Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01088/USCOURTS-caDC-98-01088-0/pdf.json

Parties Involved:
Arkansas Public Service Commission
Intervenor
City of New Orleans
Intervenor
Entergy Services, Inc.
Intervenor
Federal Energy Regulatory Commission
Respondent
Louisiana Public Service Commission
Petitioner
Mississippi Public Service Commission
Petitioner
Occidental Chemical Corporation
Intervenor for Petitioner

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 8, 1999 Decided April 13, 1999

No. 98-1088

Louisiana Public Service Commission, et al.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Arkansas Public Service Commission, et al.,

Intervenors

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.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 1 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

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 s 205 of the Federal Power Act (FPA), 16 U.S.C.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 2 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

s 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

__________

1 These transactions are sales of electric energy at wholesale in

interstate commerce, and hence are subject to the Commission's

regulatory authority. See 16 U.S.C. s 824 (1994).

2 The company load responsibility, measured monthly, is a

rolling 12-month average of the company's hourly loads, i.e., sales

of power, coincident with the System's monthly peak hour load.

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 s 205(f), 16

U.S.C. s 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)

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 3 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

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

__________

3 If there is more than one short company, the payment

obligation is allocated based on the ratio of each short company's

deficiency to the total deficiency of the short companies.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 4 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

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,

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 5 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

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 then-existing ERS units as available capability

for MSS-1 purposes before those units were returned to

active service; the Commission decided that Gulf States

should not receive credit for those ERS units because "there

has been no historic practice of maintaining rough production

cost equalization between Gulf States and the Operating

Companies." Entergy Servs., Inc., 65 F.E.R.C. p 61,332, at

62,497 (1993). The Commission, sua sponte, raised the

broader question of whether Entergy's System Agreement

permits the four incumbent subsidiaries to count their ERS

units as "available" for MSS-1 purposes, and initiated a

proceeding under FPA s 206, 16 U.S.C. s 824e (1994), to

determine whether the Entergy companies were violating the

Agreement. See Entergy Servs., 65 F.E.R.C. at 62,548.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 6 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

The Louisiana Public Service Commission and the Mississippi Public Service Commission, petitioners here, argued

that the Entergy system had violated the MSS-1 tariff's clear

definition of "available" units by including ERS units in

MSS-1. They requested that Entergy Arkansas and Entergy New Orleans, the operating companies that benefitted

from the inclusion of ERS units in the MSS-1 calculation,

refund to the customers of Entergy Louisiana and Entergy

Mississippi the amount by which their rates had been escalated by virtue of the alleged tariff violation. The Commission

agreed that Entergy had violated its tariff, relying on the

ALJ's finding that ERS units are neither under the control of

the System Operator nor down for maintenance or nuclear

refueling, but rather are effectively in storage. See Entergy

Servs., Inc., 80 F.E.R.C. at 61,786-87. But FERC decided

that the equities of the case did not support a refund because

the end result of the tariff violation was not unjust, unreasonable, or unduly discriminatory. See id. at 61,787-88. (The

Commission expressly disclaimed any reliance on Entergy's

submission that it acted in good faith in interpreting the tariff

to address the novel problem of unnecessary capacity. See

id. at 61,788 & n.45.)4

The Commission then turned to the appropriate treatment

of ERS units going forward. An amendment to the System

Agreement was proposed that would include an ERS unit as

an available unit under MSS-1 if Entergy intends to return

the unit to service at a future date, with Entergy's "intent" to

be ascertained by an examination of several enumerated

factors and recorded in the minutes of the Operating Committee. See id. at 61,788-89. Over the objections of the Louisiana and Mississippi regulators that it would be unjust to

impose MSS-1 costs for units that provide no present benefit

to the system and that the amendment's ambiguity made it

__________

4 The Commission also noted that because it was declining to

order refunds based on its discretion, it had no need to address

whether or to what extent FPA s 206(c), 16 U.S.C. s 824e(c) (1994),

might preclude ordering refunds in any event. See Entergy Servs.,

80 F.E.R.C. at 61,788 n.46.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 7 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

susceptible to discriminatory application, the Commission approved the proposed amendment. See id. at 61,789.

