United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 8, 2009 Decided January 29, 2010
No. 08-1199
CONNECTICUT DEPARTMENT OF
PUBLIC UTILITY CONTROL, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
BRAINTREE ELECTRIC LIGHT DEPARTMENT, ET AL.,
INTERVENORS
On Petition for Review of Orders
of the Federal Energy Regulatory Commission
Randall L. Speck argued the cause for petitioners. With
him on the briefs were Harvey L. Reiter, Michael C.
Wertheimer and John S. Wright, Assistant Attorneys General,
Attorney General’s Office of the State of Connecticut, Lisa
Fink, and Bruce C. Johnson.
Lona T. Perry, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
2
With her on the brief were Cynthia A. Marlette, General
Counsel, and Robert H. Solomon, Solicitor.
Scott H. Strauss, Jeffrey A. Schwarz, Jesse S. Reyes,
Assistant Attorney General, Attorney General's Office of the
Commonwealth of Massachusetts, and John P. Coyle were on
the briefs for intervenors Massachusetts Municipal Wholesale
Electric Company, et al. in support of petitioners. Joseph W.
Rogers, Assistant Attorney General, Attorney General's Office
of the Commonwealth of Massachusetts, entered an
appearance.
Kenneth G. Jaffe, David B. Raskin, Elias G. Farrah,
Mary E. Grover, Richard M. Lorenzo, Mary A. Murphy,
Phyllis E. Lemell, G. Philip Nowak, C. Fairley Spillman,
Wendy N. Reed, and Sonia C. Mendonca were on the brief for
intervenors transmission Owners in support of respondent.
Charles G. Cole, Alice E. Loughran, and Amanda M. Riggs
entered appearances.
Before: ROGERS and GARLAND, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: 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
3
presumably will be paid by power consumers in New
England, is contrary to applicable precedent, and arbitrary and
capricious. We deny the petition.
* * *
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., 106 FERC ¶ 61,280 (2004); see
also Maine Pub. Utils. Comm’n v. FERC, 454 F.3d 278 (D.C.
Cir. 2006) (upholding the 50 basis point incentive).
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, 106 FERC ¶ 61,280, at
P 249. Petitioners do not dispute the Commission’s
conclusion that even with the adder the total rate of return
afforded to the transmission owners is within the range of
reasonable returns. See Bangor Hydro-Electric Co., 117
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FERC ¶ 61,129, at P 19 (2006) (“Opinion No. 489”)
(calculating a zone of reasonable returns from 7.3% to
13.1%).
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., 111 FERC ¶ 63,048, at PP 160-
163 (2005). (Petitioners do not attack the expert analysis,
though they say it’s largely irrelevant.) Hence, in the
transmission owners’ view, the incentive would provide
ratepayers an unequivocal net benefit if it accelerated
completion of the projects by two years. Nevertheless,
another transmission owner expert witness conceded that the
projects would be completed eventually whether or not they
received an incentive. Id. at P 158.
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, 117 FERC ¶ 61,129, at P 104. Instead, the
Commission described “the applicable standard [as] whether
5
(i) the proposed incentive falls within the zone of reasonable
returns; and (ii) there is some link or nexus between the
incentives being requested and the investment being made,
i.e., to demonstrate that the incentives are rationally related to
the investments being proposed.” Id. at P 105. (We will
return to the Commission’s “rationally related” standard, but
we should say upfront that the Commission clearly did not
mean the equivalent of the famously easy-going “rational
basis review” that courts apply under some provisions of the
Constitution.) The Commission found that its standard was
met since “the proposed incentive will give project owners a
significant impetus to push hard for their projects at all phases
of the approval process.” Id. at P 109.
On rehearing, the Commission limited the incentive to
projects completed by December 31, 2008. Bangor Hydro-
Electric Co., 122 FERC ¶ 61,265, at PP 55, 64 (2008) (“Order
on Rehearing”). Transmission owners with projects
completed after that date must seek incentives on a case-by-
case basis in their rate filings, following a procedure the
Commission adopted in response to the Energy Policy Act of
2005, Pub. L. No. 109-58, § 1241, 119 Stat. 594, 961-62
(codified at 16 U.S.C. § 824s). See Order on Rehearing, 122
FERC ¶ 61,265, at P 63; see also Opinion No. 489, 117 FERC
¶ 61,129, at P 113 (noting that the incentive “is consistent
with EPAct 2005 and [FERC’s] final rule issued pursuant to
EPAct 2005,” i.e., Promoting Transmission Investment
Through Pricing Reform, Order No. 679, 116 FERC ¶ 61,057,
order on reh’g, 117 FERC ¶ 61,345 (2006)). After the
petition for review was filed in this matter, the Commission
granted a waiver of the December 31, 2008, cut-off date for
certain projects. See, e.g., Bangor Hydro-Electric Co., 124
FERC ¶ 61,136, at P 26 (2008); Northeast Utils. Serv. Co.,
124 FERC ¶ 61,044, at P 63 (2008).
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* * *
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’ exceptional value under circumstances of congestion
and unreliability. See Opinion No. 489, 117 FERC ¶ 61,129,
at P 107 (“We begin with the observation that there is an
undisputed need for the projects to which the proposed
adjustment will apply . . . .”). The experts’ calculation of
dramatic savings from a mere two-year acceleration of the
facilities’ availability seems to confirm this sense of urgency.
