International Transmission Company v. FERC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 23, 2020 Decided February 19, 2021

No. 19-1190

INTERNATIONAL TRANSMISSION COMPANY , ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION ,

RESPONDENT

AMERICAN MUNICIPAL POWER, INC., ET AL.,

INTERVENORS

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Aaron M. Streett argued the cause for petitioners. With

him on the briefs were Jay Ryan and J. Mark Little.

Carol J. Banta, Senior Attorney, Federal Energy

Regulatory Commission, argued the cause for respondent.

With her on the brief were David L. Morenoff, Acting General

Counsel, and Robert H. Solomon, Solicitor. Lona T. Perry,

Deputy Solicitor, entered an appearance.

Gerit F. Hull, Daniel R. Simon, Omar Bustami, Robert A.

Weishaar, Jr., Kenneth R. Stark, James K. Mitchell, Deborah

2

A. Moss, Emerson J. Hilton, Steven D. Hughey, Assistant

Attorney General, Office of the Attorney General for the State

of Michigan, David E. Pomper, Cynthia S. Bogorad, Amber L.

Martin, James H. Holt, David Eugene Crawford, and Andrea

I. Sarmentero Garzon were on the brief for intervenors

American Municipal Power, Inc., et al. in support of

respondent. Spencer A. Sattler, Assistant Attorney General,

Office of the Attorney General for the State of Michigan,

entered an appearance.

Before: ROGERS and PILLARD, Circuit Judges, and

SENTELLE , Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge PILLARD.

Dissenting opinion filed by Senior Circuit Judge

SENTELLE .

PILLARD , Circuit Judge: Three electrical transmission

companies, subsidiaries of the same parent company, petition

for review of a decision by the Federal Energy Regulatory

Commission (FERC) to reduce the enhanced return on equity

FERC had previously authorized them to collect from

ratepayers due to their status as standalone transmission

companies. FERC calls such companies Transcos. Since 2003

it has granted return-on-equity “adders” to Transcos because of

what the Commission had concluded was a willingness and

ability on their part to invest in transmission infrastructure—a

policy objective that Congress endorsed in 2005 when it

required FERC to formally establish incentive-based rate

treatments for transmission companies. FERC consistently has

premised companies’ eligibility for “Transco adders” on their

standalone transmission status, which it has evaluated by

looking to the companies’ ability to maintain operational

3

independence from other participants in the electrical market,

such as companies invested in power generation.

In 2016, two foreign-based companies with holdings in

U.S. electrical markets acquired the parent company of the

three petitioners. A group of transmission customers formally

complained to FERC that the petitioners’ existing return-on-

equity adders were no longer just and reasonable because the

companies, post-merger, were no longer independent. FERC

found the merger had reduced but not eliminated the three

Transcos’ independence from other market participants and,

based on that finding, reduced the adders at issue by half.

Petitioners argue on appeal that, in so doing, FERC arbitrarily

departed from a particular methodology for determining

independence that they say FERC precedent requires. They

claim that, under that methodology, they remained materially

independent so the reductions were unjustified. They also

argue that FERC exceeded its statutory authority by not

expressly finding the existing adders unlawful before setting

them at a new level. We conclude that neither claim has merit

so deny the petition in full.

BACKGROUND

A. Regulatory Context

In 2005, Congress amended the Federal Power Act to

require FERC to take action within the year to promulgate a

rule to establish “incentive-based . . . rate treatments for the

transmission of electric energy,” that is, for the bulk movement

of electricity across electrical grids. See Energy Policy Act of

2005, Pub. L. No. 109-58, § 1241, 119 Stat. 594, 961 (codified

as amended at 16 U.S.C. § 824s). Congress’s stated purpose

was to “benefit[] consumers by ensuring reliability and

reducing the cost of delivered power by reducing transmission

congestion.” 16 U.S.C. § 824s(a). Congestion in the grid arises

4

when the demand for electricity exceeds the capacity of

existing transmission infrastructure. That results in a grid that

cannot accommodate consumer demand in certain areas

through the transmission of low-cost generation, forcing the

grid to instead draw on more expensive generation closer to the

areas of high demand, which ultimately raises costs to

consumers. Congress legislated in 2005 “against the backdrop

of declining investment in transmission infrastructure and

increasing electric load”—a combination ripe for transmission

congestion. Promoting Transmission Investment Through

Pricing Reform, Notice of Proposed Rulemaking, 113 FERC ¶

61,182 at P1 (2005). It intended the incentive-based rate

treatments to help alleviate that problem by encouraging

investments in transmission infrastructure, thereby improving

the transmission system’s capacity and reliability. See San

Diego Gas & Elec. Co. v. FERC, 913 F.3d 127, 130 (D.C. Cir.

2019).

The implementing rule FERC promulgated the following

year established a series of categories of incentive-based rate

treatments for public utilities. See 18 C.F.R. § 35.35(d). Two

of these incentives were limited to standalone transmission

companies, meaning companies that deal exclusively in the

transmission of electricity, not its generation. Id.

§§ 35.35(b)(1), (d)(2). Under the incentive at issue in this case,

FERC will authorize “[a] return on equity that both encourages

Transco formation and is sufficient to attract investment” in

transmission facilities and related technologies. Id.

§ 35.35(d)(2)(i); see 16 U.S.C. § 824s(b)(2).

The 2006 rule was the first codification of that incentive,

but it reflected a preexisting FERC practice of granting

independent and standalone transmission companies “adders”

to their base return on equity. As its name suggests, a FERC-

authorized return on equity determines the extent to which a

5

utility in the highly regulated electricity sector may earn a

profit. FERC ties “adders” to certain behaviors or

characteristics of utilities, incentivizing needed actions by

bumping up their returns on equity above the base level set by

FERC. The first “Transco adders” were granted in 2003 to

International Transmission Company and Michigan Electric

Transmission Company (METC), two of the petitioners in this

case. ITC Holdings Corp., 102 FERC ¶ 61,182 (2003); METC,

105 FERC ¶ 61,214 (2003); see also METC, 113 FERC ¶

61,343 (2005).1 Each adder was worth 100 basis points, an

amount equal to a single percentage point.