Upon FERC's denial of the Louisiana and Mississippi

regulators' request for rehearing on the refund and amendment issues, see Entergy Services, Inc., 82 F.E.R.C. p 61,098

(1998), the regulators, joined by an energy consumer (Occidental Chemical Corporation) as intervenor, brought the instant petition for review. They contend that the Commission

abused its discretion by relying on superficial, even irrational,

equitable factors to deny the requested refund, especially

when the Commission's self-described general policy is to

provide refunds to remedy overcharges.5 And, while abandoning their complaint to the Commission that the concept of

the amendment is unlawful insofar as it countenances the

inclusion of some ERS units in the MSS-1 schedule, petitioners argue that the wording of the amendment is so ambiguous

and prone to discriminatory implementation that the Commission has effectively abdicated its statutory responsibilities in

approving it.

II.

We take up the refund issue first. Before addressing

petitioners' various attacks on the Commission's reasoning,

we think we should clarify a point on which the briefs were

somewhat obscure: just what sort of injury has been caused

by Entergy's violation of its tariff. No one disputes that

holding everything else constant, the decision to include ERS

units in MSS-1 worked to the detriment of the two compa-

__________

5 Intervenor Occidental makes a similar argument for a full

refund but, unlike petitioners, alternatively seeks a refund under

Western Resources, Inc., 65 F.E.R.C. p 61,271, at 62,252 (1993), in

which the Commission held that in certain circumstances involving a

tariff violation that benefits ratepayers, it would deny a full refund

but award a refund of the time value of the overcharged amount.

But since only intervenor Occidental raises the Western Resources

refund issue before us, we decline to address it. See Illinois Bell

Tel. Co. v. FCC, 911 F.2d 776, 786 (D.C. Cir. 1990) ("An intervening

party may join issue only on a matter that has been brought before

the court by another party.").

nies, Entergy Louisiana and Entergy Mississippi, that had

fewer ERS-eligible units than the other companies in the

system. Entergy Louisiana, a short company, became more

short, i.e., faced higher MSS-1 payment obligations; Entergy

Mississippi, consistently a long company, became less long,

i.e., received less in MSS-1 payments. But since the retail

rates of both companies were fixed before Entergy began to

include ERS units in MSS-1 and did not change until petitioners initiated rate cases in 1994, the harm cannot be found

in an increase in retail rates charged to customers--as retail

rates were fixed, no such increase occurred. Nor can it be

asserted that the injured parties are Entergy Louisiana and

Entergy Mississippi--after all, these companies, along with

the other Entergy subsidiaries and the holding company,

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 8 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

support the Commission's order. We gather the harm arises

from petitioners' expectation that but for the distortions in

MSS-1 payments flowing from the tariff violation, they would

have brought rate cases earlier that would have lowered retail

rates.

This injury might well warrant a refund to the retail

customers of Entergy Louisiana and Entergy Mississippi.

But the Commission claimed it took a broader perspective

and concluded that the equities cut against ordering a refund.

Petitioners, while emphasizing the Commission's selfdescribed "general policy ... to order refunds to remedy

overcharges," Entergy Servs., 82 F.E.R.C. at 61,369 (footnote

omitted), do not--and, indeed, could not--contend that the

policy is without exception. See Koch Gateway Pipeline Co.

v. FERC, 136 F.3d 810, 816 (D.C. Cir. 1998) (vacating refund

order as an abuse of discretion); Towns of Concord v. FERC,

955 F.2d 67, 72 (D.C. Cir. 1992) ("[O]ur examination of the

Federal Power Act reveals no statutory command mandating

refunds when the rate charged exceeds that filed.").6 Instead, petitioners submit that the Commission's four grounds

__________

6 The Commission's authority to order refunds of amounts

improperly collected in violation of the filed rate derives from FPA

s 309, 16 U.S.C. s 825h (1994). See Towns of Concord, 955 F.2d at

73.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 9 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

for departing from its general policy are irrational. As the

Commission did not set forth these equitable factors in the

alternative or otherwise suggest that its decision would be the

same in the absence of one or more of the four factors, we

consider each one. See Sundor Brands, Inc. v. NLRB, 1999

WL 94803, *3 (D.C. Cir. Feb. 26, 1999) (citing SEC v.

