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Emera Maine v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

April 14, 2017

Emera Maine, formerly known as Bangor Hydro-Electric Company, et al., Petitioners
v.
Federal Energy Regulatory Commission, Respondent Attorney General for the State of Connecticut, et al., Intervenors

          Argued December 6, 2016

         On Petitions for Review of Orders of the Federal Energy Regulatory Commission

          David 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.

          David 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 Rhode Island.

          Beth 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, Deputy Solicitor.

          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.

          Scott 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.

          OPINION

          Sentelle, Senior Circuit Judge

         Under 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.

         After 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 206.

         In 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.

         FERC 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.

         Both 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.

         I.

         ISO New England Tariff

         Transmission 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, 420 (1980).

         Section 205 Proceedings Before the Commission

         Pursuant 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.

         FERC 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).

         Section 206 Proceedings Before the Commission

         This 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").

         In 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.

         Applying 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.

         On 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 ΒΆ 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 ...


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