Opinion for the Court filed by Senior Circuit Judge WILLIAMS.
In calculating the permissible return on equity for ISO New England, Inc., a regional organization of transmission owners, the Federal Energy Regulatory Commission explicitly hiked the rate in order to induce the ISO and its members to proceed swiftly in the completion of certain key transmission projects. It applied the incentive—a 100 basis point bonus in their return on equity—primarily to projects completed by December 31, 2008. Petitioners, mainly state utility regulators in New England, challenge the decision, arguing that the bonus, which presumably will be paid by power consumers in New England, is contrary to applicable precedent, and arbitrary and capricious. We deny the petition.
Hi Hi *
ISO New England, Inc., and owners of various New England transmission facilities, applied on October 31, 2003, to establish a new regional transmission organization (“RTO”) in New England for the purpose of coordinating energy transmission in that area. Shortly after filing the application to establish the RTO, the transmission owners asked FERC to establish the return on equity percentage for transmission investments contemplated in the new RTO’s expansion plan. Specifically, the RTO asked FERC to set a base return on equity, plus an incentive of 50 basis points (0.50%) to induce the utilities to join the RTO, and an additional incentive of 100 basis points (1%). FERC conditionally approved the RTO and the 50 basis point incentive for RTO participation. See
ISO New England Inc.,
As to the 100 basis point bonus, the Commission ordered a hearing before an administrative law judge, at which the transmission owners would be required to “demonstrate why the [100 basis point] adder is needed to incent investment in new transmission facilities and whether the adder should apply to all types of transmission expansion or be more narrowly focused on ... innovative, less expensive technologies.”
ISO New England,
At the hearing, the transmission owners introduced expert testimony suggesting that the incentive, applied to the projects at issue before us, would cost customers $148.2 million in present value terms in the form of higher rates, but, by protecting customers from future reliability costs, would yield them benefits worth $76 million for each year by which the incentive accelerated the transmission projects’ completion (putting aside “less easily quantified benefits”). Rebuttal Testimony of Michael M. Schnitzer, J.A. 567-77;
see also Bangor Hydro-Electric Co.,
The ALJ found this evidence inadequate to show a “need” for the adder within the meaning of the Commission’s prior order as she understood it. The evidence cited above, she said, did “not show that the adder will result in building of transmission that would otherwise not be built at all or that the ... projects would [otherwise not] be built in a ‘timely’ manner.” Id. at P 163.
The Commission reversed the ALJ, expressing the view that she had erred in requiring the utilities to show “that ‘but for’ the incentive, the projects at issue will not be built.” Opinion No. 489,
On rehearing, the Commission limited the incentive to projects completed by December 31, 2008.
Bangor Hydro-Electric Co.,
Petitioners launch several attacks on the legal standard that FERC applied. They regard the “rationally related” nexus requirement as attenuated and vague; absent more specific criteria for ascertaining the presence or absence of the required nexus, they contend that the standard is not really a requirement at all. In their view, every transmission owner will be able to satisfy the nexus requirement and thus secure a 100 basis point adder up to the outer limit of the “zone of reasonableness.”
We are sympathetic to petitioners’ concern about the “rationally related” formulation’s facial vagueness. But the Commission’s application of the standard in this case belies the notion that it employed the phrase as a fig leaf for accepting any link, however nominal or trivial. Rather, FERC made findings—uncontested by petitioners—of the proposed projects’ excep
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tional value under circumstances of congestion and unreliability. See Opinion No. 489,
Petitioners contend that instead of simply requiring “nexus,” the Commission should have required that the transmission owners demonstrate a “causal link between the incentive adder and any expected customer benefit,” Petitioners’ Br. at 43, as well as “a demonstrated need and identifiable benefits,” id. at 45. This argument is inseparable from their contention that FERC lacked substantial evidence that the proposed incentive would affect the transmission owners’ conduct or benefit consumers. Once we examine the Commission’s goal in providing the adder, however, we see that it in effect did insist on evidence establishing the requisite causal link.
First, nothing in the law or FERC’s stated purposes required FERC to adduce evidence, as petitioners occasionally suggest, “that the adder would produce new transmission investment.” Petitioners’ Br. at 35; see also
id.
