Contested Settlement Report Blasts FERC Staff

Settlement Judge Faults Trial Staff for Raising Mostly New Objections After Negotiations End
Mark Reishus
November 6, 2018 at 11:38:38 ET

On Nov. 5, 2018, John P. Dring, a FERC Administrative Law Judge (ALJ) acting as settlement judge, reported a contested settlement to the Commission. According to Dring, the settlement with 28 signatories “is ‘contested’ by the Municipal PTF Owners (Contesting Municipals or CMs) only. Commission Trial Staff (Staff) filed comments in opposition; if the Contesting Municipals had not contested, I would have ‘certified’ the settlement as uncontested.” Dring was particularly critical of Staff’s statement of opposition to the settlement given that “the vast majority of Staff’s 100-or-so issues were raised only after the settlement agreement was reached.” He said he was “in complete agreement with the statements that were filed in support of the settlement,” and commended the New England Transmission Owners’ (NETOs) reply comments “for a complete and accurate detail of the reasons why Staff’s opposition and that of the CMs is in error.”

Settlement Offer

On Aug. 17, 2018, certain NETOs filed a joint offer of settlement that, if approved by the Commission, will resolve all issues in Docket No. EL16-19, a Federal Power Act Section 206 proceeding that concerns the formula rates for transmission service contained in the ISO New England Inc. (ISO-NE) Open Access Transmission Tariff (OATT). (The filing of the settlement triggered the assignment of a new docket, ER18-2235.)

“On behalf of the Settling Parties, the filing NETOs request that these materials be transmitted to the Honorable John P. Dring, the Settlement Judge in this proceeding, for certification to the Commission promptly following the applicable comment period. The Settling Parties urge the Settlement Judge to certify, and the Commission to approve, the settlement, without change or condition. This settlement is the product of over two and one-half years of negotiations, and reflects participation and numerous compromises from a wide range of interests, including both public and non-public utility transmission owners, all New England state public utility commissions, and other state governmental agencies.”

The Settling Parties agreed to certain changes to the ISO-NE OATT. Specifically, they agreed “to replace the existing regional and local formula rates under the ISO-NE OATT with a new formula rate based on spreadsheets (or templates) … along with associated formula rate protocols,” to “amend the ISO-NE OATT sections relating to local transmission service,” and to make certain other changes.

Staff's Initial Comments

On Sept. 6, 2018, Staff filed a 90-page “Initial Comments … Opposing the Offer of Settlement and Settlement Agreement as Filed.”

“While the Settlement Agreement (Settlement) claims to resolve all issues set for hearing in this proceeding, the Settlement, as filed, is not fair and reasonable nor is it in the public interest because it would result in unreasonable rates and contains fundamental defects. Specifically, it: (1) enables all [ISO-NE] Participating Transmission Owners (PTOs) to conduct extra-formulaic, ad hoc ratemaking for all externally-sourced inputs every year; (2) enables certain PTOs to over-recover certain plant costs; (3) enables certain PTOs to recover greater than fifty percent of Construction Work in Progress (CWIP) in rate base in violation of 18 C.F.R. §35.35; (4) violates prior Commission Orders about which customer groups can be made to pay incentive returns; (5) fails to appropriately calculate federal and state income taxes and, in particular, fails to account for excess Accumulated Deferred Income Taxes (ADIT) created by the Tax Cuts and Jobs Act; (6) does not contain a fixed and stated rate of return on equity (ROE); and (7) does not contain a fixed and stated post-retirement benefits other than pension (PBOPs) expense.”

In addition, Staff opposed the settlement terms which would bind non-settling parties to the terms of the Settlement and may impose a stricter standard of review with respect to any changes to the Settlement on third parties of the Commission acting sua sponte than on the Settling Parties.

Although Staff opposed the settlement as filed, it requested that FERC “approve the Settlement on the condition that it order the NETOs to make a comprehensive compliance filing correcting the inconsistencies with Commission policy and precedent identified in these comments and attached affidavits. If the Commission declines to order such a compliance filing … Staff requests that the Commission reject the Settlement in its entirety and set the entire matter for hearing.”

Contesting Municipals' Initial Comments

On Sept. 6, 2018, the Contesting Municipals filed comments opposing the proposed settlement.

They argued that the proposed settlement “seeks to replace a narrative rate formula approximately 30 pages long in its current form, which the Commission found unjust and unreasonable in part because of its complexity, with 18 dysfunctional Excel workbook ‘templates’ that actually appear to exacerbate the lack of transparency, clarity and specificity that led the Commission [to] find the existing … formula unjust and unreasonable. The additional complexity of the proposed templates, coupled with the consolidation of [Pool Transmission Facilities (PTF)] and non-PTF rate base, substantially worsens the problems of extra-formulaic rate making that also caught the Commission’s attention.”

The CMs asserted, among other things, that the settlement substantially discriminates against load that is directly connected to PTFs and exempted by the ISO-NE Transmission, Markets and Services Tariff from paying costs associated with service across non-PTF facilities. The settlement “seeks to legitimize and immunize from challenge an entirely non-transparent, extra-formulaic methodology for allocating holding company/service company costs to transmission rates.”

