# Unite d States Court of Appe als

F O R T H E D I S T R

I C T O F C O L U M B I A

C I R C U I T

Arg ued September

8, 2017 Dec ided J anuar y 26, 2018

No. 15-1453

PJ M P O W

E R P R O V I D E R S G R

O U P , P E TI TI O N E R

v.

F E D E R A L E N E R

G Y R E G U L A TO R Y C O M M I S S I O N , R E S P O N D E

N T

PJ M I N TE R C O N N E C TI O N , L L C, E T A L ., I N TE R V E N O R S

Consolidated with 15-1455

On Petitions for Review of O rder s of the Fe dera l Energ y

Reg ulatory

Commi ssion

Kenneth R. Carretta arg ued the cause for petitioners. Wit h him on the briefs we re Cara J. Lewis and John L. She pherd Jr. John N. Estes III and Paul F. W ight enter ed appe ara

nces.

A n a n d R

. V

i s w a n a t h a n , A t t o r n e y , F e d e r a l E n er gy Reg ulatory Commi ssion, arg ued the cause for responde nt. Wit h him on the brief was R o b er t H. Solomon
, Solicitor. Lisa B. Lufti g , Attorney , enter ed an a

ppear ance

.2

Paul M. Flynn arg ued the cause for intervenor s. Wit h him

on the brief wer e Jennifer H. Tribul ski
, Ryan J. Colli n s , Adrienne E. Clair
, Robert A. W eishaar Jr.
, Gary J. Newell
, Christ opher S. Porrino
, Attorney Gene ral, Offic e of the At torney Gene ral for the State of New J erse y , and Carolyn McI n t o s h
, Deputy Attorney Gene ral. Dennis Lane and Alex Moreau
, Deputy Attorney Gene ral, Offic e of the Attorney Gene ral for

the State of Ne w J erse y , enter ed appe ara nces.

Be fore : G A R

L A N D , Chief Judge
, W I L K I N S , Circuit Judge
, and E D W

A R D S , Senior Circuit Judge

. Opinion for the Court filed by Chief Judge G A R L A N D

.

G A R L A N D , Chief Judge : Congr ess has g iven the Fe der al Energ y Reg ul atory Commi ssion (F ERC) authority to reg ulate the transmiss i on and sale at wholesale of elec tric ener g y in interstate commerc e. 16 U.S.C. § 824(a)
, (b). FE R C tasks

cer tain non-prof

it entit ies, known as reg ional transmission
org anizations, with manag ing the transmissio n o f e le c tr ic ity over the elec tric g rid and ensuring that ener g y is reliably available for

co n s umers. 18 C.F.R. § 35.34; see Advanc ed Energy Mg mt

. Alliance v. FERC
, 860 F.3d 656, 659 (D.C. C i r. 2017). One such reg ional transmission org anization is PJ M I nterc onnection, L L C
, which has responsibility for administering a tariff that dete rmines the rate s paid to ener g y providers for providing elec tric capa city in th e b road mid-Atlantic reg ion. See 1 Advanc ed Energy
, 860 F.3d at 6 5 9-60. FERC, in turn, must

ensure that PJ M I nterc onnection’s tariff is “just and rea sonable.” 16 U.S.C. § 824d(a).

“‘ Capa ci ty ’ is the abil it

y to pro duce elec tr ic it

y

. Purcha se rs of 1

ca pac it y ac quire the ri ght to buy el ec tr ic it y in the futur e.” Advance d Ener gy , 860 F.3d at

659

.3

This case conce rns one element of PJ M I n t erconnec tion’s 2014 tariff revisions: the estimated cost of new entry , which approximates the reve nue that a newly constructed power g ener ator would need to rec oup its costs. Throug h a complica t ed methodology
, which we fortunate ly need not test the rea der’ s patience by explaining ag ain, the cost of new entry aff ects the pr ices paid to energ y providers f

or ele ctric c apac ity

. See TC Rave nswood, LLC v. FERC
, 741 F.3d 112, 114-15 (D.C. C i r. 2013); see also N.J. Bd. of Pub. Utils. v. FERC
, 744 F. 3 d 74, 84-87 (3d Cir. 2014). The petitioners in this case -- PJ M Power Providers Group, a coalition of ener g y providers, and the PSEG Companies, a publ i c u t ility holding company and its subsidiaries -- challeng e FERC’s o rder s approving PJ M I nterc onnection’s tariff

. See 149 FERC ¶ 61,183 (Nov

. 2 8
, 2014) (I nitial Orde r); 153 FERC ¶ 61,035 (Oc t. 15, 2015) (Rehear i n g Orde r). I n the petitioners’ view, the cost of new entry submitt ed by PJ M I nterc onnection and approve d by FERC is too low. Consequently
, they arg ue, the resulting price that they ar e paid for wholesale capa city is also too low. And this, they say , means that the PJ M I nterc onn ec t i o n tariff that FERC approve d is not just and re asonable

.

