United States: D.C. Circuit Tells FERC To Try Again On Utility Rates Of Return

In Short

The Decision: The D.C. Circuit vacated a landmark FERC order, requiring the Commission to provide a rational explanation of its policy for setting the rate of return on equity for electric utilities.

The Impact: In the short term, the decision will cause uncertainty regarding the rates of return electric utilities are allowed to earn through FERC-approved rates.

Looking Ahead: It's unclear whether the litigants will appeal to the Supreme Court, but either way, FERC could have years of work on its hands.

On April 14, 2017, the U.S. Court of Appeals for the D.C. Circuit issued a decision that could cause short-term uncertainty for electric utilities, whose rates for transmission service, including the allowed rate of return, are set by the Federal Energy Regulatory Commission ("FERC"). In Emera Maine v. FERC, No. 15-1118 (D.C. Cir. Apr. 14, 2017), the court vacated and remanded FERC's 2014 landmark Opinion No. 531 (and successor orders), through which FERC had updated its methodology for setting the rate of return on equity ("ROE") a utility is permitted to recover through its transmission service rates. On remand, FERC will have the opportunity to revisit and reformulate its policy, a process that could take several years.

In Opinion No. 531, FERC addressed a complaint brought by states and consumer-side stakeholders ("Customers") alleging excessiveness in the ROE levels reflected in transmission rates for utility members of the regional independent system operator ISO-New England ("Transmission Owners"). In doing so, FERC announced that it was adopting the two-step discounted cash flow methodology ("DCF") long applied to natural gas and oil pipelines for use in determining ROE for electric utilities to set an ROE zone of reasonableness—a range of ROEs that investors would expect to receive on capital invested in electric utilities. FERC also altered the way it selects a specific just and reasonable ROE level within that zone of reasonableness.

Historically, FERC set the ROE for utilities at the midpoint value within the zone. In Opinion No. 531, however, FERC determined that anomalous capital market conditions could produce unduly low ROEs, and it decided that the ROE instead should be set at the midpoint of the zone's upper half. Thus, while in Opinion No. 531 FERC lowered the Transmission Owners' ROE, it did so by less than the Customers had requested. Parties on both sides of the dispute pursued rehearing and ultimately petitioned the D.C. Circuit for review.

The court's decision faulted FERC's reasoning in two principal ways. First, the court explained that FPA section 206 requires FERC to find that an existing rate is unjust and unreasonable as a "condition precedent" to acting to change that rate. In Opinion No. 531, however, FERC had performed a single DCF analysis and used the results of that analysis to set a new just and reasonable ROE and to find the existing ROE to be unjust and unreasonable.

In rejecting FERC's approach, the court explained that FERC's showing that a new rate was just and reasonable did not, by itself, show that all other rates, including the preexisting rate, were per se unlawful. (The court also rejected arguments that all rates within the DCF zone of reasonableness were just and reasonable and that only rates that fell outside of the zone could be found to be unlawful under Section 206.) FERC's failure, in the court's view, was that it never explained how the existing rate was unjust and unreasonable, other than by showing that the rate was higher than the new rate FERC deemed to be just and reasonable.

Second, the court found that FERC failed to explain adequately its decision to set the new ROE at the midpoint of the DCF zone's upper half. Having expressed a lack of confidence in the historical ROE methodology, FERC looked to alternative methods for selecting a just and reasonable ROE from within the zone of reasonableness. The D.C. Circuit held, however, that FERC "did not set forth a rational connection between the record evidence and its placement of the base ROE."

Although evidence supported the selection of an ROE above the median, FERC inadequately explained how these analyses justified the ROE ultimately selected as just and reasonable. Notably, the court required only that FERC make "a principled and reasoned decision supported by the evidentiary record."

A key takeaway is that the court did not find fault with FERC's reliance on a DCF analysis, including the use of alternative benchmarks. Rather, the court found that FERC had failed to adequately explain how it relied on this methodology to reach the specific determinations at issue here, i.e., whether an existing rate is unlawful and what a new just and reasonable rate should be.

The long-term impact of Emera Maine is unclear. FERC's Opinion No. 531 methodology led to numerous challenges to utility ROEs, and in the short term, the court's decision likely will cause uncertainty and additional litigation. But while FERC now must revisit its ROE policy, Emera Maine provides little basis to question the new methodology's substance or its effect of raising ROEs above levels produced by the historical model. Moreover, Emera Maine clarifies the way FERC must exercise its power under section 206 but does not appear to constrain FERC's flexibility in doing so.

Three Key Takeaways

  1. The D.C. Circuit vacated and remanded FERC's landmark 2014 order on utility rates of return on equity, Opinion No. 531, but did not fault FERC's reliance on discounted cash flow analysis or alternative benchmarks.
  2. Electric utilities could experience significant short-term rate uncertainty given the importance of Opinion No. 531 to setting ROE.
  3. FERC will have the opportunity to revisit and reformulate its policy, but that process could take several years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions