Opinion ID: 187286
Heading Depth: 1
Heading Rank: 4

Heading: Evidence of Windfall Profits

Text: Connecticut next argues that FERC unreasonably rejected its direct verified evidence that rates under the hybrid market structure are unjust and unreasonable. Br. for Pet'r at 28. This evidence consists of two charts Connecticut presented to FERC, one estimating the returns earned by three market-rate generators between September 2004 and September 2005, and one estimating the returns those three plants would earn in 2006. The estimated returns varied from 44% to 257%. Connecticut argues that these estimates of grossly excessive returns are prima facie evidence of unjust and unreasonable rates. The Supreme Court has repeatedly rejected the argument that there is only one just and reasonable rate possible . . . and that this rate must be based entirely on some concept of cost plus a reasonable rate of return. Mobil Oil Corp. v. Fed. Power Comm'n, 417 U.S. 283, 316, 94 S.Ct. 2328, 41 L.Ed.2d 72 (1974); see also In re Permian Basin, 390 U.S. at 796-98, 88 S.Ct. 1344 (explaining that there is not one reasonable rate but rather a zone of reasonableness); Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1944) (noting that the Commission was not bound to the use of any single formula or combination of formulae in determining rates); Me. Pub. Utils., 520 F.3d at 471 (The Supreme Court has disavowed the notion that rates must depend on historical costs and has held that rates may be determined by a variety of formulae.). In particular, as FERC points out, market rates are expected and permitted to be higher than marginal costs during times of scarce supply, such as the twelve-month period shown on Connecticut's second chart. See Edison Mission Energy, Inc. v. FERC, 394 F.3d 964, 968-69 (D.C.Cir.2005); Interstate Natural Gas Ass'n v. FERC, 285 F.3d 18, 32 (D.C.Cir.2002) (approving full deregulation of market despite spikes in price during times of extreme exigency); see also Oral Arg. Recording at 10:20-10:38 (counsel for FERC noting that the period shown reflected a spike in gas prices following Hurricane Katrina). At the same time that they reflect existing scarcity, these high rates also serve a critical signaling function: encouraging new development that will increase supply. In fact, we recently vacated FERC's approval of a price-mitigation rule because it would have impaired this price-signaling function. See Edison Mission, 394 F.3d at 969 (noting that although the rule might do some good, the Commission gave no reason to suppose that it does not also wreak substantial harmin curtailing price increments attributable to genuine scarcity that could be cured only by attracting new sources of supply). Thus, even if Connecticut's estimates were correct, FERC reasonably declined to consider them prima facie evidence of unjust and unreasonable rates. But FERC also explained that the estimates in the charts are not correct. Rather, they are based on numerous assumptions about the actual cost-of-service values for the highlighted units, including the assumption that the average market-clearing price in 2006 would be $90 per megawatt-hour; in fact, the average was $70 per megawatt-hour. Blumenthal I, 117 F.E.R.C. ¶ 61,038, at 61,180. FERC's refusal to treat the charts as prima facie evidence of unjust rates was therefore eminently reasonable.