FERC’s stated reason for codifying the Transco adder as

one of several available incentives was Transcos’ positive track

record of investing in transmission infrastructure. It explained

that the three Transcos to which it had previously granted such

adders, including petitioners International Transmission and

METC, had “demonstrated the capability to invest, on a timely

basis, significant amounts of capital in transmission projects

and in efforts to reduce congestion.” Promoting Transmission

Investment Through Pricing Reform, Notice of Proposed

Rulemaking, 113 FERC ¶ 61182 at P38. FERC concluded that

their positive investment record was “related to the stand-alone

nature of these entities,” explaining that “[b]y eliminating

competition for capital between generation and transmission

functions and thereby maintaining a singular focus on

transmission investment, the Transco model responds more

rapidly and precisely to market signals indicating when and

where transmission is needed.” Promoting Transmission

Investment Through Pricing Reform, Order No. 679, 116

FERC ¶ 61,057 at P224 (2006) (Order No. 679). In addition,

because Transcos deal only in transmission, they “provide non-

1

International Transmission Company is a subsidiary of ITC

Holdings, which owns all three petitioners in this case.

6

discriminatory access to all grid users.” Id. Independent

Transcos “have no incentive to maintain congestion in order to

protect their owned generation”—a situation that might arise,

for example, with an integrated utility whose highest-cost

generation is brought on line when congestion impedes access

to lower-cost power. Id. FERC was careful to note that a

Transco would be allowed an adder over the long term only if

it “continue[d] to provide the benefits which we are trying to

incentivize.” Id. at P226.

Since 2003, FERC has weighed a Transco’s ownership and

business structure in the course of deciding whether to grant a

requested Transco adder. FERC emphasized from the outset

that “[i]ndependent ownership and operation of transmission is

an important policy objective of the Commission,” citing

among the benefits of independence the “lessened potential for

discrimination, improved access to capital markets for

transmission investment, improved asset management, and

development of innovative services.” METC, 105 FERC ¶

61,214 at P20; see also ITC Holdings Corp., 102 FERC ¶

61,182 at P68. FERC assessed the Transcos’ ability to operate

independently from market participants—entities that sell

generation or other services that could be affected by a

Transco’s actions and thus might bear on investment decisions.

In 2003, International Transmission was indirectly owned

by a limited partnership, so in assessing International

Transmission’s independence FERC considered the roles and

affiliations of the owner’s general and limited partners. See

ITC Holdings Corp., 102 FERC ¶ 61,182 at PP39-44. The

Commission determined the general partners were of little

concern because they lacked financial ties to market

participants and that, while the limited partners had interests in

generation holdings, they would nonetheless not affect

International Transmission’s operational independence on

7

account of their limited voting rights in those other interests.

Id. When International Transmission went public two years

later, FERC continued to permit its adder on the condition that

no market participant acquire more than five percent of the

company’s stock. See ITC Holdings Corp., 111 FERC ¶ 61,149

at PP18-26 (2005).

Soon after that decision, FERC issued a policy statement

clarifying its policy on Transco independence. The

Commission announced that Transcos with “market

participants as passive minority equity owners” were

permissible. Policy Statement Regarding Evaluation of

Independent Ownership & Operation of Transmission, 111

FERC ¶ 61,473 at PP1-2 (2005). It underscored, however, that

it would evaluate rate proposals “to ensure that passive

ownership does not affect the independent operation, planning

and construction of their transmission system.” Id.

FERC continued its practice of evaluating Transco

independence when it codified the Transco adder in 2006.

FERC defined a Transco as simply a standalone transmission

company, “regardless of whether it is affiliated with another

public utility.” Order No. 679, 116 FERC ¶ 61,057 at P201. In

so doing, the Commission declined to “exclude affiliated

Transcos with active ownership by market participants.” Id. at

P202. But the preamble to FERC’s 2006 rule stressed that their

independence remained “an important component of the

positive contribution of Transcos [to] investment in needed

transmission infrastructure,” noting specifically that

International Transmission and METC were “totally

independent of market participants.” Id. at P240; see also id.

at P202. FERC thus determined that it would “consider the

level of independence of a Transco as part of [its] analysis” in

determining “appropriate incentives.” Id. at P239. It stated

that a Transco with active ownership by market participants

8

could receive the adder “to the extent it can show, for example,

why active ownership by an affiliate does not affect the

integrity of its investment planning, capital formation, and

investment processes or how its business structure provides

support for transmission investments in a way similar to the

structure of non-affiliated Transcos or Transcos with only

passive ownership by market participants.” Id. at P240.

Since codifying the Transco adder in 2006, FERC has

granted it to twelve entities. See Electric Transmission

Incentives Policy Under Section 219 of the Federal Power Act,

Notice of Proposed Rulemaking, 170 FERC ¶ 61,204 at P90 &

n.106 (2020). One of the twelve is the third petitioner in this

case, ITC Midwest. See Midcontinent Indep. Sys. Operator,

Inc., 150 FERC ¶ 61,252 (2015). FERC found ITC Midwest

to be “fully independent” but, unlike in earlier cases, granted

the Transco a 50—instead of 100—basis point adder. Id. at

P45. It concluded that its earlier decisions granting 100 basis

points were “based on the specific circumstances of the

applicants and market conditions at the time of their

applications” and determined that 100 basis points was

“excessive for the Transco Adder at this time.” Id. FERC has

since recognized 50 basis points to be presumptively the

appropriate size for a Transco adder.2

2

In a notice of proposed rulemaking published in 2020, FERC

proposes eliminating the Transco adder entirely. See Electric

Transmission Incentives Policy Under Section 219 of the Federal

Power Act, Notice of Proposed Rulemaking, 170 FERC ¶ 61,204. It

states “that the circumstances have changed significantly since Order

No. 679,” that “the key reasoning underpinning [FERC’s] policy . . .

no longer appl[ies],” and that “the Transco business model has not

enhanced the deployment of transmission infrastructure sufficiently

to justify incentives based on this business model beyond those

9

B. Administrative Proceedings

ITC Holdings is the parent company of the three

petitioners in this case.3 All three are members of the

Midcontinent Independent System Operator, Inc.

(Midcontinent Region), a regional transmission organization.

