North Carolina Utilities Comm’n v. Federal Energy Regulatory Comm’n, No. 12-1881

Decided: January 24, 2014

The Fourth Circuit, “[c]onstrained by the standard of review,” held that the Federal Energy Regulatory Commission (“FERC”) properly exercised its discretion in declining to grant the North Carolina Utilities Commission (“NCUC”) rehearing and in evaluating the Virginia Electric and Power Company’s (“VEPCO”) application for incentives. Therefore, FERC’s decision was affirmed.

Under the Federal Power Act (“FPA”), FERC has jurisdiction over all rates, terms, and conditions of interstate electric transmission services provided by public utilities. In response to concerns about the reliability of the country’s aging transmission system, the FPA required FERC to promulgate a rule establishing incentive-based rate treatments for qualifying projects to spur infrastructure investment. The final rule established the following three-prong test for evaluating applications for incentives: (1) the utility must show that its infrastructure project will increase reliability or reduce congestion; (2) the utility must demonstrate a nexus between the requested incentive and the project; and (3) the utility must prove that its resulting rates with the incentive remain “just and reasonable.”

In 2008, VEPCO sought incentives for eleven transmission projects. After notice of VEPCO’s filings was published, NCUC and numerous other parties moved to intervene. The parties challenged the grant of incentives to five of the eleven projects. On appeal to FERC, NCUC challenged only one project under prong one, arguing that it would not increase reliability. It challenged all five projects under prong two, however, contending that they failed to meet the nexus requirement. FERC ultimately granted VEPCO’s application in full. NCUC filed a petition for rehearing on September 29, 2008. In its request for rehearing, NCUC reiterated its objections to the incentives for the five challenged projects and identified other errors in FERC’s order as well. On May 22, 2012, FERC finally issued its Order Denying Rehearing almost four years after its initial order. In the meantime, in 2010, a policy change was instituted with respect to the nexus requirement. Nonetheless, FERC declined to grant rehearing to apply the change. This appeal followed.

Noting the extremely deferential standard of review constraining it, the Fourth Circuit addressed in turn NCUC’s arguments: (1) that FERC erred by declining to grant rehearing to apply the 2010 policy change with respect to the nexus test; and (2) that FERC abused its discretion by granting VEPCO incentives based on the five challenged projects. In addressing NCUC’s first contention, the Court first determined it had jurisdiction because NCUC adequately exhausted its administrative remedies. Next, it explained that FERC’s decision whether to apply the new policy on rehearing is committed to the agency’s sound discretion. Noting that VEPCO was entitled to rely on consistent application of administrative rules, the Court found no error in FERC’s decision to deny NCUC’s rehearing request to apply the policy change.

Then, the Court addressed NCUC’s challenges based on the grant of incentives to certain projects. Looking for a “rational connection between the facts found and the choice made,” the Court found the first two projects satisfied this requirement of the nexus test by resulting from a regional planning process, facing ongoing and significant local opposition, and involving construction challenges based on changeable elevation and the use of new technology. For two other projects, the Court found FERC’s decision was supported by substantial evidence because the projects’ construction risks, ongoing local opposition, and impact on regional reliability satisfied the nexus test. Likewise, the Court affirmed FERC’s decision as to the final project even though it twice incorrectly stated that the project involved the replacement of only nine, instead of the actual thirty-two, transformers. In so holding, the Court concluded that, based on the record as a whole, FERC fully understood the nature of the project and believed it would increase reliability. It further determined it was innovative and a large-scale undertaking. Consequently, the Court concluded FERC’s decision was supported by substantial evidence.

Full Opinion

-W. Ryan Nichols

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