Louisiana Public Service Com'n v. F.E.R.C.

• Decision Date: 13 April 1999
• Docket Number: No. 98-1088,98-1088
• Citation: 174 F.3d 218
• Parties: Util. L. Rep. P 14,265 LOUISIANA PUBLIC SERVICE COMMISSION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Arkansas Public Service Commission, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 218

174 F.3d 218

Util. L. Rep. P 14,265

LOUISIANA PUBLIC SERVICE COMMISSION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Arkansas Public Service Commission, et al., Intervenors.

No. 98-1088.

United States Court of Appeals District of Columbia Circuit.

Argued March 8, 1999.

Decided April 13, 1999.

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

Michael R. Fontham argued the cause for petitioners. With him on the briefs were Noel J. Darce and George M. Fleming.

David H. Coffman, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solicitor.

Douglas G. Green argued the cause for intervenor Entergy Services, Inc. With him on the brief was J. Wayne Anderson.

Earle H. O'Donnell and Roger L. St. Vincent were on the briefs for intervenor Occidental Chemical Corporation.

Mary W. Cochran, Paul R. Hightower, Clinton A. Vince, and Glen L. Ortman were on the brief for intervenors City of New Orleans and Arkansas Public Service Commission.

Before: WALD, SILBERMAN, and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

FERC determined that Entergy Corporation had violated the inter-company formula tariff that it administers to equalize costs among its five parallel subsidiaries; the Commission declined, however, to order a refund from the subsidiaries that were undercharged by virtue of the tariff violation to the customers of the overcharged subsidiaries. The state regulatory bodies of Louisiana and Mississippi (the service areas of the overcharged subsidiaries), supported by an energy consumer as intervenor, petition for review of the Commission's order, contending that the Commission abused its discretion in declining to order a refund. We deny the petition.

I.

Entergy Corporation owns five public utilities--Entergy Gulf States, Entergy Arkansas, Entergy Louisiana, Entergy New Orleans, and Entergy Mississippi--that provide electrical power to retail customers in Arkansas, Louisiana, Mississippi, and Texas. (Entergy Arkansas, alone among the subsidiaries, sells wholesale as well as retail power.) Entergy's subsidiaries are linked by more than common parentage: each subsidiary makes its capacity available to its sister companies as a backstop for when demand exceeds selfgenerated supply. Maintaining the availability of such capacity, of course, carries costs, even when it is not tapped for power generation. Since the subsidiaries' retail rates are set by state regulators based on principles of cost-of-service ratemaking, it would be inequitable--vis-a-vis a subsidiary's retail customers--for that subsidiary not to earn compensation from its sister companies when it keeps capacity on hand for them.

The Entergy subsidiaries' response to this problem of cost equalization inter se is the System Agreement, a tariff that has been filed with and approved by the Commission pursuant to § 205 of the Federal Power Act (FPA), 16 U.S.C. § 824d (1994). One provision of the Agreement, known as the MSS-1 schedule, requires monthly payments from subsidiaries contributing less than their fair share of the System's total capacity to subsidiaries contributing more. ¹ A company first determines its capability: the power that its "available" generating units--whether owned, leased or operated for its benefit--can generate in the month at issue. Next the company ascertains its responsibility ratio by dividing its use of power (self-generated and otherwise)--known as load responsibility--by the sum of all the individual companies' load responsibilities. ² Then the company determines its proportionate share of total System capability--known as capability responsibility--by multiplying its responsibility ratio by the total System capability, and compares this figure to its actual capability for the month. If the company's actual capability is less than its capability responsibility, then the company is "short" and must make a monthly payment; if the company's actual capability exceeds its capability responsibility, then the company is "long" and will receive a monthly payment. The size of the payment is determined by multiplying the long company's MSS-1 rate--its average cost of oil and gas generating units based on the previous year's operating results--by the number of megawatts by which the company is long. ³

As a formula rate tariff, the MSS-1 tariff's components may vary and hence the formula may dictate different equalization payments from month to month. Such changes do not, however, subject the Entergy system to the Federal Power Act's pre-filing and pre-approval requirements for changes in a tariff; they are instead countenanced by FPA § 205(f), 16 U.S.C. § 824d(f), which governs automatic adjustment clauses. The retail rates charged by the subsidiaries to their customers are subject to state regulatory authority and operate quite differently. Apart from a fuel adjustment clause that allows for automatic changes in retail rates when fuel costs change, the retail rates are fixed by state regulators and remain in place until the regulators initiate a new rate case.

