A U.S. appeals court upheld the Federal Energy Regulatory Commission's decision that Dominion Energy Inc.'s customers in Virginia must bear the cost of undergrounding power lines as part of a transmission upgrade project.

In a Dec. 20 ruling, the U.S. Court of Appeals for the District of Columbia Circuit said it was not persuaded by Northern Virginia Electric Cooperative Inc.'s substantive and procedural argument against FERC's decision and, therefore, denied the cooperative's petitions for review.

The case involves Dominion's plans for three projects to upgrade its electric transmission grid, which serves customers in Virginia and North Carolina. Virginia regulators required Dominion to place the transmission wires underground rather than using cheaper overhead lines, a mandate that increased the cost of the three projects from about $84 million to a total of $233 million.

FERC eventually concluded that Dominion's Virginia customers, but not those in North Carolina, should bear the extra costs, pointing to evidence that Virginia customers alone would benefit from running the transmission lines underground.

In their petitions for review, Dominion customers in Virginia such as Northern Virginia Electric, a distribution cooperative, argued that FERC did not properly invoke its power under Section 206 of the Federal Power Act and failed to provide adequate notice of its intent to modify Dominion's filed rate. In addition, the petitioners said FERC acted arbitrarily in requiring only Virginia customers to absorb the undergrounding costs.

Under a Section 206 proceeding, complainants or FERC must prove the unjustness or unreasonableness of a utility's rate. Regarding the Dominion upgrade projects, the Virginia customers launched their challenge to Dominion's project cost allocation through a "formal challenge" to Dominion's annual updates to its formula rates under a Section 205 proceeding, in which the utility bears the burden of proving a rate's justness or reasonableness. The petitioners therefore argued that FERC lacked the authority to change the formula rate itself to saddle only Virginia customers with the costs under Section 206.

But the D.C. Circuit noted that following the Virginia customers' formal challenge, Dominion filed its own proposal under Section 205 to assign the undergrounding costs directly to its customers in case FERC prevented Dominion from including the costs in its existing formula rate. In May 2010, FERC said that proceeding would determine a refund effective date for a different allocation of costs than the then-current ones, meaning that Section 205 procedures were too limited and that FERC would rely on the powers of a conventional Section 206 proceeding.

The Virginia customers said FERC never initiated its own Section 206 proceeding, but the D.C. Circuit said petitioners "advanced [their] argument far too late" and did not include that argument in briefs before the court or in an application for rehearing before FERC.

Petitioners next alleged that FERC failed to give adequate public notice that it would consider requiring some, but not all, of Dominion's customers to pay more for the undergrounding. But the court said FERC's May 2010 order "placed everyone on notice from the very beginning that the commission might allocate the costs differently between Dominion's customers."

Turning to substantive matters, the D.C. Circuit dismissed the petitioners' claim that FERC lacked affirmative evidence that North Carolina customers did not benefit from the undergrounding. The court pointed to "the mountain of evidence that Virginians clamored for the undergrounding," including a public hearing in the state where the vast majority of witnesses testified that they wanted the three power lines — all located in Virginia — to be located underground for aesthetic reasons and to avoid electromagnetic radiation.

The D.C. Circuit also noted the Virginia Legislature's insistence that Dominion underground all three projects and "the absence of any evidence that North Carolina customers caused or benefited from the undergrounding." Those factors, according to the court, all support FERC's decision to make a limited exception to its general policy that utilities do not directly assign individual costs for a project that has systemwide benefits.

"Though the benefits of conventional grid enhancement are shared throughout the grid, here Virginians uniquely caused and benefited from the undergrounding," the court's Dec. 20 ruling stated.

The opinion was filed by Judge Stephen Williams, who was joined in the decision by Judges Merrick Garland and Robert Wilkins.

Northern Virginia Electric Cooperative v. FERC (No. 17-1262, et al.)