Chenery Corp., 318 U.S. 80, 87 (1943)).

We bear in mind, however, that "[w]hen a federal court of

appeals reviews an administrative agency's choice of remedies

to correct a violation of a law the agency is charged with

enforcing, the scope of judicial review is particularly narrow."

National Treasury Employees Union v. FLRA, 910 F.2d 964,

966-67 (D.C. Cir. 1990) (en banc); see also ICC v. Transcon

Lines, 513 U.S. 138, 145 (1995); Towns of Concord, 955 F.2d

at 76 (explaining that the words "necessary or appropriate" in

FPA s 309, 16 U.S.C. s 825h, evince Congress' intent to

leave refund determinations to the Commission's "expert

judgment"). Indeed, "the breadth of agency discretion is, if

anything, at [its] zenith when the action assailed relates

primarily not to the issue of ascertaining whether conduct

violates the statute, or regulations, but rather to the fashioning of policies, remedies and sanctions ... in order to arrive

at maximum effectuation of Congressional objectives." Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 (D.C.

Cir. 1967). Thus, we will set aside FERC's remedial decision

only if it constitutes an abuse of discretion. See, e.g., Public

Utils. Comm'n of Calif. v. FERC, 143 F.3d 610, 617 (D.C. Cir.

1998); Koch Gateway, 136 F.3d at 816. To the extent the

Commission made factual determinations in the course of

exercising its discretion, we of course ask whether those

conclusions are supported by substantial evidence. See 16

U.S.C. s 8251(b) (1994).

A.

We begin with the Commission's "disincentive" rationale

for denying a refund:

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 10 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

[G]iven that there would have been a disincentive to

participate in the ERS program without Schedule MSS-1

treatment for the units, Entergy's actions, both in creating the ERS program and in continuing to include these

units in Schedule MSS-1 calculations, resulted in considerable system-wide benefits, in the form of enhanced

system efficiencies and cost reductions, that ultimately

benefitted ratepayers.

Entergy Servs., 80 F.E.R.C. at 61,787 (footnotes omitted). In

other words, the Commission thought it inequitable to order a

refund when the predicate tariff violation had conferred benefits on the system, including the allegedly injured parties,

that would not have come to pass absent the tariff violation.

Petitioners' primary argument is that FERC is simply

wrong in asserting that the operating companies needed any

added incentive to place units in ERS.7 They submit that the

enormous benefits expected to flow from the ERS program in

terms of reduced operating, maintenance, and fuel costs, far

outweigh any disincentive created by adverse MSS-1 treatment. One view of Entergy's own data supports this claim:

company by company, over a roughly concurrent six-year

period, the benefit of the ERS program in terms of operating

and other cost savings outweighs the "cost" of adverse MSS-1

treatment for all but Entergy New Orleans. In the case of

Entergy Louisiana and Entergy Mississippi, adverse MSS-1

treatment, i.e., inclusion of ERS units in MSS-1, is what

__________

7 Petitioners also argue--half-heartedly--that treating ERS

units as available capability for MSS-1 purposes would neither

avoid a disincentive, nor create an incentive, for the operating

companies to place units in ERS. But, in a world where ERS units

are excluded from treatment as available capability, an operating

company will not be indifferent between receiving MSS-1 credit

now (by keeping the unit in active service) and receiving MSS-1

credit later (by putting the unit in ERS and later restoring it to

active service)--money now is always more valuable than money

later. And petitioners overlook that treating ERS units as "available" for MSS-1 also creates an "extra" incentive in that the life of

the unit is extended and the unit continues to receive MSS-1 credit

(albeit at lower rates in the case of a long company) while in ERS.

actually occurred. Yet Entergy Louisiana's ERS savings of

$13.8 million outweigh its MSS-1 detriment of $10.6 million;