A regional transmission organization is a FERC-approved

non-profit, independent organization that administers the grid

on a regional basis on behalf of transmission-owning member

utilities. The Midcontinent Region operates in the Eastern

Interconnection, one of the three major electrical grids in the

continental United States. The Midcontinent Region’s

geographic footprint encompasses Manitoba, Canada, and

extends south across fifteen U.S. states, most of which are in

the Midwest, with a few in the South.

In 2016, ITC Holdings was acquired by Fortis, Inc., and

GIC (Ventures) Private Limited in a merger transaction

authorized by FERC. See Fortis Inc., 156 FERC ¶ 61,219

(2016). Fortis is a Canadian holding corporation whose

holdings include electric distribution and natural gas utilities in

the United States. GIC Ventures is an investment company

indirectly owned by the government of Singapore. As a result

of the merger transaction, Fortis now owns 80.1 percent of ITC

Holdings and GIC Ventures owns the remaining 19.9 percent.

incentives available to all public utilities.” Id. at P90-91. FERC

noted that “the Transco business model that the Commission

envisioned in approving Transco incentives . . . was one of robust

independence,” but that, “currently, the majority of Transcos have

started out as, or become, transmission affiliates of integrated

utilities.” Id. at P90.

3

ITC Holdings acquired METC in 2006, after METC had been

granted a Transco adder. See ITC Holdings Corp., 116 FERC

¶ 61,271 (2006).

10

Both Fortis and GIC Ventures have representatives on ITC

Holdings’ board.

After the merger, a group of ITC Holdings transmission

customers—including companies involved in the generation,

distribution, and retail sale of electricity and organizations of

municipal utilities—filed a complaint with FERC under

Section 206 of the Federal Power Act asserting that the three

adders held by the petitioners in this case, worth approximately

$24 million in annual revenues, were no longer just and

reasonable, as required by the Federal Power Act. 16 U.S.C.

§ 824d(a). As a result of the merger, the three ITC subsidiaries

(collectively, ITC) were affiliated with market participants that

generate, purchase, and/or sell electricity in the Eastern

Interconnection. The complainants argued that petitioners’

independence could be affected by ITC’s operations, so

petitioners were no longer entitled to an incentive reserved for

independent Transcos.

The complainants identified two Fortis subsidiaries that

generate, purchase, and sell electricity over the Eastern

Interconnection grid—one in Ontario, which borders the

Midcontinent Region, and the other in New York. And they

identified two GIC Ventures subsidiaries that operate in PJM,

a regional transmission organization that covers much of the

Rust Belt region and that borders the Midcontinent Region in

the Midwest. One of those GIC Ventures subsidiaries markets

and sells electricity in and around Pittsburgh, and the other

owns generation close to the Midcontinent Region, in Illinois,

Michigan, and Ohio. Explaining how the affiliates might

compromise ITC’s independence, the complainants noted that

Fortis’s subsidiaries operate on an integrated basis, raising the

risk, for example, that ITC could make transmission decisions

biased in favor of the Ontario and New York companies. They

contended that the three Transcos’ membership in the

11

Midcontinent Region, which, like all regional transmission

organizations, is itself required to be independent from market

participants and collectively oversees the transmission

operations of its members, was insufficient to guard against the

risks posed by ITC’s lack of independence. The consumers

argued that the adder’s “entire point is the belief that ratepayers

gain by placing transmission ownership in an entity that has no

reason to even wish to discriminate for or against any subset of

transmission users, in part because discrimination can take

subtle forms that are difficult to detect and remedy.”

Complaint at 10 (J.A. 69).

In its answer to the complaint, ITC claimed that the

complainants assumed the wrong level of analysis, arguing that

participants’ status is appropriately assessed at the level of an

individual regional transmission system, not across the entire

Eastern Interconnection. ITC pointed out that neither GIC nor

Fortis has subsidiaries in the Midcontinent Region’s markets.

It asserted that it accordingly remained independent of the

relevant market participants. As support, ITC cited FERC’s

recent decision in NextEra Energy Transmission N.Y., Inc., 162

FERC ¶ 61,196 (2018), which granted an adder to an Eastern

Interconnection Transco even though its parent company

owned 38,000 megawatts of generation in different regions

within the Interconnection—generation holdings that ITC

argued “dwarf[ed] the Fortis and GIC Ventures interests”

identified by complainants. Answer at 18 (J.A. 179).

Even if market-participant status were assessed on an

Interconnection-wide basis, ITC argued, it maintained

sufficient independence under criteria identified in Order No.

679, FERC’s preamble to the 2006 rule, because its affiliations

did not affect the integrity of its investment planning, capital

formation, or investment processes. The ITC companies

continued to plan their transmission operations through the

12

Midcontinent Region, free of influence from Fortis, GIC, or

any affiliates; they established capital plans independently

before they were used by Fortis management; and they

maintained their own financing, funding their programs

through debt issuances and equity infusions.

In October 2018, FERC granted the complaint in part,

finding that the merger had reduced ITC’s independence. It

stated that Order No. 679 “established criteria for use in

determining whether an entity with active ownership by a

market participant is sufficiently independent to qualify for a

Transco Adder,” including the criteria identified by ITC—an

“entity’s ‘integrity of investment planning, capital formation,

and investment processes’”—“‘as well as how its business

structure provides support for transmission investments.’”

Consumers Energy Co. v. Int’l Transmission Co., 165 FERC

¶ 61,021 at P67 (2018) (Complaint Order) (quoting Order No.

679, 116 FERC ¶ 61,057 at PP239-40). FERC drew from

Order No. 679 three specific criteria relevant to independence:

investment planning, capital formation, and business structure.

It assessed ITC’s post-merger status under each one.

First, with regard to investment planning, FERC found that

ITC “demonstrate[s] some level of independence by

developing [its] own capital expansion plans.” Id. at P69. But

it also found that Fortis’s evaluation of “capital expenditures

on a consolidated basis for its entire corporate family . . .

indicate[s] . . . some level of coordination [with] and control”

over ITC. Id.

Second, with regard to capital formation, FERC again

noted that ITC “demonstrate[s] some level of independence in

that [it] can issue [its] own debt independently from Fortis and

GIC.” Id. at P70. But Fortis’s annual report revealed that “ITC

13

Holdings can no longer issue its own common stock, and, to

some degree, [ITC] rel[ies] on Fortis for financing.” Id.

