Miso Transmission Owners v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 18, 2021 Decided August 9, 2022
No. 16-1325
MISO TRANSMISSION OWNERS, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
MIDCONTINENT INDEPENDENT SYSTEM OPERATOR, INC., ET
AL.,
INTERVENORS
Consolidated with 16-1326, 20-1182, 20-1240, 20-1241,
20-1248, 20-1251, 20-1267, 20-1513
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Christopher R. Jones and Matthew J. Binette argued the
causes for petitioner MISO Transmission Owners, et al. With
them on the joint briefs were Miles H. Kiger, Wendy N. Reed,
Michael J. Thompson, Victoria M. Lauterbach, Ryan J. Collins,

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Steven J. Ross, and Stacey L. Burbure. David S. Berman
entered an appearance.
David E. Pomper argued the cause for petitioners on
Return Issues. With him on the briefs were Robert A.
Weishaar, Jr., Omar Bustami, Vasiliki Karandrikas, Gerit F.
Hull, Matthew R. Rudolphi, Michael Postar, Bhaveeta K.
Mody, Sean T. Beeny, Barry Cohen, Andrea I. Sarmentero
Garzon, John Michael Adragna, James H. Holt, David Eugene
Crawford, and Benjamin Sloan.
Eric B. Wolff argued the cause for petitioners on Refund
Issues. With him on the briefs were Jane E. Rueger, Robert A.
Weishaar, Jr., Alison R. Caditz, Vasiliki Karandrikas, Omar
Bustami, Matthew R. Rudolphi, David E. Pomper, Gerit F.
Hull, Sean T. Beeny, Barry Cohen, Andrea I. Sarmentero
Garzon, Michael Postar, Bhaveeta K. Mody, James H. Holt,
David Eugene Crawford, John Michael Adragna, and
Benjamin Sloan. James K. Mitchell entered an appearance.
Jason T. Gray, Michael R. Fontham, Dana M. Shelton, and
Justin A. Swaim were on the briefs for intervenors supporting
Consumer-Side petitioners. Arthur W. Iler entered an
appearance.
Catherine P. McCarthy, Blake R. Urban, Nicholas J.
Cicale, Gary Epler, Phyllis E. Lemell, Lisa B. Luftig, Mary E.
Grover, Sean A. Atkins, David M. Gossett, S. Mark Sciarrotta,
Jeffrey M. Jakubiak, and Jennifer C. Mansh were on the brief
for amici curiae in support of Transmission Owning
petitioners.
Lona T. Perry, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent.

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With her on the brief were Matthew R. Christiansen, General
Counsel, and Robert H. Solomon, Solicitor.
Michael R. Fontham argued the cause for intervenors in
support of respondent aligned with remaining petitioners. With
him on the brief were Andrea I. Sarmentero Garzon, Matthew
R. Rudolphi, Sean T. Beeny, Barry Cohen, Benjamin Sloan,
Joshua E. Adrian, Gerit F. Hull, James H. Holt, David Eugene
Crawford, Robert A. Weishaar, Jr., David E. Pomper, Vasiliki
Karandrikas, Omar Bustami, Michael Postar, Bhaveeta K.
Mody, Dana M. Shelton, Justin A. Swaim, Deborah A. Moss,
Jason T. Gray, and Emerson J. Hilton. Arthur W. Iler entered
an appearance.
Matthew J. Binette argued the cause for intervenors in
support of respondent. With him on the joint brief were Steven
J. Ross, Stacey L. Burbure, Wendy N. Reed, Michael J.
Thompson, Victoria M. Lauterbach, Ryan J. Collins,
Christopher R. Jones, and Miles H. Kiger. David S. Berman
entered an appearance.
Before: SRINIVASAN, Chief Judge, KATSAS and WALKER,
Circuit Judges.
Opinion for the Court filed by Circuit Judge WALKER.
WALKER, Circuit Judge: The Federal Energy Regulatory
Commission is responsible for ensuring that interstate
electricity rates are “just and reasonable.” 16 U.S.C.
§§ 824d(a), 824e(a). To do so, it approves electricity
providers’ proposed rate changes, and it can require them to
change their rates if the rates become unreasonable. This case
is about one of FERC’s rate determinations.

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Midcontinent Independent System Operator, Inc.
administers the electric grid on behalf of the companies that
own transmission lines. Those transmission owners invested
money to build their transmission lines, and MISO must charge
customers electricity-transmission rates that provide those
companies an appropriate return on their investment. That
return-on-equity component of the transmission rates, which
we’ll just call the Return, is at issue in this case.
In this case, a group of customers thought MISO provided
transmission owners a too-generous Return. They asked FERC
to reduce that aspect of MISO’s rates. FERC did. In the
process, it completely overhauled its approach to setting an
appropriate Return.
Both the customers and transmission owners now
challenge several aspects of the FERC proceedings as unlawful
or arbitrary and capricious.
We agree with the customers that FERC’s development of
the new Return methodology was arbitrary and capricious, so
we vacate its rate-determination orders and remand for further
proceedings. Because the other challenged aspects of FERC’s
orders flow from FERC’s rate determination, we do not reach
them.
I
We start this section with some background on the general
regulatory framework for electricity-transmission rates. Then
we describe the history of FERC’s approach to Return
determinations. Finally, we explain what happened in these
proceedings.