Entergy Mississippi's ERS savings of $11.2 million similarly

surpass its MSS-1 detriment of $8.8 million. In the case of

Entergy Arkansas and Entergy New Orleans, adverse

MSS-1 treatment, i.e., exclusion of ERS units from MSS-1

treatment, did not occur in fact. Supposing that ERS units

had been excluded from MSS-1 treatment, Entergy Arkansas

would have lost $6.3 million in MSS-1 receipts but would still

have enjoyed $33.9 million in ERS savings; on the other

hand, Entergy New Orleans would have faced $13.1 million

more in MSS-1 payments and would have enjoyed only $6.8

million in ERS savings. (This assumes that Entergy Arkansas and Entergy New Orleans would have placed the same

number of units into ERS had those units been excluded from

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 11 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

MSS-1 treatment.) All this suggests that each company

except Entergy New Orleans would have made roughly the

same ERS "investment" even if it had received adverse

MSS-1 treatment as a result.

This analysis is inadequate, however, because it assumes

that the companies make their ERS decisions with hindsight

on a net basis, rather than at the margin looking forward.

For each of the four pre-merger companies, if ERS units

were excluded from MSS-1 treatment, there would be a cost

to placing an extra unit into ERS; the company will suffer in

its MSS-1 standing vis-a-vis the other companies (and they

could not be sure how the other companies would behave).

To be sure, there is also a benefit, in terms of ERS savings,

upon placing that marginal unit into ERS. But, as the

Commission and intervenor Entergy point out, the magnitude

of the costs was certain whereas the scope of the benefits was

not. Accordingly, we cannot say the Commission abused its

discretion in rejecting an analysis that itself ignored the

distinction between ex ante and ex post reasoning.

Be that as it may, petitioners argue that it makes little

sense to talk of "providing incentives" or "avoiding disincentives" to the operating companies' putting units into ERS.

That analytical framework is, according to petitioners, a post

hoc construct that ignores the reality that the operating

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 12 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

companies are wholly owned subsidiaries of Entergy Corporation and therefore have neither the ability nor the inclination

to flout the System's goals. The only incentives that matter,

petitioners submit, are those faced by the System as a whole.

Petitioners acknowledge, as they must, however, the record

testimony of several witnesses that the operating companies

do in fact possess the authority to identify and recommend

for final approval by the System's operating committee

which--and how many--units to place in ERS. One of

FERC's trial staff testified, for example, that "each operating

company ... made the decision as to which unit if any to

place in ERS and when to place a unit in ERS." There was

further testimony that the visibility of the adverse MSS-1

treatment felt by each of the companies on a unit-by-unit

basis might raise the ire of state regulators ignorant of the

less visible (and more uncertain) benefits of ERS. To these

witnesses, the aggravation of justifying the ERS program to

state regulators might deter even the most System-loyal

operating company officers from putting units into ERS. As

one witness summarized, "as long as there are individual

Operating Companies with responsibilities to their regulators

and ratepayers, such individual Operating Company interests

cannot be ignored." Surely this constitutes substantial evidence in support of the Commission's finding.8

__________

8 Petitioners submit that other record evidence casts doubt on

the Commission's finding that the operating companies approached

the ERS program in a self-interested way. They point to the

testimony of the operating committee's delegate that the System's

final approval of units for ERS was not always documented carefully, and suggest that if the operating companies really were looking

out for themselves, they would have insisted on more fastidious

record-keeping. This testimony stands in contrast to the numerous

other witnesses testifying that the operating companies did have

some autonomy in ERS decisions, and surely cannot be said to tip

the scales such that no "reasonable jury [could] reach the [Commission's] conclusion," Allentown Mack Sales & Serv., Inc. v. N.L.R.B.,

522 U.S. 359, 367 (1998).

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 13 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Still, petitioners claim that the Commission's, and our own,

prior interpretations of the nature of the Entergy system

support their conception of the operating companies as indistinguishable (and unthinking) parts of a whole. However, we

think that precedent is not inconsistent with the Commission's findings here. In Middle South Energy, Inc., 31

