Opinion ID: 184742
Heading Depth: 3
Heading Rank: 1

Heading: Use of a Two-Stage Dividend Growth Factor in the DCF Model

Text: 24 One of Williston Basin's principal concerns is the Commission's decision to follow Ozark and other Commission precedent and include a two-stage growth factor in its DCF model. Williston Basin suggests that the applicability of the DCF methodology is unjustified for lack of clarity in FERC precedent. We have a very different view of the matter. The Commission squarely addressed the application of its new policy to the particular context of Williston Basin's ongoing proceeding: following a hearing devoted expressly to long-term growth issues, the Commission entertained and rejected Williston Basin's arguments on this point, explaining in full its decision to require a long-term growth estimate in conformity with the Ozark methodology. See Williston Basin, 77 F.E.R.C. at 65,005; Williston Basin, 79 F.E.R.C. at 62,388; Williston Basin, 81 F.E.R.C. at 61,173-76. In short, whatever questions Williston Basin had regarding the use of some two-stage growth factor in the DCF model were answered by FERC. 25 Williston Basin, for its part, was intractable in its position that the Commission should rely exclusively on the short-term IBES forecasts in projecting dividend growth. Indeed, when the Commission established a hearing for the sole purpose of determining the appropriate long-term growth rate, Williston Basin proposed no objective measure of long-term growth, arguing instead that long-term growth was irrelevant, and that, even if it was relevant, IBES five-year data was the best estimate thereof. See Rehearing Request at 21-22, reprinted in J.A. 221-22. This tactic proved to be fruitless, for the Commission reasonably decided to adhere to its two-stage DCF model after concluding that it properly applied in this context. See Michigan Wis. Pipe Line Co. v. FPC, 520 F.2d 84, 89 (D.C.Cir.1975) (There is no question that the Commission may attach precedential, and even controlling weight to principles developed in one proceeding and then apply them under appropriate circumstances in a stare decisis manner.). Thus, to the extent that Williston Basin's arguments on this score reflected efforts to skirt or modify, rather than comply with, the Commission's preferred DCF policy, the Commission acted reasonably in rejecting them. 26 In summary, we find that the question of whether the DCF model must incorporate some long-term growth factor was clearly raised, considered, and resolved by the Commission. We conclude, therefore, that Williston Basin is not entitled to yet another opportunity to oppose the application of that policy to this rate case. 27 Our inquiry does not end here, however, for a critical issue remains with regard to the Commission's implementation of its two-stage growth projection--specifically, the appropriate weight to be given to the short- and long-term data in this model. In performing the DCF analysis in this case, the Commission averaged these data, relying on the general approach used in prior proceedings. The Commission supported this method by explaining that it lacked the information necessary to predict the duration of the short and long terms, as well as the rate at which growth would transition to maturity. See Williston Basin, 81 F.E.R.C. at 61,176. As a result, the Commission decided to give [these periods] equal weight in applying the well-accepted constant growth model ... to determine an average constant growth over time. Id. 28 During the pendency of this appeal, however, the Commission shifted course, finding in the context of a different proceeding that short-term growth projections should receive a two-thirds, rather than one-half, weighting in this analysis. See Transcontinental Gas Pipe Line Corp., 84 F.E.R.C. p 61,084, at 61,423 (1998). The Commission concluded that: 29 While determining the cost of equity nevertheless requires that a long-term evaluation be taken into account, long-term projections are inherently more difficult to make, and thus less reliable, than shortterm projections. Over a longer period, there is a greater likelihood for unanticipated developments to occur affecting the projection. Given the greater reliability of the short-term projection, we believe it is appropriate to give it greater weight. However, continuing to give some effect to the long-term growth projection will aid in normalizing any distortions that might be reflected in short-term data limited to a narrow segment of the economy. 30 Id. In other words, the Commission essentially found that the method of averaging short- and long-term projections used in this case gave undue weight to the long-term data. 31 Because Transcontinental appears to reflect a significant shift in Commission policy with regard to the DCF analysis, we conclude that the Commission is obligated to reconsider the application of that policy to Williston Basin. See Panhandle E. Pipe Line Co. v. FERC, 890 F.2d 435, 438-39 (D.C.Cir.1989). In Panhandle, the Commission had rejected the pipeline's tariff sheets, based in part on the agency's policy against capacity brokering. While the matter was on appeal to this court, the agency revised its policy, determining that capacity brokering should be considered on a case-by-case basis. See id. at 438. We held that [w]hen an agency changes a policy or rule underlying a decision pending review, the agency should immediately inform the court and should either move on its own for a remand or explain how its decision can be sustained independently of the policy in question. Id. at 439 (citation omitted). 32 Notwithstanding the admonishment in Panhandle, Commission counsel contended at oral argument that Transcontinental does not require a remand in the present case. Rather, according to counsel, Transcontinental has no bearing on this case, because Williston Basin never discussed how the growth factors should be weighted in the DCF model. We reject this view as too simplistic. While preserving the basic two-stage approach of Ozark, the Commission in Transcontinental explicitly determined that long-term growth projections can be unreliable and therefore should be given a lesser weight in the DCF model. See Transcontinental, 84 F.E.R.C. at 61,423. Similarly, Williston Basin, although it did not propose a re-weighting of the growth projections per se, relied in large part on the shortcomings of long-term data in advocating sole reliance on the IBES data. See Rehearing Request at 13, reprinted in J.A. 213. Clearly subsumed within the argument that the long-term data should receive no weight is the argument that the long-term data should receive a lesser weight. 33 Commission counsel also attempted to distinguish Panhandle by characterizing that case as involving a reversal, rather than a mere revision, of Commission policy. We find this argument equally unavailing. For one thing, in Panhandle, we referred to the intervening policy change as a revision, see 890 F.2d at 439, which belies the suggestion that the relevance of that case is limited to instances in which an agency makes an about-face. Moreover, the instant case itself implicates important policy matters that have concerned the Commission in multiple rate adjudications over the course of the past half decade. See, e.g., Northwest Pipeline Corp., 79 F.E.R.C. p 61,309 (1997); Williams Natural Gas Co., 77 F.E.R.C. p 61,277 (1996); Panhandle E. Pipe Line Corp., 71 F.E.R.C. p 61,228 (1995); Ozark Gas Transmission Sys., 68 F.E.R.C. p 61,032 (1994). While the Commission's paramount change in policy was its incorporation of a two-stage growth rate in the DCF model, its determination of the appropriate weights to be assigned the various growth projections is central to any application of this policy. On this score, even the Commission conceded that a re-weighting of the short- and long-term growth factors would have a substantial impact, in dollar terms, on Williston Basin's rates. 34 Thus, we find that, in light of the Commission's recent refinement of its two-stage DCF model, Williston Basin may be entitled to a re-calculation of its rate of return on common equity. Accordingly, we remand this matter to the Commission so that the agency can reconsider whether the IBES five-year projections advocated by Williston Basin should receive a greater weighting in the DCF analysis, and, if so, to implement this change. Cf. NLRB v. Food Store Employees Union, Local 347, 417 U.S. 1, 10 n. 10, 94 S.Ct. 2074, 40 L.Ed.2d 612 (1974) ([A] court reviewing an agency decision following an intervening change of policy by the agency should remand to permit the agency to decide in the first instance whether giving the change retrospective effect will best effectuate the policies underlying the agency's governing act.); National Fuel Gas Supply Corp. v. FERC, 899 F.2d 1244, 1249-50 (D.C.Cir.1990) (referring, in another context, to the general principle that an agency should be afforded the first word on how an intervening change in law affects an agency decision pending review). 35