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

• Decision Date: 15 April 2008
• Docket Number: No. 05-1462.,No. 06-1057.,No. 06-1054.,05-1462.,06-1054.,06-1057.
• Citation: 522 F.3d 378
• Parties: LOUISIANA PUBLIC SERVICE COMMISSION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Arkansas Public Service Commission, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

522 F.3d 378

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

No. 05-1462.

No. 06-1054.

No. 06-1057.

United States Court of Appeals, District of Columbia Circuit.

Argued November 2, 2007.

Decided April 15, 2008.

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

John Longstreth argued the cause for petitioner Arkansas Electric Energy Consumers, Inc. On the briefs were Brian C. Donahue and Stacy M. Hazell. Donald A. Kaplan entered an appearance.

Michael R. Fontham argued the cause for petitioner Louisiana Public Service Commission. With him on the briefs were Paul L. Zimmering and Noel J. Darce.

Mary W. Cochran argued the cause for petitioners Arkansas Public Service Commission and Mississippi Public Service Commission. With her on the briefs were Paul Randolph Hightower, Ted J. Thomas, and George M. Fleming.

Lona T. Perry, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Robert H. Solomon, Solicitor.

J. Wayne Anderson argued the cause for intervenor Entergy Services, Inc. With him on the brief was William S. Scherman.

Mary W. Cochran, Paul Randolph Hightower, Ted Thomas, Clinton A. Vince, J. Cathy Fogel, Paul E. Nordstrom, George M. Fleming, Brandon J. Harrison, Andy Adams, Brian C. Donahue, and Stacy M. Hazell were on the brief for intervenors Arkansas Public Service Commission, et al. in support of respondent. Donald A. Kaplan, John Longstreth, and Emma F. Hand entered appearances.

Earle H. O'Donnell, Zori G. Ferkin, Daniel A. Hagan, Michael R. Fontham, Paul L. Zimmering, and Noel J. Darce were on the brief for intervenors Louisiana Public Service Commission and Occidental Chemical Corporation.

Before: SENTELLE, Chief Judge, and GARLAND and GRIFFITH, Circuit Judges.

Opinion for the court filed PER CURIAM.

PER CURIAM:

We consider three consolidated petitions for review of two orders of the Federal Energy Regulatory Commission ("FERC" or "the Commission"), La. Pub. Serv. Comm'n v. Entergy Servs., Inc. et al., 111 F.E.R.C. ¶ 61,311 (2005) ("Opinion No. 480"), and La. Pub. Serv. Comm'n v. Entergy Servs., Inc., 113 F.E.R.C. ¶ 61,282 (2005) ("Opinion No. 480-A"). In the orders under review, the Commission held that the production costs of the five operating companies in the Entergy power system must be "roughly equalized" in a +/-11 percent bandwidth around System average each year. The Commission further found that production costs associated with the Vidalia hydropower plant in Vidalia, Louisiana should not be included in the +/- 11 percent bandwidth calculation. The Commission ordered that the remedy be implemented prospectively on January 1, 2006 without refunds due to any of the Entergy operating companies.

Petitioners contest the Commission's jurisdiction to order the bandwidth remedy, the rationality of its decision, the timing of the implementation of its remedy, and its denial of refunds. We conclude that the Commission had jurisdiction to reallocate production costs, that its +/- 11 percent bandwidth remedy was not arbitrary or capricious or contrary to law, and that its exclusion of the Vidalia hydropower plant was supported by substantial evidence. However, we grant the petition with respect to the Commission's decisions to deny refunds and to implement a prospective remedy commencing in 2007 based on 2006 data, and we remand the matter to the Commission for further proceedings on those issues consistent with Part V of this opinion.

I. BACKGROUND

The dispute before us stems from disparities in production costs among the five operating companies in the Entergy System which have resulted from Entergy's systemwide approach to locating generation capacity, a spike in the price of natural gas, and a phased-in rate schedule associated with an inefficient hydropower plant near Vidalia, Louisiana.

A. The Entergy System

1. System-wide Planning Approach

Entergy Corporation is a public utility holding company that sells electricity, both wholesale and retail, in Arkansas, Louisiana, Mississippi, and Texas. It does so through five operating companies named after their respective jurisdictions: Entergy Arkansas, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., Entergy Gulf States, Inc., and Entergy New Orleans, Inc. The Entergy System has been highly integrated for over fifty years, with transactions within the System governed by a System Agreement. The current System Agreement was filed in 1982.