F.E.R.C. p 61,305 (1985), the Commission, in the course of

approving the 1985 (and still current) version of the System

Agreement, rejected an ALJ's finding that the operating

companies exhibited a "pattern of autonomy." Id. at 61,645

(quoting Middle South Energy, Inc., 30 F.E.R.C. p 63,030, at

65,168 (1985)). The Commission found that "major critical

decisions, including decisions to build new generating units,

are made by the Operating Committee for the benefit of the

system as a whole." Id. But the Commission also acknowledged that "it is clear that there is input from the individual

companies and consideration of their needs in making coordinated decisions." Id. And, in denying petitions for review of

the Commission's decision in Middle South, we described the

Commission as finding, inter alia, that the "individual operating companies were intimately involved in the planning stages

of new generation units and sought to promote their own

interests." Mississippi Indus. v. FERC, 808 F.2d 1525,

1555-56 (D.C. Cir. 1987), rev'd on other grounds, 822 F.2d

1104 (D.C. Cir. 1987). That the operating companies are

involved in the "planning stages" of the ERS program--not

that their decisions are final--is all the Commission found in

this case.

Taking the broadest tack, petitioners also seek to undermine the Commission's very premise that the ERS program

"ultimately benefitted ratepayers." Petitioners do not dispute that the ERS program provided benefits; but it is

asserted that those benefits, rather than being passed on to

ratepayers, stayed within the Entergy system, and thus

within the pockets of Entergy's shareholders. How could it

be, petitioners ask, that ratepayers enjoyed the benefits of

the ERS program--which predominantly take the form of

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 14 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

reduced operating costs that are reflected in retail rates only

when a new rate case is initiated--when no such rate case

occurred during the first seven years of the program?

FERC responds by pointing to several ERS-related benefits

that flowed to ratepayers in Louisiana and Mississippi, the

service areas regulated by petitioners. For one, a 1994 rate

case involving Entergy Mississippi resulted in a $28.1 million

reduction in retail rates; Entergy Louisiana was in the

course of a similar rate proceeding not yet completed (based

on the current record) but expected to have a similar outcome. For another, even before the 1994 rate cases, the

Commission identifies certain benefits that flowed to Louisiana and Mississippi ratepayers. The ERS program produced

some $2.6 million in energy cost savings, $2.1 million of which

was passed on to Entergy Louisiana's and Entergy Mississippi's ratepayers through the automatic fuel adjustment clauses

in those companies' retail rate tariffs. And perhaps more

important, as the Commission explained in its order denying

rehearing, the ERS savings support an inference that, ceteris

paribus, the companies would have less need to seek rate

increases. See Entergy Servs., 82 F.E.R.C. at 61,370.

There is ample evidence, therefore, supporting the Commission's general finding that some ERS-related benefits

accrued to Louisiana and Mississippi ratepayers. Nor can we

quarrel with the Commission's "expert judgment" that these

benefits supported denying the requested refund, a proposition that we have endorsed in the past. See Gulf Power Co.

v. FERC, 983 F.2d 1095, 1100 (D.C. Cir. 1993). Petitioners

do not even respond to the Commission's point about the

pass-through of fuel cost savings to retail ratepayers, or to

the Commission's observation that the 1994 rate cases undoubtedly have captured some of the ERS-related benefits

for ratepayers. And the Commission's finding that the ERS

program obviated the need for Entergy Louisiana and Entergy Mississippi to seek rate increases is not, as petitioners

suggest, suspect because based on an inference from the

record. Those sorts of "sound inference[s] from all the

circumstances," Allentown Mack Sales & Serv., Inc. v.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 15 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

N.L.R.B., 522 U.S. 359, 379 (1998), are the stuff of which

substantial evidence is made.

B.

Now to the Commission's second reason: "[T]he non-Gulf

States ERS units were planned and constructed for the

benefit of all of the pre-merger Operating Companies." Entergy Servs., 80 F.E.R.C. at 61,787 (footnote omitted). In

other words, the ERS units are really just another sort of

excess capacity--albeit an "extended reserve"--that is available, once restored, to serve the System's needs, and therefore should receive the same cost equalization treatment

under MSS-1 as does "ordinary" excess capacity. See id.

