So. California Edison Company v. FERC

Filing

OPINION filed [1435509] (Pages: 21) for the Court by Judge Rogers [11-1471]

USCA Case #11-1471

Document #1435509

Filed: 05/10/2013

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 25, 2013

Decided May 10, 2013
No. 11-1471

SOUTHERN CALIFORNIA EDISON COMPANY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
CALIFORNIA DEPARTMENT OF WATER RESOURCES, ET AL.,
INTERVENORS

On Petition for Review of Orders of
the Federal Energy Regulatory Commission

Charles G. Cole argued the cause for petitioner. With him
on the briefs were Gary A. Morgans, Linda C. Bailey, and Jill C.
Maguire. Anna J. Valdberg entered an appearance.
Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief was Robert H. Solomon, Solicitor.
Peter J. Scanlon, Joshua E. Adrian, Bonnie S. Blair, Peter
C. Kissel, Elisa J. Grammar, Philip W. Mone, Margaret E.
McNaul, Rebecca L. Sterzinar, Sean M. Neal, Seth T. Lucia,
Kamala D. Harris, Attorney General, Office of the Attorney

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General for the State of California, Kathleen A. Kenealy, Senior
Assistant Attorney General, Frank R. Lindh, Harvey Y. Morris,
Gregory Heiden, Joseph B. Nelson, Michael Postar, and
Bhaveeta K. Mody were on the brief for intervenors California
Department of Water Resources, et al. in support of respondent.
Lisa S. Gast and Natalie M. Karas entered appearances.
Before: ROGERS, Circuit Judge, and GINSBURG and
SENTELLE, Senior Circuit Judges.
Opinion for the Court by Circuit Judge ROGERS.
ROGERS, Circuit Judge: Before the court is a challenge to
the regulatory mechanism for the recovery by an investor-owned
public utility of the cost of three transmission projects in its
transmission rates. In 2007, the Federal Energy Regulatory
Commission granted various rate incentives to encourage the
construction of three projects by the Southern California Edison
Company (“SoCal Edison”). The beneficial rate treatment
included incentives to be added to a base rate of return for the
projects. Later that year, SoCal Edison filed revisions to its
transmission tariff, pursuant to section 205 of the Federal Power
Act (“FPA”), 16 U.S.C. § 824d, to reflect changes to its
transmission revenue requirements and rates, implementing the
rate incentives and proposing a base return on equity (“ROE”).
The Commission concluded that SoCal Edison’s base ROE
should be set at the median, rather than the midpoint as SoCal
Edison proposed, of the range established by a proxy group of
publicly-traded companies, and that the ROE for the locked-in
period (March 1, 2008 to December 31, 2008, when the rate at
issue was in effect) should be updated to reflect the most
recently available financial data, based on the average yields on
ten-year U.S. Treasury bonds. SoCal Edison challenges the
Commission’s use of the median as contrary to FPA § 205, its

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updating without considering proffered evidence as contrary to
5 U.S.C. § 556(e), and both its use of the median and its
updating of the ROE for the locked-in period as arbitrary and
capricious. We deny the petition as to the Commission’s
methodology for measuring the ROE, and we grant the petition
and remand in view of the Commission’s failure to comply with
5 U.S.C. § 556(e) when it updated the ROE with information
outside the record.
I.
In order to attract capital investment for construction of
transmission facilities, a utility must offer a risk-adjusted
expected ROE sufficient to attract investors. See Canadian
Ass’n of Petroleum Producers v. FERC, 254 F.3d 289, 293
(D.C. Cir. 2001). To calculate the ROE, the Commission
“measures the return enjoyed by the company’s equity investors
by the discounted cash flow (‘DCF’) model, which assumes that
a stock’s price is equal to the present value of the infinite stream
of expected dividends discounted at a market rate commensurate
with the stock’s risk.” Id. When a utility is not publicly traded,
key values needed to calculate the ROE are missing, and the
Commission must resort to more roundabout estimations,
including relying on the ROEs of comparable publicly-traded
companies, termed a proxy group. See Pub. Serv. Comm’n of
Ky. v. FERC, 397 F.3d 1004, 1006–07 (D.C. Cir. 2005)
(“Midwest ISO”); Canadian Ass’n, 254 F.3d at 293–94.
Adjusting that range by applying screens to exclude
unrepresentative high or low rates of return, see Canadian
Ass’n, 254 F.3d at 294, the Commission assembles a zone of
reasonable ROEs on which to base a utility’s ROE. Pursuant to
the Energy Policy Act of 2005, the Commission has also
established incentive-based rate treatments to further encourage
the construction of transmission facilities and replacement of
aging transmission infrastructure. See 16 U.S.C. § 824s;

