## Facts

- Northwest Pipeline Corp., a privately held interstate natural-gas pipeline, filed a Natural Gas Act § 4 rate case seeking increased rates to recover expansion costs.
- A disputed question was Northwest’s allowed return on equity (ROE), which FERC had to estimate without market-traded equity data for Northwest.
- FERC used a discounted cash flow (DCF) model applied to a proxy group of five publicly traded pipeline companies to estimate investors’ required ROE.
- From the resulting ROE range, FERC selected the median value as Northwest’s allowed ROE.
- Purchasers of natural gas and local distribution companies (including CAPP) argued that the median overstated a fair ROE and urged FERC to use the average of the three middle proxy-group results (excluding the highest and lowest observations).
- FERC described the conceptual difference between a median and an average but did not clearly explain why the median better addressed the purchasers’ objections regarding outliers and the appropriate placement within the proxy-group range.

## Issues

1. Whether FERC acted arbitrarily and capriciously by selecting the median ROE from a five-company proxy group without adequately responding to parties’ material objections advocating a trimmed-mean approach.
2. Whether FERC’s explanation satisfied the Administrative Procedure Act requirement of reasoned decisionmaking sufficient to permit judicial review.

## Decision

- The D.C. Circuit granted the petitions in part and remanded to FERC for further explanation.
- The court held that FERC failed to provide an adequate, reasoned explanation for choosing the median over the proposed trimmed mean in light of record-based objections.
- The court did not hold that use of the median is unlawful; it required FERC to reexamine and justify its selection (or choose another measure) with a reasoned explanation.

## Legal Principles

- Under the APA arbitrary-and-capricious standard, an agency must examine relevant data, articulate a rational connection between facts found and choices made, and respond meaningfully to significant arguments.
- FERC has broad discretion in natural-gas ratemaking to use DCF analysis and proxy groups to estimate ROE for non-publicly traded entities.
- When a party raises a non-frivolous, potentially outcome-determinative objection to how an agency applies its methodology (including selection of a statistical measure), the agency must address that objection with sufficient clarity to allow judicial review.
- An agency’s failure to explain a central methodological choice in response to material objections warrants remand even if the general methodology is permissible.

## Conclusion

The D.C. Circuit required FERC to provide a reasoned explanation for selecting the proxy-group median ROE rather than a trimmed-mean alternative, remanding because the agency’s orders did not adequately address record-based objections as required by the APA.


Canadian Ass'n of Petroleum Producers v. FERC, 254 F.3d 289 (D.C. Cir. 2001)