NETOs' Reply Comments

On Sept. 28, 2018, the NETOs filed reply comments in support of the settlement.

The NETOs argued that the settlement achieves the Commission’s objective when it initiated the proceeding — greater transparency in the New England transmission formula rates under the ISO-NE OATT. The settlement “replaces the word-based formulas used in New England with Excel templates similar to those used around the country, therefore achieving the appropriate level of transparency.”

The NETOs asserted that the Commission “has a simple choice. It can give effect to a carefully negotiated resolution of an extraordinarily complex matter among a large number of sophisticated parties and approve this Settlement. Or, it can choose to find, consistent with … Staff’s apparent position, that compromise settlements of rate proceedings will never be acceptable because there is only one acceptable method for calculating every single component of rates and only one method of presenting this in a rate formula, in which event this case will go to hearing. The settlement documents and substantial other analyses and associated materials developed during the negotiation will remain privileged, and two and a half years of negotiations among multiple parties with a range of different interests will be tossed aside.”

The NETOs warned that “there is no in-between: The Settlement provides that if the Commission modifies it, the Settlement is subject to termination by any party, and the NETOs intend to exercise this termination right if the Commission changes the economics of this negotiated deal in any material respect.”

The NETOs insisted that the settled formula rate is transparent and “the product of an open process in which all negotiating parties were offered numerous opportunities to request clarifications and changes, resulting in trade-offs producing an overall result that is just and reasonable and that all Settling Parties were able to support.”

The NETOs characterized the CMs’ interest as narrow. “They are unhappy because the Settlement eliminates a substantial subsidy that [Regional Network Service (RNS)]-only customers are receiving under the current rate design. They are not entitled to this subsidy, which was illustrated by calculations performed during the settlement negotiations.”

As for Staff, the NETOs pointed out that it “sat silent during the negotiation of economic terms, and during the broader negotiations with other parties raised only a handful of issues that were openly considered in the negotiations. … Staff then showed up at the end, after the negotiations were completed and a deal had been announced to the Settlement Judge, with a list of approximately 100 issues. Many of the issues on the list had not been raised during the prior two-and-a-half years of negotiations. Consideration of these issues challenged what had been negotiated and therefore threatened to unravel the deal already struck by the parties. These issues (and now more included in their comments for the first time) are the basis for the Trial Staff’s comments.”

The NETOs argued that the Contesting Municipals and Staff “identify no actual issue of material fact. … Staff states that the issues in dispute are ‘primarily policy issues.’ Many of the issues raised are based on misinterpretations of the Settled Formula Rate and thereby create the impression of disagreement where none exists. Another significant category of issues involves attempts to litigate rate issues that were resolved in the previous New England rate settlement and left untouched in the current Settlement. A small number of issues involve disagreements over policy, but the Commission will see that the positions of the Contesting Municipals and Trial Staff repeatedly misstate Commission precedent, and the Commission should be able to resolve the few real policy issues without further proceedings because they are not based on factual disagreements.”

The NETOs urged the Commission to approve the settlement, as the policy objections are without merit. “But even if the Commission were to conclude that there are issues of material fact, the record in this proceeding, including the information provided in these Reply Comments, contains substantial evidence upon which the Commission can make a decision on the merits of the contested issues and find that, as a whole, the settlement will produce a just and reasonable result. … Viewed in its entirety, the Settlement balances different interests to reach a just and reasonable outcome, and addresses each of the concerns that the Commission raised in its order establishing this proceeding.”

Role of Settlement Judge

Dring began his Nov. 5, 2018 “Report of Contested Settlement” by citing and quoting City of Anaheim, et al. v. California Independent System Operator Corp., Order Providing Guidance on the Appropriate Procedures for Approval of Settlement, 101 FERC ¶61,392 (2002) (Guidance).

Dring pointed out that, in the Guidance, FERC explained that its Rule 602 “provides procedures for the submission of offers of settlement. An uncontested offer of settlement may be certified to the Commission upon a finding that the offer is not contested by any participant. Where an offer of settlement is contested, it may be certified to the Commission if there is no genuine issue of material fact or if the record contains substantial evidence from which the Commission may reach a reasoned decision on the merits of the contested issues. The [rule] does not expressly discuss settlement judges, the role they play in the settling of cases, or the handling of such settlements.”

On the other hand, the Guidance explained, Rule 603 “provides procedures for negotiating settlements before a settlement judge. The powers and duties of settlement judges include convening and presiding over conferences and settlement negotiations, assessing the practicalities of a potential settlement, reporting to the Chief [ALJ] or the Commission describing the status of the negotiations, and recommending the termination or continuation of settlement negotiations. The [rule] does not expressly discuss certification of settlements to the Commission.”

