Maine v. Federal Energy Regulatory Commission
2017 U.S. App. LEXIS 6406
D.C. Cir.2017Background
- New England Transmission Owners (privately owned utilities) recover transmission revenue under ISO New England’s tariff using a single base ROE and assorted incentive adders approved by FERC.
- In 2011 Massachusetts and other customer plaintiffs filed a section 206 complaint alleging the 2006 base ROE (11.14%) had become unjust and unreasonable due to changed capital markets.
- FERC adopted a new two-step DCF methodology, produced a DCF zone of reasonableness of 7.03%–11.74%, and set the base ROE at 10.57% (midpoint of the upper half of the zone) after concluding the midpoint (9.39%) was too low given anomalous market conditions.
- FERC also stated that total ROE (base plus incentives) must not exceed the upper end of the new zone, effectively capping previously approved incentive adders.
- Transmission Owners challenged FERC for failing to make an explicit section 206 finding that the existing ROE was unlawful before imposing a new rate; Customers challenged FERC’s choice of 10.57% as arbitrary and unexplained.
- The D.C. Circuit granted review, vacated FERC’s orders, and remanded because FERC did not adequately (1) make the required explicit finding that the existing ROE was unjust and unreasonable under section 206 and (2) reasonably support its selection of 10.57% from the record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FERC satisfied section 206's requirement to find the existing rate unlawful before imposing a new ROE | Transmission Owners: FERC failed to make an explicit finding that the existing 11.14% ROE was unjust or unreasonable before setting a new rate | FERC: A single ROE analysis that identifies a new just-and-reasonable ROE (10.57%) necessarily shows the existing ROE is unlawful if it is higher | Held: Rejected FERC — FERC must make an explicit, reasoned finding that the existing rate is unlawful; its single-analysis approach was insufficient and arbitrary |
| Whether FERC rationally explained selecting 10.57% (midpoint of upper half) instead of the midpoint | Customers: The record did not support the specific placement at 10.57%; alternative analyses only showed midpoint was too low | FERC: Anomalous market conditions justified departing from midpoint; alternative benchmarks supported an upward adjustment; precedent supports central-tendency adjustments | Held: Rejected FERC — FERC failed to connect the record to the specific 10.57% choice; remand required for reasoned explanation |
| Whether FERC lawfully capped previously approved incentive adders by lowering the zone’s upper bound | Transmission Owners: They lacked notice and FERC improperly altered incentives outside the complaint; due process and APA concerns | FERC: Did not change incentives; applied longstanding policy that total ROE (including incentives) cannot exceed the zone’s upper end | Held: Court did not decide this issue on the merits because it remanded for failure on section 206 burdens; Transmission Owners’ incentive arguments were left unaddressed in light of the primary holdings |
| Scope of deference to FERC's ratemaking methodology | Transmission Owners/Customers: FERC must still provide reasoned explanation and satisfy statutory burdens even when using discretionary methodologies | FERC: Courts should defer to FERC’s expertise and methodology choices in ratemaking | Held: Court affirms strong deference but requires FERC to provide a reasoned, evidentiary connection between records, statutory burdens, and the chosen rate; arbitrary or unexplained choices will be vacated |
Key Cases Cited
- FPC v. Hope Nat. Gas Co., 320 U.S. 591 (establishes capital-attraction standard for ROE)
- Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of W. Va., 262 U.S. 679 (ROE must maintain financial integrity and attract capital)
- Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246 (reasonableness permits a spread; courts must defer to FERC’s chosen rate within zone absent flaws)
- Permian Basin Area Rate Cases, 390 U.S. 747 (FERC not required to adopt any particular rate; must explain rate selection)
- FERC v. Electric Power Supply Ass’n, 136 S. Ct. 760 (standard of review: arbitrary and capricious for FERC ratemaking)
- Papago Tribal Util. Auth. v. FERC, 723 F.2d 950 (finding a new just-and-reasonable rate does not automatically render all other rates unlawful)
- TransCanada Power Mktg. Ltd. v. FERC, 811 F.3d 1 (agency must explain reasoning when approving rates as just and reasonable)