Balt. Gas & Elec. Co. v. Fed. Energy Regulatory Comm'n

• Decision Date: 27 March 2020
• Docket Number: No. 18-1298,18-1298
• Citation: 954 F.3d 279
• Parties: BALTIMORE GAS AND ELECTRIC COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Maryland Office of People’s Counsel and Maryland Public Service Commission, Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

954 F.3d 279

BALTIMORE GAS AND ELECTRIC COMPANY, Petitioner

v.FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Maryland Office of People’s Counsel and Maryland Public Service Commission, Intervenors

No. 18-1298

United States Court of Appeals, District of Columbia Circuit.

Argued October 17, 2019

Decided March 27, 2020

Matthew E. Price, Washington, DC, argued the cause and filed the briefs for petitioner.

Jared B. Fish, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were James P. Danly, General Counsel, and Robert H. Solomon, Solicitor.

Stephen C. Pearson, Washington, DC, argued the cause for intervenors. With him on the brief were Miles H. Mitchell, Washington, DC, Ransom E. Davis, Paula M. Carmody, Baltimore, MD, William F. Fields, Joseph G. Cleaver, Owings Mills, MD, and Scott H. Strauss, Washington, DC.

Before: Henderson and Rao, Circuit Judges, and Williams, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Rao with respect to Part III.

Dissenting Opinion filed by Senior Circuit Judge Williams with respect to Part III.

Williams, Senior Circuit Judge:

This case arises out of the Federal Energy Regulatory Commission’s effort to apply its "matching" principles to divergences between the timing of deductions for tax purposes and timing for purposes of allocating costs to ratepayers. While Congress and other bodies imposing taxes may want to allow early depreciation of an asset (to encourage investment), for example, the Commission wants a cost (less offsetting tax benefits) to be charged in the period over which the resulting asset provides services to the utility’s customers.

I.

In December 2016, Baltimore Gas and Electric Company ("BGE") filed a new rate proposal with the Commission under § 205 of the Federal Power Act, 16 U.S.C. § 824d. The proposal sought a net recovery of approximately $38 million from future ratepayers relating to various costs incurred by BGE dating back to 2005. It is undisputed that consumers had not been charged for these costs between 2005 and the 2016 filing.

The relevant items are in fact a good deal more complicated than the accelerated depreciation example used above, but their details do not affect the issues before us. They arise from (1) a transition problem posed by a switch in Commission handling of such matters, (2) a change in tax rates, and (3) differences between ratemaking and tax treatments of the equity component of construction costs. The sums involved in the first and third categories totaled about $42 million, offset by about $4 million in the second (which BGE proposed to return to the ratepayers). FERC expects utilities to track these amounts according to Financial Accounting Standard 109 ("FAS 109"), a financial accounting and reporting standard promulgated by the not-for-profit Financial Accounting Standards Bureau intended to set forth recording requirements to facilitate "tax normalization," i.e., resolution of timing differences exemplified by the matters discussed above. See FERC Br. 12; Accounting for Income Taxes, FERC Docket No. AI93-5-000 (Apr. 23, 1993) ("1993 Guidance").

FERC denied BGE’s request to recover these amounts, declining to find BGE’s proposed rate "just and reasonable," as required by § 205(a). Specifically, it found BGE’s request in violation of the procedural requirements that it had developed for implementation of the matching principle in this context and had stated in its order, Regulations Implementing Tax Normalization for Certain Items Reflecting Timing Differences in the Recognition of Expenses or Revenues for Ratemaking and Income Tax Purposes , Order No. 144, FERC Stats. & Regs. ¶ 30,254 (1981). Order No. 144 requires that any such adjustment "be made in the applicant’s next rate case following applicability of the rule." Id. at ¶ 31,519. It also requires applicants "to begin the process of making up deficiencies in or eliminating excesses in their deferred tax reserves so that, within a reasonable period of time to be determined on a case-by-case basis, they will be operating under a full normalization policy." Id . at ¶ 31,560.

FERC concluded that BGE had breached the requirements of Order No. 144 by failing to file for recovery of these amounts in its "next rate case," which, according to FERC, was BGE’s 2005 rate filing. Order Rejecting Proposed Tariff Revisions, PJM Interconnection, LLC , 161 FERC ¶ 61,163 (2017) ("Order"). On requests for clarification and rehearing, the Commission made clear its position that the "reasonable period of time" requirement of Order No. 144 "was intended to work in conjunction with the ‘next rate case’ requirement," so that it does not "negate the requirement that applicants must seek recovery in their next rate case." Order on Rehearing and Clarification, PJM Interconnection, LLC , 164 FERC ¶ 61,173, at P 18 (2018) ("Rehearing Order").