Although settlement judges “typically will certify to the Commission uncontested settlements, the substantive determinations necessary to certify a contested settlement, as described in Rules 602(h)(2)(ii) and (iii), are not appropriately made by a settlement judge. Given that the settlement judge may well be privy to confidential, nonrecord information and given that the settlement judge may have had off-the-record discussions about the merits of issues and not all parties may have been present, Rule 603 does not empower settlement judges to make substantive findings regarding a contested offer of settlement or to certify a contested offer of settlement. Further, it is not necessary that the settlement judge do so. Where a contested settlement is filed in a case that is pending solely before a settlement judge, the contested settlement is already before the Commission itself.”

In the Guidance, FERC added that, “insofar as the settlement judge is to report to the Chief Judge and/or the Commission, in the future when a settlement is contested the settlement judge should report the fact that a filed settlement has been contested, and identify what the matters at issue may be.” (In reference to this statement, Dring said: “I have come to the conclusion that as to settlement proceedings under Rule 603, the distinction made in [the Guidance] between ‘certification’ and ‘report’ is virtually meaningless.”)

The Guidance stated that FERC “thus does not need the settlement judge in this case to pursue the question of whether, in fact, any genuine issues of material fact remain. The Commission will consider the record in this proceeding as it has been developed to date, address the merits of the issues presented, and also determine what, if any, additional procedures may be necessary.”

In light of the Guidance, Dring “reported” that “the settlement is ‘contested’ by the [Contesting Municipals] only. [Staff] filed comments in opposition; if the Contesting Municipals had not contested, I would have ‘certified’ the settlement as uncontested.” Dring explained that Rule 102(b)-(c) excludes Staff from the definition of “Party,” and the Commission has held that a settlement was uncontested despite opposition from Staff because Staff was a participant, not a party.

Dring's Description of Settlement

Dring said that the settlement “addresses the needs of more than 97 percent of the electric load in New England and is the product of two-and-a-half years of intense negotiations among transmission owners, state regulators, consumer advocates, and municipal governments operating throughout the region. There are 28 signatories to this settlement, which provides for transparency and reformed rates for local network distribution costs, and more than $2.3 billion in annual regional network charges. The filings associated with this settlement include no less than 46 separate tariffs, which speak to the extent and complexity of this agreement. As the New England Power Pool Participants Committee (NEPOOL) demonstrated in its reply comments, 24 members of the Publicly Owned Entity sector, including one of the Contesting Municipals (Middleborough Gas & Electric Department), voted in favor of the settlement at NEPOOL, while only eight voted against it.”

Reaching a settlement “was a massive undertaking. The expanse of the geographic area covered in this settlement and its population density alone would be sufficient to inform anyone as to its importance. The complexity and importance of any outcome of negotiations actually encouraged all parties to settle, as it was obvious to all participants that trying this case would be a nightmare, because of both the complexity and the expectation of many years of litigation before reaching a final resolution of the issues. As the Massachusetts Attorney General wryly observed in her comments in support of the settlement, ‘[N]o one is completely happy [with it].’ Conventional wisdom holds that such general unhappiness is one of the hallmarks of a good settlement.”

Dring's Description of Opposition

Dring agreed with the NETOs that the Contesting Municipals’ interest is narrow. “The CMs consist of seven small municipal utilities, which are [RNS]-only … customers. The CMs’ sole complaint here is that the settlement eliminates a substantial subsidy, to which they are not entitled. The CMs allege that the settlement moves Local Network Service (LNS) costs to the [RNS] rates, but provided no support for this assertion. In actuality, however, the settlement rate design removes the lag between the timing of updates to the RNS and LNS rates, thereby removing the subsidy that RNS-only customers enjoyed under the prior rate design.”

If the case were to go to hearing, Dring noted, “the CMs could lose their subsidy argument because it may be a collateral attack on the Commission’s determination in 2005 that they are not entitled to this subsidy based on a lag between the timing of the updates to RNS and LNS rates. As the [NETOs] so accurately observed in their comments, the CMs believe that this subsidy is an entitlement and are understandably unhappy over losing it. I concur with the NETOs’ conclusion that the new rate structure, which removes the CMs’ subsidy ‘is cost-based, consistent with Commission precedent, and altogether just and reasonable.’ ”

Dring's Description of Staff's Position

Dring found Staff’s statement of opposition the “most difficult and unsettling aspect of this settlement.” He agreed with the NETOs’ characterization of Staff’s behavior as sitting mostly silent during settlement negotiations, only to show up after the conclusion of negotiations to present a list of 100 issues, many of which were new. “I find the NETOs’ last statement here to be exceptionally diplomatic because my recollection of events would lead me to conclude that the vast majority of Staff’s 100-or-so issues were raised only after the settlement agreement was reached.”


Dring concluded his “report” by stating that he is “in complete agreement with the statements that were filed in support of this settlement,” and commended, in particular, “the reply comments filed by the NETOs for a complete and accurate detail of the reasons why the Staff’s opposition and that of the CMs is in error.”

For More Information

See ¶602-80: Contested Settlements — In General and ¶602-82: Contested Settlements — Certification Denied for summaries of orders discussing the inability of settlement judges to certify contested settlements.

ISO New England Inc., et al., Report of Contested Settlement, 165 FERC ¶63,015 (2018) (J. Dring) [Docket Nos. EL16-19-000 and ER18-2235-000].

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