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A
For most of the twentieth century, vertically integrated
state and local utilities monopolized electricity markets. See
Atlantic City Electric Co. v. FERC, 295 F.3d 1, 4 (D.C. Cir.
2002). When technological progress enabled competitors to
offer lower prices for electricity, the incumbent utilities used
their control of transmission lines to keep competitors out of
the market. Id. That exclusion caused higher prices. So in
1996, FERC required utilities to provide open access to
transmission lines. Id. To help achieve its open-access goals,
FERC created a framework for independent companies, called
independent system operators, that would impartially operate
transmission lines. Id. at 5.
MISO performs that service for fifteen states in the middle
of the country from Louisiana up to Minnesota (and beyond to
Manitoba). In exchange for its services, it charges transmission
rates that approximate the costs it incurs plus an appropriate
return on equity for the transmission owners’ original
investment in building the lines. See FERC, Energy Primer: A
Handbook of Energy Market Basics 59-60 (2020).
Like all public utilities, MISO must file its proposed rates
with FERC for approval. As part of its review, FERC ensures
that the Return portion of the rates is appropriate to compensate
transmission owners for the risks they took and to attract future
investment in transmission lines. Emera Maine v. FERC, 854
F.3d 9, 20 (D.C. Cir. 2017).
There are two ways that MISO’s rates can change.
One, called a Section 205 proceeding, is utility-initiated.
If MISO wishes to change its rates, it can file a new set of
proposed rates with FERC. 16 U.S.C. § 824d(d). FERC then

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reviews the proposed rates to determine whether they are just
and reasonable. Id. § 824d(e). If they are, MISO can charge
them. NRG Power Marketing, LLC v. FERC, 862 F.3d 108,
114 (D.C. Cir. 2017). If not, FERC rejects them. Id.
The other, called a Section 206 proceeding, is customer-
or FERC-initiated. A customer can file a complaint alleging
that a current rate is unjust and unreasonable, or FERC can set
a hearing on its own motion. 16 U.S.C. § 824e(a). At step one,
FERC decides if the old rate is unjust and unreasonable. Id. If
so, then FERC proceeds to step two and sets a new rate. Id.
Until FERC sets a new rate in a Section 206 proceeding,
customers continue to pay the challenged rates. See City of
Anaheim v. FERC, 558 F.3d 521, 525 (D.C. Cir. 2009). So
Congress gave FERC limited refund authority. At the
beginning of the proceeding, FERC sets “a refund effective
date.” 16 U.S.C. § 824e(b). It can then give refunds of any
excess payments for fifteen months after that refund effective
date. Id. Those excess payments are calculated as the
difference between the old, challenged rate and the new rate
ordered by FERC. Id.
This case is about a Section 206 proceeding.
B
To understand what FERC did in this proceeding, it helps
to have some historical background on FERC’s methodology
for assessing the reasonableness of the existing Return and, if
necessary, setting a new one.
Since the 1980s, FERC calculated the Return with the aid
of a financial tool called the discounted-cash-flow model. That
model uses a company’s stock price to represent the company’s

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value to investors. Canadian Association of Petroleum
Producers v. FERC, 254 F.3d 289, 293 (D.C. Cir. 2001). It
assumes that the stock price is equal to all the dividends the
company will pay out in the future “discounted at a market rate
commensurate with the stock’s risk.” Id. A simplified version
of that baseline formula is P = D/(r-g), “where P is the price of
the stock at the relevant time, D is the dividend to be paid at
the end of the first year, r is the rate of return and g is the
expected growth rate of the firm.” Id. That is the version
investors use to try to calculate a company’s stock price. But
to calculate an appropriate Return for transmission owners,
FERC rearranges the equation to be:
r = D/P + g.1
For publicly traded companies, calculating an appropriate
Return with the discounted-cash-flow model is relatively easy
because of its publicly traded stock price. But for privately
held companies like the transmission owners, which have no
public stock price, FERC uses a proxy group of comparable,
publicly traded companies. Id. at 293-94. With that proxy
group of public companies, FERC can approximate what a
discounted-cash-flow analysis should look like for the
privately held companies at issue. Id.
When FERC chooses a proxy group and conducts a
discounted-cash-flow analysis for each company in the group,
it gets a range of possible Returns that FERC calls the “zone of
reasonableness.” Emera Maine v. FERC, 854 F.3d 9, 15 (D.C.
1 As we said, r = D/P + g is a simplified version of FERC’s formula.
The actual, more complicated formula includes a dividend multiplier,
which accounts “for the fact that dividends are paid on a quarterly
basis.” JA 514. It is r = D/P(1 + .5g) + g. But because the dividend
multiplier affects none of the analysis in this case, we’ll use the
simplified formula when discussing the discounted-cash-flow model.