I

We revie w FERC’s order s under the Administrative Procedur e Act, asking whether they are “ar bitrary
, capr icious, an abuse of discretion, or otherwise not in acc ordanc e with law.” Braintree Elec. Light Dep’ t v. FERC
, 667 F.3d 1284, 1288 (D.C. Cir. 2012) (quoting 5 U.S.C. § 706(2)( A)). The Commi ssion’s fac tual finding s, “if support ed by substantial evidenc e,” are “conc lusive.” 16 U.S.C. § 825 l (b).

The petitioners acknow ledg e that “[ t] he questions posed here are purely fac tual issues,” and they challeng e FERC’s order s solely on the g round that th ey are unsupported by4

substantial evidenc e. P etitioners’ Reply Br

. 4. Our revie w in these circ umstances is “hig hly defe rential, as issues of rate desig n are fairly technica l and, insofar as they are not technica l, involve policy judgme nts that lie at the core of the re gu l at o ry mission.” Alcoa Inc. v. FERC
, 564 F.3d 1342, 1347 (D.C. Cir. 2009) (interna l quotat i o n marks and citation omitted). As the Supreme Court has made clea r, our role is “not to ask whether

a reg ulatory decision is the best one possible or even whether it is better than the alterna tives.” FERC v. Elec. Power S u p p l y Ass’n
, 136 S. Ct. 760, 782 (2016). I nstead, we must “af firm the Commi ss ion’s order s so long as FERC examined the rele vant data and articula ted a rational connect i o n betwee n the fac ts found and the choice made.” Alcoa
, 564 F.3d a t 1347 (interna l quotation marks and ci t ation omitted); see Elec. Power Supply Ass’n , 136 S. Ct . at 782.

Having examined the m in detail, we conclude that none of the petitioners’ o b

j ections to the cost-of- new- entry fig ure that FE RC approve d can overc ome our defe rential standard o f revie w.

1

. The petitioners’ first objection is that FERC lac k ed substantial evidenc e to approve the estimates of labor costs that formed part of the calc ulation of the cost of new entry

. FERC’s labor-c ost analy sis relied princip all y on aff idavits by Paul Sotkiewicz, an economist employ ed by PJ M I nterc onnection. See I nitial Orde r P 108; Rehea ring Orde r PP 76, 78. Sotkiewicz conclude d that a gene ric power gene rator cou l d be constructed in 360,000 labor hours, a fig ure he supported by pointing to, inter alia, three studies conducte d by differ ent consulting firms. See Sotkiewicz I nitial Af fi d avit ¶¶ 38, 39 (J.A. 73-74); Sotkiewicz Answer ing Affida v it ¶¶ 5, 6 (J.A. 683). The petitioners attack Sotkiewicz’s relianc e on eac h of those studies.5

One of the studies, authore d by the CH2M Hill eng ineer ing firm, had previously been submitt ed in a 2011 FERC proce eding

. The petitioners maintain that this study lacks “proba tive value” beca

use the prior proce eding was resolved by
sett l ement befor e the Commi ssion had an opportunity to make

a final just-and-re asonable deter mination. Petitioners’ Re p ly B r. 1 5

. But the fac t that the matter was settled does nothing to d i m i n ish the study ’s reliability

. Nor is there any require ment that witnesses cite only to studies that FERC has p re viously blessed.

The petitioners asser

t that a second study
, prepa red by Sarg ent & L

undy
, could not have contained the data Sotkiewicz said it did. But consultants from the firm that commissioned the Sarg ent & L undy study filed an affidavit corr oborating Sotkiewicz’s repr esenta tions. See Pfeifenbe rg er & Z hou Affida vit 23 (J.A. 639). Although the petitioners insist that the aff idavit is he arsa

y , hear say can constitute substantial e vidence in an administrative proce eding

. See L a cson v. U.S. Dep’ t of Homeland Se c ., 726 F.3d 170, 178 (D.C. Cir. 2013). And her e it does, beca

use the c onsultants were “uniquely in a position to know” the rele vant information. Honey well Int’l, Inc. v. E P A
, 372 F.3d 441, 447 (D.C. Cir. 2004) (citatio n omitted); see Second Taxing Dist. v. FERC
, 683 F.2d 477, 488 & n.14 (D.C. Cir. 1982).

