United States Court of Appeals, District of Columbia Circuit
Emera Maine, formerly known as Bangor Hydro-Electric Company, et al., Petitioners
Federal Energy Regulatory Commission, Respondent Attorney General for the State of Connecticut, et al., Intervenors
December 6, 2016
Petitions for Review of Orders of the Federal Energy
B. Raskin argued the cause for petitioners Emera Maine, et
al. With him on the briefs were Gary A. Morgans, Charles G.
Cole, Jeffrey M. Jakubiak, Kenneth G. Jaffe, Sean A. Atkins,
Gunnar Birgisson, Stephen M. Spina, David R. Poe, Karen Krug
O'Neill, and S. Mark Sciarrotta. Jason J. Fleischer and
Mary E. Grover entered appearances.
E. Pomper argued the cause for petitioners Attorney General
of Massachusetts, et al. With him on the briefs were Scott H.
Strauss, Latif M. Nurani, John P. Coyle, Joseph A. Rosenthal,
Susan W. Chamberlin, Maura Healy, Attorney General, Office of
the Attorney General for the Commonwealth of Massachusetts,
Jeffrey A. Schwarz, George Jepson, Attorney General, Office
of the Attorney General for the State of Connecticut, John S.
Wright, Michael C. Wertheimer, and Clare E. Kindall,
Assistant Attorneys General, Donald J. Sipe, Cynthia Arcate,
Timothy R. Schneider, and Leo J. Wold, Assistant Attorney
General, Office of the Attorney General for the State of
G. Pacella, Deputy Solicitor, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were Robert H. Solomon, Solicitor, and Lona T. Perry,
Jefffrey M. Jakubiak, Kenenth G. Jaffe, Sean A. Atkins,
Gunnar Birgisson, Stephen M. Spina, David R. Poe, David B.
Raskin, Gary A. Morgans, Charles G. Cole, Karen Krug
O'Neill, and S. Mark Sciarrotta were on the brief for
intervenor Transmission Owners supporting respondent.
H. Strauss, David E. Pomper, Latif M. Nurani, John P. Coyle,
Joseph A. Rosenthal, Susan W. Chamberlin, Maura Healy,
Attorney General, Office of the Attorney General for the
Commonwealth of Massachusetts, Jeffrey A. Schwarz, George
Jepson, Attorney General, Office of the Attorney General for
the State of Connecticut, John S. Wright, Michael C.
Wertheimer, and Clare E. Kindall, Assistant Attorneys
General, Donald J. Sipe, Cynthia Arcate, Timothy R.
Schneider, and Leo J. Wold, Assistant Attorney General,
Office of the Attorney General for the State of Rhode Island,
were on the brief for Customers as Intervenors Supporting
FERC Authority To Reduce Regulated Returns.
Before: Millett, Circuit Judge, and Sentelle and Randolph,
Senior Circuit Judges.
Sentelle, Senior Circuit Judge
the Federal Power Act ("FPA"), the Federal Energy
Regulatory Commission ("FERC" or "the
Commission") must ensure that all rates charged for the
transmission or sale of electric energy are "just and
reasonable." 16 U.S.C. §§ 824d(a), 824e(a).
Petitioners New England Transmission Owners
("Transmission Owners") provide transmission
services for customers in New England. In 2011, Petitioners
Massachusetts and various consumer-side stakeholders
("Customers") filed a complaint under section 206
of the FPA, 16 U.S.C. § 824e, alleging that Transmission
Owners' base return on equity ("ROE") had
become unjust and unreasonable. FERC's orders in that
section 206 proceeding are the subjects of the petitions for
review in this case.
creating a new zone of reasonableness and identifying a
specific base ROE it found to be just and reasonable, FERC
held that Transmission Owners' existing ROE-which was
within the newly determined zone of reasonableness but did
not equal FERC's new ROE-was unlawful. FERC explained
that by setting a new just and reasonable ROE, it necessarily
found that Transmission Owners' existing ROE was unjust
and unreasonable, thus satisfying its burdens under section
setting Transmission Owners' new ROE, FERC deviated from
its traditional use of the midpoint of the zone of
reasonableness, citing the presence of anomalous capital
market conditions and concluding that a mechanical
application of the midpoint would not result in a just and
reasonable rate in this case. After considering additional
record evidence, FERC placed the ROE at the midpoint of the
upper half of the newly determined zone of reasonableness.
then informed Transmission Owners that their total ROE-base
ROE plus any incentive adders-was now capped at the upper end
of the newly determined zone of reasonableness. Rather than
change Transmission Owners' previously approved incentive
adders, FERC explained that its decision merely applied the
Commission's well-established policy that a utility's
total ROE must remain within the zone of reasonableness.
Transmission Owners and Customers filed petitions for review
challenging whether FERC satisfied the statutory requirements
under section 206 in setting a new ROE. Transmission Owners
argue that FERC's orders must be vacated because it
failed to find that the existing ROE was unjust and
unreasonable before setting a new ROE. Customers
contend that FERC arbitrarily placed the new ROE at the
midpoint of the upper half of the zone of reasonableness.
Because FERC failed to articulate a satisfactory explanation
for its orders, we grant the petitions for review.
New England Tariff
Owners are a group of privately owned utilities that provide
transmission services in New England. In 2004, Transmission
Owners and ISO New England, Inc. established ISO New England
as a regional transmission organization. See Conn.
