On April 4, 2017 (NextEra Desert Center Blythe, LLC v. FERC, Case No. 16-1003 (“NextEra”)), the DC Circuit issued a decision remanding back to the Federal Energy Regulatory Commission (“FERC”) orders denying NextEra Desert Center Blythe, LLC’s (“NextEra”) complaint against the California Independent System Operator Corporation (“CAISO”) regarding the allocation of congestion revenue rights (“CRRs”) under the CAISO tariff. The DC Circuit’s ruling was narrow, based on finding ambiguity in the relevant contract and tariff provisions where FERC determined there was none. The court’s decision highlights the importance of addressing potential regulatory cost recovery options in a FERC-jurisdictional contract.

The underlying issues involve an interim transmission project (“Interim Project”) that NextEra agreed to self-fund in order for two 250 MW solar plants in California to achieve CAISO full capacity deliverability status in the timeframe required by the projects’ power purchase agreements. Pursuant to a January 2012 letter agreement with Southern California Edison (“SCE”) that was later incorporated into the projects’ interconnection agreement (“Letter Agreement”), NextEra agreed to pay the entire cost of the Interim Project and acknowledged that the Interim Project would not be considered a network upgrade and therefore would not be entitled to reimbursement as a network upgrade under Article 11.4.1 of the interconnection agreement. The Interim Project is to be removed upon completion of the permanent network upgrades specified in the interconnection agreement. But, in December 2014, CAISO notified NextEra of its intent to release any incremental CRRs created by the Interim Project in its 2016 annual CRR allocation process. (As the court explained, “CRRs are financial instruments that are principally used to allow the holder to avoid paying [transmission] congestion costs.” NextEra at 4.) In response, NextEra filed a Federal Power Act Section 206 complaint at FERC, arguing that since it entirely funded the Interim Project, it has a right to receive incremental CRRs created by the Interim Project (see FERC Docket No. EL15-47). SCE and CAISO protested the filing.

In June 2015, FERC issued an order denying NextEra’s complaint, finding that under the Letter Agreement, NextEra expressly agreed that the Interim Project would not be treated as a network upgrade and therefore the Interim Project is not eligible to create incremental CRRs to be allocated to any party (i.e., to NextEra). Under Article 11.4.1 of the interconnection agreement, the interconnection customer may elect to “receive Congestion Revenue Rights as defined in and available under the CAISO Tariff . . ., in lieu of a refund of the cost of Network Upgrades.” FERC determined that the language in Article 11.4.1 and the Letter Agreement (providing that the Interim Project was not to be treated as a network upgrade) was unambiguous and did not allow for NextEra to receive CRRs for the Interim Project. As its request for rehearing was denied, NextEra submitted a petition for review to the DC Circuit.

The DC Circuit treated this case as one of contract interpretation (finding ambiguity where FERC found none) and did not provide any deference to the agency. According to the court: “Because FERC erroneously concluded that the relevant contract and tariff provisions unambiguously foreclose petitioner’s request, we remand to the Commission so that it may ‘consider the question afresh in light of the ambiguity we see.” (NextEra at 1). The court found that, contrary to FERC’s rulings, the relevant contract language did not unambiguously address the issue in dispute since Article 11.4.1 of the interconnection agreement only addresses receiving CRRs for network upgrades and does not touch on other avenues for receiving CRRs and the Letter Agreement only provides that the Interim Project is not to be treated as a network upgrade. Therefore, the DC Circuit found that no deference was owed to the agency’s decision and remanded the proceeding back to FERC.

Importantly, the DC Circuit did not further address the merits of the case. Before both FERC and the DC Circuit, SCE and CAISO presented arguments, beyond the language of the Letter Agreement and the provisions of the interconnection agreement, regarding why NextEra is not entitled to CRRs. The proceeding was remanded back to the agency for FERC to evaluate and rule on these other arguments. As the court found, “it is altogether appropriate that we decline to reach issues of tariff interpretation without first receiving the benefit of FERC’s considered judgment.” (NextEra at 8)  Thus, NextEra has another opportunity to argue that it is entitled to receive CRRs for its investment in the Interim Project. While the ultimate outcome of the case is unknown, the court has removed one impediment (the lack of network upgrade status for the Interim Project foreclosing all attempts to obtain CRRs) to NextEra receiving CRRs and ordered FERC to evaluate other potential avenues (besides network upgrade status) under which NextEra may receive CRRs for its investment in the Interim Project.

The court decided the case on narrow grounds of contract interpretation and did not address wider regulatory issues surrounding CRRs. Thus, a takeaway for generation developers from this case is, when signing agreements to fund facilities that are not covered under the standard interconnection agreement, to use broad enough language that will not foreclose potential avenues for regulatory cost recovery.