On December 28, 2015, the Federal Energy Regulatory Commission (“FERC”) issued an order pursuant to Section 206 of the Federal Power Act (“FPA”) finding that the ISO New England Inc.’s Transmission, Markets and Service Tariff (“Tariff”) is unjust, unreasonable, and unduly discriminatory or preferential. FERC’s determination was based on a finding that the Tariff lacks formula rate protocols and, by extension, lacks adequate transparency and challenge procedures with regard to the formula rates used by the ISO New England Participating Transmission Owners (“PTOs”). FERC also found that the formula rates themselves may be unjust and unreasonable or otherwise unlawful because the formula rates appear to lack sufficient detail to accurately determine how certain costs are derived and recovered.
Findings with respect to the ISO New England Tariff
FERC found that the lack of formula rate protocols in the Tariff means that the PTO’s formula rates lack adequate safeguards to ensure that: (1) the data inputted into the formula rates is correct and accurate; (2) that all calculations are performed consistent with the formula rates; and (3) that the costs to be recovered through the formula rates are reasonably and prudently incurred. Along the same lines, FERC found that interested parties are not provided with all the information necessary to understand and evaluate the implementation of the formula rates, and that the lack of protocols means that there is no mechanism to allow interested parties to resolve disputes relating to the formula rates. Accordingly,FERC set the matter for hearing and settlement to allow ISO New England, the PTOs and interested stakeholders to develop effective formula rate protocols to address the concerns raised in the Commission’s order.
Findings with Respect to the ISO New England Formula Rates
Separate from its concerns as to the lack of formula rate protocols in the Tariff,FERC also found that the PTOs’ formula rates may be unjust and unreasonable because the formula rates fail to specify how certain costs are derived and recovered in the formula rates. For example, the formula rates do not include the specific derivation of several cost components, including the costs relating to PBOP expenses, depreciation rates and asset retirement obligations, and in some cases, the formula rate templates fail to include the mathematical formulas that are used to calculate certain inputs. The Commission also found that, for some of the PTOs, there is a timing mismatch between how the regional network service rate is calculated and how the individual local network service rate is calculated, leading to the potential for the over-recovery of costs by the PTOs. Accordingly, FERC n instituted an investigation to determine whether the PTO’s regional and local formula rates are just and reasonable, and directed that hearing and settlement procedures instituted with respect to the formula rate protocols should also address the justness and reasonableness of the PTOs’ formula rates.
The ISO New England Order is the latest in a series of orders issued by FERC in an effort to ensure that all formula rates and formula rate protocols are consistent with the Commission’s current regulations and the “Guidance on Formula Rate Updates” issued by the Commission staff on July 14, 2014 (“Guidance”). It is likely that the Commission will continue to use its investigatory power under Section 206 of the FPA to bring transmission owner formula rates in line with recent Commission orders setting out requirements for transparency and with the FERC staff’s Guidance. Accordingly, transmission owners should be proactive in tracking the latest trends with respect to formula rates and formula rate protocols, and should ensure that their formula rates are consistent with the requirements established in recent orders and in the Commission staff’s Guidance.
Footnotes: 16 U.S.C. § 824(e). Under Section 206 of the FPA, the Commission may, on its own motion, find that an existing rate, term or condition is not just and reasonable or is unduly discriminatory or preferential.  In ISO New England, PTOs recover their transmission revenue requirements through a combination of local and regional formula rates. Specifically, all PTOs use a group regional formula rate for their high voltage facilities that provide regional network service and use individual formula rates for their low voltage facilities that provide local network service.  A copy of Staff’s Guidance on Formula Rate Updates is available at https://www.ferc.gov/industries/electric/indus-act/oatt-reform/staff-guidance.pdf