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Promoting Transmission Investment Through Pricing Reform,
Order No. 679, 71 Fed. Reg. 43,294 (July 20, 2006), order on
reh’g, Order No. 679-A, 72 Fed. Reg. 1152 (Dec. 22, 2006),
order on reh’g, 119 FERC ¶ 61,062 (2007).
In November 2007, the Commission approved incentive rate
treatment for SoCal Edison’s construction of three transmission
projects, including rate adders of 0.75% for the Rancho Vista
Project, 1.25% for the Devers-Palo Verde II (“DPV2”) and
Tehachapi Projects; 0.50% across the board for joining the
California Independent System Operator; and 100% recovery for
Construction Work In Progress (“CWIP”) for the projects. S.
Cal. Edison Co., Order Granting Petition for Declaratory Order,
121 FERC ¶ 61,168 (2007) (“Incentives Order”), reh’g denied,
123 FERC ¶ 61,293 (2008). The following month, SoCal
Edison filed revisions to its transmission tariff, pursuant to FPA
§ 205, to implement the Incentives Order and propose a base
ROE of 11.5% for the three transmission projects, which were
estimated to have capital expenditures of approximately $2.5
billion, see Incentives Order, 121 FERC at ¶ 61,753. SoCal
Edison followed the DCF methodology, screened a national
proxy group, and proposed a base ROE of 11.5% by reference
to the midpoint (12.07%) of that group. It calculated total
ROEs, including incentives, that ranged from 12.75% to
13.25%: 12.75% for the Rancho Vista Project and 13.25% for
both the DPV2 and Tehachapi Projects.
The Commission accepted the tariff revisions subject to
conditions, preliminarily determined (using a different proxy
group and screening criteria than in SoCal Edison’s application)
that the zone of reasonableness ranged from 7.97% to 13.67%
(putting SoCal Edison’s proposed overall ROEs within the upper
end), and ordered a paper hearing to allow all parties to “present
evidence to rebut the proposed ROE determination.” S. Cal.
Edison Co., Order Accepting Tariff Revisions, Subject to

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Conditions and Establishing Paper Hearing, 122 FERC ¶ 61,187,
¶ 62,069 (2008). The California Public Utilities Commission
sought rehearing and, as relevant, also commented in the Paper
Hearing that the Commission should update the ROE based
upon changes in the ten-year U.S. Treasury bond rate, as it had
done in the past. The California Department of Water
Resources commented in part that the Commission should use
the median, not the midpoint, in determining the ROE. Six
California cities urged, in protests, updating and use of the
median. SoCal Edison responded that the midpoint, not the
median, was consistent with a long line of Commission
precedent for determining the ROE for electric utilities and was
appropriate for its base ROE, as well as that Commission hints
of a change of policy without explanation were arbitrary and
capricious. SoCal Edison, offering expert testimony of Dr. Paul
T. Hunt, argued that the midpoint emphasizes the range of the
proxy group returns, the median causes distortions because it
disregards that range, and the median produces lower ROEs
thereby undermining the goal of Congress and the Commission
of expanding the transmission grid. It also urged the
Commission to use proxy group data as of November 30, 2007
and not to use more recent data or update the ROE based upon
the ten-year Treasury bond yields.
The Commission was not persuaded by SoCal Edison’s
arguments. Upon consideration of comments submitted at the
Paper Hearing, the Commission determined the appropriate
proxy group, found that the zone of reasonableness was between
7.80% and 16.19%, and set SoCal Edison’s base ROE at the
median of that zone, 10.55%. S. Cal. Edison Co., Order on
Paper Hearing and Request for Rehearing, 131 FERC ¶ 61,020,
¶¶ 61,141, 61,145-47 (2010) (“Paper Hearing Order”). It also
updated the ROE for the locked-in period (March 1, 2008 to
December 31, 2008) when the rate at issue was in effect, relying
on extra-record data, to reflect a 1.01% reduction in the ten-year