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Cir. 2017). A Return must be a single value, so FERC then
needs to choose a point within the zone. It typically uses the
midpoint, at least for independent system operators like MISO.
See Southern California Edison Co. v. FERC, 717 F.3d 177,
186 (D.C. Cir. 2013).
That was the state of play until 2014: FERC would
produce a zone of reasonableness using a discounted-cash-flow
analysis of proxy group companies, then set the Return at the
midpoint.
Then FERC changed things up. In a rate-review
proceeding for New England’s independent system operator,
FERC found that anomalous market conditions required a
higher Return than the one provided by the midpoint of the
discounted-cash-flow model’s zone of reasonableness. Emera
Maine, 854 F.3d at 18. It looked at several other models to
determine how much higher the Return should go and
ultimately set the Return at the midpoint of the upper half of
the zone of reasonableness. Id.
That brings us to this case.
C
This case started with two separate Section 206 complaints
against MISO’s rates.
In 2013, a group of customers believed the Return
component of MISO’s existing rate was too high. They filed a
Section 206 complaint asking FERC to lower it. That was this
case’s first complaint.
FERC set a refund effective date of November 12, 2013,
which meant that customers could only get refunds for

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overpayments through February 11, 2015. But FERC did not
resolve the first complaint by February 11, 2015. The following
day, a different group of customers filed a complaint
challenging the same MISO rate. That was this case’s second
complaint.
Finally, on September 28, 2016, FERC resolved the first
complaint in Opinion No. 551. It agreed with the customers
and reduced the Return from 12.38% to 10.32%. In doing so,
it used the same Return-setting methodology that it had
developed in the New England proceeding.
The next year, in Emera Maine v. FERC, we vacated
FERC’s orders from the New England proceeding. 854 F.3d at
30. We identified two infirmities in FERC’s analysis. First, as
the transmission owners had argued, FERC “never actually
explained how” the New England transmission owners’
existing Return “was unjust and unreasonable.” Id. at 26. And
second, as the customers had argued, FERC failed to justify its
decision to set the Return at the three-quarters point of the zone
of reasonableness. Id. at 28-29.
Because FERC had relied so heavily in this proceeding on
the orders that we vacated in Emera Maine, FERC chose to
revisit Opinion 551. It set the first complaint for rehearing and
informed the parties that it planned to resolve the second
complaint in the same rehearing proceeding.
In its rehearing order, FERC proposed an entirely new
methodology for calculating a just and reasonable Return. The
proposal used four different financial models, giving each
equal weight:
• Model 1, discounted cash flow (as described three
pages ago);

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• Model 2, capital-asset pricing;2
• Model 3, expected earnings;3 and
• Model 4, risk premium.4
FERC planned to use the first three models, each of which
produce a zone of reasonableness, to answer the threshold
question whether an existing rate is unjust and unreasonable.
Because risk premium (Model 4) produces only a single point,
FERC intended to leave it out of that first step. It planned to
create a composite zone produced by the average of the first
three models’ zones of reasonableness, then divide the
composite zone to create presumptively just and reasonable
ranges for utilities based on their risk profiles, as this image
shows:
2 The Return for this model depends on, among other things, a risk-
free rate like the Treasury-bond rate, an analysis of the returns in the
market, and an estimate of the company’s riskiness. Part III.B of this
opinion explains it in more detail.
3 This model produces a Return based on the earnings investors in
comparable stocks expect to receive based on those stocks’ “book
value,” which measures the difference between a company’s assets
and liabilities. Spoiler alert: FERC will later drop this model from
its methodology.
4 This model subtracts past corporate-utility-bond rates from past
Returns to calculate an average risk premium that FERC has given
in the past. The new Return is that number added to the current
Treasury-bond rate. We will explain more about this model in Part
III.E.

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Then, if FERC found an existing Return unjust and
unreasonable, it would set a new Return by averaging the
midpoint (or the one-quarter or three-quarters point for utilities
of below-average and above-average risk respectively) of the
first three models with the single point that the risk-premium
model (Model 4) produces.
A year later, when FERC issued its second order in this
proceeding — Opinion No. 569 — it abandoned expected
earnings (Model 3) and risk premium (Model 4), and made
other, more minor tweaks to its proposed Return methodology.
It then applied the new methodology, again found the pre-
complaint 12.38% Return unjust and unreasonable, and set a
new Return of 9.88%. FERC backdated that new Return to
make it effective as of September 28, 2016, requiring the
transmission owners to refund — for the period between the
first and second orders — the difference between the 10.32%

