Louisiana Public Service Comm v. FERC , 883 F.3d 929 ( 2018 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 2, 2018 Decided March 6, 2018
No. 16-1382
LOUISIANA PUBLIC SERVICE COMMISSION,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
ARKANSAS PUBLIC SERVICE COMMISSION AND ENTERGY
SERVICES, INC.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Michael R. Fontham argued the cause for petitioner. With
him on the briefs were Noel J. Darce, Dana M. Shelton, and
Justin A. Swaim. Paul L. Zimmering entered an appearance.
Holly E. Cafer, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were David L. Morenoff, General
Counsel, and Robert H. Solomon, Solicitor.
Clifford M. Naeve argued the cause for intervenors. With
him on the brief were Gerard A. Clark, Matthew W.S. Estes,
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Gregory W. Camet, Glen Ortman, Dennis Lane, and Paul
Randolph Hightower. Jennifer S. Amerkhail entered an
appearance.
Before: GARLAND, Chief Judge, ROGERS, Circuit Judge,
and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: After finding a rate
unjust and unreasonable under § 206 of the Federal Power Act,
16 U.S.C. § 824e, the Federal Energy Regulatory Commission
sets a new just and reasonable rate to take effect for the future.
In addition, the Commission “may order” refunds for a portion
of the period in which the unreasonable rate was in effect. Id.
§ 824e(b). Here the Commission found in 2004 that certain of
Entergy Corporation’s rates were unjust and unreasonable.
Opinion No. 468, 106 FERC ¶ 61,228, PP 60–77 (2004). After
a good deal of vacillation, it refused to require refunds. 135
FERC ¶ 61,218, PP 20–25 (2011); 142 FERC ¶ 61,211, PP 49–
77 (2013). On a challenge by the Louisiana Public Service
Commission (“LPSC”), we remanded the case to the
Commission, finding, as urged by LPSC, that the Commission
had failed to adequately “explain its reasoning in departing
from its ‘general policy’ of ordering refunds when consumers
have paid unjust and unreasonable rates.” Louisiana Public
Service Commission v. FERC, 772 F.3d 1297, 1298 (D.C. Cir.
2014) (“Louisiana III”). (The numbering will soon be clear.)
On remand, the Commission clarified that it actually has
no general policy of ordering refunds in cases of rate design.
155 FERC ¶ 61,120, P 17 (2016) (“Order on Remand”); 156
FERC ¶ 61,221, P 20 (2016) (“Rehearing Order”). Now that
the Commission has corrected its characterization of its own
precedent, we find that the Commission’s denial of refunds
3
accords with its usual practice in cost allocation cases such as
this one. We also find that the Commission adequately
explained its conclusion that it would be inequitable to award
refunds in this case. The Commission did not abuse its
discretion; we deny the petition for review.
* * *
Much of the factual and procedural background has been
recited at length in our three prior decisions. See Louisiana
Public Service Commission v. FERC, 184 F.3d 892, 894–97
(D.C. Cir. 1999) (“Louisiana I”); Louisiana Public Service
Commission v. FERC, 482 F.3d 510, 513–15 (D.C. Cir. 2007)
(“Louisiana II”); Louisiana III, 772 F.3d at 1299–1302. We
repeat here only what is necessary for the present decision.
More than two decades ago, LPSC filed a complaint under
§ 206(a), 16 U.S.C. § 824e(a), challenging Entergy’s allocation
of capacity costs among its various operating companies. At
the time, Entergy did so on the basis of the companies’ total
usage at the time of peak demand, regardless of whether the
load was “firm” (entitling the customer to service at any time)
or “interruptible” (subject to Entergy’s curtailment at any time
of insufficient capacity). When Entergy had set these rates, the
system was “awash in capacity” and projected firm load would
have required no more capacity. As a result, charging
interruptible load for capacity costs was of comparatively little
importance in terms of signaling to customers whether to use
firm or interruptible service, or to Entergy whether to invest in
more capacity. Over time, however, Entergy’s capacity
became inadequate to handle all demand; it changed its
planning criteria so that, in deciding whether to add capacity, it
no longer counted interruptible load. Louisiana I, 184 F.3d at
896.