Third, with regard to business structure, FERC yet again

found that ITC “demonstrate[s] some level of independence”

because the majority of ITC Holdings’ board of directors “is

unaffiliated with Fortis and GIC.” Id. at P71. But its

independence was materially decreased because the

representatives of Fortis and GIC on ITC Holdings’ Board

“provide some oversight,” and executives across all of Fortis’s

utility subsidiaries “meet[] regularly to discuss business

operations.” Id.

In addition to those three criteria, FERC noted “certain

minor potential conflicts of interest associated with other assets

owned by Fortis and GIC.” Id. at P72. But it concluded that

“such concerns are largely attenuated by the location of such

assets and the fact that they are largely subject to small

ownership shares by Fortis and GIC.” Id. It did not respond

directly to ITC’s suggestion that, under NextEra, the location

of those interests outside of the regional transmission

organization by itself required a finding of continued

independence. In the order’s recitals, however, FERC did note

complainants’ efforts to distinguish NextEra. See id. at P58.

Complainants had argued that the ITC Transcos—“incumbent

transmission owners of virtually all of the transmission

facilities in their respective zones”—are materially different

from the Transco in NextEra—“a new entrant to the relevant

region, with ‘no transmission plant in service,’ and no

established financial history to support external financing.”

Reply at 13-14 (J.A. 274-75) (quoting NextEra, 162 FERC

¶ 61,196 at P22). The NextEra Transco “sought a transco

incentive for a single project, for which it was the non-

incumbent developer selected through a competitive

solicitation,” whereas the ITC companies were granted adders

14

“on the basis of their promised full independence from market

participants.” Id. at 14 (J.A. 275).

Considering the independence criteria in combination,

FERC concluded that ITC’s independence had been materially

reduced by the merger. Based on the reduced level of

independence, it determined it was “appropriate to revisit the

appropriate level” of its Transco adders. Complaint Order, 165

FERC ¶ 61,021 at P73. Citing its decision granting ITC

Midwest an adder in 2015, FERC stated that current policy was

for “a fully independent transmission company” to receive a 50

basis point adder. Id. And “[b]ecause the merger ha[d]

reduced, but not eliminated, [ITC’s] level of independence,”

the Commission determined that a 25 basis point adder

“appropriately encourages the Transco business model in these

circumstances and promotes corresponding consumer

benefits.” Id.

One Commissioner dissented, stating that he would have

eliminated the adder entirely because ITC was no longer

“sufficiently independent to justify” an adder at any level. Id.

(Glick, Comm’r, dissenting).

ITC filed a request for rehearing before the Commission.

It argued that FERC had failed to identify the applicable legal

standard for independence, and had not explained whether the

Fortis and GIC subsidiaries that its order suggested present

“minor potential conflicts of interest” were properly considered

market affiliates. Request for Rehearing at 7 (J.A. 293). It also

argued that FERC departed without explanation from its most

recent precedent granting Transco adders, NextEra and

GridLiance West Transco LLC, 164 FERC ¶ 61,049 (2018).

ITC noted again the NextEra Transco’s generation holdings in

the Eastern Interconnection, and added that the GridLiance

Transco was controlled by a limited partnership whose

15

majority partner owned generation throughout the country. See

Request for Rehearing at 10-11 (J.A. 296-97). ITC claimed

that FERC had “offer[ed] no basis for treating [ITC] differently

from” those Transcos. Id. at 10 (J.A. 296).

FERC denied ITC’s request for rehearing in July 2019.

Consumers Energy Co. v. Int’l Transmission Co., 168 FERC

¶ 61,035 at PP 16-20 (2019) (Rehearing Order). The

Commission first held that it had applied the appropriate

independence standard, which it identified as the criteria

described in Order No. 679. It disagreed with ITC’s suggestion

that market affiliates outside the relevant regional transmission

organization should not be considered at all, noting that Order

No. 679 “places no geographic limitation on the scope of

relevant affiliate relationships.” Id. at P12. And it explained

that its conclusion was consistent with NextEra, in which

FERC deemed the Transco independent despite affiliates

“located inside and outside” the relevant region. Id. at P13

(emphasis in original) (quoting NextEra, 162 FERC ¶ 61,196

at P51).

FERC then affirmed its conclusion that ITC was no longer

fully independent after the merger, disagreeing with ITC that

NextEra and GridLiance required a contrary conclusion.

FERC noted that it found on the facts of both of those cases

that those Transcos’ market affiliates “did not ‘affect the

integrity of [the Transcos’] investment planning, capital

formation, and investment processes.’” Id. at P17 (quoting

NextEra, 162 FERC ¶ 61,196 at P51). ITC claimed it was more

independent than the Transco in NextEra, the Commission

noted, but failed to explain “how [it is] more independent.” Id.

at P20. “The Commission evaluates the independence of each

Transco on a case-by-case basis based on each proceeding,”

FERC explained, and “evidence in this record specifically

demonstrate[d] that [ITC’s] affiliate relationships reduced the

16

independence of its invest[ment] planning, capital formation,

investment processes, and business structure.” Id.

ITC petitioned us for review.

DISCUSSION

We uphold FERC’s final orders unless they are arbitrary

or capricious, an abuse of discretion, or otherwise not in

accordance with the law. FERC v. Elec. Power Supply Ass’n,

136 S. Ct. 760, 782 (2016); NextEra Energy Res., LLC v.

FERC, 898 F.3d 14, 20 (D.C. Cir. 2018). We review the

Commission’s factual findings for substantial evidence. 16

U.S.C. § 825l(b). “[I]n rate-related matters, the court’s review

of the Commission’s determinations is particularly deferential

because such matters are either fairly technical or ‘involve

policy judgments that lie at the core of the regulatory

mission.’” S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41, 54

(D.C. Cir. 2014) (quoting Alcoa Inc. v. FERC, 564 F.3d 1342,

1347 (D.C. Cir. 2009)).

ITC’s petition raises two claims. First, it argues that FERC

arbitrarily and capriciously departed from precedent

establishing a particular methodology to assess Transco

independence. Second, it argues that FERC exceeded its

statutory authority by reducing ITC’s Transco adders without

first finding the adders to be unjust and unreasonable. We

consider each challenge in turn.