As to th e third study
, prepa red by Stantec Consulti ng S er v i ces, the petitioners object on the g round that no witness with persona l knowledg e of that stud y ap pear ed befor e FERC and that the repor

t itself was not enter ed i nto the rec ord. The petitioners cite no authority for t h e proposition that
persona l-knowledg e testimony is require d fo r relianc e on an expert repor

t in a FERC proce eding

. I ndeed, as we have just mentioned, hear say can be admissible in such proce eding s. And6
althoug h failure to include an underly ing repor t in the rec ord of

an ag ency proce eding could be troubling in some circ umstances, here FERC rea sonably relied on Sotkiewicz’s assessment of multipl e information source s -- “including a revie w of publicly -ava ilable dat a” -- of which the Stantec estimate was just one part. R ehea

ring Orde r P 76; see I nitial Orde r P 108 (noting that “PJ M revie wed the marke t monitor’s estimate of construction labor and found that it was consistent with public information on utilit y construction labor costs”); id. (ci t ing Sotkiewicz’s state ment that “the va lues closely trac k data from the U.S. Bur eau of L abor Statist i cs Quar terly Census of Employ ment and Wage s”); Sotkiewicz I nitial Affidavit ¶¶ 37, 41 (J.A. 73-75) (discussin g Bu re au of L abor Statist ics data) ; Sotkiewicz Answering Affida vit ¶¶ 5, 8 (J.A. 683-84) (same ).

2. Nex t, the petitioners contend that FERC should have

acc epted the labor-c ost calc u l ati ons of the petitioners’ expert, Robert Uniszk i ew i cz, who, in their view, possessed more “expertise and experience reg arding construc tion rela ted matters” than did Sotkiewicz. Petitio n er s ’ Br

. 52. But FERC

rea sonably explained that it pref err ed Sotkiewicz’s analy s is to Uniszki ewicz’s b ec au se the latter had failed to acc ount for economies of

scale

. Rehea

ring Orde r P 77. This court “defe rs to the Commi ssion’s resolution of fac tual disputes betwee n expert witnesses,” Transmissi on Agenc y of N. Cal. v. FERC
, 628 F.3d 538, 551 (D.C. C ir. 201 0 ) (quoting Elec. Consumers Res. C ouncil v. FERC
, 407 F.3d 1232, 1236 (D.C. Cir. 2005)), and the Commi ssion’s explanation for its pref e renc e was rea sonable.

The petitioners further arg ue that FERC should have held an evidentiar y hear ing to adjudg e the compar ative cre dibilit y of the
two experts. But the petitioners’ ch al l enge -- based on their claim of the superior expertise of their witness

-- go es n o t to Sotkiewicz’s cre dibilit y but to the wei gh t of his evidenc e. FERC did not abuse its discretion in decidin g t o rely on the7

written rec ord to resolve that question. See Minisink Residents for Envt’l Pres. & Safety v. F E R C
, 7 62 F.3d 97, 114-15 (D.C. Cir. 2014); Blumenthal v. FERC
, 613 F.3d 1142, 1144-45 (D.C. Cir. 2010).

3. Finally
, the petitioners contend that FERC err ed in approving another input to the estimated cost of new entry : the
cost of cap ital. FERC approve d the methodology that the Br attle Group, PJ M I nterc onnection’s consultant, used to estimate t his input. That m ethodolog y relied on a proxy g roup of eig ht ener g y companies, includin g p ublicly trade d independe nt power produce rs, merc hant g ener ation companies that wer e rec ently acquir ed by other companies, and re cent

merc hant g ener ation divestitures. See Samuel A. Newe ll et al., Cost of New Entry Estim a t es for Combustion Turbine and Combined Cycle Plants in PJM 34-37 & tbl.25 (May 15, 2014) (J.A. 159-62). The petiti oners object to PJ M’s relianc e on this
g roup, maintaining that t h e majority of new g ener ator construction is instead financ ed by private- equity firms, which, they asser t, require highe r rate s of return than publi cl y t ra ded companies.

But “[m] ere ly beca

u s e p et itioners can conce ive of a

. . . method that they believe would be superior t o t he one FERC approv ed does not mean that FERC err ed in concluding the lat t er was just and rea sonable.” W isc. Pub. Power, Inc. v. FERC
, 493 F.3d 239, 266 (D.C. C ir. 2007 ). FERC considere d the petitioners’ co ntention, but approve d PJ M’s exclusion of
p rivate- equity investors from the sample beca use their cost of capital was not observa

ble in the market and hence was not “ver ifiable.” Rehea

ring Orde r P 57; see also Newe ll et al.,
supra , at 35 n.27 (J.A. 160) (“We do not inc lude private equity investors in our sample beca use the cost of equity can n o t be observe d i n m arke t data.” ). Moreove r, the Commi ssion conclude d that the private- equity data the petitioners proff ere d8

was u n re l iable for calc ulating cost of capital in the elec tricity
context beca

u s e i t “consist[ed] of portfolios of investments in

man y d i fferent projec ts in many differ ent industries.” I nitial Orde r PP 82, 91; see Rehea ring Orde r P 67. This response was

a “r easona

ble explanation for reje cting ” the petitioners’

con t en t i on. See Elec. Consumers Res. Council
, 407 F.3d at 1241.

I I

For the fore g oing rea sons, the petitioners’ objections fail to undermine the substantial evidenc e s u p p o r ti n g FERC’s approva l of PJ M I nterc onnection’s f igur e for the cost of ne w entry

. The petitions for revie w ar e ther efor e

Denied

.