D.C. Circuit Affirms FERC ROE Policy But Reverses For Failure to Apply APA Official Notice Rule

The D.C. Circuit's remand today of a FERC transmission incentive rate of return order relating to Southern California Edison Company ("SoCal Edison") is less interesting for its affirmance of the Commission's rate of return methodology, than it is for its remand based on FERC's misuse of the official notice provisions of the Administrative Procedure Act ("APA").

The case, SoCal Edison v. FERC, U.S. Court of Appeals for the D.C. Circuit, No. 11-1471, May 10, 2013, essentially affirmed FERC's determination to change its yardstick on measuring required returns on equity ("ROE") for inclusion in incentive rate formulae for transmission projects. For a number of years FERC had determined ROEs for electric companies by applying its discounted cash flow ("DCF") methodology to a proxy group of comparable publicly-traded companies and using the midpoint of the range of that group.

In the orders under review, however, FERC instead applied its DCF methodology by using the median rather than the midpoint of the range. The court held that outcome to be acceptable as reasoned decision-making because the Commission had concluded in its order that the median of the range was mathematically preferable as a better "measurement of the central tendency" of the calculation. In so holding, the court rejected SoCal Edison's protestations that the Commission had not demonstrated that SoCal Edison's proposed use of a midpoint ROE produced a rate that was not just and reasonable under Section 205 of the Federal Power Act.

Nonetheless, the case was remanded to the Commission because the court found that FERC had failed to follow the requirements of Section 556(e) of the APA relating to an agency taking official notice of evidence not appearing in the record. Section 556(e) permits an agency to take official notice of a publicly-known fact generally not subject to dispute so long as the party against whom it would be used is given a reasonable opportunity to either contradict it or temper its use in the context of the particular case. With respect to SoCal Edison, the court noted that, after the record had closed, the Commission had taken official notice of the average ten-year U.S. Treasury bond yields for the period, March 1, 2008 to December 31, 2008, using that information to reduce the allowed ROE. Thereafter, SoCal Edison had submitted an affidavit of an expert who noted that during the free-fall of the U.S. economy during that period, the normal relationship between treasury yields and the private cost of capital had been disrupted, undercutting the proxy relationship between the two values. FERC refused to consider the affidavit on the grounds that the record had closed. The court held that refusal to be error, contrary to the requirements of Section 556(e) of the APA, and remanded the case to the Commission.