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U.S. Treasury bond yields and so reducing SoCal Edison’s base
ROE from 10.55% to 9.54%. Id. at ¶¶ 61,147-48. The
Commission denied rehearing. S. Cal. Edison Co., Order on
Rehearing and Clarification, 137 FERC ¶ 61,016 (2011)
(“Rehearing Order”).1
II.
SoCal Edison’s challenge to the Commission’s use of the
median, instead of the midpoint, to measure the base ROE of a
single electric utility of average risk includes a statutory
argument that effectively devolves into an argument that the
Commission’s use of the median was arbitrary and capricious.
However viewed, SoCal Edison’s contentions face an uphill
battle. As the Supreme Court has observed, “[t]he statutory
requirement that rates be ‘just and reasonable’ is obviously
incapable of precise judicial definition, and we afford great
deference to the Commission in its rate decisions.” Morgan
Stanley Capital Grp., Inc., 554 U.S. 527, 532 (2008) (citations
omitted). Under the deferential arbitrary and capricious
standard, 5 U.S.C. § 706(2)(A), the court will “affirm the
Commission’s orders so long as [it] examined the relevant data
and articulated a . . . rational connection between the facts found
and the choice made. In matters of ratemaking, our review is
highly deferential, as issues of rate design are fairly technical
and, insofar as they are not technical, involve policy judgments

1

The Rehearing Order also addressed SoCal Edison’s
challenges to two other Commission orders requiring it to use the
median in setting its ROE, S. Cal. Edison Co., Order Accepting and
Suspending Proposed Rates and Establishing Hearing and Settlement
Judge Proceedings, 133 FERC ¶ 61,269 (2010), and S. Cal. Edison
Co., Order Accepting and Suspending Proposed Formula Rate Filing
and Establishing Hearing and Settlement Judge Procedures, 136 FERC
¶ 61,074 (2011). Rehearing Order, 137 FERC ¶ 61,016.

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that lie at the core of the regulatory mission.” Sacramento Mun.
Util. Dist. v. FERC, 616 F.3d 520, 528 (D.C. Cir. 2010)
(citation, quotation marks, and alterations omitted). This court’s
“scrutiny is limited to ensuring that the Commission has made
a principled and reasoned decision supported by the evidentiary
record.” Complex Consol. Edison Co. of N.Y., Inc. v. FERC,
165 F.3d 992, 1000–01 (D.C. Cir. 1999) (citation omitted).
Under FPA § 205(e), 16 U.S.C. § 824d(e), “the burden of
proof to show that the increased rate or charge is just and
reasonable shall be upon the public utility.” The Commission,
however, must “approve th[e increase] as long as the new rates
are ‘just and reasonable.’” Wis. Pub. Power, Inc. v. FERC, 493
F.3d 239, 254 (D.C. Cir. 2007) (citation omitted); see Atl. City
Elec. Co. v. FERC, 295 F.3d 1, 9 (D.C. Cir. 2002). SoCal
Edison therefore contends that “if a utility proposes use of the
midpoint in a Section 205 filing and the use of the midpoint is
just and reasonable, then under the statute [the Commission]
must accept it.” Pet’r’s Br. 25. By SoCal Edison’s reading, the
Commission did not conclude in the challenged orders that it
had failed to prove the midpoint was just and reasonable, and
under the FPA without so concluding the Commission could not
reject its proposed rate. See id. at 25–28.
The Commission rejected SoCal Edison’s midpoint-based
ROE upon concluding that for a single electric utility of average
risk “the best measure of central tendency is the median,” Paper
Hearing Order, 131 FERC at ¶ 61,147, and stating that it was
“not persuaded that our established procedures for determining
a[] ROE for a utility of average risk are not just and reasonable
for setting SoCal Edison’s ROE,” Rehearing Order, 137 FERC
at ¶ 61,068. SoCal Edison correctly points out that the
Commission did not expressly state that its use of the midpoint
was not just and reasonable, but neither has this court required
the Commission to do so with respect to a component of a

