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November 26, 2014

FIFTH CIRCUIT REAFFIRMS FERC LIMITS ON CHALLENGES TO FORMULA RATES

In Louisiana Public Service Commission v FERC, No. 13-60874 (Nov. 14, 2014), the Fifth Circuit upheld a FERC order limiting the scope of issues that may be raised in proceedings implementing formula wholesale power rates. FERC had ruled that while a party to those proceedings may challenge erroneous formula inputs, implementation errors or the prudence of cost inputs, it may not challenge the inclusion of particular inputs in the formula; challenges to the latter may only be made in separate proceedings under Sections 205 and 206 of the Federal Power Act, even though consumers may be left without a complete remedy for overcharges.

The case grew out of a series of proceedings establishing and implementing a formula rate for sharing production costs among the six Entergy operating subsidiaries. In 2005, FERC directed Entergy to adopt a formula in its System Operating Agreement to ensure that the production costs allocated to each subsidiary were within a bandwidth of ±11 percent of the Entergy System average production costs. If not, low production cost subsidiaries were required to make equalization payments to subsidiaries whose costs were above the bandwidth. FERC required Entergy to make annual compliance proceedings beginning in 2007, in each case based on prior calendar year costs as reflected in Entergy’s FERC accounts.

The Fifth Circuit appeal arose out of Entergy’s third annual implementation filing, in 2009. The Louisiana Public Service Commission (LPSC) had argued before the Commission that Entergy should be required to exclude out-of-period costs from inputs to the formula, and that the inputs should be modified to reflect the fact that two of the operating companies had not owned newly-acquired plants for the full calendar year. FERC rejected those arguments on the ground that they amounted to challenges to the formula itself, which were not properly within the scope of the proceeding, but rather must be raised in a Section 206 proceeding. (In fact, LPSC did file a separate Section 206 complaint, but that case was still pending before the Commission.) Inasmuch as Entergy had properly applied the formula, FERC ruled that the resulting cost allocations must be upheld.

In its appeal to the Fifth Circuit, LPSC challenged as arbitrary FERC’s interpretation of the Entergy formula tariff as requiring inputs to be the “actual amounts” in FERC accounts, and claimed that FERC was inconsistent in barring challenges to the justness and reasonableness of cost inputs in annual implementation proceedings. The Court rejected both arguments. As to the first point, the Court held that FERC’s interpretation that the formula required use of FERC Form 1 account data was “a plain reading” of the tariff, which FERC was obligated to honor under the Filed Rate Doctrine, and therefore was neither arbitrary nor irrational. The Court noted that it had recently reached the same conclusion in another case brought by LPSC, arising from FERC Orders in Entergy’s second annual formula implementation proceeding. Louisiana Public Service Commission v FERC, 761 F.3d 540 (5th Cir. 2014). While LPSC claimed that being required to pursue its claims in a Section 206 proceeding would leave consumers without a complete remedy, the Court found that the absence of retroactive relief in such a proceeding was a necessary consequence of the Filed-Rate Doctrine.

On LPSC’s second argument, the Court acknowledged that FERC had taken inconsistent positions as to whether a party could challenge formula inputs in an implementation proceeding. However, the Court noted that FERC had (a) corrected its previous interpretation in its very first ruling on an annual implementation proceeding in light of its experience in conducting that proceeding; (b) explained its new interpretation; and (c) consistently interpreted the System Agreement ever since. As FERC had offered a “reasoned explanation” for its approach, no more was required.

The Fifth Circuit also rejected LPSC’s argument that the tariff itself allowed the use of inputs from sources other than FERC Form 1 accounts. The tariff stated that “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.” LPSC asserted that the “other supporting data” clause allowed it to challenge the reasonableness of formula inputs in an implementation proceeding if they did not reflect actual test year costs. The Court disagreed, affirming FERC’s holding that that language simply permitted parties to use “other supporting data” to ascertain “actual amounts on the Company’s books” that were not included or were misinterpreted in the Company’s FERC Form 1.

The Fifth Circuit also rejected LPSC’s challenges to FERC’s decision to require Entergy to include all accumulated deferred income taxes (ADIT) associated with storm-related casualty losses in its bandwidth calculation. LPSC had argued that it did not receive proper notice that the ADIT issue would be addressed in the proceeding, and that FERC’s decision on this issue conflicted with a 2009 FERC Order approving a settlement relating to Entergy.

On the notice issue, while LPSC was correct in stating that Entergy excluded ADIT from its third bandwidth filing, that filing occurred before the Commission issued Order No. 505. In that Order, on appeal from an ALJ decision in Entergy’s first bandwidth proceeding, the Commission agreed with LPSC’s argument there that all net operating loss ADIT amounts should be included in the bandwidth calculation. Because of that ruling, one of the issues to be litigated in the hearing in the third bandwidth proceeding was what portion of ADIT to include in the bandwidth calculation, and Entergy submitted testimony on that issue.  Because of the issuance of Order No. 505, and given that that Order resulted from an LPSC’s own challenge, the Fifth Circuit dismissed LPSC’s notice argument as meritless.

In rejecting LPSC’s argument that the ADIT ruling conflicted with FERC’s ruling on a settlement, the Court relied on the fact that LPSC failed to raise the issue below, and that rulings on settlements lack precedential effect. The Court also held that LPSC’s argument was “selective, if not disingenuous,” inasmuch as LPSC had brought about the change in FERC’s position by challenging the exclusion of ADIT in the first bandwidth proceeding. The Court also found that the inclusion of ADIT was necessitated by the terms of the System Agreement.

While arising in the context of Entergy’s somewhat unusual System Operating Agreement, the ruling on the scope of issues that can be raised in formula implementation proceedings rests largely on the Court’s application of the Filed Rate Doctrine and therefore may be relevant to formula rate proceedings generally. In ruling that challenges to the reasonableness of formula inputs must be raised in Section 205 or 206 proceedings, the Court acknowledged that those proceedings offer no remedy for retroactive overcharges. Accordingly, the case serves as a reminder that parties objecting to the justness and reasonableness of formula rates should file Section 206 complaints promptly, and not await the outcome of proceedings that merely implement those formulas.

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