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Lauisiana Public Service Commission v. Federal Energy Regulatory Commission

United States Court of Appeals, Fifth Circuit

November 14, 2014

LOUISIANA PUBLIC SERVICE COMMISSION, Petitioner
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Page 904

On Petition for Review of Orders of the Federal Energy Regulatory Commission.

For Louisiana Public Service Commission, Petitioner: Michael Fontham, Esq., Noel Joseph Darce, Esq., Stone Pigman Walther Wittmann, L.L.C., New Orleans, LA.

For Federal Energy Regulatory Commission, Respondent: Carol Jayne Banta, Robert Harris Solomon, Esq., Solicitor, Federal Energy Regulatory Commission, Washington, DC.

For Arkansas Public Service Commission, Intervenor: P. Randolph Hightower, Counsel, Arkansas Public Service Commission, Little Rock, AR; Dennis Lane, Stinson Morrison & Hecker, L.L.P., Washington, DC.

For Council For The City of New Orleans, Intervenor: Presley Randolph Reed Jr., Jennifer Anne Morrissey, Dentons US, L.L.P., Washington, DC.

For Entergy Services, Incorporated, Intervenor: Kathryn Ann Washington, Entergy Services, Incorporated, New Orleans, LA; David Chapman Duggins, Patrick Joseph Pearsall, Mark P. Strain, Duggins Wren Mann & Romero, L.L.P., Austin, TX.

Before KING, DENNIS, and CLEMENT, Circuit Judges.

OPINION

Page 905

EDITH BROWN CLEMENT, Circuit Judge:

The Louisiana Public Service Commission (" LPSC" ) seeks review of certain orders of the Federal Energy Regulatory Commission (" FERC" ) relating to the allocation of production costs among Entergy Corporation's (" Entergy" ) six operating companies. Because FERC's procedural and ratemaking decisions were not arbitrary and capricious, we DENY LPSC's petition for review.

Facts and Proceedings

I. Regulatory Background

Section 201 of the Federal Power Act (" FPA" ) endows FERC with jurisdiction over the transmission and sale at wholesale of electricity in interstate commerce. 16 U.S.C. § 824(a)-(b). FERC reviews all rates within its jurisdiction to ensure that they are " just and reasonable." Id. § 824d(a). In furtherance of this objective, FERC may, on its own initiative or upon the filing of a third-party complaint, investigate whether an existing rate is lawful. Id. § 824e(a). This is referred to as a " Section 206" proceeding. The complainant--whether it is FERC or a third party--bears the burden of proof to demonstrate that a rate is unjust or unreasonable. Id. § 824e(b). If FERC concludes that a rate is unlawful, it must set a new just and reasonable rate. Id. § 824e(a). A public utility itself may also pursue a rate change in a " Section 205" proceeding, and FERC has the power to determine whether the proposed rate is lawful and thus will take effect. Id. § 824d(d)-(e). If the public utility seeks to increase the rate, it bears the burden of proof to demonstrate that the increase is just and reasonable. Id. § 824d(e).

II. Entergy System Agreement and Bandwidth Remedy

Entergy is a public utility holding company that sells electricity in Arkansas, Louisiana, Mississippi, and Texas through six operating subsidiaries.[1] See La. Pub. Serv. Comm'n v. FERC, 522 F.3d 378, 383, 380 U.S. App. D.C. 353 (D.C. Cir. 2008) (" La. 2008 " ). The operating companies collaborate for their mutual benefit and their generation and transmission facilities, although individually owned, are operated as a single electric system (" System" ). Id. at 383-84, 394. Transactions among the six operating companies are governed by the System Agreement, a FERC-approved tariff that " acts as an interconnection and pooling agreement for the energy generated in the System and provides for the joint planning, construction and operation of new generating capacity in the System." Id. at 383; see also Entergy La., Inc. v. La. Pub. Serv. Comm'n, 539 U.S. 39, 42, 123 S.Ct. 2050, 156 L.Ed.2d 34 (2003). New generating capacity is added to the System on a rotating basis, and because each operating company

Page 906

bears the costs of the generation facilities in its jurisdiction, " the rotation of new plants throughout the System historically had the effect of roughly evening out investment costs over time among the operating companies." La. 2008, 522 F.3d at 384.

Although this rotation system prevented substantial deviations in operating costs between the subsidiaries for the first thirty years of the System's existence, the arrangement faltered in the early 1980s when Entergy Mississippi incurred billions of dollars in unanticipated costs in connection with its construction of a nuclear power plant. Id. FERC interpreted the System Agreement to require that production costs be " roughly equal" among the operating companies and ordered nuclear-investment equalization to remedy the disparity. Id. Production costs again diverged dramatically in the early 2000s when a spike in natural gas prices rendered electricity production more expensive for Entergy Louisiana, which relies more heavily on gas generation than its sister companies. Id. at 385. FERC again concluded that the System was " out of rough production cost equalization" and imposed a " bandwidth remedy." Id. at 388-89 (internal quotation marks omitted).

