Friday, August 23, 2013

FERC Confirms That Non-Jurisdictional Contract Rates Are Not Pass-Through Rates Subject To FERC’s Jurisdiction


    

By Alan I. Robbins & Andrea I. Sarmentero Garzón

On July 26, 2013 the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued three orders (“July 2013 Orders”)[1] in the context of East Kentucky Power Cooperative’s (“EKPC”) integration into PJM Interconnection, LLC (“PJM”) (Docket Nos. ER13-1177-000 et.al, ER13-1570-000 and EL13-68-000).

The July 2013 Orders, the Commission reaffirmed that the concept of pass-through rates under the Commission’s Orders and Opinions in City of Vernon (“Vernon”) does not apply to rates charged by a non-jurisdictional entity pursuant to a bi-lateral contract. See FERC Opinions 479 and 479-A.[2]

Pass Through Rates under the City of Vernon Decision

Vernon filed a petition for declaratory order with FERC in year 2000 requesting the Commission to determine that its Transmission Revenue Requirement (“TRR”) was acceptable for the purpose of becoming a Participating Transmission Owner in the California Independent System Operator (“CAISO”). FERC subsequently approved Vernon’s TRR. Pacific Gas and Electric Company appealed the Commission’s ruling to the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”). On October 15, 2002, the D.C. Circuit remanded to FERC the question of whether the standard of review conducted by the Commission of a non-jurisdictional entity’s TRRs (Vernon), which is a part of the rate of a jurisdictional independent system operator (CAISO), was sufficient to ensure that a pass through of Vernon’s costs by the CAISO would be just and reasonable under section 205 of the Federal Power Act (“FPA”).[3] The D.C. Circuit held that “FERC may analyze and consider the rates of non-jurisdictional utilities to the extent that those rates affect jurisdictional transactions.”[4]

In Opinions 479 and 479-A, FERC ruled that it was within its statutory jurisdiction to review Vernon’s TRR pursuant to FPA Section 205. FERC asserted that the TRR of participating transmission owners are part of the transmission rate charged by the CAISO, which is subject to FERC’s jurisdiction. FERC reasoned that Vernon voluntarily submitted the TRR as a component of a jurisdictional rate and therefore a full section 205 review was necessary to ensure that CAISO rates remained just and reasonable. The D.C. Circuit upheld the Commission’s decision to apply a section 205 standard of review to Vernon’s TRR in Transmission Agency of Northern California v. FERC.[5] The Commission has since then consistently applied Opinions 479 and 479-A to “pass through” rates voluntarily filed by non-jurisdictional entities.

The July 2013 Orders

In the context of EKPC’s integration with PJM, FERC further addressed the limits of its standard of review of rates voluntarily submitted by non-jurisdictional entities under Vernon. Louisville Gas and Electric Company and Kentucky Utilities Company (“LG&E/KU”) argued that the ancillary service rates to be charged to LG&E/KU by EKPC under a bi-lateral contract were FERC-jurisdictional rates subject to review by the Commission under section 205 of the FPA. LG&E/KU attempted to characterize the ancillary service rates as “pass-through” rates in an effort to invoke FERC’s jurisdiction pursuant to Vernon. EKPC responded by explaining that: (i) the ancillary service rates to be paid by LG&E/KU after EKPC’s integration into PJM were not pass-through rates; (ii) LG&E/KU had agreed to enter into a bilateral contract with EKPC for the provision of ancillary services by EKPC; (iii) EKPC, not PJM, was to charge those rates to LG&E/KU; and (iv) rates charged by a non-jurisdictional entity under a bi-lateral contract are not subject to the Commission’s jurisdiction.

In the July 2013 Orders, the Commission recognized that EKPC, like Vernon, is a non-jurisdictional utility that has voluntarily chosen to integrate into PJM and transfer functional control over its transmission facilities.[6] The Commission held, however, that the ancillary service rates to be paid by LG&E/KU were not pass-through rates as discussed in Vernon because the ancillary service rates at issue were specifically exempted from charges by PJM under the non-conforming Network Integration Transmission Service Agreement between LG&E/KU and PJM and are instead supplied and billed for by EKPC under a bi-lateral agreement between EKPC and LG&E/KU.[7] Citing a prior decision in Louisville Gas & Electric Company and Kentucky Utilities Company v. East Kentucky Power Cooperative, Inc., the Commission reiterated that it has no jurisdiction to review the contractual rates charged by FPA section 201(f) non-jurisdictional entities, such as EKPC, to their customers.

Jennings Strouss lawyers Alan I. Robbins, Debra D. Roby and Andrea I. Sarmentero Garzón represented EKPC in this matter.



[1] Order on Clarification or ,in the Alternative, Rehearing, 144 FERC ¶ 61,067 (July 26, 2013); Order Accepting Cancellation, 144 FERC ¶ 61,063 (July 26, 2013); and Order Accepting Proposed Revenue Requirements and Establishing Hearings and Settlement Judge Procedures, 144 FERC ¶ 61,066 (July 26, 2013).
 
[2] See City of Vernon, California and California Independent Sys. Operator, Inc., Opinion No. 479, 111 FERC ¶ 61,092 (2005) at P 44, order on reh’g, Opinion No. 479-A, 112 FERC ¶ 61,207 (2005) at P 26, reh’g denied, Opinion No. 479-B, 115 FERC ¶ 61,297 (2006).
 
[3] Pacific Gas & Elec. Co. v. FERC, 306 F.3d at 1112, 116 and 1117 (D.C. Cir. 2002).
 
[4] Id. at 1114.
 
[5] Transmission Agency of Northern California v. FERC, 495 F.3d 663, 672 (D.C. Cir. 2007).
 
[6] See Order Accepting Cancellation, 144 FERC ¶ 61,063 (July 26, 2013) at P 22.
 
[7] Id. at P 21 and P 23.
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