Although neither party speaks directly to the issue, we take it that, for purposes of this case anyway, the "next rate case following applicability of the rule " is the "next rate case" after the utility has incurred an item (including either a cost or a benefit) requiring "normalization" under Order No. 144 and the 1993 Guidance, not counting periods in which a rate case or settlement had itself normalized the treatment of the item (or adequately addressed its normalization). Indeed, even though FERC denied recovery of such amounts for years past, its denial was without prejudice to BGE’s recovery of FAS 109 amounts properly allocable to future years, leaving open BGE’s opportunity to achieve normalization prospectively. See Rehearing Order at PP 37–38; see also FERC Br. 15.

BGE petitioned for review and claims that FERC’s application of Order No. 144 was arbitrary and capricious under the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), misapplying the "next rate case" and "reasonable period of time" requirements. BGE also asserts that FERC erred in failing to recognize BGE’s 2006 settlement of the 2005 rate case as an example of the sort of settlement briefly discussed in Order No. 144. That order had said that it left "undisturbed the ability of the parties to reach a settlement on any of the issues covered by the rule." Order No. 144 at ¶ 31,519. BGE argues the settlement qualified under Order No. 144 and as a result preserved BGE’s ability to recover the FAS 109 amounts here at issue.

For the reasons developed below we find that FERC’s orders were not arbitrary and capricious and therefore deny the petition for review.

II.

We begin with the 2006 settlement agreement, which BGE claims preserved its right to recover FAS 109 amounts dating back to 2005. As BGE acknowledges, BGE Br. 32 n.5, we have long applied Chevron deference to FERC’s reasonable interpretations of settlement agreements it approves, Nat’l Fuel Gas Supply Corp. v. FERC , 811 F.2d 1563, 1569 (D.C. Cir. 1987), and we do so here. The question before us is whether FERC’s determination that BGE’s settlement agreement did not preserve FAS 109 amounts for recovery in a later rate case filing is "reasonable and reasonably explained," Nw. Corp. v. FERC , 884 F.3d 1176, 1179 (D.C. Cir. 2018), which we answer in the affirmative. BGE’s arguments that FERC is wrong in its application of Order No. 144’s settlement provision are not convincing.

The rate filing by BGE that led to the 2006 settlement expressly excluded the FAS 109 amounts, and line items in a spreadsheet attached to the ultimate agreement described certain amounts as "net of" or "less" FAS 109 amounts. BGE claims that the spreadsheets and contemporaneous testimony explaining the same indicate that the parties intended these amounts to be recoverable at a later date. BGE Br. 45; BGE Add. 34. But the Commission observed that the settlement "did not expressly reserve deferred income tax issues," but rather, "was silent on this point." Rehearing Order at PP 16–17. That seems an apt characterization. A mere description of how the parties calculated figures says nothing about an intent to agree on later recovery of amounts not included in the calculation, especially as such a recovery, starting after lapse of the settlement but allowing recovery of amounts properly due over the settlement’s time in effect, would have seriously compromised the Commission’s matching principle. It is thus hard to see more in the settlement references than an agreement to disagree. And FERC’s insistence that a settlement do more than that fits comfortably within Order No. 144’s admittedly vague language on settlements.

BGE suggests that because 18 C.F.R. § 35.24 "require[s] utilities to adopt some mechanism to pass through FAS 109 amounts to customers," the settlement agreement’s near silence should be understood as merely leaving undisturbed a background expectation that FAS 109 amounts will eventually be recovered. BGE Br. 49 (emphasis in original). But while the heading of § 35.24(b)(1) reads, "Tax normalization required," and the text goes on to specify details for fulfillment of the requirement, understanding normalization as a requirement is entirely consistent with Order No. 144’s imposing conditions on utilities’ recovery of deferred tax amounts and with the Commission’s reading the Order’s language on settlements as requiring more than the opaque treatment applied in the 2006 settlement. Indeed, as the Commission requires normalization in order to fulfill the matching principle, it would seem to contradict itself if it allowed the 2006 settlement’s language to allow indefinite postponement of a utility’s recovery of FAS 109 amounts. FERC reasonably interpreted its regulations and the settlement agreement to mean that BGE simply failed to comply with 18 C.F.R. § 35.24 by its next rate case , as required by Order No. 144.

BGE also introduces information about its rates before 2005, pointing to settlements reached in 1996 and 1997, and conjures a new argument out of the settlements. These were "black...