The bandwidth remedy establishes outer boundaries of 11% by which production costs may deviate from the System average. Id. at 387-89. Pursuant to this remedial measure, each calendar year the production costs of each operating company are calculated and, if necessary, " payments [are] made by the low cost Operating Company(ies) to the high cost Operating Company(ies) such that, after reflecting the payments and receipts, no Operating Company would have production costs more than 11 percent above the Entergy System average or more than 11 percent below the Entergy System average." La. Pub. Serv. Comm'n v. Entergy Servs., Inc., 146 FERC ¶ 61,152 at P 3 (2014). The D.C. Circuit found that FERC had jurisdiction to allocate production costs among the operating companies, and upheld the bandwidth remedy as a reasonable exercise of the agency's discretion. La. 2008, 522 F.3d at 389, 391.

III. Bandwidth-Related Proceedings

A. Bandwidth Remedy Compliance Filings

In conjunction with its legislation of the bandwidth remedy, FERC directed Entergy to implement the remedy into the System Agreement. La. Pub. Serv. Comm'n v. Entergy Servs., Inc., 111 FERC ¶ 61,311 (2005) (" Op. No. 480 " ), on reh'g, 113 FERC ¶ 61,282 (2005) (" Op. No. 480-A " ). Entergy submitted amendments to the System Agreement, which FERC accepted with modifications. See La. Pub. Serv. Comm'n v. Entergy Servs., Inc., 117 FERC ¶ 61,203 (2006) (" 2006 Compliance Order " ), on reh'g and compliance, 119 FERC ¶ 61,095 (2007), pet. for review denied, La. Pub. Serv. Comm'n v. FERC, 341 F.App'x 649 (D.C. Cir. 2009). Entergy modified " Service Schedule MSS-3" to prescribe a formula for calculating the production costs of the operating companies, which are then compared to the System average to determine whether a variation of greater than 11 percent from the average exists, and thus whether any rough production cost equalization payments are owed. See Service Schedule MSS-3, Sec. 30.12 (formula for determining actual production costs); id. Sec. 30.13 (formula for determining average production costs); 2006 Compliance Order, 117 FERC ¶ 61,203 at PP 23-27.[2] Service Schedule MSS-3

Page 907

also specifies that in populating the actual production cost formula inputs: " All Rate Base, Revenue and Expense items shall be based on the actual amounts on the Company's books for the twelve months ending December 31 of the previous year as reported in FERC Form 1 or such other supporting data as may be appropriate for each Company . . . ." Service Schedule MSS-3, Sec. 30.12, n.1.[3]

B. Annual Bandwidth Implementation Proceedings

As required by FERC, Entergy must annually file its rates calculated from Service Schedule MSS-3 and any bandwidth payments and receipts derived therefrom. These compliance filings implement the bandwidth formula using the prior calendar year's production costs.

1. First Bandwidth Proceeding

FERC scheduled the first annual bandwidth payment for June of 2007 and Entergy initiated the first bandwidth proceeding in May of 2007. On exceptions to many of the ALJ's findings, FERC clarified, as relevant here, that " the bandwidth formula in Service Schedule MSS-3 is the lawful rate," and that " amendments to correct errors or deficiencies . . . in the underlying methodology" could not be raised in an annual implementation proceeding. Entergy Servs., Inc., 130 FERC ¶ 61,023 at PP 12, 170, 245 (2010) (" Op. No. 505 " ), on reh'g, 139 FERC ¶ 61,103 (2012) (" Op. No. 505--A " ). LPSC and Entergy each filed still-pending petitions for review of FERC's orders related to the first bandwidth proceeding in the D.C. Circuit.

2. Second Bandwidth Proceeding

Entergy initiated the second bandwidth proceeding in May of 2008. FERC again heard exceptions to the ALJ's rulings on various issues, including the proper scope of bandwidth proceedings. Entergy Servs. Inc., 137 FERC ¶ 61,029 (2011) (" Op. No. 514 " ), reh'g denied, 142 FERC ¶ 61,013 (2013) (" Op. No. 514--A " ). LPSC appealed FERC's orders to the Fifth Circuit and, as discussed infra, a panel of this court denied FERC's petition for review. La. Pub. Serv. Comm'n v. FERC, 761 F.3d 540 (5th Cir. 2014) (" Second Bandwidth Decision " ).

3. Third Bandwidth Proceeding

The third bandwidth proceeding began in May of 2009. The ALJ ordered issues related to certain depreciation inputs removed from the proceeding based on FERC's ruling in Op. No. 505 that the reasonableness of expense inputs cannot be litigated in annual bandwidth filings. FERC upheld the ALJ's removal order on interlocutory appeal. See Entergy Servs., Inc., 130 FERC ¶ 61,170 (2010) (" Third Bandwidth Interlocutory Order " ). After completing the hearing, the ALJ ruled that casualty loss ADIT recorded in bandwidth-eligible accounts is to be included in the bandwidth calculation. Entergy Servs., Inc., 132 FERC ¶ 63,005 at PP 275-77 (2010) (" Third Bandwidth Initial Decision " ). FERC affirmed the ALJ's decision in relevant respects and those orders are now on review in this petition. See Entergy Servs., Inc., 139 FERC ¶ 61,105 (2012) (" Op. No. 518 " ), on reh'g, 145 FERC ¶ 61,047

Page 908

(2013) (" Third Bandwidth Rehearing Order " ...


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