In 1985, when the current version of the System Agreement was approved by the Commission, there were four Entergy subsidiaries. Entergy Louisiana and Entergy New Orleans were consistently short; Entergy Arkansas and Entergy Mississippi consistently long. (A fifth subsidiary, Entergy Gulf States, joined the System in a merger approved in 1993.) Despite this imbalance among the subsidiaries in terms of relative contribution to System capability, circumstances were such that each subsidiary, in terms of absolute need for power given consumer demand, was maintaining a sizable number of operating units that were rarely (if ever) tapped for power generation. In 1986, Entergy's operating committee initiated the Extended Reserve Shutdown (ERS) program in the hope of reducing the costs of maintaining this unnecessary capacity. Under the program, some of the generating units would be identified as unnecessary for capacity needs, removed from active service, and preserved in a reserve status. It was hoped that the ERS program would allow the companies to reduce staffing and other operating and maintenance expenses that otherwise would have been required to maintain the units in a constant state of readiness, enable the companies to defer the cost of repairing broken units until it was necessary to bring the reserve units back on line, and obviate the need to construct costly new generating capacity to meet long-term requirements. Although Entergy contemplated retiring some of the ERS units rather than bringing them back on line, it intended to return many of the units to active service notwithstanding the 8-12 month period necessary to restore the ERS units. Forty percent of the units placed in ERS since the inception of the program in 1986 had been restored to active service by 1993.

The dispute before us stems not from Entergy's implementation of the ERS program itself, but rather from Entergy's decision to allow the individual companies to include ERS units within the category of "available" capability for purposes of cost equalization under the MSS-1 tariff. Recall that the higher a company's capability relative to the capabilities of its sister companies, the better off that company will be in terms of cost equalization under MSS-1. Under the version of the System Agreement then in place,

A unit is considered available to the extent the capability can be demonstrated and (1) is under the control of the System Operator, or (2) is down for maintenance or nuclear refueling. A unit is considered unavailable if in the judgement of the Operating Committee it is of insufficient value in supplying system loads because of (1) obsolescence, (2) physical condition, (3) reliability, (4) operating cost, (5) start-up time required, or (6) lack of due-diligence in effecting repairs or nuclear refueling in the event of a scheduled or unscheduled outage.

Entergy Servs., 80 F.E.R.C. p 61,197, at 61,787 (1997) (footnote omitted) (emphasis in original). Entergy's Operating Committee interpreted "available" to include ERS units, which had the effect of improving the lot of those companies that had relatively more ERS-eligible units. That benefitted Entergy Arkansas and Entergy New Orleans: in the period 1987-1993, Entergy Arkansas, which was long to begin with, became more long, and Entergy New Orleans, which was short to begin with, grew less short. Conversely, Entergy Mississippi and Entergy Louisiana were, at least in this respect, disadvantaged by virtue of the inclusion of ERS units in MSS-1: Entergy Mississippi, which was long to begin with, became less long, and Entergy Louisiana, which was short to begin with, became more short. (The inclusion of ERS units as "available" for MSS-1 purposes also bears on the MSS-1 rates of the long companies. As noted, that rate is the average cost per megawatt of the long company's oil and gas-fired generating units. A long company, by placing units into ERS, reduces the cost associated with those units and consequently reduces the average cost of all of its oil-and gas-fired generating units, and hence its MSS-1 rate.) Holding constant the number of units that each company actually put in ERS from 1987-1993, an Entergy officer determined that Entergy Mississippi received $8.8 million less, and Entergy Louisiana paid $10.6 million more, than would have been the case had ERS units been excluded from MSS-1.

Though inclusion of ERS units in the MSS-1 calculation began in 1986, neither the Commission nor any other party challenged the practice until 1993. One issue presented in FERC's review of the merger of Gulf States into the Entergy system as a fifth subsidiary was whether to allow Gulf States to include its...