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proposed rate. To the extent SoCal Edison maintains that a “just
and reasonable” rate is a zone and not a point, suggesting that
there is room for both the midpoint and the median to meet the
statutory standard, see Pet’r’s Br. 26, whether any space exists
between the median being just and reasonable and the midpoint
not being so is a subset of the question of what rate is “just and
reasonable.” And SoCal Edison’s counsel understandably
acknowledged that the Commission has discretion regarding the
methodology by which it determines whether a rate is just and
reasonable. See Oral Arg. Tr. at 5; Fed. Power Comm’n v. Hope
Natural Gas Co., 320 U.S. 591, 602 (1944).
Despite SoCal Edison’s use of cherry picked phrases from
the Paper Hearing Order to imply that the Commission simply
chose the median as “preferable,” 131 FERC at ¶ 61,145, and
not because the midpoint-based ROE SoCal Edison proposed
was not “just and reasonable,” Reply Br. 4, the Commission did
not hold SoCal Edison to a higher standard than the FPA
requires. Rather, the Commission concluded that the median
methodology was preferable and it may, consistent with the
FPA, reject a utility’s proposed methodology without assessing
the justness or reasonableness of that methodology. In order to
discharge its statutory duty of ensuring that “[a]ll rates . . . [are]
just and reasonable,” 16 U.S.C. § 824d(a), the Commission may
require the use of a particular ratemaking methodology so long
as its embrace of that methodology is not arbitrary and
capricious. The Supreme Court explained in Hope Natural
Gas, “[u]nder the statutory standard of ‘just and reasonable’ it
is the result reached not the method employed which is
controlling” and “infirmities” in Commission methodology are
“not . . . important,” provided that “the total effect of the rate
order cannot be said to be unjust and unreasonable.” 320 U.S.
at 602 (citations omitted). Indeed, SoCal Edison essentially
concedes in footnote 2 of its Reply Brief that its statutory
argument collapses into its argument that the Commission’s use

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of the median for a single electric utility of average risk is
arbitrary and capricious because the Commission has previously
determined, and this court has affirmed, that the midpoint is a
just and reasonable measure of the ROE for a group of electric
utilities with diverse risk profiles. This it fails to show, in part
because the Commission’s “endorsement of the median of the
proxy group results produced by the DCF methodology to
determine an individual electric utility’s ROE represents the
logical development of [the Commission’s] ROE policy over the
past fifteen years.” Intervenors’ Br. 9.
Under the Natural Gas Act, the Commission has long used
the median to set the ROE. In Transcontinental Gas Pipe Line
Corp., 84 FERC ¶ 61,084 (1998), the Commission concluded
that for a company of average risk, the ROE should be set at the
median because doing so “giv[es] consideration to more of the
companies in the proxy group, rather than only those at the top
and the bottom,” and “will lessen the impact of any single proxy
company whose ROE is atypically high or low.” Following a
remand in Canadian Association, 254 F.3d 289, the Commission
elaborated the median’s “important advantages over the mean
and midpoint approaches in determining central tendency,”
Northwest Pipeline Corp., 99 FERC ¶ 61,305, ¶ 62,276 (2002),
specifically noting that the median best represents central
tendency in a skewed distribution, is less affected by extreme
numbers than the midpoint, and aids the Commission’s effort to
treat all companies of average risk equally.
By contrast, until 2008, the Commission used the midpoint
to establish the ROE for both individual electric utilities of
average risk, see, e.g., Consumers Energy Co., 98 FERC ¶
61,333 (2002), and diverse-risk electric utilities filing jointly,
see, e.g., Midwest Indep. Transmission Sys. Operator, Inc., 106
FERC ¶ 61,302 (2004) (“Midwest ISO”). In determining the
ROE for “a broad group of [electric] utilities with diverse risks

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and business profiles,” the Commission explained that it used
the midpoint because “[s]electing the most refined measure of
central tendency, as might be achieved with use of the median,
is not the Commission’s goal in [such a] case, given that [it is]
not selecting a ROE for a single utility of average risk.”
Midwest ISO, 106 FERC at ¶ 62,192. Rather, in selecting the
ROE for a diverse set of electric companies “the range of results
becomes as important as the central value,” and the midpoint,
“unlike the other measures of central tendency,” fully considers
that range. Midwest ISO, 397 F.3d at 1010.
In 2008, the Commission announced in Golden Spread
Electric Coop., Inc., 123 FERC ¶ 61,047 (2008), that it would
use the median as the measure of the ROE for a single electric
utility of average risk. Drawing on the distinction identified in
Midwest ISO, and the advantages of using the median noted in
Transcontinental Gas, the Commission observed that, although
there were no concerns of extremes in that case, “using the
median also has the advantage of taking into account more of
the companies in a proxy group rather than only those at the top
and bottom.” Id. at ¶ 61,1247. Since then, the Commission has
continued to use the median to set the ROE for electric utilities
filing individually. See, e.g., Pub. Serv. Co. of N.M., 142 FERC
¶ 61,168 (2013); Pac. Gas & Elec. Co., 141 FERC ¶ 61,168
(2012); Pub. Serv. Co. of N.M., 137 FERC ¶ 61,119 (2011);
Pioneer Transmission, LLC, 126 FERC ¶ 61,281 (2009); Va.
Elec. & Power Co., 123 FERC ¶ 61,098 (2008). It has
continued, however, using the midpoint for electric utilities
applying jointly as a regional group.
This is the first time a challenge to the Commission’s use of
the median for an individual electric utility of average risk has
come before the court. SoCal Edison contends that the
Commission still has provided an inadequate justification for its
policy change. Essentially, SoCal Edison maintains that it is

