Federal judges today faulted regulators for failing to adequately explain their decision to set a new tariff rate for Northeastern utilities to charge for services that use their transmission assets.
More than 30 entities have sued the Federal Energy Regulatory Commission over the new rate, which is meant to ensure that utility investors receive a rate of return that squares with the risks of the power industry.
"You dropped the ball," Judge Patricia Millett, an Obama appointee, told an attorney for FERC this morning in the U.S. Court of Appeals for the District of Columbia Circuit.
A three-judge panel of the court heard more than an hour of oral arguments in the case this morning. A decision in Emera Maine v. FERC is expected in the coming months.
Under the Federal Power Act, utilities collect "just and reasonable" rates for transmitting and selling electric energy.
Led by the Massachusetts attorney general, a coalition of consumer-side stakeholders in 2011 challenged FERC's base return on equity, or ROE, for privately owned utilities in the Northeast region. The coalition complained to the agency that the 11.14 percent rate FERC approved in 2006 had become unjust and unreasonable.
FERC set a new base rate at 10.57 percent after an analysis that included determining the "zone of reasonableness" for the new rate. As it set the new rate, the agency determined that the old figure of 11.14 percent had become unreasonable, even though that rate was still within the zone of reasonableness. And it capped rate incentives for utilities at the high end of its zone.
Massachusetts and other members of the coalition sued, arguing that FERC should have set the new rate lower at 9.39 percent, the midpoint of its zone. The electricity consumers say that FERC departed from its long-standing precedent of choosing the midpoint.
That lower rate would have saved New England consumers an extra $200 million a year, the coalition told the D.C. Circuit. FERC said that the midpoint, however, was too low because of historically low Treasury Department bonds.
Transmission owners launched their own legal assault on the rate, arguing that the new rate was already too low and that FERC should have retained the existing rate. They, too, argued that FERC had dropped long-standing precedent by forgoing its normal two-step process of first determining that an old rate was unreasonable and then choosing a new rate.
Setting a rate too low would undermine utilities' efforts to raise investment capital, said David Raskin, an attorney at Steptoe & Johnson LLP representing the transmission owners.
"The electric power industry is the most capital-intensive in the country," Raskin said.
Millett, who presided over today's oral arguments, said that FERC had not given a good explanation of why, when it determined that the midpoint of the zone was too low, it then simply chose the midpoint of the upper half of its zone as the reasonable rate.
"We like midpoints, and so we're going with the midpoint," she said of FERC's explanation of its choice. "That's a lack of reasoned decisionmaking, isn't it?"
Judge A. Raymond Randolph, a George H.W. Bush appointee, joined Millett in questioning why FERC's choice of a new rate automatically made the existing rate unreasonable.
Senior Judge David Sentelle, a Reagan appointee, told FERC that it would have been "a lot easier" if the agency had gone through its typical two-step process — where it first determines that the old rate has become unreasonable — instead of collapsing the analysis into one.
"Why didn't the commission go through the two steps here?" he said.
Still, Millett at times appeared skeptical of the transmission owners' arguments that FERC didn't have discretion to choose any point within its zone of reasonableness.
FERC attorney Beth Pacella defended the commission's decision today as being consistent with precedent.
The suit is a "classic ratemaking case" in which the court should defer to FERC's technical expertise, the commission argued in a recent court brief.
"The Commission made a ratemaking decision between the two polar opposites, that is informed by record testimony, that is respectful of Commission policy and judicial precedent, and that is responsive to all arguments," the commission said. "That decision should be upheld."
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