9th Circuit Finds That FERC Acted Arbitrarily and Capriciously by Awarding Incentive Adders to PG&E for Membership in CAISO

In an opinion 1 issued January 8, 2018, the United States Court of Appeals for the 9th Circuit found that the Federal Energy Regulatory Commission (FERC) had acted arbitrarily and capriciously when it determined that Pacific Gas & Electric Company (PG&E) was eligible for an incentive adder to its transmission return on equity (ROE) for remaining a member of the California Independent System Operator (CAISO). The court reasoned that FERC had misinterpreted its own landmark orders—Orders No. 679 and 679-A2 —which provide that FERC will award incentive adders on a “case-by-case basis”3 on the presumption that membership in an independent system operator or regional transmission organization (each a “transmission organization”), such as CAISO, is voluntary.4 The California Public Utilities Commission (CPUC) challenged FERC’s decision to grant PG&E an incentive ROE adder on the grounds that PG&E’s membership in CAISO was not, in fact, voluntary, and that PG&E required authorization from CPUC to withdraw from CAISO.

The court’s reasoning was straightforward. FERC stated in Order No. 679 that it “will approve, when justified, requests for ROE-based incentives for public utilities that join and/or continue to be a member of” a transmission organization.5 But FERC also stated that it would not create a “generic adder for such membership” and that it would consider incentives on a case-by-case basis.6 The justification that FERC gave for offering such incentives is that “continuing membership [in a transmission organization] is generally voluntary”7 and that such incentives would induce utilities to join, and remain members of, transmission organizations. However, as the court observed, an incentive adder “cannot ‘induce’ behavior that is already legally mandated,”8 and FERC itself has previously refused to award incentives for legally mandated behavior.9
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