Blumenthal v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 7, 2010 Decided July 16, 2010

No. 09-1220

RICHARD BLUMENTHAL, ATTORNEY GENERAL FOR THE STATE

OF CONNECTICUT, AND CONNECTICUT OFFICE OF CONSUMER

COUNSEL,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

ISO NEW ENGLAND INC. AND NEW ENGLAND POWER POOL

PARTICIPANTS COMMITTEE,

INTERVENORS

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Michael C. Wertheimer, Assistant Attorney General,

Attorney General’s Office of the State of Connecticut, argued

the cause for petitioner. With him on the briefs were John S.

Wright, Assistant Attorney General, and Joseph A. Rosenthal.

Beth G. Pacella, Senior Attorney, Federal Energy

Regulatory Commission, argued the cause for respondent.

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With her on the brief were Thomas R. Sheets, General

Counsel, and Robert H. Solomon, Solicitor.

Before: SENTELLE, Chief Judge, and BROWN and

KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge

KAVANAUGH.

KAVANAUGH, Circuit Judge: This case arises because the

State of Connecticut thinks that executives with ISO New

England – a non-profit entity that administers New England’s

wholesale electricity market – got too greedy when setting

executive compensation.

Utility companies like ISO New England must file their

proposed electric power tariffs – including their proposed

executive compensation – with the Federal Energy Regulatory

Commission for FERC’s annual approval. In late 2008, ISO

New England submitted its 2009 executive compensation plan

to FERC and supported that plan with an independent

consultant’s report as to the reasonableness of the proposed

executive compensation. Over the objections of the State of

Connecticut, FERC then approved ISO New England’s

executive compensation for 2009. In this Court, Connecticut

raises a variety of procedural and substantive challenges to

FERC’s approval – the core of Connecticut’s complaint being

its view that ISO New England’s executive pay is too high.

Although Connecticut’s concerns are not without some basis,

our deferential standard of review requires that we deny the

State’s petition.

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I

ISO New England is a private, non-profit utility company

that administers New England’s energy markets. Under the

Federal Power Act, companies like ISO New England must

file their rates and service terms with the Federal Energy

Regulatory Commission, which in turn must ensure that those

rates and terms are “just and reasonable.” 16 U.S.C.

§ 824d(a).

In October 2008, ISO New England filed its proposed

2009 rates with FERC and at the same time sought approval

for its 2009 executive compensation plan.

Acting on behalf of the State of Connecticut, the

Connecticut Attorney General intervened in the FERC

proceedings. Connecticut argued that FERC should hold an

evidentiary hearing on ISO New England’s proposed 2009

executive compensation. According to Connecticut, ISO New

England did not provide sufficient evidence to demonstrate

that its executive compensation plan for 2009 was just and

reasonable. At the time of Connecticut’s initial filing, ISO

New England had provided only the total amount of its

proposed executive compensation package for all executives

combined.

In December 2008, in response to Connecticut’s filing,

ISO New England provided FERC with additional

information supporting its 2009 executive compensation plan.

That submission included the 2009 estimated total

compensation for 11 senior executives, ranging from

$984,000 for ISO New England’s President to $319,000 for

the Vice President of Information Services. The filing also

contained a report produced by Mercer Consulting – an

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independent consulting firm – supporting the reasonableness

of ISO New England’s estimated executive compensation. In

addition, ISO New England’s supplemental filing explained

the process it used to calculate proposed executive

compensation, which included approval by ISO New

England’s independent Board of Directors.

FERC then approved ISO New England’s 2009 executive

compensation plan. See ISO New England Inc., Order

Accepting Tariff Revisions, 125 FERC ¶ 61,392 (2008).

Connecticut filed a petition for rehearing. Connecticut

argued that FERC should hold an evidentiary hearing to

consider the merits of ISO New England’s executive

compensation plan. The State also raised several objections

to the Mercer analysis underlying FERC’s approval of the

executive compensation plan. FERC denied Connecticut’s

request for a rehearing. See ISO New England Inc., Order

Denying Rehearing, 127 FERC ¶ 61,254 (2009).

Connecticut now seeks review in this Court of FERC’s

decision.

II

Connecticut raises two distinct procedural challenges to

FERC’s approval of ISO New England’s executive

compensation plan.

First, Connecticut argues that FERC must hold an

evidentiary hearing to determine whether Mercer – the

independent consultant that reviewed ISO New England’s

proposed executive compensation – was biased. Connecticut

suggests that Mercer’s sole motivation when reviewing ISO

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New England’s executive compensation was Mercer’s desire

to be rehired in the future. In Connecticut’s view, the issues

raised by this alleged bias called for an evidentiary hearing.