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arbitrary and capricious for the Commission to “treat[] the same
utility—with the same risk profile—differently, depending upon
the context in which the utility files a[] ROE application” (singly
or as part of a group) since “this context does not in any way
affect the ROE that a utility needs to earn in order to attract
investors, maintain a reliable energy infrastructure, and serve its
customers.” Pet’r’s Br. 19. The record shows that the
Commission has not “glosse[d] over or swerve[d] from prior
precedents without discussion [so as to] cross the line from
tolerably terse to intolerably mute.” W & M Props. of Conn.,
Inc. v. NLRB, 514 F.3d 1341, 1347 (D.C. Cir. 2008) (citation
and quotation marks omitted). Nor has it failed to conform to
the requirement of FCC v. Fox Television Stations, Inc., 556
U.S. 502, 514–16 (2009), that it acknowledge its change and
provide a reasoned explanation for it.
In the Paper Hearing Order, the Commission explained
why it had changed its policy for an individual electric utility:
[W]hile SoCal Edison is correct that the Commission
has traditionally used the midpoint for setting the ROE
in electric proceedings and the median in gas
proceedings, as the electric and gas industries have
evolved, the Commission finds that, when establishing
the ROE of an individual utility, there is no longer a
sufficient basis for divergent approaches to
determining the middle of the range of reasonable
returns in the gas and electric industries. Rather, the
Commission finds that here, the median is appropriate
because it is the most accurate measure of central
tendency for a single utility of average risk, such as
SoCal Edison.
131 FERC at ¶ 61,147 (emphases added). (As intervenors note,
the gas industry restructuring preceded the electric industry

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restructuring by a number of years. See Intervenors’ Br. 11–12
& n.10 (citing Transmission Access Policy Study Grp. v. FERC,
225 F.3d 667, 681–83 (D.C. Cir. 2000), aff’d sub nom. New
York v. FERC, 535 U.S. 1 (2002))). Looking to its gas cases
such as Transcontinental Gas and Northwest Pipeline to explain
the “benefits of using the median rather than the midpoint to set
the ROE for a company of average risk,” the Commission
concluded that the median was the “most accurate measure” for
a ROE for a single electric utility of average risk. Paper
Hearing Order, 131 FERC at ¶¶ 61,145–47. It gave three
principal reasons: (1) “[T]he median lessens the impact of
atypical outliers in the proxy group,” id. at ¶ 61,145; (2) The
median “gives consideration to more of the companies in the
proxy group, rather than only those at the top and bottom,” id.
(citation and quotation marks omitted); and (3)
“The laws of statistics support the Commission’s use
of the median in setting [the] ROE for a company
facing average risk because it has important advantages
over the mean and midpoint approaches in determining
central tendency. The median best represents central
tendency in a skewed distribution over the mean
because the latter is drawn in the direction of the skew
more than the median. That is, in a very positively
skewed distribution, the mean will be higher than the
median. In a very negatively skewed distribution, the
mean will be lower than the median. These statistical
facts make the median an appropriate average to use to
represent the typical observation in a skewed
distribution because it is less affected by extreme
numbers than the mean. Similarly, the median is also
less affected by extreme numbers than the midpoint in
a skewed distribution. Since the midpoint is the
average of the highest and lowest numbers in the

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group, it is clearly subject to distortion by extremely
high or low values.”
Id. at ¶¶ 61,145–46 (quoting Northwest Pipeline, 99 FERC at ¶
62,276). The Commission stated as well that “the median is
preferable to the midpoint or mean because it aids the
Commission in its effort to treat all companies that face average
risk equally.” Id. at ¶ 61,145.
Given these reasons and the evolution of the gas and
electric industries, the Commission concluded in the Paper
Hearing Order that “when establishing the ROE of an individual
utility, there is no longer a sufficient basis for divergent
approaches to determining the middle of the range of reasonable
returns in the gas and electric industries.” Id. at ¶ 61,147. The
Commission distinguished cases cited by SoCal Edison as
involving either a diverse group of utilities, id. ¶ 61,146 (citing,
e.g., Devon Power Co., 104 FERC ¶ 61,123 (2003)), or cases in
which “the issue of how to determine the middle of the range
when setting the ROE for a single utility of average risk was not
specifically raised by the parties or addressed by the
Commission,” id. (citing, e.g., Norwalk Power, LLC, 120 FERC
¶ 61,048 (2007)). SoCal Edison continues to rely on these cases
in its brief to no avail, for reasons the Commission identified.
And the Commission explained that its prior cases that had
distinguished “between the gas and the electric industries with
regard to the DCF analysis . . . pertained to the differences in the
relative growth rates of each industry, and not to the measure of
central tendency.” Id.
The Commission also explained that its decision to apply
the midpoint in Midwest ISO occurred in the “unique
circumstances” in which “the ROE was going to apply to a
diverse group of companies, rather than to a single company of
average risk, [and so] it was important to consider the entire