The System Agreement 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. The System Agreement assigns the task of coordinating the addition of new generating capacity to a systemwide operating committee that is composed of a representative from Entergy Corporation and each of its operating companies. Miss. Indus. v. FERC, 808 F.2d 1525, 1529 (D.C.Cir.1987). The operating committee makes "the major decisions concerning general timing, location and size of plant additions, in view of the overall needs of the system, while accommodating individual company needs wherever possible." Id. at 1556 (internal quotations omitted).

In adding generating capacity, the committee follows both a system-planning approach, which ensures that "generation facilities are planned, constructed and operated for the benefit of the whole system," and a rotational approach, which adds new capacity on a rotating basis to the jurisdictions in the System. 111 F.E.R.C. at 61,351; 113 F.E.R.C. at 62,132. Because an operating company is responsible for the costs of the generation plants in its jurisdiction, id., the rotation of new plants throughout the System historically had the effect of roughly evening out investment costs over time among the operating companies, Miss. Indus., 808 F.2d at 1531.

Within this scheme, in the 1950s and 1960s, the operating committee tended to add new generating units in Louisiana to take advantage of its inexpensive oil and gas reserves. Id. In the late 1960s and early 1970s, the operating committee decided to shift away from oil and gas generation and to add nuclear and coal capacity. Id. at 1556. A company's ability to construct oil- and gas-fired units generally depended on the existence of sufficient natural resources within its service area, while the ability to build coal and nuclear units was less restricted. Id. at 1555. In accordance with the rotational scheme of asset additions, much of the coal capacity was constructed in Arkansas. 111 F.E.R.C. at 62,352. As before, production costs among the operating companies remained "roughly equal." 113 F.E.R.C. at 62,133.

The investment in nuclear generation, on the other hand, proved prohibitively expensive and catastrophically uneconomical. Miss. Indus., 808 F.2d at 1531-32. The Grand Gulf nuclear plant in Port Gibson, Mississippi, for example, was initially projected to cost $1.2 billion for two generating units, but ended up costing more than $3 billion for one unit. Id. at 1531. After it became apparent that Entergy Mississippi, then named Mississippi Power & Light, could not bear the cost of the Grand Gulf facility, the System formed a generating subsidiary to finance and run the Grand Gulf plant. Id. at 1533. The costs of Grand Gulf were allocated to the operating companies through an addendum to the 1982 System Agreement. Id. at 1554.

The Commission considered the proposed allocation of nuclear investment costs in proceedings initiated by the System in 1982. Id. at 1534. The Commission found that the System Agreement requires that production costs be "roughly equal" among the operating companies. 111 F.E.R.C. at 62,351. It further found that the "great disparities in installed nuclear investment costs disrupted the rough equalization of production costs that had existed on the system and thereby produced undue discrimination" in violation of Section 206 of the Federal Power Act. Id. The Commission concluded that equalizing responsibility for the nuclear investment costs among the operating companies would remedy the undue discrimination. Id.; Miss. Indus., 808 F.2d at 1553. On petition for review, this Court agreed that the System Agreement showed an intent to roughly equalize capacity costs among the operating companies, id. at 1554-55, that the Commission "could properly conclude that the tremendous disparities in nuclear capacity costs among the operating companies disrupt[ed] the System's historical pattern of roughly equalizing capacity costs," id. at 1557, and that the Commission's choice to order nuclear investment equalization to remedy the problem was both rational and within its discretion, id. at 1565.

2. The Rising Cost of Natural Gas and its Effect on the Entergy System

After implementation of the nuclear investment remedy, rough production cost equalization was "maintained from 1986-1999, with variations from year-to-year, but without any long-term large bias for any one company or another." 111 F.E.R.C. at 62,352. During the three years prior to the nuclear investment remedy, the production costs of the Entergy operating companies had deviated from System average by 35.15, 25.32, and 32.9 percent. Id. at 62,355. During the fourteen years after the nuclear investment remedy, the deviations on the System moderated, ranging from a low of 7.71 percent in 1995 to a high of 22.2 percent in 1987. Id.

The picture changed in 2000 when there was a spike in the price of natural gas. 111 F.E.R.C. at 62,352. The increase "had a dramatically disproportionate effect on [Entergy Louisiana]'s relatively large amount of gas-fired generation, as compared to [Entergy Arkansas]'s relatively large amount of cheaper coal base load capacity." Id. In 2000, Entergy Louisiana had production costs...