at 38 (arguing that the record indicates that the base rate of return “provided sufficient revenues to motivate the [transmission owners] to complete required new transmission” and that the incentive “would not increase transmission investment”). In fact the Commission made clear that it was concerned not with ensuring that the projects would be completed
eventually,
as the transmission owners’ witness conceded they would be, but with ensuring that they would be completed
promptly:
“[T]he proposed incentive will give project owners a significant impetus to push hard for their projects at all phases of the approval process.” Opinion No. 489,
In an argument more attuned to the Commission’s expressed goal, petitioners note that the transmission owners’ own witnesses were unable to identify any particular action that they would take if they received the incentive but that they would not take without it. See J.A. 205 (“I can’t sit here and give you a shopping list now, looking forward, to exactly what we are going to do, specifically in response to this incentive.”). But in fact FERC did adduce substantial evidence for the proposition that the incentive was likely to increase the speed with which projects are completed. Noting the expert testimony in the record, the Commission found that “utilities can be expected to respond to financial motivations and, in so doing, to expend the time and effort necessary to sell the importance of their projects at the local level.” Opinion No. 489,
The idea that firms respond to financial incentives is, of course, hardly revolution
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ary; such cases as
Maine Pub. Utils. Comm’n v. FERC,
Certainly the Commission’s failure to pinpoint specific actions that utilities would take only because of the incentive is of no moment. In
Public Utilities Comm’n of Cal. v. FERC,
In their reply brief petitioners turn to a specific reason why the adder would not bring on the hoped for effects. They suggest that the Commission undercut any such tendency by its readiness to allow at least some of the utilities to include the accrued costs of “construction work in progress” or “CWIP” in their rate base. See Petitioners’ Reply Br. at 6 n. 2 (citing
United Illuminating Co.,
Also in the reply brief petitioners argue that the adder enables the utilities to maximize their profits by “increasing the capitalized cost of the project in order to recover the enhanced [rate of return] on a larger base amount.” Petitioners’ Reply Br. at 6. Here petitioners allude to the familiar Averch-Johnson effect, as to which they submitted expert testimony. See Testimony of David W. Savitsky, J.A. 256-57. The Commission’s order in fact
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discussed this issue, expressing confidence that “the approval process itself [including approval by ISO New England] and its focus on ‘necessary’ additions,” gave reasonable assurance against “over-building.” Opinion No. 489,
Petitioners are in the curious position of arguing on the one hand that the Commission should give incentives only if it can identify each “ineented” act and how the utility’s behavior would differ from what it would have been absent the incentive—a task of positively heroic monitoring, indeed anticipatory monitoring-—-but on the other hand that the Commission erred in placing confidence in its ability to monitor past expenditures for reasonableness. Petitioners fail to explain just what is arbitrary or capricious about the Commission’s refusing the first burden and accepting the second.
We note that petitioners’ “causal link” argument might be thought to suggest that the Commission should have applied a de facto cost-benefit analysis to the adder and demanded proof that the incremental cost of the adder would be matched by at least equivalent incremental benefits for the customers (see, e.g., the apparent demand for “symmetry” between the incentive payment and the resulting benefits, Petitioners’ Br. at 43). But there is no trace of a proposal for cost-benefit analysis in the Petition for Rehearing, which alone would defeat our jurisdiction to review it, see 16 U.S.C. § 825i(b), and even here petitioners barely hint at such an argument.
Petitioners also argue that, to the extent that FERC invoked the desirability of helping the utilities to obtain favorable financing terms as a justification for the incentive, the favorable financing will benefit only the transmission owners’ shareholders, not customers. Petitioners fault FERC for failing to explain “how customers derive any, material incremental benefit” from more favorable financing. Petitioners’ Reply Br. at 23-24. Petitioners’ assertion appears to assume that the Commission was considering only the utilities’ equity returns, not their debt costs; further, full evaluation would require inquiry into the impacts of agency rate-setting on stock market performance and vice versa. But petitioners failed adequately to raise this issue in their Petition for Rehearing, referring only in a general way to their assertion that the Commission had not identified adequate customer benefits. See J.A. 408. We therefore do not have jurisdiction to consider the argument. As we have said, the Commission adequately responded to the general argument by pointing to the benefits of accelerating a reduction in congestion and an increase in reliability.
Another argument that fails for want of jurisdiction is the claim that the Commission’s “rational relation” standard impermissibly deviated from its own prior formulae. The closest petitioners came to raising such an issue in the Petition for Rehearing was a quotation from the dissenting Commissioner’s claim, “I cannot conceive of a case in which an applicant would ever be denied an incentive under the majority’s
new
standard.” J.A. 407 (emphasis added) (internal quotation marks omitted). But in context they appeared to use the statement only as support for their claim that the Commission’s criteria were generally too lax. They did not otherwise develop the issue. Cf.
Pub. Serv. Elec. & Gas Co. v. FERC,
Finally, amici question the Commission’s use of a “reliance” rationale in the rehearing order. Recognizing in the rehearing order that since issuing Opinion No. 489 in this case it had articulated a
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slightly different and arguably more demanding standard for granting incentive adders, see Order No. 679,
But the Commission’s decision makes clear that it was in fact principally concerned with the administrative burden that would result for both it and the transmission owners from reconsidering the decision under the new standard, not with reliance as such. See id. at P 70 (noting that holding a new hearing under the new standard “would be an administrative burden on the Commission and on the parties” and “would also create unnecessary confusion and uncertainty”). Given that, as the Commission observed, “an ROE incentive is not susceptible to a precise calculation,” id. at P 71, it was reasonable to conclude that any gain from evidence that might have been obtained on remand would not improve the decision-making process enough to justify the burden of doing so.
The petition for review is therefore
Denied.