(Placing a unit in ERS, while significantly reducing the costs

associated with that unit, does not eliminate those costs

entirely. See Entergy Servs., 82 F.E.R.C. at 61,370 n.9.)

The Commission also pointed out that even during the units'

ERS tenure, they provide System-wide benefits. See Entergy Servs., 80 F.E.R.C. at 61,788. Most notably for present

purposes, the companies' ability to return ERS units to active

status allows the companies to defer the construction of costly

new generation units. Moreover, the Commission's approval

of an amendment to the System Agreement specifically to

address this situation would have been forthcoming if requested (as it was in this proceeding). See id. Though

petitioners attack this rationale--that extended reserves

should be treated like ordinary reserves--insofar as it supported the Commission's decision on refunds, paradoxically

they do not take issue with the identical concept underlying

the amendment approved by the Commission, which expressly countenances the inclusion of ERS units in MSS-1 going

forward. In challenging the amendment solely on the ground

that it is too vague, petitioners have de facto conceded the

basic equitable argument.

Even aside from petitioners' implied concession, they do

not persuade us that the Commission has abused its "considerable discretion in fashioning remedies." Public Utils.

Comm'n, 143 F.3d at 617. Petitioners contend that ERS

units provide no benefits to the System during their ERS

tenure, and hence are properly excluded from MSS-1 cost

equalization because they are not presently "used and useful"

to the System. But the Commission explained that ERS

units are useful to the System in providing a backup reserve

to the System and in allowing the companies to defer repairs

of the ERS units and construction of new generating units,

and we see no reason not to defer to the Commission's

conception of usefulness. Nor are we impressed with petitioners' alternative point that, even though ERS units may be

useful if restored to active service, Entergy officials have

testified that some of the ERS units would be retired permanently rather than restored. The Commission reasonably

concluded that all of the ERS units could be brought back to

active service, and that this benefit was sufficient, especially

when the decision to retire certain ERS units would be made

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 16 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

in the future. (Indeed, as we noted earlier, 40% of the units

placed in ERS since the inception of the program in 1986 had

already been restored to active service by 1993.) FERC's

judgments on these questions of benefits readily support its

application of the well-settled principle that the costs associated with ERS units (whether construction expenses incurred

in the past or maintenance costs incurred today) should be

borne by those who benefit from them. See, e.g., Gulf Power

Co., 983 F.2d at 1100; City of New Orleans v. FERC, 875

F.2d 903, 905 (D.C. Cir. 1989).

Petitioners, moreover, oversimplify in claiming that the

appropriateness of MSS-1 cost equalization treatment at a

given point in time hinges on whether the unit in question is

"used and useful" to the System at that time. We explored

this issue in Town of Norwood v. FERC, 80 F.3d 526 (D.C.

Cir. 1996), which involved the analogous context of a dispute

over which assets a single utility could appropriately include

in its rate base--analogous because an individual Entergy

company's catalogue of MSS-1 eligible units is akin to a

"cost-equalization rate base." The utility in Norwood had

shut down its nuclear power plant temporarily in response to

a regulator's safety concerns, and four months later decided

to retire the plant permanently because the costs of restarting it and operating it through the remainder of its license

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 17 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

exceeded the value of the energy it could produce. See id. at

528. The Commission granted the utility's request to include

in its rate base 100% of its $48.4 million investment in the

plant that it would have recovered if it had operated the plant

through the remainder of its license, and its post-shutdown

operating and maintenance expenses of $68.9 million. See id.

at 528, 530. A petition for review asserted, inter alia, that

forcing ratepayers to pay for a plant no longer producing

electricity conflicts with the principle that ratepayers should

only pay for items "used and useful" in providing service.