A. Independence Analysis

FERC expressly declined in Order No. 679 to “establish a

specific methodology to factor the level of independence into

any request for [return on equity]-based incentives for

Transcos,” stating that it would instead “evaluate the specific

attributes of a particular proposal, including the level of

17

independence, to determine appropriate incentives.” 116

FERC ¶ 61,057 at P239. ITC nonetheless suggests that FERC

established just such a methodology in two orders decided

before this case: NextEra and GridLiance. In those cases,

FERC granted the Transco adder after finding that the Transco

at issue could operate independently of market affiliates inside

and outside its transmission region. The analysis was similar

in both: FERC noted that affiliates outside the relevant region

“[were] distant from . . . and [did] not participate in [the

regional system’s] markets” and that affiliated holdings inside

the region were small and had the sale of their generation

output committed under long-term contracts. GridLiance, 164

FERC ¶ 61,049 at P43; accord NextEra, 162 FERC ¶ 61,196 at

P51. From these two cases ITC argues that FERC “established

its methodology for applying Order No. 679’s general guidance

to assess the independence of transmission subsidiaries that are

part of corporate families that include some generation

holdings.” Pet’rs Br. 21. According to ITC, under the

NextEra/GridLiance methodology, FERC first categorizes

affiliated holdings based on whether they are inside or outside

the transmission region: Those outside have no effect on a

Transco’s independence because they are geographically

distant and outside the regional system’s markets, and those

inside do not affect a Transco’s independence if they are small

and their output is committed under long-term contracts. ITC

claims FERC “departed without acknowledgment or

explanation from its geographically focused methodology” in

this case, instead applying “a new corporate-structure test.”

Pet’rs Br. 22.

ITC’s argument that FERC departed from an established

methodology fails at the outset because FERC, consistent with

its stated intent in Order No. 679, never established any

definitive methodology, let alone the one ITC claims it did.

FERC has consistently applied a case-by-case approach to

18

determining Transco independence, considering ownership

and business structure as part of that inquiry since it first

granted a Transco adder in 2003. When the adder was codified

in 2006, Order No. 679 built on prior practice by identifying

certain criteria that ITC now mistakenly claims constitute “a

new corporate-structure test.”

In Order No. 679, FERC extended eligibility for a Transco

adder to “[a] transco with active ownership by a market

participant . . . to the extent it can show, for example, why

active ownership by an affiliate does not affect the integrity of

its investment planning, capital formation, and investment

processes or how its business structure provides support for

transmission investments in a way similar to the structure of

non-affiliated Transcos or Transcos with only passive

ownership by market participants.” Order No. 679, 116 FERC

¶ 61,057 at P240. FERC considered precisely those criteria in

its order reducing ITC’s adders. It found that ITC was no

longer fully independent based on a multi-factored assessment

of its investment planning, capital formation, and business

structure.

The precedents that ITC argues established a different

methodology in fact concluded that the Transcos were

independent according to the Order No. 679 criteria. In

NextEra, FERC held in the same paragraph from which ITC

draws its test that, “[b]ased on the record here . . . [the Transco]

has demonstrated that its relationship to its affiliated market

participants will not affect the integrity of [its] investment

planning, capital formation, and investment processes.” 162

FERC ¶ 61,196 at P51. FERC then turned to the geographical

facts presented on the NextEra record to inform that bottom-

line finding. Id. Its analysis in GridLiance was similar. FERC

began there by noting it “found [the Transco] ha[d]

demonstrated that its relationship to its affiliates will not affect

19

the integrity of [its] investment planning, capital formation, and

investment processes.” 164 FERC ¶ 61,049 at P43. Only then

did it go on to consider the location and details of the Transco’s

affiliated holdings. Id. Nowhere in either decision did FERC

suggest that the geographical factors it weighed in concluding

that the Transcos at issue were independent were the only

criteria to be considered under Order No. 679. Based on a plain

reading of NextEra and GridLiance, and bolstered by the

deference that we owe FERC in the interpretation of its own

precedent, see Mo. Pub. Serv. Comm’n v. FERC, 783 F.3d 310,

316 (D.C. Cir. 2015), we conclude those decisions do not

establish a methodology for assessing independence.

ITC argues that our cases requiring that an agency provide

a reasoned explanation when it departs from precedent demand

vacatur here. But because FERC adopted no exclusively

“geographically focused methodology” from which to depart,

FERC had no obligation to explain specifically why its inquiry

here was broader. West Deptford Energy, LLC v. FERC, 766

F.3d 10 (D.C. Cir. 2014), one of the cases on which ITC relies,

illustrates the difference. The issue in West Deptford was

which tariff governs an “interconnection agreement” between

a generator and a regional transmission organization when the

organization’s tariff is amended in the course of a generator

seeking access to the organization’s network—the tariff in

place when the generator’s request is first made, or the tariff in

place when the “interconnection agreement” is executed or

filed. Id. at 12. FERC decided in that case that the earlier tariff

governs, despite what “appeared to be an unbroken

Commission practice of holding that interconnection

agreements filed after the designated effective date of an

amended tariff are governed by the amended tariff.” Id. at 21.

We held that the “one-off decision in this case to deviate” from

settled agency practice was arbitrary. Id. FERC claimed a right

to employ a case-by-case approach in making the timing

20

decision, but we dismissed the commission’s “paean to

administrative flexibility” as unreasoned. Id. at 20. ITC argues

FERC made the same mistake here, claiming a right to assess

Transco independence case-by-case but failing to support its

decision to do so with adequate reasoning or explanation.

What ITC overlooks is that the regulatory background and

established commission precedent here support a case-by-case

approach in a way they did not in West Deptford. In West

Deptford, the practice at issue was uniform, and FERC’s

claimed adoption of a case-by-case approach arrived in the

single decision in which it deviated from that uniform practice.

