## Facts

- Union Electric Company placed the Callaway nuclear plant into service in December 1984; including Callaway in rate base under traditional cost-of-service principles would have increased wholesale rates by about 75%.
- To mitigate the expected rate shock, Union and its wholesale municipal customers (acting through the Wholesale Defense Group (WDG)) negotiated a framework intended to be reflected in Union’s FERC wholesale rate filing.
- The negotiated framework included, among other elements, accelerated amortization of a Westinghouse nuclear-fuel settlement over two years and phased-in rate treatment intended to smooth the rate increase associated with Callaway.
- Union filed proposed wholesale rates with FERC; an ALJ issued an initial decision that generally credited much of the parties’ approach and set a return on equity based on the evidentiary record.
- FERC issued a final order and an order on rehearing that (1) largely declined to implement the Union–WDG negotiated framework, (2) imposed an off-peak demand charge on a special class of off-peak users, and (3) adjusted the allowed return on equity using post-record Treasury bond yield changes taken by official notice, without giving Union a full opportunity to respond.
- Union petitioned for review of the return-on-equity adjustment and procedures; WDG (through two remaining municipal customers) petitioned for review of FERC’s rejection of the negotiated framework and the off-peak demand charge. The petitions were consolidated.

## Issues

1. Whether FERC lawfully rejected the Union–WDG negotiated arrangements for mitigating rate shock without an adequate, reasoned explanation consistent with its statutory duty to ensure just and reasonable rates.
2. Whether FERC’s imposition of an off-peak demand charge on a special class of off-peak users was supported by substantial evidence and a reasoned explanation grounded in cost causation.
3. Whether FERC could adjust Union’s allowed return on equity based on post-record Treasury bond data taken by official notice without affording Union a meaningful opportunity to respond.

## Decision

- The D.C. Circuit reversed FERC on all three challenged matters and remanded for further proceedings.
- The court held that FERC’s stated rationale for disregarding the Union–WDG negotiated framework was inadequately explained and could not be sustained on review.
- The court held that the off-peak demand charge lacked sufficient record support and reasoned justification.
- The court held that FERC’s use of officially noticed, post-record Treasury bond information to revise the allowed return on equity was procedurally defective because Union was not given a full and fair opportunity to respond.

## Legal Principles

- FERC may reject negotiated rate arrangements, but it must provide a reasoned explanation consistent with the Federal Power Act’s just-and-reasonable standard and its prior practice; unexplained or inconsistent treatment is arbitrary and capricious.
- Unusual rate-design features must be justified by substantial evidence and a coherent rationale tied to cost causation; departures from customary approaches require explanation grounded in the record.
- An agency may take official notice of certain facts, but if those facts materially affect the outcome, due process and record-based decisionmaking require notice and a meaningful opportunity for affected parties to contest or rebut the noticed material.

## Conclusion

The court set aside FERC’s rejection of the parties’ mitigation plan, its special off-peak demand charge, and its post-record return-on-equity adjustment based on officially noticed Treasury yields, remanding for record-based and adequately explained determinations consistent with required procedures.


Union Elec. Co. v. FERC, 890 F.2d 1193 (D.C. Cir. 1989)