Voluntary RTO Participation as a Prerequisite for FERC's RTO Adder: Sixth Circuit Sets New Legal Precedent

Voluntary RTO Participation as a Prerequisite for FERC's RTO Adder: Sixth Circuit Sets New Legal Precedent

Introduction

The case of Dayton Power & Light Company, dba AES Ohio, American Electric Power Service, DUKE ENERGY OHIO, INC., and FIRSTENERGY SERVICE COMPANY, collectively referred to as the Petitioners, contested the decisions of the Federal Energy Regulatory Commission (FERC). The core issues revolved around the eligibility for the Regional Transmission Organization (RTO) adder—a surcharge intended to incentivize utilities to voluntarily join RTOs—and whether state laws mandating RTO participation were preempted by the Federal Power Act (FPA). The United States Court of Appeals for the Sixth Circuit delivered a comprehensive opinion addressing these pivotal questions.

Summary of the Judgment

The Sixth Circuit reviewed consolidated petitions challenging FERC's rulings in two separate proceedings: the Dayton Power proceeding and the Office of the Ohio Consumers' Counsel (OCC) proceeding. In the Dayton Power case, FERC denied the utility's application for the RTO adder on the grounds that Ohio law mandated its participation in an RTO, rendering the membership involuntary. The court affirmed this decision, holding that FERC correctly interpreted the FPA to require voluntary participation for eligibility.

In the OCC proceeding, FERC had removed the RTO adder from American Electric Power Service Corporation (AEP) but retained it for Duke Energy Ohio and FirstEnergy Service Company. The Sixth Circuit found FERC's inconsistent treatment of these utilities arbitrary and capricious, necessitating the removal of the adder from all three companies. Additionally, the court upheld that Ohio’s mandatory RTO membership law was not preempted by the FPA, allowing states to regulate intrastate transmission activities.

Analysis

Precedents Cited

The court referenced several key precedents to underpin its decision:

  • Louisville Gas & Elec. Co. v. FERC, 988 F.3d 841 (6th Cir. 2021) - Provided an overview of the interstate wholesale electricity market.
  • CPUC v. FERC, 879 F.3d 966 (9th Cir. 2018) - Addressed the arbitrary approval of RTO adders without individualized review.
  • Skidmore v. Swift & Co., 323 U.S. 134 (1944) - Discussed the principles of agency deference.
  • Hughes v. Talen Energy Marketing, LLC, 578 U.S. 150 (2016) - Examined federal preemption of state regulations in the energy sector.

These cases collectively informed the court's understanding of FERC’s regulatory authority, the necessity of agency rules being well-reasoned, and the boundaries of federal preemption over state laws.

Legal Reasoning

The court’s legal reasoning focused on two main aspects:

  • Voluntariness Requirement: Under Section 219(c) of the FPA, FERC was mandated to provide incentives to utilities that voluntarily join an RTO. The court emphasized that the term “incentive” inherently implies a voluntary action. Since Ohio law requires utilities to join an RTO, their participation is not voluntary, disqualifying them from receiving the RTO adder.
  • State Law Preemption: The court evaluated whether Ohio’s mandatory RTO membership law was preempted by the FPA. It concluded that the FPA does not preempt state laws regulating intrastate transmission facilities, as Ohio’s law primarily addresses intrastate issues and does not conflict with FERC’s interstate regulatory framework.

Furthermore, the court criticized FERC’s inconsistent application of the RTO adder in the OCC proceeding, noting that treating AEP differently from Duke and FirstEnergy without a meaningful distinction was arbitrary and violated the principles of just and reasonable rate determination.

Impact

This judgment sets a significant precedent in the energy regulation landscape. Key impacts include:

  • Consistency in FERC’s Application: FERC must apply the RTO adder uniformly to all utilities, ensuring that only those who voluntarily join RTOs are eligible for the incentive.
  • State Autonomy Preserved: States retain the authority to mandate RTO participation without such mandates being preempted by federal law, provided they regulate intrastate transmission matters.
  • Enhanced Regulatory Clarity: Utilities and state regulators now have clearer guidance on eligibility criteria for RTO incentives, promoting transparency and fairness in rate setting.
  • Future RTO Agreements: Utilities may reconsider the voluntary nature of RTO participation in light of the clarified eligibility for financial incentives.