We explained that a case-by-case approach as applied to that

issue was in tension with the Federal Power Act’s prioritization

of predictability and uniformity in tariff terms, and that FERC

had entirely failed to “identify[] the relevant factors that would

govern a case-by-case analysis.” Id. at 21. Here, by contrast,

FERC expressly adopted a case-by-case approach to

transmission incentives generally, and the Transco adder

specifically, in Order No. 679. See 116 FERC ¶ 61,057 at P43,

P239. It explained that a “case-by-case approach ensures that

the incentives granted will be tailored to particular

circumstances.” Id. at P43. With regard to the adder, FERC

stressed that it would “evaluate the specific attributes of a

particular proposal, including the level of independence,” in

granting any adder. Id. at P239. And FERC identified factors

relevant to determining independence in the case of a Transco

with active market affiliates—the factors applied in the case at

hand—even as it declined to identify any particular

methodology for weighing them. Id. at P240. Unlike in West

Deptford, then, FERC’s multi-factored assessment of ITC’s

independence was not a departure from established precedent

but a continuation of it.

21

At bottom, ITC’s claim is that FERC’s case-by-case

determinations cannot be reconciled with one another on their

facts, and that FERC failed to acknowledge or justify those

inconsistencies. ITC argues that, whatever the ultimate finding

as to the Order No. 679 criteria in NextEra and GridLiance, the

only facts FERC actually considered in making those findings

were the location and nature of the affiliated holdings. And in

those analyses, the only market affiliates that FERC concluded

could affect independence were those operating in the same

regional markets as the Transcos at issue; affiliates or holdings

outside those markets were found to have no effect on a

Transco’s independence. ITC argues that if FERC had limited

itself to those same geographical considerations in this case, it

would have found ITC to be independent even after the merger,

as neither GIC nor Fortis has subsidiaries operating in the

Midcontinent Region. Additionally, ITC insists that, even if

the Order No. 679 criteria FERC assessed were determinative,

ITC has “at least as much independence from a corporate-

structure perspective” as did the Transcos at issue in NextEra

and GridLiance. Pet’rs Br. 33-34. Like ITC, those Transcos

were reliant on parent companies for financial support, and,

unlike ITC, neither was governed by its own board of majority-

independent directors, but each was subject to the direction of

its parent company’s board.

The complainants below, now intervenors on appeal, have

offered a possible rejoinder to ITC’s claim that the cases cannot

be reconciled under a geographical analysis. They note that,

while the market affiliates in this case are outside the

Midcontinent Region, they are located in bordering areas close

enough to be affected by ITC’s decisions. Whatever the merit

of that argument, ITC’s first claim fails for a simpler reason:

because, as discussed, FERC has never used a “geographically

focused methodology” to determine independence, it was

22

under no obligation to reconcile the cases under the terms of

such a test.

ITC’s second claim—that FERC failed to analyze ITC’s

structural independence relative to NextEra and GridLiance—

is more clearly on point. As context for assessing that claim, it

is worth considering the distinct procedural postures in which

the cases arrived before FERC. Both NextEra and GridLiance

involved proceedings under Section 205 of the Federal Power

Act. See 16 U.S.C. § 824d. “Section 205 enables a utility to

propose changes in its own rates.” Emera Me. v. FERC, 854

F.3d 9, 24 (D.C. Cir. 2017). Ratepayers can then challenge

filed rates before they go into effect. See 16 U.S.C. § 824d(d)-

(e). When a utility seeks to increase its rate, it bears the burden

of demonstrating that the increase is just and reasonable. Id.

§ 824d(e). Under FERC’s 2006 rule implementing

transmission incentives, a utility’s request for incentive-based

rate treatments must be made in a section 205 filing. 18 C.F.R.

§ 35.35(d).

This case, on the other hand, arose in response to a

complaint filed pursuant to Section 206 of the Federal Power

Act. See 16 U.S.C. § 824e. “Section 206 empowers FERC to

modify existing rates upon complaint or on FERC’s own

initiative.” Emera Me., 854 F.3d at 24. Its procedures “are

‘entirely different’ and ‘stricter’ than those of section 205.” Id.

(quoting City of Anaheim v. FERC, 558 F.3d 521, 525 (D.C.

Cir. 2009)). Unlike in a Section 205 proceeding, the proponent

of a rate change under Section 206 “bears ‘the burden of

proving that the existing rate is unlawful.’” Id. (quoting Ala.

Power Co. v. FERC, 993 F.2d 1557, 1571 (D.C. Cir. 1993)).

Against this procedural backdrop, the reason for FERC’s

assertedly inconsistent analyses comes into sharper relief.

Unlike in the case at hand, which arose entirely in response to

23

a Section 206 complaint that ITC was no longer independent,

the issue of independence was not central in NextEra or

GridLiance. The utilities in those cases requested several

incentives in their Section 205 filings, only one of which was

the Transco adder. NextEra, 162 FERC ¶ 61,196 at P1;

GridLiance, 164 FERC ¶ 61,049 at P1. In both cases, several

parties intervened to challenge elements of the Transcos’

requests, but in neither did a party challenge the standard for

assessing a Transco’s independence.

In GridLiance, the only challenge raised to granting a

Transco adder was based on the adder’s interaction with the

overall return on equity and other incentives at issue. 164

FERC ¶ 61,049 at PP33-36. No party even questioned the

Transco’s decisional independence.

In NextEra, the closest that any party got to an

independence-centered challenge was the claim by an

intervenor representing ratepayers that the Transco should not

be treated as a standalone entity because it was supported by

the financial strength of a parent company. See Notice of

Intervention and Protest of the N.Y. State Public Service

Comm’n at 6-7, NextEra, 162 FERC ¶ 61,196. That intervenor

argued that the proposed base return on equity was sufficient

to compensate investors for the project’s risks, rendering other

incentives redundant. At no point did any party challenge or

even discuss the criteria by which FERC assesses

independence, and FERC’s order reflects as much. The

Commission merely noted that “a Transco adder under Order

No. 679 is not based on the specific risks of an applicant’s

project, but based upon whether the applicant qualifies under

the independence standard for a Transco and ‘continues to

provide the benefits which we are trying to incentiv[ize].’” 162

FERC ¶ 61,196 at P52 (quoting Order No. 679, 116 FERC

¶ 61,057 at P226).

