In 2011, Entergy announced it would be joining the Midwest Independent Transmission System Operator (“MISO”). Entergy’s transmission lines are currently connected to both MISO and Southwest Power Pool’s (“SPP”) networks. In order to fully absorb Entergy’s electricity — which is based in Arkansas, Mississippi, Louisiana and Texas — MISO proposed transferring some of the electricity over SPP’s lines. Entergy’s Arkansas arm is scheduled to connect to the MISO network by the end of 2013. SPP objected and said the proposal violated a joint operating agreement that allowed MISO to use its lines only if it was moving electricity from a third party. Once MISO absorbs Entergy, SPP argued, the utility would no longer be a third party.

Section 5.2 of the Joint Operating Agreement is the center of the dispute:

Sharing Contract Path Capacity. If the Parties have contract paths to the same entity, the combined contract path capacity will be made available for use by both Parties. This will not create new contract paths for either Party that did not previously exist. SPP will not be able to deal directly with companies with which it does not physically or contractually interconnect and the [MISO] will not be able to deal directly with companies with which it does not physically or contractually interconnect.

SPP argues that an RTO cannot have a “contract path to” itself or to part of itself. Thus, once Entergy Arkansas joins MISO, Section 5.2 will no longer apply. After the parties negotiated for some time in vain, MISO petitioned FERC for a declaratory judgment on the interpretation of Section 5.2. FERC adopted MISO’s reading, finding that the term “contract path” was broad enough to encompass any physical or contractual interconnection, and that “entity” could include any operating entity, whether or not it was part of one of the RTOs. Order, 136 FERC ¶ 61,010 at PP 61-62; Order on Rehearing, 138 FERC ¶ 61,055

On appeal, SPP told the three-judge D.C. Circuit panel that FERC did not consider evidence that supported SPP’s interpretation of the joint operating agreement. The D.C. Circuit unanimously agreed, vacating FERC’s order and sending it back to the Commission to reconsider.

…we find that the Commission failed to provide a reasoned explanation for its decision. It leapt to an interpretation of one item of evidence without explaining its implicit rejection of alternative interpretations, and, equally without explanation (or at least adequate explanation), it disregarded evidence that the applicable law required it to consider. See Order on Petition for Declaratory Order, 136 FERC ¶ 61,010 (2011) (“Order”), rehearing denied, Order on Rehearing, 138 FERC ¶ 61,055 (2012) (“Order on Rehearing”). Accordingly, its decision was arbitrary and capricious, and we vacate and remand the orders. Opinion page 2.

Like most litigation, this underscores the importance of understanding when negotiating contract terms. You never know which clause will mean millions of dollars when the unanticipated occurs. In light of this dispute, I presume other transmission owners will review similiar language in their agreements.