Dep't of Pub. Util. Control v. FERC, 593 F.3d 30, 32
(D.C. Cir. 2010). Transmission Owners recover their
transmission revenue requirements through formula rates
included in ISO New England, Inc.'s open access
transmission tariff ("ISO New England Tariff"). To
calculate the total cost for each Transmission Owner to
provide transmission service from its facilities, the ISO New
England Tariff uses formula rates, which are based on the
aggregated cost of all the transmission assets of each
Transmission Owner. The revenue requirements for Transmission
Owners are calculated using the same single base ROE. Each
Transmission Owner's costs are calculated under the
formula, summed, and then divided by the aggregate demand in
New England to produce the regional transmission rates under
the ISO New England Tariff. This is known as
"rolled-in" ratemaking. See, e.g.,
Otter Tail Power Co., 12 FERC ¶ 61, 169 at 61,
205 Proceedings Before the Commission
to section 205 of the FPA, 16 U.S.C. § 824d,
Transmission Owners submitted a proposal in 2003 to establish
ISO New England as a regional transmission organization.
Transmission Owners also submitted "a related section
205 filing seeking approval for the ROE component recoverable
under the regional and local transmission rates charged by
ISO New England." Bangor Hydro-Elec. Co., 117
FERC ¶ 61, 129 at P 5 (2006), order on
reh'g, 122 FERC ¶ 61, 265 (2008), order
granting clarification, 124 FERC ¶ 61, 136 (2008),
aff'd sub nom. Conn. Dep't of Pub. Util. Control
v. FERC, 593 F.3d 30 (D.C. Cir. 2010). In 2006, FERC
established the base ROE for Transmission Owners at 11.14
percent. In establishing the base ROE, FERC relied on a zone
of reasonableness, determined in a discounted cash flow
analysis, of 7.3 percent to 13.1 percent.
also approved a number of ROE incentive adders applicable to
Transmission Owners. Citing section 219 of the FPA, 16 U.S.C.
§ 824s, FERC established "incentive-based rate
treatments to further encourage the construction of
transmission facilities and replacement of aging transmission
infrastructure." S. Cal. Edison Co. v. FERC,
717 F.3d 177, 179 (D.C. Cir. 2013) (citing Promoting
Transmission Inv. Through Pricing Reform, 116 FERC
¶ 61, 057 (2006), order on reh'g, 117 FERC
¶ 61, 345 (2006), order on reh'g, 119 FERC
¶ 61, 062 (2007)). All rates approved under section 219
must meet the FPA's just-and-reasonable standard. 16
U.S.C. § 824s(d). In Transmission Owners' section
205 proceeding, FERC approved a 100-basis-point adder for
certain transmission projects, which we affirmed. See
Conn. Dep't of Pub. Util. 593 F.3d at 33-37. Most of
Transmission Owners' incentives were approved in separate
proceedings. See, e.g., Ne. Utils. Serv.
Co., 125 FERC ¶ 61, 183 (2008), reh'g
denied, 135 FERC ¶ 61, 270 (2011); Cent. Me.
Power Co., 125 FERC ¶ 61, 079 (2008), reh'g
denied, 135 FERC ¶ 61, 136 (2011).
206 Proceedings Before the Commission
case concerns FERC's determination of Customers'
section 206 challenge to Transmission Owners' base ROE
set in the section 205 proceedings. See Coakley v. Bangor
Hydro-Elec. Co., 144 FERC ¶ 63, 012 (2013)
("ALJ Decision"), aff'd in part, rev'd
in part, Opinion No. 531, 147 FERC ¶ 61, 234 (2014)
("Opinion No. 531"), order on paper
hearing, Opinion No. 531-A, 149 FERC ¶ 61, 032
(2014) ("Opinion No. 531-A"), order on
reh'g, Opinion No. 531-B, 150 FERC ¶ 61, 165
(2015) ("Opinion No. 531-B").
2011, Customers filed a section 206 complaint with FERC
alleging that Transmission Owners' 11.14 percent base ROE
had become unjust and unreasonable. The complaint was
premised on Customers' contention that Transmission
Owners' capital costs had declined since the base ROE was
established in 2006 due to changes in the capital markets.
This section 206 proceeding was "the first case of its
kind to challenge utilities' base ROEs [after] the
economic recession of 2007-2009 . . . ." Opinion No.
531-B, 150 FERC ¶ 61, 165 at P 15 n.34.
a newly created discounted cash flow zone of reasonableness
of 6.1 percent to 13.2 percent, the Administrative Law Judge
concluded that Transmission Owners' current 11.14 percent
base ROE was unjust and unreasonable. ALJ Decision, 144 FERC
¶ 63, 012 at PP 544, 587, 589. Then, using the midpoint
of the newly determined zone of reasonableness, the ALJ set
Transmission Owners' base ROE at 9.7 percent.
Id. at PP 544, 587, 590.
review of the ALJ's decision, FERC adopted a new two-step
discounted cash flow, or DCF, methodology for determining an
electric utility's just and reasonable ROE. See
Opinion No. 531, 147 FERC ¶ 61, 234 at PP 7-9, 13-41
(adopting the methodology historically used to set ROEs for
natural gas and oil pipelines). Applying the two-step
methodology in this case, FERC created a new zone of
reasonableness of 7.03 percent to 11.74 percent. Id.
at PP 125, 143; Opinion No. 531-B, 150 FERC ¶ 61, 165 at
P 25. In the instant proceeding, Transmission Owners and
Customers do not challenge FERC's use of the two-step
methodology or ...