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FERC had set in its first order and the 9.88% it had set in its
second order.5
As it had promised, FERC also resolved the second
complaint in Opinion 569. It determined that the currently
effective Return was the new 9.88% Return that it had just
imposed. Then it found that 9.88% was not unjust and
unreasonable. It therefore did not order a new rate in response
to the second complaint. And because it had not ordered a new
rate, FERC concluded that it could not order a refund for the
second complaint’s fifteen-month refund period.
The customers and transmission owners alike found fault
with Opinion 569, so both petitioned for rehearing on several
grounds. FERC granted rehearing and, in its third order
— Opinion 569-A — FERC again changed its Return
methodology. It added risk-premium (Model 4) back into the
mix and shifted the presumptively just and reasonable zones,
among other things.
After explaining its changes, FERC applied the new
Return methodology to, yet again, find the pre-complaint
12.38% Return unjust and unreasonable. FERC then set a new
Return of 10.02%, which it again backdated to September 28,
2016. Finally, it used that 10.02% Return to again reject the
second complaint.
The parties again sought rehearing before FERC. In
response, FERC issued Opinion No. 569-B, which tweaked the
Return methodology a bit without making any further major
changes.
5 The MISO transmission owners’ primary challenge focuses on the
lawfulness of this backdating decision. Because we do not reach that
question, we won’t delve into the sides’ conflicting positions.

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This chart summarizes the relevant FERC proceedings.
First Section 206 Complaint: November 12, 2013
(Refund period = November 12, 2013 – February 11, 2015)
Second Section 206 Complaint: February 12, 2015
(Refund period = February 12, 2015 – May 11, 2016)
September 28, 2016
FERC Opinion No. 551
Only addresses first complaint
New Return = 10.32%
Orders refunds for November
12, 2013 – February 11, 2015
Return methodology: applies
methodology from the New
England ISO proceeding
April 14, 2017: This Court issues Emera Maine, vacating the
opinion on which Opinion 551 was based.
November 21, 2019
FERC Opinion No. 569
Addresses both complaints
New Return = 9.88%
Orders refunds for November
12, 2013 – February 11, 2015
and backdates the new rate’s
effective date to September 28,
2016, when it issued Opinion
551.
Dismisses second complaint.

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Return methodology: rejects the
expected-earnings and risk-
premium models; will use only
the discounted-cash-flow and
capital-asset models.
May 21, 2020
FERC Opinion No. 569-A
Addresses both complaints
New Return = 10.02%
Requires refunds for the same
periods as Opinion 569.
Still dismisses second
complaint.
Return methodology: will now
use the risk-premium model in
the Return analysis in addition
to the discounted-cash-flow and
capital-asset models.
November 19, 2020
FERC Opinion No. 569-B
Addresses both complaints
Return still = 10.02%
Requires refunds for the same
periods as Opinion 569-A
Still dismisses second
complaint.
Return methodology: corrected
certain inputs to the risk-
premium model but continued to
reach the same result it reached
in Opinion No. 569-A

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II
Under the Administrative Procedure Act’s arbitrary-and-
capricious standard, our review of FERC’s ratemaking choices
is limited. 5 U.S.C. § 706(2)(A); see also Emera Maine v.
FERC, 854 F.3d 9, 21-22 (D.C. Cir. 2017). We must deny the
petitions for review as long as FERC “has made a principled
and reasoned decision supported by the evidentiary record.”
Id. at 22 (quoting Southern California Edison Co. v. FERC, 717
F.3d 177, 181 (D.C. Cir. 2013)). That inquiry includes
verifying that FERC had a reasoned basis for any changes of
heart. Verso Corp. v. FERC, 898 F.3d 1, 7 (D.C. Cir. 2018).
III
The customers challenge FERC’s new Return
methodology on five grounds. First, they argue that FERC
should not have altered its previous approach to balancing
long-term and short-term growth rates in the discounted-cash-
flow model (Model 1). Second, they challenge three aspects of
FERC’s approach to the capital-asset model (Model 2). Third,
they argue that FERC’s creation of presumptively just and
reasonable ranges at step one of the Section 206 analysis was
arbitrary and capricious. Fourth, they argue that FERC should
have set the new Return based on the median of the zone of
reasonableness rather than the midpoint. And fifth, they
challenge FERC’s decision to resuscitate the risk-premium
model (Model 4) in its second rehearing order shortly after
interring the model in its first rehearing order.
We find the first four of those arguments unpersuasive.
But we agree with the customers’ final argument. And that
conclusion is alone enough to make FERC’s rate orders
arbitrary and capricious.