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range of results yielded by the proxy group.” Id. In those
circumstances, it was “less concerned about distortions that may
occur because of the highest or lowest number,” and “instead, it
must ensure that the base ROE sufficiently supports the entities
that have ventured into the [Regional Transmission
Organization] membership and that [the base ROE] results in a
reasonable rate of return as applied to all the companies in the
group.” Id. The Commission emphasized that “the median
places more weight on the middle values of a range of values
than does the midpoint, and thus, it potentially produces a value
that is not appropriate for a diverse group of utilities.” Id. It
underscored that “it was not seeking the most refined measure
of central tendency, which might be achieved with the median,
because it was not establishing a[] ROE for a single company of
average risk.” Id. ¶ 61,147.
On rehearing, the Commission reaffirmed that its approach
of using the median “recognizes important differences in the
purpose of the analysis that the Commission conducts when it
sets a[] ROE for an individual utility rather than for a group
comprising all of the utilities within an [Independent System
Operator].” Rehearing Order, 137 FERC at ¶ 61,068. That is,
when setting the “ROE for an individual utility, [its] analysis is
designed to address the risks of the individual utility,” id.
whereas with a group of utilities with differing risks and
business profiles, see id. ¶ 61,069, the goal is “not to select the
most refined measure of central tendency, as is the case when .
. . setting a[] ROE for a single utility of average risk,” id. The
Commission emphasized that in explaining its use of the
midpoint in Midwest ISO, it had stated that it was not
considering “what constitutes the best overall method for
determining ROE generically (i.e., the midpoint versus the
median or mean),” but only in the unique circumstances of
setting the ROE for a diverse group of transmission owners. Id.
(citation and quotation marks omitted).

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Absent continuing reasons to treat the electric and gas
industries differently, the Commission identified its changed
policy and provided principled reasons for using the median to
establish SoCal Edison’s base ROE. The Commission was
under no obligation to “demonstrate . . . that the reasons for the
new policy are better than the reasons for the old one; it suffices
that the new policy is permissible under the statute, that there are
good reasons for it, and that the agency believes it to be better,
which the conscious change of course adequately indicates.”
Fox Television, 556 U.S. at 515. The challenged orders reflect
that belief for the use of the median to measure the ROE for a
single electric utility of average risk.
Contrary to SoCal Edison’s position, the Commission did
not apply “different standards to similarly situated entities and
fail[] to support this disparate treatment with a reasoned
explanation and substantial evidence in the record.” Burlington
N. & Santa Fe Ry. Co. v. Surface Transp. Bd., 403 F.3d 771, 777
(D.C. Cir. 2005). The Commission instead explained how its
different purposes determine its different approaches when
setting the ROE for a single electric utility as opposed to a group
of utilities with diverse risk profiles. As described, the
Commission’s “goal in setting a[] ROE for a group comprising
all members of a[] [Regional Transmission Organization] is not
to select the most refined measure of central tendency, as is the
case when the Commission is setting a[] ROE for a single utility
of average risk,” Rehearing Order, 137 FERC at ¶ 61,069,
because in the context of a diverse group of companies the
Commission is “not as concerned” that “the high or low results
represent different risks from the single company,” id. (citation
and quotation marks omitted); see Intervenors’ Br. 22–24.
Rather, it must ensure that the ROE results in a reasonable rate
of return as applied to all of the utilities in the group. See Paper
Hearing Order, 131 FERC at ¶¶ 61,146–47.

