The D.C. Circuit has granted a petition for review filed by the Southwest Power Pool (SPP) regarding two orders of the Federal Energy Regulatory Commission (FERC) addressing a dispute between SPP and the Midwest Independent System Operator (MISO) regarding the terms upon which SPP and MISO may use “shared contract path” transmission capacity.  The D.C. Circuit found that FERC “failed to give a reasoned explanation for its decision” supporting MISO’s view in the dispute,   Southwest Power Pool, Inc. v. FERC, D.C. Cir. Case No. 12-1158, slip op. (Dec. 3, 2013).

SPP and MISO (now renamed the Midcontinent Independent System Operator) are adjoining RTOs that have executed a Joint Operating Agreement (JOA).  Section 5.2 of the JOA provides, in relevant part, “If the Parties have contract paths to the same entity, the combined contract path capacity will be made available for use by both Parties.”  Entergy Arkansas, a transmission-owning utility interconnected with both SPP and MISO, wishes to join MISO because membership in MISO will provide Entergy Arkansas with production-related cost savings compared to membership in SPP.  To achieve those savings, however, Entergy Arkansas must be able to deliver energy it produces to other destinations within MISO.  Entergy Arkansas’ transmission connections to MISO are less robust than its transmission connections to SPP, and as a result, MISO would need to rely on transmission over non-MISO facilities in order to adequately serve Entergy Arkansas.  MISO filed a request for declaratory order with FERC, claiming that Section 5.2 of the JOA provides it with the ability to use those non-MISO transmission facilities, because both SPP and MISO “have contract paths to the same entity” – Entergy Arkansas.  In response, SPP claims that Section 5.2 becomes inapplicable if Entergy Arkansas joins MISO.

FERC’s orders grant MISO’s request for declaratory order, finding that the parties’ course of performance supports MISO’s interpretation of Section 5.2.  Specifically, prior to Entergy Arkansas’ decision to join MISO, MISO used SPP’s contract path to Entergy Arkansas in order to serve Ameren, which is another MISO transmission owner.  Midwest Independent System Operator, Inc., 136 FERC ¶ 61,010 (2011), order on reh’g, 138 FERC ¶ 61,055 (2012).

The D.C. Circuit, after quickly dismissing FERC’s claims that SPP lacks standing to petition for review of FERC’s orders and that the orders are not ripe for review, found FERC’s reasoning on the merits to be arbitrary and capricious.  The court found that the prior course of performance by the parties seems to support both interpretations of Section 5.2, because at the time Entergy Arkansas was not a member of either RTO.  The D.C. Circuit stated (slip op. at p. 8), “Given the [prior] episode’s apparent complete consistency with both parties’ competing views, we are at a loss to see why FERC regarded the episode as decisive in favor of MISO.”  The court then noted that FERC compounded its error by failing to consider contrary evidence submitted by SPP, including an affidavit by SPP’s chief negotiator of the JOA and the definition of “contract path” adopted by the North American Electric Reliability Corporation and the North American Energy Standards Board.  The court concluded (slip p. 10) that “together with its unexplained reading of that [prior] episode, the Commission’s complete failure to consider the evidence proffered renders its orders arbitrary and capricious.”  The D.C. Circuit vacated and remanded the orders to FERC.