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A
The customers take aim at a change that FERC made to its
discounted-cash-flow analysis (Model 1). Remember, the
simplified version of that is r = D/P + g, with the letters
representing the Return, dividend, stock price, and expected
growth rate.
In conducting a discounted-cash-flow analysis for a
company, FERC balances short-term and long-term expected
growth to pick an expected growth rate. Before 1999, FERC
used a fifty-fifty split. Canadian Association of Petroleum
Producers v. FERC, 254 F.3d 289, 292, 297 (D.C. Cir. 2001).
After 1999, FERC used a two-thirds-short-term versus one-
third-long-term split. Id. at 297.
In this proceeding, FERC changed to a four-fifths-short-
term versus one-fifth-long-term split. When we approved the
1999 change (from the pre-1999 fifty-fifty split), we noted that
because this kind of weighting doesn’t lend itself to “strict
rules, it would likely be difficult to show that [FERC] abused
its discretion in the weighting choice.” Id.
That remains true. Short-term rates are more reliable
projections; long-term rates just “normalize any distortions” in
the short-term rates. Id. (cleaned up). Recently, the
normalizing value of long-term rates has declined as the short-
term and long-term projections have converged. So as the
importance of long-term rates has declined, FERC decided that
their role in the discounted-cash-flow analysis should too. That
was not arbitrary and capricious.

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B
The customers next challenge three aspects of FERC’s
application of the capital-asset model (Model 2). We reject
each challenge.
That model begins with the following formula:
Return = risk-free rate + beta(expected return – risk-free rate).
Let’s break down each term in that formula, as FERC
applied it in this proceeding:
• The risk-free rate is the Treasury-bond rate.
• The “beta” is a company-specific value that industry
experts assign to measure a company’s riskiness as an
investment. A beta value of one represents average
risk, such that a beta below one represents a lower-risk
company and a beta above one represents a higher-risk
company.6
6 Specifically, the beta looks at risk as compared to the full market.
So an investment that “fluctuates exactly in step with the market,”
which means that the investment’s “rate of return increases on
average by 1 percent when the market’s return increases 1 percent,”
will have a beta of one. A. Lawrence Kolbe, James Read, Jr. &
George Hall, The Cost of Capital: Estimating the Rate of Return for
Public Utilities 70 (1984).

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• The expected return is the result of a discounted-cash-
flow analysis of all dividend-paying companies in the
S&P 500.7
Although FERC’s application of the model begins with
that formula, it doesn’t end with it. Before running the formula,
FERC adjusts the beta towards 1.0 because some finance
scholars believe that betas “converge to 1.0” in the long run.
JA 611 (quotation marks omitted). Then, after running the
formula, FERC takes the formula’s Return result and applies a
“size-premium adjustment” to that result. The adjustment is a
value meant to ensure that the model adequately accounts for
companies’ sizes.
For this model, the customers challenge: (1) FERC’s
decision not to include long-term growth rates in its analysis of
7 For some concrete examples of that formula in action, imagine three
companies with slightly different risk profiles at a time when (1) the
risk-free rate is 3% and (2) the discounted-cash-flow analysis of
dividend-paying companies in the S&P 500 produces an expected
return of 10%. Let’s calculate the three companies’ Returns using
the formula above:
• If Company A has a completely average risk profile, its Beta
is 1. So Company A has a Return of 10%. That’s because
10 = 3 + 1(10 - 3).
• Say Company B is slightly riskier than Company A. If its
Beta is 1.05, then its Return is 10.35%. That’s because
10.35 = 3 + 1.05(10 - 3).
• Finally, say Company C is slightly safer than Company A.
If its Beta is 0.95, then its Return is 9.65%. That’s because
9.65 = 3 + 0.95(10 - 3).

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the S&P 500; (2) its use of adjusted betas (as part of the
formula) with a size-premium adjustment derived from
unadjusted betas (applied after running the formula); and (3) its
use of betas based on the market risk of the New York Stock
Exchange with an expected market return based on the S&P
500. We will address each individually.
1
For the dividend-paying S&P 500 companies that FERC
used to determine the “expected return,” no one knows for sure
how much they will grow. But those companies’ growth rates
are necessary to calculate the expected return. So FERC filled
in that blank with five-year growth projections from the
Institutional Brokers’ Estimate System. It rejected the
customers’ request that it average those five-year projections
with longer-term growth projections.
FERC adequately explained that decision. It cited
financial research that supported the use of only short-term
growth rates. And it explained that the short-term rates better
reflect an investor’s expected return on an investment in the
S&P 500 as an index. That’s because the S&P 500 is regularly
updated to include only companies with high market
capitalization. Further, FERC explained that the S&P 500
includes companies at all stages of growth, so older companies
with lower growth potential will balance out younger
companies with higher growth potential. In light of the “great
deference” that we afford FERC’s ratemaking analysis, that
explanation is sufficient. See FERC v. Electric Power Supply
Association, 577 U.S. 260, 292 (2016) (cleaned up).