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Likewise, SoCal Edison’s assertion that it and individually
filing electric utilities generally are disadvantaged by the
Commission’s use of the median instead of the midpoint does
not withstand scrutiny. In Midwest ISO, the court stated:
If FERC’s orders premised a policy of using the
midpoint on an effort to obtain the highest rate of
return, the orders could not withstand APA review.
This is because there would be no logical connection
between the rationale and the result: nothing about the
midpoint ensures it will be higher than the median or
the mean in any particular case. Of course, FERC
could have explained that it would always choose the
measure that yields the highest result, and tried to
defend that rationale here. But the Commission cannot
justify a commitment to the midpoint on the ground that
it produced the highest return, because that is pure
happenstance.
397 F.3d at 1011. So too here. Nothing about the midpoint
ensures that it will be higher than the median in any particular
instance, as SoCal Edison’s own expert confirms, see Prepared
Supplemental Testimony of Dr. Paul T. Hunt at 21 (May 2,
2008). So the use of the median does not necessarily
disadvantage single filing electric utilities, and it is only by
“pure happenstance” that the midpoint is higher than the median
here. Hence, SoCal Edison fails to show that the Commission’s
use of the median for single utilities of average risk and the
midpoint when determining a generic ROE for a diverse-risk
group of electric utilities necessarily disadvantages single
electric utilities or violates the principle that “the return to the
equity owner should be commensurate with returns on
investments in other enterprises having corresponding risks.”
Hope Natural Gas, 320 U.S. at 603.

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SoCal Edison’s more technical arguments fare no better. Its
suggestion that because the Commission screens the proxy
group for atypically high or low ROEs, the Commission is not
justified in using the median to lessen the impact of extreme
data points is flawed. Although the use of screening parameters
lessens the effect of high or low data points, the Commission’s
basic point is that use of the median, as a mathematical
principle, reduces the influence of extremes, see Northwest
Pipeline, 99 FERC at ¶ 62,276 (citing Robert D. Mason,
STATISTICAL TECHNIQUES IN BUSINESS AND ECONOMICS 86–87
(3d ed. 1974); A.J. Jaffe & Herbert F. Spirer, MISUSED
STATISTICS STRAIGHT TALK FOR TWISTED NUMBERS 90 (1987)).
SoCal Edison is also incorrect when it suggests that in Canadian
Association the court “rejected” the view that the median is
preferable because it shows consideration of more companies in
the proxy group, see Pet’r’s Br. 34. The court concluded only
that the midpoint does not “completely disregard” the central
data points, 254 F.3d at 298, which does not undermine the
Commission’s embrace of the median here. Indeed, the court
stated that the median’s consideration of more data points might
be “acceptable as an explanation for choosing the median over
the midpoint.” Id.
III.
SoCal Edison also contends that, in updating its ROE, the
Commission erred by taking official notice of the change in U.S.
Treasury bond yields as a proxy for its private cost of capital
during the locked-in period without affording it an opportunity
to show to the contrary. SoCal Edison does not contest the fact
of the change in the Treasury bond yields or the Commission’s
updating policy in general. Instead, because rehearing was its
first opportunity to respond to the officially noticed data, SoCal
Edison maintains that the Commission erred, to SoCal Edison’s

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prejudice, in refusing to consider proffered expert analysis of the
unique conditions of the 2008 market collapse.
Section 556(e) of the Administrative Procedure Act
(“APA”) provides, “[w]hen an agency decision rests on official
notice of a material fact not appearing in the evidence in the
record, a party is entitled, on timely request, to an opportunity
to show the contrary.” 5 U.S.C. § 556(e). In Union Electric Co.
v. FERC, 890 F.2d 1193 (D.C. Cir. 1989), the court interpreted
§ 556(e) in light of pre-APA decisions involving challenges to
official notice, identifying two prerequisites: “First, the
information noticed must be appropriate for official notice.
Second, the agency must follow proper procedures in using the
information, disclosing it to the parties and affording them a
suitable opportunity to contradict it or ‘parry its effect.’” Id. at
1202. The court viewed Treasury bond rates to be a type of
information that was appropriate for official notice because such
information is not typically subject to dispute. Id. at 1202–03.
Union Electric, however, had raised “substantial objections” to
the Commission’s apparent assumption of a linear relationship
between the trend for Treasury bond rates and Union Electric’s
cost of equity capital. Id. at 1203. The court held that, despite
Union Electric’s “partial opportunity” to oppose the
Commission’s updating, id., the Commission failed to “either
accept[] or appropriately refute[]” the company’s evidence and
“broader attack on [the Commission’s] use of the Treasury bond
rates,” id. at 1203–04; see also Gutierrez-Rogue v. INS, 954 F.2d
769, 773 (D.C. Cir. 1992) (due process guarantees “the right to
challenge an officially noticed fact—with respect both to its
truth and its significance.” (citations omitted)).
The Commission took official notice, after the record had
closed, of the average ten-year U.S. Treasury bond yields during
the locked-in period (March 1, 2008 to December 31, 2008).
See Paper Hearing Order, 131 FERC at ¶¶ 61,147–48. In