As we shall see, the Commission linked the urgency of
bringing the projects on line to the incentive’s likely tendency
to speed up that event.
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
7
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, 117 FERC ¶ 61,129, at
P 109. Hence, we review the record to determine whether
FERC had a reasonable basis for concluding that the incentive
might benefit consumers by accelerating completion of the
projects. Thus the case is quite different from New England
Power Pool, 97 FERC ¶ 61,093 (2001), which petitioners
characterize as establishing a rule against “reward[ing]
[utilities] for doing what [they are] supposed to do” anyway.
Id. at 61,477. Since the Commission was concerned in this
case not just with ensuring completion of the projects but with
accelerating completion, its decision is not inconsistent with
New England Power Pool.
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
8
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, 117 FERC ¶ 61,129, at P 109.
The idea that firms respond to financial incentives is, of
course, hardly revolutionary; such cases as Maine Pub. Utils.
Comm’n v. FERC, 520 F.3d 464 (D.C. Cir. 2008), rev’d in
part on other grounds sub nom. NRG Power Mktg. v. Maine
Pub. Utils. Comm’n, No. 08-674, 2010 WL 98876 (U.S. Jan.
13, 2010), understandably take the proposition for granted.
There may be situations, to be sure, where circumstances
somehow block standard incentive effects. But there is no
indication that this is one of them.
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,
367 F.3d 925, 928-29 (D.C. Cir. 2004), for example, we
approved incentives that FERC had provided for western
transmission owners in order to accelerate their provision of
new facilities aimed at reducing congestion and congestion
costs; we did not suggest any need for evidence of the precise
steps the incentives would bring about. And in In re Permian
Basin Area Rate Cases, 390 U.S. 747 (1968), in approving the
Commission’s two-tier system for wellhead pricing of natural
gas dedicated to the interstate market, the Court plainly did
not require a showing of exactly what wells would be drilled
9
in response to higher prices. Id. at 765-99. Farmers Union
Cent. Exch. v. FERC, 734 F.2d 1486 (D.C. Cir. 1984), cited
by petitioners for its language faulting the Commission for
failing to “attempt to calibrate the relationship between
increased rates and the attraction of new capital,” id. at 1503,
imposed no such requirement (assuming we can substitute
precise forms of acceleration for the “new capital” at issue
there). We made the remark in rejecting FERC’s idea that the
statute allowed it to set rates “at levels so high that they would
seldom be reached in actual practice.” Id. at 1503 (internal
quotation marks omitted). We obviously did not purport to
overturn, for example, the Supreme Court’s less demanding
view of conventional ratemaking. See, e.g., Mobil Oil Corp.
v. Federal Power Comm’n, 417 U.S. 283, 318 (1974) (“It is
true that the Commission concluded that it could not
determine the precise amount of additional gas supply that
would be found and dedicated to interstate sales as a result of
this formula. But this was also true of any change it might
have made in gas prices.”).
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., 119 FERC ¶ 61,182 (2007)).
It is true that deferring inclusion in the rate base until project
completion might have given the utilities a sharper incentive,
because they would have started to earn the higher rate of
return on a project only when it was finished and brought into
service. But even to the extent that utilities are permitted to
put CWIP into the rate base, they can do so only by incurring
the relevant expenses and filing a new rate schedule to reflect
the added sums. See 18 C.F.R. § 35.25(c). Thus CWIP
hardly nullifies the adder’s incentive effects.
10
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 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, 117 FERC ¶ 61,129, at
P 123.
Petitioners are in the curious position of arguing on the
one hand that the Commission should give incentives only if it
can identify each “incented” 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
11
defeat our jurisdiction to review it, see 16 U.S.C. § 825l(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
12
otherwise develop the issue. Cf. Pub. Serv. Elec. & Gas Co.
v. FERC, 485 F.3d 1164, 1170 (D.C. Cir. 2007).
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 slightly different and arguably more
demanding standard for granting incentive adders, see Order
No. 679, 116 FERC ¶ 61,057, order on reh’g, 117 FERC
¶ 61,345, the Commission required transmission owners to
follow the new standard for projects completed after
December 31, 2008; for projects completed prior to that date,
it granted the incentive based on the existing record. It
justified the incentive for pre-2009 projects in part on the
basis of the “project owners’ reasonable reliance” on their
already-filed rates. Order on Rehearing, 122 FERC ¶ 61,265,
P 55. Amici claim a lack of any evidence that the
transmission owners actually relied on their filings and argue
that any such reliance would not have been reasonable.
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.
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The petition for review is therefore
Denied.