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2
The second issue concerns the size-premium adjustment
that FERC applied to the result of its formula. Ibbotson, the
company that calculated the size premium, analyzed a large
group of companies in the New York Stock Exchange. To
grossly simplify, Ibbotson applied a capital-asset formula to
those companies and then saw if there were any differences in
the results that were best explained by size. See Frank Torchio
& Sunita Surana, Effect of Liquidity on Size Premium and Its
Implications for Financial Valuations, 9 J. Bus. Valuation &
Econ. Loss Analysis 55, 56-57 (2014).
Ibbotson used unadjusted betas in its capital-asset formula.
But recall that FERC used adjusted betas for its capital-asset
formula. The customers argue that FERC’s decision to use
both despite that mismatch was irrational.
FERC acknowledged the “imperfect correspondence”
between the two. JA 611. But it decided that the size-premium
adjustment sufficiently improved the capital-asset model’s
accuracy to justify the mismatch.
We can only judge FERC’s logic based on the evidence it
had before it. See FCC v. Prometheus Radio Project, 141 S.
Ct. 1150, 1160 (2021). Here, because FERC had a size-
premium adjustment based on unadjusted betas and believed
that adjusted betas were the most appropriate input to use in the
capital-asset model, it had to choose between “imperfect
correspondence” and no size adjustment at all. That is the kind
of technical choice to which we are “particularly deferential.”
Public Service Commission of Kentucky v. FERC, 397 F.3d
1004, 1006 (D.C. Cir. 2005) (quoting Time Warner
Entertainment Co. v. FCC, 56 F.3d 151, 163 (D.C. Cir. 1995)).
We do not find it arbitrary and capricious.

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3
That same logic persuades us to reject the challenge to
FERC’s decision to combine adjusted betas based on the New
York Stock Exchange with an expected return based on the
S&P 500. Here, too, FERC acknowledged the “imperfect
correspondence” between the New York Stock Exchange and
the S&P 500. JA 873. But FERC concluded that it would not
be reasonable to calculate an expected return using all 2,800
companies in the New York Stock Exchange. And no party
provided adjusted betas from the appropriate time frame based
on the S&P 500. It was not arbitrary and capricious for FERC
to do the best it could with the data it had. See Prometheus,
141 S. Ct. at 1160.8
C
From there, the customers level an array of challenges to
FERC’s creation of presumptively just and reasonable ranges
at step one of the Section 206 analysis. Recall, if you’ll suffer
another reminder, that FERC created ranges within the zone of
reasonableness based on the company’s risk profile to analyze
the step-one question of whether an existing rate is unjust and
unreasonable. Rates within the appropriate range are presumed
to be just and reasonable.
1
First, the customers argue that we did not require FERC to
adopt its presumption scheme when we vacated FERC’s New
8 In a more recent proceeding FERC did have access to adjusted betas
based on the S&P 500, so it used them. Constellation Mystic Power,
LLC, 176 FERC ¶ 61,019, 61,102 (2021).

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22
England opinion in Emera Maine. See 854 F.3d 9 (D.C. Cir.
2017). That is true, but it misses the point. FERC is entitled to
adopt any methodology it believes will help it ensure that rates
are just and reasonable, so long as it doesn’t adopt that
methodology in an arbitrary and capricious manner. See
Southern California Edison Co. v. FERC, 717 F.3d 177, 182
(D.C. Cir. 2013).
As FERC recognized, our opinion in Emera Maine held
that FERC had failed to sufficiently explain why the existing
rate was unjust and unreasonable at step one of the Section 206
inquiry. 854 F.3d at 26-27. We had explained that “the zone
of reasonableness creates a broad range of potentially lawful”
Returns, such that FERC needed to do more than identify a
single new Return that it preferred. Id. at 26. So in response,
FERC developed this new framework to more effectively
verify that an existing rate is in fact unjust and unreasonable.
The customers have provided no persuasive reason to think that
doing so was arbitrary and capricious.
2
Second, the customers contend that the presumption
scheme unlawfully heightens the burden of proof that they
must carry. It doesn’t. The presumption is just that: a
presumption. FERC provided several types of evidence that
could rebut it, from non-utility stock prices to expert testimony.
3
Next, the customers claim that FERC created an
irrebuttable presumption in this particular case by using the
Return it had set in the first-complaint proceeding to adjudicate
the second complaint. Their argument has two layers. First,
they argue that it was unlawful for FERC to use the new Return

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23
(the 10.02% it had just set earlier in Opinion 569-A) instead of
the pre-complaint 12.38% Return they had originally
challenged. Second, they say that even if that was lawful,
FERC’s adjudication of both proceedings in one order denied
them any meaningful opportunity to rebut the presumption
because they didn’t know what presumptively just and
reasonable number they had to rebut. They are wrong on both
fronts.
To the first point, Section 206 says:
Whenever the Commission, after a hearing held upon
its own motion or upon complaint, shall find that any
rate, charge, or classification, demanded, observed,
charged, or collected by any public utility for any
transmission or sale subject to the jurisdiction of the
Commission, or that any rule, regulation, practice, or
contract affecting such rate, charge, or classification is
unjust, unreasonable, unduly discriminatory or
preferential, the Commission shall determine the
just and reasonable rate, charge, classification, rule,
regulation, practice, or contract to be thereafter
observed and in force, and shall fix the same by order.
16 U.S.C. § 824e(a) (emphases added).
Two aspects of the statute show that FERC was correct to
use the 10.02% Return it had set earlier in Order 569-A when
it resolved the first complaint.9 First, the statute uses the
present-tense verb “is,” which means that FERC must look to
the current Return at the time of decision. See Carr v. United
9 Although the statute uses “rate,” in this case the only component of
the rate that was at issue was the Return, so that is what FERC
focused on.