FERC’s choice whether to hold an evidentiary hearing “is

generally discretionary.” Cerro Wire & Cable v. FERC, 677

F.2d 124, 128 (D.C. Cir. 1982); see Moreau v. FERC, 982

F.2d 556, 568 (D.C. Cir. 1993). It is well established in the

context of FERC proceedings that “mere allegations of

disputed facts are insufficient to mandate a hearing;

petitioners must make an adequate proffer of evidence to

support” their claim. Cerro, 677 F.2d at 129; see Braintree

Elec. Light Department v. FERC, 550 F.3d 6, 13 (D.C. Cir.

2008); Gen. Motors Corp. v. FERC, 656 F.2d 791, 798 n.20

(D.C. Cir. 1981).

Connecticut provides nothing more than a bald assertion

that Mercer was biased. As the Commission rightly

concluded in response to this contention: “Mercer

Consulting’s motivations are no different from any other

independent paid consultant’s, including any that”

Connecticut itself “would hire.” ISO New England Inc.,

Order Denying Rehearing, 127 FERC ¶ 61,254, at ¶ 22

(2009). Without more, Connecticut’s assertion of bias does

not require FERC to hold a hearing.

To bolster its plea for an evidentiary hearing on this

ground, Connecticut cites this Court’s case law stating that

“FERC may resolve factual issues on a written record unless

motive, intent, or credibility are at issue or there is a dispute

over a past event.” Union Pac. Fuels, Inc. v. FERC, 129 F.3d

157, 164 (D.C. Cir. 1997). Connecticut argues that Mercer’s

credibility is at issue and that resolution on a written record

alone is not permitted. But Connecticut does not raise a

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genuine issue of credibility, only an unsubstantiated general

claim. Under our case law, that kind of bare allegation does

not require an agency to conduct an evidentiary hearing. Cf.

Braintree, 550 F.3d at 13; Cerro, 677 F.2d at 129.

Second, Connecticut contends that FERC must hold an

evidentiary hearing to assess the validity of Mercer’s

methodology – in particular, Mercer’s choice of which

companies to consider as ISO New England’s peers when

Mercer determined the reasonableness of ISO New England’s

executive compensation. The State asserts that Mercer used

the wrong companies as a measuring stick – a point it raises in

arguing for a hearing and in challenging the substantive

reasonableness of ISO New England’s executive

compensation (we address the latter point below).

Connecticut says that the comparison companies had higher

revenues and that their executive salaries thus provided an

inaccurate basis for comparison.

Even when there are disputed factual issues, FERC does

not need to conduct an evidentiary hearing if it can adequately

resolve the issues on a written record. See Ark. Elec. Energy

Consumers v. FERC, 290 F.3d 362, 369-70 (D.C. Cir. 2002);

Moreau, 982 F.2d at 568. FERC reviewed the filings in this

case – which included a detailed justification of the

composition of the comparison group – and determined that

no evidentiary hearing was necessary to determine the validity

of Mercer’s approach. Nothing in the record suggests that

FERC’s decision to resolve the issue without a hearing was

unreasonable.

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III

Connecticut also asserts that FERC’s decisonmaking

process violates the Due Process Clause of the Fifth

Amendment.

First, in a constitutional spin on its plea for an

evidentiary hearing, Connecticut contends that its due process

rights were abridged by FERC’s refusal to hold such a

hearing. Due process generally requires a “meaningful

opportunity” to be heard before one is deprived of life, liberty,

or property. BNSF Ry. Co. v. Surface Transp. Bd., 453 F.3d

473, 486 (D.C. Cir. 2006) (quoting Mathews v. Eldridge, 424

U.S. 319, 349 (1976)). But Connecticut was heard in this

case; it had an opportunity to submit its objections, and FERC

carefully considered them. This Court has never held that an

in-person evidentiary hearing is constitutionally required

whenever FERC makes decisions. Indeed, we have

frequently suggested the opposite. See Moreau v. FERC, 982

F.2d 556, 568 (D.C. Cir. 1993); Cerro Wire & Cable v.

FERC, 677 F.2d 124, 129 (D.C. Cir. 1982). Connecticut

provides no good reason for us to create a new due process

right to an evidentiary hearing where none now exists.