Complex Concepts Simplified

Regional Transmission Organizations (RTOs)

RTOs are non-profit entities that manage the electricity grid over large regions, facilitating competition and ensuring reliable power supply. They coordinate the movement of wholesale electricity, allowing utilities to buy and sell energy efficiently.

Federal Power Act (FPA)

The FPA grants FERC authority to regulate interstate electricity transmission and wholesale sales. It also allows states to regulate intrastate transmission, maintaining a balance between federal oversight and state autonomy.

RTO Adder

An RTO adder is a surcharge that utilities can include in their wholesale electricity rates if they voluntarily join an RTO. This incentive is designed to encourage utilities to participate in RTOs, thereby enhancing grid efficiency and reliability.

Preemption

Preemption occurs when federal law overrides or nullifies state law. In this case, the court determined that Ohio's law mandating RTO participation does not conflict with or impede the objectives of the FPA, thus it is not preempted.

Return on Equity (ROE)

ROE is the rate of return a utility is allowed to earn on its invested capital. It is a critical factor in determining wholesale electricity rates, ensuring that utilities remain financially viable while providing fair rates to consumers.

Conclusion

The Sixth Circuit’s decision reinforces the principle that FERC’s incentives, such as the RTO adder, are contingent upon the voluntary participation of utilities in RTOs. By affirming the denial of the adder to utilities compelled by state law and addressing the arbitrary application of these incentives, the court ensures that federal regulatory mechanisms are applied consistently and justly. Moreover, upholding Ohio’s state law underscores the delicate balance between federal authority and state regulatory powers, preserving states’ roles in regulating intrastate transmission activities. This judgment not only clarifies the eligibility criteria for RTO incentives but also fortifies the framework within which federal and state regulations coexist in the energy sector.

Case Details

Year: 2025
Court: United States Court of Appeals, Sixth Circuit

Judge(s)

BLOOMEKATZ, CIRCUIT JUDGE

Attorney(S)

Matthew E. Price, Jenner & Block LLP, Washington, D.C., for Petitioners. Carol J. Banta, Federal Energy Regulatory Commission, Washington, D.C., for Respondent. Thomas G. Lindgren, Office of the Ohio Attorney General, Columbus, Ohio, for Intervenor Public Utilities Commission of Ohio. Matthew E. Price, Zachary B. Cohen, Jenner & Block LLP, Washington, D.C., William M. Rappolt, Aes U.S. Services, LLC, Arlington, Virginia, William M. Keyser, Steptoe & Johnson LLP, Washington, D.C., Morgan E. Parke, P. Nikhil Rao, Firstenergy Service Company, Akron, Ohio, Sanford I. Weisburst, Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, for the Dayton Power & Light Co. et al. Petitioners. Carol J. Banta, Federal Energy Regulatory Commission, Washington, D.C., for Respondent. Thomas G. Lindgren, Office of the Ohio Attorney General, Columbus, Ohio, for Intervenor Public Utilities Commission of Ohio. Denise C. Goulet, Wendy Simon Pearson, McCarter & English, LLP, Washington, D.C., for Petitioner Office of the Ohio Consumers' Counsel in 23-3324 and 23-3417 and as an Intervenor in 21-4072, 22-3351, 23-3196, and 23-3366. Paul M. Flynn, Ryan J. Collins, Wright & Talisman, P.C., Washington, D.C., for Intervenor PJM Interconnection, L.L.C. Cynthia S. Bogorad, David E. Pomper, Jeffrey M. Bayne, Lauren L. Springett, Spiegel & McCiarmid LLP, Washington, D.C., for Intervenor Buckeye Power. Heather M. Horne, Duke Energy Corporation, Washington, D.C., Matthew A. Fitzgerald, McGuireWoods LLP, Richmond, Virginia, for Intervenor Duke Energy Ohio, Inc. Sanford I. Weisburst, Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, Morgan E. Parke, P. Nikhil Rao, Firstenergy Service Company, Akron, Ohio, for Intervenor FirstEnergy Service Company in 23-3324, 23-3366, and 23-3417.

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