4
The Commission initially rejected LPSC’s complaint, 76
FERC ¶ 61,168 (1996); 80 FERC ¶ 61,282 (1997), but we
reversed in Louisiana I. The Commission had in 1981 adopted
the principle that costs should be allocated to customers
according to the principle of cost causation; we rejected the
Commission’s explanations for failing to adhere to that
principle. As we explained, interruptible customers do not
cause the utility to incur capacity costs; by definition, the utility
can curtail such service when load exceeds capacity. Charging
them for capacity costs thus creates an uneconomic
disincentive to the use of interruptible service; customers are
dissuaded from using interruptible service even where the
utility’s costs of providing that service fall well below the
potential benefit to the customer. By the same token, to the
extent that such a cost allocation relieves firm customers of the
burden of covering capacity costs that they do cause the utility
to incur, it provides an inadequate disincentive to the choice of
such service and signals to the utility more need for adding
capacity than really exists. Louisiana I, 184 F.3d at 896–97;
JAMES C. BONBRIGHT, PRINCIPLES OF PUBLIC UTILITY RATES
494–96 (2d ed. 1988); 1 KAHN, ECONOMICS OF REGULATION
89–95 (2d ed. 1988).
On remand from Louisiana I, the Commission ultimately
found Entergy’s inclusion of interruptible load in the cost
allocation equation to be unjust and unreasonable. It ordered
the cost allocation changed for the future, but denied LPSC’s
request for refunds, which § 206(b), 16 U.S.C. § 824e(b), gave
it authority to order for a 15-month period starting at a date set
by the Commission at the outset of the proceedings. Opinion
No. 468, 106 FERC ¶ 61,228, PP 60–77, 82–89 (2004),
rehearing denied, Opinion 468-A, 111 FERC ¶ 61,080, PP 10–
22. Because Louisiana customers relied on interruptible
service in a higher proportion than other Entergy customers,
they gained from the ordered future change in cost allocation,
and would have gained more from any refund. In a series of
5
orders, the Commission took a considerable variety of positions
on refunds, culminating in denial in the orders reviewed in
Louisiana III and in the present Order on Remand and
Rehearing Order.
* * *
Louisiana III’s conclusion determines our task here. There
we were convinced by LPSC’s argument that the Commission
had failed to “‘reasonably explain the departure’ from its
‘general policy’ of ordering refunds when consumers have paid
unjust and unreasonable rates.” Louisiana III, 772 F.3d at
1303. We acknowledged that the Commission was free to
“depart from a prior policy or line of precedent, but it must
acknowledge that it is doing so and provide a reasoned
explanation.” Id. We find that the Commission has made its
historic practice clear and justified its application of that
practice here.
Above all, the Commission has clarified its previously
muddled position, explaining that—despite its prior
representations to the contrary—it has no generally applicable
policy of granting refunds. Order on Remand, 155 FERC
¶ 61,120, P 17. The Commission now recognizes that its
previous characterization of its refund policy does “not
accurately represent that policy as both the Commission and the
courts have described it in the past.” Id. The Commission
found that it had only twice—both times in the course of these
proceedings—referred to a “general policy” in favor of refunds.
Id. at P 18.
The Commission does “generally award[] refunds where
there have been overcharges that result in overcollection of
revenue.” Rehearing Order, 156 FERC ¶ 61,221, P 10. But a
series of Commission decisions, cited in the Order on Remand,
155 FERC ¶ 61,120, P 25 & n.58, makes clear that the
6
Commission’s default position is quite the opposite in the set
of cases to which this belongs: ones in which it has found a rate
unjust and unreasonable because of a flaw in rate design, such
as cost allocation (at least so long as there is no violation of the
filed rate doctrine). In such instances (putting aside some filed
rate violations), the utility has received no net over-recovery.
