On February 18, 2005, the United States Circuit Court for the District of Columbia granted the petition of the Public Service Commission of the Commonwealth of Kentucky ("PSC"), which claimed that the Federal Energy Regulatory Commission ("FERC") had increased rates for electric transmission without notice or an opportunity for hearing. Specifically, the PSC objected to FERC's 2002 decision to award to those transmission owners who agreed to transfer control of their transmission systems to a regional transmission organization ("RTO"), in this case the Midwest Independent System Operator ("MISO"), an "incentive adder" of  50 basis points to the adjudicated rate of return on equity for transmission services.  While the Court acknowledged that utility ratemaking decisions by regulators are entitled to considerable deference and otherwise affirmed the mechanics of selecting an appropriate return in this case, it found that FERC's decision to increase transmission rates sua sponte, without an announced policy or record support of the need for the incentives, was manifestly unfair.  The court offered no observations on the petitioner's substantive challenges to the incentive adder.

The procedural defect in FERC's decision could have been addressed, at least in part, by a prospective Statement of Policy or a binding rule articulating the basis and rationale for granting such rate incentives.  In fact it proposed such a policy in January 2003, 102 FERC ¶ 61,032 (2003), but has failed to take final action.  The proposed policy was issued after the FERC's action in this case and, as the Court pointed out, would not technically be binding on the agency even if it were final.  It is anticipated that this will spur the FERC to take swift action to issue a definitive Policy Statement or even to undertake a rulemaking to preserve its ability to encourage transmission owners to contribute their facilities to RTOs.

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