24

Here, by contrast, ratepayers came forward with evidence

central to their claim that ITC’s independence had been

reduced by the merger. FERC weighed that evidence against

the Order No. 679 criteria and found that ITC’s independence

had been reduced but not eliminated. In its request for

rehearing ITC argued that FERC “offer[ed] no basis for”

treating ITC differently from the Transcos in NextEra and

GridLiance, but its only support for that assertion concerned

the location of market affiliates, Request for Rehearing at 10-

11 (J.A. 296-97), which FERC’s initial order made clear was

not decisive in this case. As to the Order No. 679 criteria, ITC

explained in its request for rehearing why it thought that FERC

had gotten the analysis wrong, but it did not compare its

decisional independence to that of the Transcos in those earlier

cases. It asserted it was more independent than the NextEra

Transco, but ITC did not even support that conclusory claim

with any comparison of the factors that it contends demonstrate

its greater independence, as it has sought to do here. For

instance, ITC asserted its board was majority-independent

without discussing how that compared to the board

composition of the other Transcos; it does that for the first time

in its petition to this court.

None of this is to suggest ITC bore a burden of

demonstrating it was more independent that the Transcos at

issue in NextEra and GridLiance. It is simply to underscore as

we consider how its precedents fit together that FERC was not

confronted with any “significant showing that analogous

cases” under Order No. 679 had “been decided differently.”

LeMoyne-Owen Coll. v. NLRB, 357 F.3d 55, 61 (D.C. Cir.

2004). Based on the evidence before FERC on rehearing and

the case-by-case analysis Order No. 679 requires, it was

reasonable for FERC to stand by its initial finding

notwithstanding ITC’s standalone assertion of greater

independence. FERC concluded that, while it “determined that

25

the integrity of [the NextEra Transco’s] investment planning,

capital formation, and investment processes were unaffected by

its affiliate relationships,” the “evidence in this record

specifically demonstrate[d] that [ITC’s] affiliate relationships

reduced the independence of its investment planning, capital

formation, investment processes, and business structure.”

Rehearing Order, 168 FERC ¶ 61,035 at P20.

FERC surely could have more extensively investigated

investment planning, business structure, and capital formation

in NextEra and GridLiance. It acknowledged as much in a

recent decision raising the same issue as the one presented here.

See Kansas Corp. Comm’n v. ITC Great Plains, LLC, 173

FERC ¶ 61,160 at P8 (2020). FERC’s failure to address the

Order No. 679 criteria more clearly in earlier cases, however,

did not prevent it from considering all relevant evidence

brought to its attention in this case.

It is FERC’s duty under Section 206 to assess a

complaint’s allegations that a utility’s existing rate is unjust or

unreasonable. If FERC finds such allegations to be supported,

it is then required to “determine the just and reasonable rate . . .

[and] fix the same by order.” 16 U.S.C. § 824e. Here, FERC

determined that ITC’s adders—then set at a level reserved for

fully independent Transcos—were no longer appropriate. That

finding triggered section 206’s requirement that it set a new just

and reasonable rate. In view of the deference that we owe

FERC in rate-related matters, we cannot conclude that this

finding was undermined by other cases in which it faced

different claims in procedurally distinct proceedings and

reached different results based on distinct records.

B. Section 206 Finding

ITC also argues that FERC exceeded its statutory authority

in the manner that it reduced the adders. Section 206 requires

26

“FERC to show that an existing rate is unlawful before ordering

a new rate.” Emera Me., 854 F.3d at 24. ITC argues that FERC

violated that mandate by failing to find the existing adders to

be unjust or unreasonable before reducing them by half. See

id. at 21.

ITC’s claim fails, however, as FERC’s analysis clearly

tracked “the two-step procedure mandated by section 206.” Id.

at 22. In response to a complaint that expressly alleged the

Transco adders had “been rendered unjust and unreasonable”

as a result of the merger, FERC reassessed ITC’s

independence. Complaint Order, 165 FERC ¶ 61,021 at P1.

Finding that the merger had reduced ITC’s independence,

FERC reasonably concluded that the existing 50 basis point

adder—a level reserved for “fully independent” Transcos—

was no longer appropriate. Complaint Order, 165 FERC

¶ 61,021 at P73; see also Rehearing Order, 168 FERC ¶ 61,035

(Glick, Comm’r, dissenting in part) (concurring in the holding

that “the Commission did not err in concluding that the then-

existing ROE adder was unjust and unreasonable”). Only then

did it proceed to set a new rate. Because the merger had

reduced “but not eliminated” ITC’s independence, FERC

concluded that a 25 basis point adder “appropriately

encourages the Transco business model in these circumstances

and promotes corresponding consumer benefits.” Id.

ITC’s challenge to that conclusion seems to rest primarily

on FERC’s failure to use the words “unjust and unreasonable”

at the first step. But because FERC granted a complaint that

itself explicitly alleged the existing adders were unjust and

unreasonable and its analysis tracked the two-step procedure of

Section 206, its failure to “use the magic words . . . did not

reflect a fatal flaw in its decision.” TransCanada Power Mktg.

Ltd. v. FERC, 811 F.3d 1, 10 (D.C. Cir. 2015); see also

Interstate Nat. Gas Ass’n v. FERC, 285 F.3d 18, 47 (D.C. Cir.

27

2002); R.I. Consumers’ Council v. Fed. Power Comm’n, 504

F.2d 203, 213 n.19 (D.C. Cir. 1974).

This case is not like Emera Maine, our precedent on which

ITC relies in claiming that FERC’s unjust-and-unreasonable

finding must be expressed in those exact terms. See 854 F.3d

at 24. In Emera Maine, FERC began by applying a

methodology that identified a new just and reasonable rate.

Based only on the fact that the newly identified rate was

numerically lower than the existing rate, FERC concluded the

existing rate was unjust and unreasonable, despite the fact that

the existing rate also remained within a broader zone of

reasonableness. Id. at 26. FERC in Emera Maine thus “never

actually explained how the existing [rate] was unjust and

unreasonable.” Id. It instead skipped to Section 206’s second

step and reasoned backward from there, claiming that its

analysis “generating a new just and reasonable [rate]

necessarily proved that Transmission Owners’ existing [rate]

was unjust and unreasonable.” Emera Me., 854 F.3d at 26; see

also id. at 18-19 (contending that “both of the burdens of proof

under . . . Section 206 can be satisfied using a single [return-

on-equity] analysis” (quoting Coakley v. Bangor Hydro-Elec.