Second, Connecticut argues that it was denied due

process because it did not have an opportunity to respond to

ISO New England’s executive compensation filings before

FERC issued its initial decision. But Connecticut had such an

opportunity and took advantage of it when filing its petition

for rehearing, which FERC in turn thoroughly considered. So

this due process argument fails as well.

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IV

Connecticut separately contends that – regardless of

whether an evidentiary hearing should have been held –

FERC’s approval of ISO New England’s executive

compensation plan was substantively unreasonable and thus

arbitrary and capricious for purposes of the Administrative

Procedure Act. Connecticut raises three separate substantive

challenges to FERC’s approval of ISO New England’s

executive compensation levels.

First, as alluded to above, Connecticut argues that

Mercer used the wrong companies when measuring the

appropriateness of ISO New England’s executive

compensation. According to Connecticut, ISO New

England’s executive compensation was excessive when

compared to that of similarly situated entities.

ISO New England brings in annual revenues of around

$128 million. Mercer based its review of ISO New England’s

executive compensation on companies with revenues in the

billions. Mercer reasoned that these higher-revenue

companies constituted an appropriate comparison group

because executive jobs at those companies matched the jobs

at ISO New England in terms of sophistication and

complexity. Moreover, Mercer observed that “ISO New

England competes for executive talent in a broad labor market

in the energy/utility industry, and for some [positions] . . . in

the broader/general industry as well.” J.A. 263. Taking those

considerations into account, Mercer concluded that ISO New

England’s proposed “executive compensation is within a

reasonable range of competitive practices for functionally

comparable positions among similarly-situated entities.” ISO

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New England Inc., Order Accepting Tariff Revisions, 125

FERC ¶ 61,392, at ¶ 35 (2008). FERC accepted the

comparison group based on Mercer’s detailed reasoning and

concluded that ISO New England had “justified its proposed

executive compensation package” and that ISO New

England’s executive compensation was “just and reasonable.”

Id.

In this context, the proper level of executive

compensation is more art than science. For purposes of the

deferential arbitrary and capricious standard, even if we

would have used a different comparison group, we cannot say

that FERC’s decision to accept Mercer’s analysis was

unreasonable.

Second, Connecticut argues that FERC must base its

approval of ISO New England’s proposed 2009 executive

compensation plan on the actual compensation for its

executives, not on estimated compensation. That argument

contravenes our precedents. As we have said, “[s]tandard

FERC ratemaking, in its most simple form, involves

projecting a revenue requirement.” Interstate Natural Gas

Ass’n v. FERC, 285 F.3d 18, 56 (D.C. Cir. 2002) (internal

quotation marks omitted). And this Court has repeatedly

validated that type of ratemaking approach. Cf. Williston

Basin Interstate Pipeline Co. v. FERC, 165 F.3d 54, 56-57

(D.C. Cir. 1999); American Pub. Power Ass’n v. FPC, 522

F.2d 142, 143-47 (D.C. Cir. 1975). Albeit arising in a slightly

different context, those precedents support FERC’s

consideration of estimated executive compensation in this

case.

Third, Connecticut relatedly argues that FERC’s approval

is unreasonable in light of the dramatic economic downturn in

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late 2008. Connecticut suggests that ISO New England’s

executive compensation levels should have gone down as

well. In a play on President Kennedy’s famous observation,

Connecticut asserts that a “declining tide should lower all

boats.” Connecticut Br. at 10 (quotation omitted).

FERC considered this argument and concluded that it

was appropriate for ISO New England to base its executive

compensation package “on the facts as they existed when” it

drafted its executive compensation package in early 2008.

ISO New England Inc., Order Denying Rehearing, 127 FERC

¶ 61,254, at ¶ 22 (2009). FERC further noted that when ISO

New England seeks “approval for executive compensation

again” for 2010, “it may use any new benchmarks that have

arisen due to the economic situation at that time.” Id.

FERC, not the Judiciary, has the principal statutory role

in determining the reasonableness of rates and proposed

executive compensation for companies such as ISO New

England. In exercising its authority, FERC allowed some lag

time between the market downturn and adjustments to

executive compensation. Although FERC could have

clamped down more (or more quickly) on ISO New

England’s executive compensation, our role is only to

determine whether FERC’s contrary approach was so

unreasonable as to violate the APA’s deferential arbitrary and

capricious standard. In light of the judicial restraint we must

exercise when applying that standard, we cannot say that

FERC’s decision jumped the rails of reasonableness.

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***

We deny Connecticut’s petition for review.

So ordered.