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24
States, 560 U.S. 438, 447-48 (2010) (explaining the importance
of verb tense). Second, the statute commands that FERC set a
Return “to be thereafter observed and in force.” Once FERC
sets a new Return in the first proceeding, it must observe and
enforce that Return until it lawfully changes, including in
ongoing proceedings.
On top of those points, the customers’ theory would upend
the strict fifteen-month refund limit that Congress placed on
Section 206 proceedings. 16 U.S.C. § 824e(b). If customers
can just file new complaints challenging the same Return every
fifteen months, the limit accomplishes nothing. Absent some
clearer indication of congressional intent, we will “not assume
that Congress left such a gap in its scheme.” Jackson v.
Birmingham Board of Education, 544 U.S. 167, 181 (2005).10
To the customers’ second argument, there is some
awkwardness in the fact that FERC chose to act on the first and
second complaints in one order. But FERC has “broad
discretion to manage” its docket. Florida Municipal Power
Agency v. FERC, 315 F.3d 362, 366 (D.C. Cir. 2003) (cleaned
up). And the customers do not point to any evidence that they
would have marshaled to challenge the new 10.02% Return
that they did not offer to challenge the old 12.38% one. So on
these particular facts, we cannot conclude that FERC abused
its broad discretion.
10 This should not be read to endorse the transmission owners’
argument that customers cannot file successive complaints. FERC
has an explanation for allowing successive complaints that it says
reconciles the practice with this provision. Because we decide that
FERC was correct to use the Return from the first complaint to
adjudicate the second, and therefore that FERC was right to dismiss
the second complaint, we need not decide this issue.

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25
4
The customers’ final step-one challenge says that the
presumption unlawfully creates a difference between Section
205 proceedings and Section 206 proceedings. But Congress
required that difference. “Section 206’s procedures are entirely
different and stricter than those of section 205.” See Emera
Maine, 854 F.3d at 24 (cleaned up).
D
Next, remember that for step two of the Section 206
analysis — setting the new just and reasonable rate — FERC
returned to its customary practice of using the midpoint of the
zone of reasonableness. The customers argue that it should
have set aside the midpoint in favor of the median.11
But we have already held that FERC can reasonably use
the midpoint of the zone of reasonableness when setting a
Return for “a diverse group of companies.” Public Service
Commission, 397 F.3d at 1011. That decision, Public Service
Commission of Kentucky v. FERC, even involved MISO. Id. at
1006.
The customers try to cabin Public Service Commission to
Return analyses where FERC uses a proxy group made up of
companies from within the same region as the transmission
owners. But that was not the reason FERC chose the midpoint
in Public Service Commission, so it is not the reason we
deemed FERC’s choice reasonable. Id. There, FERC focused
11 For a series of numbers, the midpoint is the halfway point between
the biggest number and the smallest number (calculated by adding
the two together and dividing by two). The median is the middle
number in the series. So, for example, the midpoint of 1, 3, 5, 9, and
11 is 6. The median is 5.

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26
on “the rate’s across-the-board applicability to MISO”
transmission owners. Id. at 1011. FERC did the same here, so
precedent requires that we reach the same result.
E
Finally, the customers challenge FERC’s about-face on the
risk-premium model (Model 4). As FERC applied it in this
proceeding, the model compares past Returns that FERC itself
set or approved to contemporaneous corporate-utility-bond
rates. FERC took the difference between those rates and added
it to the current corporate-utility-bond rate. So for example, if
the past corporate-utility-bond rates were always 6% and
Return rates were always 10%, FERC would take that
difference (4%) and add it to the current corporate-utility-bond
rate. If the current corporate-utility-bond rate is 5%, the new
Return would be 9%.12 See James Bonbright, Albert Danielsen
& David Kamerschen, Principles of Public Utility Rates 323
(2d ed. 1988) (offering a similar example).
12 This explanation omits one step that no one questions, which is
therefore not relevant to our analysis. Before FERC adds the risk
premium it calculated from the past corporate-utility-bond rates and
Returns to the current bond rate, it adjusts that number to “reflect the
tendency of risk premiums to rise as interest rates fall.” JA 249.
Basically, it calculates the inverse relationship between bond yields
and risk premiums to determine how much higher the risk premium
needs to be to incentivize investment when the bond rate is lower.
Here, for example, the calculation determined that for every 1% bond
rates dropped, investors required an extra .77% Return. So when the
bond rate had dropped by 1.35%, FERC multiplied 1.35 and .77 to
get an adjustment of 1.04%, which it added to the average difference
between the past bond rates and past FERC-allowed Returns. It
then added the sum of those numbers to the current corporate-utility-
bond rate to get the value for what the new Return should be.