See id. “[I]n a case where the company collected the proper
level of revenues, but it is later determined that those revenues
should have been allocated differently, the Commission
traditionally has declined to order refunds.” Black Oak Energy,
LLC, 136 FERC ¶ 61,040, P 25 (2011); see also Occidental
Chem. Corp., 110 FERC ¶ 61,378, P 10 (2005) (“The
Commission’s long-standing policy is that when a Commission
action under section 206 of the FPA requires only a cost
allocation change, or a rate design change, the Commission’s
order will take effect prospectively.”); Consumers Energy Co.,
89 FERC ¶ 61,138, 61,397 (1999) (“This case involves a
change in rate design, that, while appropriate on a prospective
basis, is inappropriate for retroactive application. The
Commission’s policy, albeit discretionary, is to avoid
retroactive application of changes in rate design.”); S. Co.
Servs., Inc., 64 FERC ¶ 61,033, 61,332 (1993) (explaining that
where the “sole issue” is cost “apportionment among the
operating companies,” the Commission’s typical practice is not
to issue refunds).
Apart from noting that in such cases the utility has received
no net over-recovery, the Commission rests this default
position on its belief that two circumstances are usually present
in such cases. Order on Remand, 155 FERC ¶ 61,120, P 28.
First, it would be difficult for the utility to recover its costs
fully. The sums that one set of customers lost through
allocation of excessive costs will usually be matched by unduly
low rates to another set, from whom it would be difficult or
inequitable to extract recompense. Second, customer firms that
had made operational decisions in reliance on one set of rates
7
would be unable to “undo” those transactions retroactively in
light of the new, corrected rates; a refund would, at least in part,
pull the economic rug out from under those transactions.
In the present case, LPSC’s briefs do not respond to these
Commission decisions. Pressed on the point at oral argument,
counsel for LPSC offered two purported distinctions. First,
counsel observed correctly that several of the cases were under
§ 205 of the Federal Power Act, 16 U.S.C. § 824d. But since
§ 205 also provides that the Commission “may” require a
refund where it finds a rate to have been unjust and
unreasonable, id. § 824d(e), it is unclear why the Commission
should disregard its § 205 cases in the § 206 context.
Second, counsel noted that many of the cases invoked by
the Commission did not involve a holding company, such as
Entergy. Counsel failed to explain, however, why that should
affect the Commission’s general principle as to refunds in rate
design cases.
After oral argument, LPSC directed us to its attempt to
distinguish these cases in the run-up to Louisiana III. See
Petitioner’s Br. at 52–54, Louisiana III, 772 F.3d 1297 (2014)
(No. 13-1155). But even if these arguments had been renewed
before us, we would find them unavailing. In its previous
briefing, LPSC emphasized that the cited cases involved
situations in which utilities would likely suffer a loss of revenue
and an under-recovery of costs. That of course is quite true, as
our summary of the cases and the Commission’s reasoning
make clear. LPSC then argued that the cases did not support
the Commission’s denial of refunds here. Id. That was true in
the 2014 case, but is no longer true, because the Commission
has—reasonably—changed its position on the feasibility of
recoupment by Entergy.
8
In the decision under review in 2014, the Commission
had—without explanation—disclaimed any reliance on a risk
of under-recovery. See 142 FERC ¶ 61,211, P 63; see also
Louisiana III, 772 F.3d at 1304. We noted that many of the
cases in which the Commission had refused to order refunds
involved at least “the possibility of under-recovery,” Louisiana
III, 772 F.3d at 1304, but, because of the Commission’s
disclaimer, we found those cases inapposite.
The Commission has now reversed its prior disclaimer and
affirmatively explained why there is at least a risk of under-
recovery. See Order on Remand, 155 FERC ¶ 61,120, PP 31–
32. 1 Specifically, the Commission explained that Entergy
sought to recover from retail customers surcharges to pay for
certain other refunds previously ordered in this proceeding, id.
at P 32; see 120 FERC ¶ 61,241, P 9, but the Arkansas
Commission rebuffed Entergy, asserting that the surcharges
would violate the filed rate doctrine and constitute retroactive
ratemaking, Order on Remand, 155 FERC ¶ 61,120, P 32. As
the Commission concedes, the ultimate outcome of the
Arkansas Commission proceedings is uncertain (if Entergy
prevails, the Arkansas Commission’s order will be reversed),
but the Commission identifies definite evidence of at least a
non-trivial risk of under-recovery—one factor that counsels
against the issuance of refunds.