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response, SoCal Edison proffered on rehearing an affidavit of its
expert stating that those yields were not a rational proxy for its
private cost of capital due to the unusual economic conditions in
late 2008. In a nutshell, this was so because the spread between
the U.S. Treasury bond yields and the rates on corporate bonds
increased, as investors fled from riskier corporate investments
to less risky Treasury bonds, reaching proportions not seen since
April 1933. See Aff. of Dr. Paul T. Hunt at 6–8 (May 17,
2010). This analysis could not have been submitted during
previous proceedings because the critical economic changes
occurred months after SoCal Edison’s final Paper Hearing brief
was filed in May 2008.
The Commission nonetheless declined to consider the
affidavit, noting its general rule that once the record is closed it
will not be reopened and that it generally does not allow new
evidence to be introduced at the rehearing stage. Rehearing
Order, 137 FERC at ¶¶ 61,066–67. The Commission explained
that its “precedent requiring updating ROEs has been applied
over the course of more than 25 years, during which time the
U.S. economy has experienced many fluctuations,” Rehearing
Order, 137 FERC at ¶ 61,070, and that “[r]egardless of whether
the ten-year bonds perfectly capture every short-term variation
in the costs of equity, we continue to find . . . [that] over time
the ten-year bond index continues to be a reliable barometer of
overall market conditions.” Id. at ¶ 61,071 (citation and
quotation marks omitted). The Commission also observes that
Union Electric did “‘not draw in question the Commission’s
past practice of making post-hearing adjustments within a range
of reasonableness previously determined on the record,’”
Resp’t’s Br. 40 (quoting Union Electric, 890 F.2d at 1204), and
that its updating practice was approved in Boston Edison Co. v.
FERC, 885 F.2d 962, 966–69 (1st Cir. 1989). All true, but off
point. The petitioner in Boston Edison did not explain how its
submission showed that a significant downward adjustment to

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reflect lower interest rates was inappropriate. Id. at 967.
Consequently, the First Circuit concluded that even if utility
share returns do not exactly track changes in the Treasury rates,
the Commission’s downward adjustment was “perfectly
reasonable” because the ultimate rate order was not unjust and
unreasonable. Id. (citing Hope Natural Gas, 320 U.S. at 602).
The record here, as in Union Electric, is different.
Application of the updating policy without regard to SoCal
Edison’s expert affidavit illustrates how material such an
officially noticed fact can be. On the basis of the decline of the
Treasury bond rates during the locked-in period, the
Commission reduced SoCal Edison’s base ROE by 101 basis
points (1.01%), from 10.55% to 9.54%. See Paper Hearing
Order, 131 FERC at ¶ 61,148. This makes it somewhat odd that
the Commission would turn a blind eye to the information
SoCal Edison proffered on rehearing. The Commission does
not suggest that it has applied the updating policy in such
extreme economic circumstances as occurred in late 2008.
SoCal Edison thus made the necessary “good showing” that it
could contest the significance of the Commission’s officially
noticed information based on “a[] flaw in the evidence.” BNSF
Ry. Co. v. Surface Transp. Bd., 453 F.3d 473, 486 (D.C. Cir.
2006); see also Tenn. Gas Pipeline Co. v. FERC, 926 F.2d
1206, 1210 (D.C. Cir. 1991). Although the Commission
responded to SoCal Edison’s objections at an abstract level, and
noted SoCal’s argument that the corporate and Treasury bond
“rates were inversely related and, therefore, not rationally
related,” Rehearing Order, 137 FERC at ¶ 61,070, it never
confronted the gravity of the economic downturn or the
magnitude of the yield spread as public and private bond rates
moved in opposite directions. Under § 556(e), the Commission
was obligated to consider and appropriately respond to SoCal
Edison’s effort “to parry the effect” of the officially noticed
information. Because we afford SoCal Edison relief under §

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556(e), we need not reach its contention that the Commission
was arbitrary and capricious in applying its updating policy
despite SoCal Edison’s evidence, i.e., the proffered affidavit of
Dr. Hunt.
Accordingly, we grant the petition in part and deny the
petition in part, and remand the case to the Commission for
further proceedings.

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