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27
In FERC’s first rehearing order, Opinion 569, it concluded
that any “additional robustness” the risk-premium model added
to its methodology was “outweighed by the disadvantages of
its deficiencies.” JA 628. It then spent several pages
demonstrating the impressive extent of those deficiencies. For
example:
• The model, at least as applied in this case, “defies
general financial logic” by keeping the Return stable
regardless of capital-market conditions. JA 629.
• There was insufficient evidence in the record to
conclude that investors rely on this kind of risk-
premium model.
• The model is less accurate than the discounted-cash-
flow model (Model 1) or capital-asset model (Model 2)
because it relies on previous Return determinations that
may not have been market-based.
• It “is largely redundant with” the capital-asset model
(Model 2), so adding it would overweight risk-premium
methodologies against the long-used discounted-cash-
flow model (Model 1). JA 628.
• It presents “particularly direct and acute” circularity
problems because it uses past FERC-allowed Returns
to set the new ones. JA 628.
And those are just from the first two pages of criticisms.
Suffice it to say that in Opinion 569, FERC found the risk-
premium model quite defective.
Then, in Opinion 569-A — on rehearing of Opinion 569
— FERC changed its tune. It decided “that the defects of the
Risk Premium model do not outweigh the benefits of model
diversity” after all. JA 882.

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28
FERC is, of course, entitled to change its mind. FCC v.
Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). But to
do so, it must provide a “reasoned explanation” for its decision
to disregard “facts and circumstances that” justified its prior
choice. Id. at 515-16. Here, FERC failed to do that.
First and worst, FERC did not explain how its changes
brought the analysis into line with “general financial logic.” JA
629. FERC can’t ignore the basic financial principles that
otherwise undergird its analysis — at least not without a
compelling explanation. See Tennessee Gas Pipeline Co. v.
FERC, 926 F.2d 1206, 1210-11 (D.C. Cir. 1991); id. at 1213
(Thomas, J., concurring) (“At the very least, FERC was obliged
to offer some convincing evidence in support of its facially
implausible economic assumption”).
Second, FERC failed to adequately explain why it no
longer mattered that investors don’t use this model. Instead, it
simply noted that investors expect a premium on a stock
investment over a bond investment, and that investors track the
Returns FERC allows. Both statements are true, but neither
offers a persuasive reason to think that the risk-premium model
as FERC applied it here offers meaningful insight into investor
behavior.
Third, FERC failed to meaningfully address its own
concerns about the risk-premium model’s circularity. Instead,
it just said that “all of the models contain some circularity” and
decided that averaging the risk-premium model’s results with
the other models’ results helps mitigate the circularity. JA 882.
That explanation doesn’t meaningfully engage with the
“particularly direct and acute” circularity problems presented
by using old rates to set new ones. JA 628.

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29
Finally, FERC never engaged with its earlier concerns
about the overweighting of risk-premium theory. It briefly
discussed the redundancy of the capital-asset and risk-premium
models (Models 2 and 4), saying that because they used
different inputs to calculate the risk premium they were not too
redundant to use. But it failed to reckon with its own serious
concerns about “variations of the risk premium model”
receiving twice the weight of the discounted-cash-flow model
(Model 1) that FERC “has long used and, over time, refined.”
JA 628. An agency ignoring its own qualms is not reasoned
decisionmaking.
* * *
FERC failed to offer a reasoned explanation for its
decision to reintroduce the risk-premium model (Model 4) after
initially, and forcefully, rejecting it. Because FERC adopted
that significant portion of its model in an arbitrary and
capricious fashion, the new Return produced by that model
cannot stand. We therefore vacate FERC’s orders.
IV
In addition to the customers’ challenge to FERC’s new
Return methodology, the customers challenged FERC’s
determination that it could not order a refund for the second
complaint’s refund period. But to the extent that any of that
argument survives our earlier rejection of the customers’
statutory basis for their “irrebuttable presumption” argument,
see Part III.C.3, we decline to opine on the customers’
argument because we have already granted their petition to
vacate FERC’s rate orders. See Southwest Airlines Co. v.
FERC, 926 F.3d 851, 859 (D.C. Cir. 2019).

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30
For the same reason, we dismiss the transmission owners’
petitions challenging those now-vacated orders. They had
challenged FERC’s right to require transmission owners to pay
the difference between the amount FERC ordered in its first
decision and the rate it ordered on rehearing. But because we
vacate FERC’s rehearing order, there is no longer a new rate to
base a refund on.
Until FERC sets a new Return, a decision on the refund
issue will not alter the parties’ rights and obligations. Nor will
a decision on the transmission owners’ argument that FERC
lacked the authority to adjudicate the second complaint. When
“it is not necessary to decide more, it is necessary not to decide
more.” PDK Laboratories, Inc. v. DEA, 362 F.3d 786, 799
(D.C. Cir. 2004) (Roberts, J., concurring in part and in the
judgment).
V
We grant the customers’ petitions for review, dismiss the
transmission owners’, vacate the underlying orders, and
remand for FERC to reopen proceedings.

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