The 6th U.S. Circuit Court of Appeals has ruled that FERC improperly allowed Duke Energy Ohio and FirstEnergy to include the RTO adder in their rates despite participation in an RTO being mandated by Ohio law.

In a December 2022 order, the commission removed the adder from the rates filed by two of American Electric Power’s (AEP) subsidiaries but left it in place for Duke and FirstEnergy (EL22-34). The commission differentiated between the three by stating that it previously approved AEP’s application for the adder as an independent element, but that Duke’s and FirstEnergy’s rates were the culmination of settlements that formed the entirety of their rates. (See FERC Orders Two Ohio Utilities Ineligible for RTO Adder.)

While FERC argued it could not disentangle the RTO adder from the negotiated rates Duke and FirstEnergy reached in separate proceedings with consumer groups, the 6th Circuit said that in both instances it could be determined that a 50-basis-point adder was included. The commission said it cannot know how the inclusion of the adder interacted with the “precise trade-offs and concessions” in other elements of the settlement.

The court asserted that FERC practice at that time was to grant the adder regardless of the circumstances of a utility, such as whether it was in a state that mandates RTO participation, so the adder likely was not to be a significant factor in negotiations.

“Contrary to FERC’s assertion, whether it approved the RTO adder explicitly on a ‘single-issue’ basis or impliedly as part of a settlement makes little difference to how the three utilities approached rate negotiations,” the ruling said.

Judge Karen Nelson Moore partially dissented from the ruling, arguing that modifying elements of a settlement could undermine the preference both FERC and the courts have adopted for resolving issues through agreements over potentially intensive and costly litigation. She said the commission’s original solution of eliminating the AEP adders while leaving the Duke and FirstEnergy agreements in place would advance valid policy goals around consumers’ rates and promote dispute resolution through settlements.

“If FERC had accepted OCC’s [Ohio Consumers’ Counsel] invitation ‘to change unilaterally a single aspect of such a comprehensive settlement’ … the commission could have signaled to parties that their settlements could become unsettled as a result of later legal developments in which the parties had little say. This in turn would rob the settlement process of the certainty and predictability that incentivize settlements and thereby enhance administrative efficiency in support of the public good,” Moore wrote.

Both AEP and the OCC appealed FERC’s order to the court, the former requesting that the adder be reinstated and the latter seeking its removal from Duke and FirstEnergy’s rates.

The court consolidated that appeal with a separate proceeding Dayton Light and Power (DPL) initiated after FERC rejected its application for the adder in 2021 (ER20-1068). The commission determined that DPL was ineligible for the adder on the grounds that Ohio law requires its membership in PJM.

Dayton argued that Section 219 of the Federal Power Act does not condition eligibility for the adder on whether a state makes that decision mandatory and posited that FERC’s awarding of the adder preempts state law.

The court disagreed, stating that the adder is an incentive for taking a voluntary act. It also ruled DPL’s argument that Section 219 does not have an Order 679 requirement that RTO membership be voluntary constitutes an impermissible collateral attack on Section 219, adopting the “very substantial risk” standard that the commission’s interpretation of a rule has shifted.