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, 
2

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. 
3

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.
4

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. 
5

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 
6

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 customeror 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 
7

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.
8

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 
9

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);
10

• 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 riskfree 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. 
11

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 precomplaint 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% 
12

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.
13

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.
14

Return methodology: rejects the 

expected-earnings and riskpremium 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 riskpremium model but continued to 

reach the same result it reached 

in Opinion No. 569-A 
15

II

Under the Administrative Procedure Act’s arbitrary-andcapricious 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-cashflow 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. 
16

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 onethird-long-term split. Id. at 297. 

In this proceeding, FERC changed to a four-fifths-shortterm 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 shortterm 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.
17

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). 
18

• The expected return is the result of a discounted-cashflow 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).
19

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).
20

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 sizepremium 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. 
21

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).
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
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.
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. 
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.
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-utilitybond rate to get the value for what the new Return should be. 
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 riskpremium model. 

• The model is less accurate than the discounted-cashflow 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-cashflow 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 riskpremium 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. 
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. 
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).
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.