Second, the Commission offered a convincing answer to
our query about the absence of evidence of “particular
decisions” made in reliance on the old rate structure. First,
1
The Commission’s conclusion that there is a risk of under-
recovery rests in part on its interpretation of City of Anaheim v.
FERC, 558 F.3d 521 (D.C. Cir. 2009). Finding that the Commission
would have reached the same conclusion about under-recovery even
absent reliance on City of Anaheim, we do not address the validity of
the Commission’s interpretation of that case.
9
since the object of sound cost allocation is to influence
customer behavior by making those who “cause” the incurrence
of costs to bear those costs and adjust their consumption
accordingly (so that costs will be incurred only up to the point
that is justified by customer benefit, evidenced by the
customer’s willingness to pay), we may fairly infer that their
purchase decisions reflected that principle. While we were
concerned in 2014 that “some amount of reliance is likely to be
present every time the Commission considers ordering
refunds,” Louisiana III, 772 F.3d at 1305–06, it becomes
apparent from the cases cited at footnote 58 of the Order on
Remand that that is exactly the Commission’s point: its general
tendency to deny refunds in cost allocation cases stems from
the high correlation between such reliance and that type of case.
See, e.g., Black Oak Energy, LLC, 136 FERC ¶ 61,040, PP 25–
28 (2011); Occidental Chem. Corp., 110 FERC ¶ 61,378, PP
10–12 (2005). (Of course in cases where there has been over-
recovery, the customers will also have rested their decisions on
the prices previously applied, but the only customers affected
will be ones getting refunds from the utility, and they will
obviously not complain despite their inability to alter prior
decisions.) Second, LPSC itself, in objecting to Entergy’s prior
cost allocation system, invoked the desirability of correcting
customers’ incentives for the purpose of changing their
behavior. Rehearing Order, 156 FERC ¶ 61,221, P 62; see also
Order on Remand, 155 FERC ¶ 61,120, PP 34–35. That these
past economic decisions cannot be revisited also justifies
denying refunds here.
Finally, under the facts of this case, the Commission noted
an additional equity militating against refunds: the disjunction
between the beneficiaries of the old regime and those who
would have to pay surcharges to ensure that each operating
company fully recouped costs retroactively allocated to it.
Order on Remand, 155 FERC ¶ 61,120, P 31. In part this
referred to whatever customers might be said to have replaced
10
the earlier era’s wholesale customers, which then accounted for
about 15% of Entergy Arkansas’s load but have now almost
entirely ceased to buy from Entergy Arkansas. Id. Further,
given the passage of time, surcharges would fall on current
Entergy Arkansas customers for benefits enjoyed by “past
customers, or a prior generation of customers.” Rehearing
Order, 156 FERC ¶ 61,221, P 67; see also Order on Remand,
155 FERC ¶ 61,120, P 36.
LPSC argues that the Commission was largely responsible
for the lag between LPSC’s original complaint and the
Commission’s most recent orders, and that the turnover in
customers can therefore be at least in part laid at the
Commission’s door. Maybe so. But that would make it no
more equitable to now force consumers who neither were at
fault nor received any benefit to “pay back” consumers who
were disadvantaged by the prior rate regime.
We note that the parties engaged in considerable argument
as to the possible effect of § 206(c), 16 U.S.C. § 824e(c). It
provides that in a proceeding “involving two or more electric
utility companies of a registered holding company,” refunds
may not be awarded if they will be paid for “through an increase
in the costs to be paid by other electric utility companies of such
registered holding company,” unless the Commission can
determine that “the registered holding company would not
experience any reduction in revenues which results from an
inability” of such electric utility companies of the same holding
company “to recover such increase in costs.” 16
U.S.C. § 824e(c)(2). To the extent applicable, of course, the
section would require the Commission to deny refunds if it
could not conclude that the holding company will not suffer any
reduction in revenues. But that is just what the Commission
has independently chosen to do under § 206(b): it denied
refunds in part because it could not conclude Entergy would be
able to offset any refunds. Because we find that choice
11
reasonable, we need not address the parties’ debate over
§ 206(c)’s applicability.
* * *
The petition for review is
Denied.