Co., 150 FERC ¶ 61,165 at P32 (2015))). The opinion under

review is markedly different: All but a single paragraph of

FERC’s analysis here concerned the first-step issue of whether

the merger reduced ITC’s independence such that an adder

level reserved for fully independent Transcos could no longer

be considered just and reasonable as applied to ITC.

ITC also claims that, “even if FERC had paid lip service

to Section 206’s requirements,” its analysis could not support

its finding that the existing adders were unjust or unreasonable.

Pet’rs Br. 42. ITC argues that FERC’s analysis “rests on

speculation rather than facts and evidence,” specifically

criticizing FERC’s reliance on what ITC calls two

28

“unremarkable fact[s]”: (1) Fortis’s consolidated reporting of

capital expenditures and (2) regular meetings of executives

across Fortis’s regulated utilities. Id. 42-43. But ITC simply

asserts without explanation that FERC was wrong in finding

the consolidated planning “indicates some level of

coordination and control.” Rehearing Order, 168 FERC

¶ 61,035 at P19. ITC also does not challenge FERC’s finding

that the ITC companies are dependent on Fortis for financing

or that Fortis and GIC have members on ITC Holdings’ board

who can “provide some oversight to ITC Holdings’

executives.” Complaint Order, 165 FERC ¶ 61,021 at PP70-

71. FERC’s analysis was thus not “based on sheer

speculation,” as ITC contends. City of Centralia v. FERC, 213

F.3d 742, 749 (D.C. Cir. 2000). There was instead substantial

evidence to support FERC’s finding that the merger had

reduced ITC’s independence, thereby rendering the existing

adders unjust and unreasonable.

* * *

For the foregoing reasons, we deny the petition for review

filed by International Transmission Company, ITC Midwest,

LLC, and Michigan Electric Transmission Company, LLC.

So ordered.

SENTELLE, Senior Circuit Judge, dissenting: Federal agencies

are creatures of statute. They have no power to act except as

directed by Congress. See Michigan v. EPA, 268 F.3d 1075, 1081

(D.C. Cir. 2001). In the Federal Power Act, Congress directed

FERC to set “just and reasonable” rates for electric transmission.

16 U.S.C. §§ 824d(a), 824e. Section 205 applies when a utility

company proposes a new rate; the company must show that the

proposal is just and reasonable. See § 824d(a). Section 206 applies

when FERC alters an existing rate, either sua sponte or at a third

party’s request. See § 824e. To alter an existing rate under § 206,

FERC must first find that the existing rate is unjust or unreasonable.

See § 824e(a); Fed. Power Comm’n v. Sierra Pac. Power, 350 U.S.

348, 353 (1956) (describing this finding as a “condition precedent”

to FERC’s § 206 authority).

Here, FERC altered ITC’s rate under § 206 without finding the

existing rate unjust or unreasonable. Put differently, FERC acted

outside its statutory authorization. The majority affirms FERC’s

action by assuming that because FERC deemed the new rate more

“appropriate,” it must have considered the old rate unjust or

unreasonable. See ante at 26; accord Consumers Energy Co. v.

Int’l Transmission Co., 165 FERC ¶ 61,021 at P73, 2018 WL

5267539 at *16 (2018). Yet under SEC v. Chenery Corp., we can

only affirm for the reasons FERC offered, without assuming

alternative conclusions FERC did not provide. See 318 U.S. 80, 87-

88 (1943). So although I agree that FERC did not arbitrarily or

capriciously depart from its precedent, I disagree with the decision

to deny ITC’s petition for review. I would vacate and remand for

FERC to consider whether ITC’s original rate was unjust or

unreasonable.

In my judgment, this case is governed by Emera Maine v.

FERC, 854 F.3d 9 (D.C. Cir. 2017). In that case, consumer-side

stakeholders filed a complaint under § 206 of the Federal Power

Act, alleging that a transmission company’s rates had become

unjust and unreasonable. In response, FERC reduced the rates to a

level it deemed more just and more reasonable without expressly

2

finding the prior rate unjust or unreasonable. When the

transmission company appealed to this Court, FERC argued “that

by setting a new just and reasonable [rate], it necessarily found that

[the transmission company’s] existing [rate] was unjust and

unreasonable.” 854 F.3d at 15. The Emera Maine court rejected

FERC’s argument, concluding that “[w]ithout a showing that the

existing rate is unlawful, FERC has no authority to impose a new

rate.” Id. at 25. Today’s decision resurrects what Emera Maine laid

to rest nearly four years ago.

The majority attempts to distinguish Emera Maine because, in

that case, FERC “never actually explained how the existing [rate]

was unjust and unreasonable,” as Congress requires. Ante at 27

(alteration in original) (quoting 854 F.3d at 26). Yet the same could

be said about FERC’s decision here. FERC explains only why the

new rate is more “appropriate.” Int'l Transmission Co., 165

FERC ¶ 61,021 at P73. Explaining why the new rate is more

appropriate does not explain whether the original rate was unjust or

unreasonable.

The majority’s distinction-without-a-difference gives short

shrift to Emera Maine and to our other decisions holding that

“section 206 mandates a two-step procedure that requires FERC to

make an explicit finding that the existing rate is unlawful before

setting a new rate.” 854 F.3d at 24; see also Am. Gas Ass’n v.

FERC, 912 F.2d 1496, 1504 (D.C. Cir. 1990) (“[T]he directive to

impose a just and reasonable rate . . . is triggered only by the

Commission’s finding that the existing one is ‘unjust[ or]

unreasonable . . . .’” (quoting § 824e(a))); City of Bethany v. FERC,

727 F.2d 1131, 1143 (D.C. Cir. 1984) (“[U]nder section 206,

FERC itself may establish the just and reasonable rate, provided

that it first determines that a rate set by a public utility is unjust[ or]

unreasonable . . . .”). By retreating from that well-reasoned and

workable rule, we invite FERC to further erode congressional

limits on its delegated power.

3

FERC dismisses those congressional limits as “magic words,”

alluding to Hanna Diyab’s Ali Baba and the Forty Thieves.

Respondent Br. 26, 36. Yet FERC would do well to remember that

when Ali Baba’s brother forgot the magic words, he could not

escape the thieves’ cave. Although “unjust” or “unreasonable” are

congressional requirements rather than magic words, I would

likewise refuse to allow FERC to escape a trap of its own making.

I respectfully dissent.