 2003 (docket no. ER03-713) and in 2006 publicly challenged a settlement negotiated between Southern and the commission’s chief of staff (EL05-102).]