## Facts

- A regulated electric utility sought incentive rate treatment for three major transmission projects costing about $2.5 billion.
- The utility filed tariff revisions proposing a base 11.5% return on equity (ROE) plus project-specific incentive adders.
- The agency accepted the filing subject to conditions and set a paper hearing to determine the base ROE using the discounted cash flow (DCF) method.
- Using a proxy group and DCF analysis, the agency established a “zone of reasonableness” of 7.80%–16.19% and set a 10.55% base ROE as the zone’s median.
- After the paper hearing closed, 10-year U.S. Treasury yields fell by 1.01 percentage points.
- The agency took official notice of the Treasury-yield drop and reduced the base ROE from 10.55% to 9.54%, treating the yield change as a proxy for changes in equity capital costs during the locked-in period.
- The utility sought rehearing and requested an opportunity to submit expert evidence that Treasury yields were an unreliable proxy for equity costs during the financial crisis; the agency denied rehearing and refused to reopen the record.

## Issues

1. Whether the agency acted arbitrarily or capriciously by selecting the median, rather than the midpoint, of the DCF zone of reasonableness to set a base ROE for a single utility of average risk.
2. Whether the agency unlawfully adjusted the ROE after the hearing by taking official notice of Treasury yields without giving a meaningful opportunity to rebut and without substantial record evidence supporting the new ROE.

## Decision

- The court affirmed the agency’s choice of the median (10.55%) within the DCF zone as the base ROE for an average-risk utility.
- The court vacated the post-hearing reduction to 9.54% and remanded.
- The court held that using official notice to make a quantitative, outcome-determinative ROE adjustment required a fair opportunity to respond and substantial evidentiary support in the record.

## Legal Principles

- Under the Federal Power Act, the agency must set rates that are just and reasonable, typically by selecting an ROE within a DCF-derived “zone of reasonableness.”
- Courts defer to the agency’s technical ratemaking choices (including selection of a central tendency measure within the zone) when the agency provides a rational explanation consistent with the statutory standard.
- An agency may take official notice of public financial data, but it may not rely on noticed facts to supply a new, material factual premise for a core rate element without allowing affected parties a meaningful chance to rebut.
- A rate set or revised in adjudication must be supported by substantial evidence in the record; an untested assumption (such as a one-for-one relationship between Treasury yields and equity costs during atypical market conditions) is insufficient.

## Conclusion

The court upheld the agency’s use of the median DCF result to set the base ROE as adequately explained and within the zone of reasonableness, but vacated and remanded the later ROE reduction because the agency relied on post-hearing noticed Treasury-yield changes without permitting rebuttal evidence and without substantial record support for the specific adjusted ROE.


S. Cal. Edison Co. v. FERC, 717 F.3d 177 (D.C. Cir. 2013)