We rejected the argument:

Although a utility's rate base normally consists only of

items presently "used and useful," see New England

Power Co. Mun. Rate Comm. v. FERC, 668 F.2d 1327,

1333 (D.C. Cir. 1981), cert. denied, 457 U.S. 1117 (1982), a

utility may include "prudent but canceled investments" in

its rate base as long as the Commission reasonably

balances consumers' interest in fair rates against investors' interest in "maintaining financial integrity and access to capital markets." Jersey Cent. Power & Light

Co. v. FERC, 810 F.2d 1168, 1178 (D.C. Cir. 1987) [(en

banc)].

Town of Norwood, 80 F.3d at 531 (emphasis and bracketed

material added). We held that the Commission had reasonably approved the requested cost recovery, in light of the

nuclear plant's record of serving ratepayers for decades and

the promise of savings going forward. Here, no one disputes

that the ERS units have a record of service as available

capacity, or that placement of units into ERS yields savings

going forward.9 And, unlike the nuclear plant in Norwood,

many of the ERS units will be returned to active service in

__________

9 As noted earlier, there are ongoing costs associated with the

ERS units, which are akin to the post-shutdown maintenance

expenses approved for recovery in Norwood. And petitioners

themselves indicate that the ERS units still have some initial

investment costs that have not yet been recovered, see Brief for

Petitioners at 25, the recoupment of which we also sanctioned in

Norwood.

the future. So even were we to assume the ERS units are

not presently "used and useful," our broader explication of

the "used and useful" principle in Norwood provides ample

support for the Commission's reasoning.

C.

The final two factors relied on by the Commission are not

all that weighty. FERC concluded that "there was no unjust

enrichment as a result of the violation [of the tariff's definition of "available"], given that Entergy as a whole received no

net gain from the inclusion of ERS units in Schedule MSS-1."

Entergy Servs., 80 F.E.R.C. at 61,787. The Commission

explained that the only consequence of the decision to include

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 18 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

or exclude ERS units for MSS-1 purposes is a different

MSS-1 payment pattern among the operating companies; but

MSS-1 payments and receipts always cancel out from the

perspective of the System as a whole, and so Entergy Corporation (the holding company) had nothing to gain by violating

its tariff. See id. at 61,787 n.37. Petitioners appreciate this

algebraic truth, but suggest that it is too superficial a characterization of the holding company's motives. Pointing to an

Entergy official's testimony that one of the reasons for including ERS units in MSS-1 was to maintain stability in MSS-1

payments and receipts so as to avoid the initiation of rate

cases by state regulators, petitioners contend that this strategy--which proved successful until 1994--unjustly enriched

the holding company by enabling it to keep the benefits of

ERS for the shareholders for longer than if ERS units had

been excluded from MSS-1. The Commission responds by

claiming that the benefits identified by petitioners flow from

the ERS program, not from the tariff violation.

We admit that petitioners cast doubt on the strength of this

factor, especially given the Commission's failure squarely to

address in its brief petitioners' notion that the tariff violation

provided a benefit insofar as it made rate cases less likely by

not "rocking the boat" of MSS-1 payments and receipts. But

under the deferential review we accord to the Commission's

remedial decisions, we think the Commission's reasoning just

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 19 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

passes muster. A reasonable response to petitioners' point,

although missing in the Commission's brief, can be found in

the Commission's explanation in its orders of the separate

disincentive rationale we discussed at the outset of our analysis. The Commission explained that the System (and its

shareholders) did not retain all of the benefits of the tariff

violation that facilitated the ERS program. Even though no

rate case was initiated before 1994, ratepayers were made

better off insofar as the operating companies were less likely

to seek rate increases. See Entergy Servs., 82 F.E.R.C. at

61,370. And the 1994 rate cases appear to have captured

benefits for ratepayers in the form of reduced retail rates.

The Commission's view that this division of benefits between

the Entergy System and the retail ratepayers was not "unjust" deserves deference. Indeed, it is hardly unusual for a

utility whose rates are set by cost-of-service ratemaking

principles to seek to reduce its costs, thereby increasing

profits, during the interim between rate-setting proceedings.

See National Rural Telecom Ass'n v. FCC, 988 F.2d 174, 178

(D.C. Cir. 1993); Stephen Breyer, Regulation and its Reform

48 (1982).

The Commission's final factor sounds in estoppel; the

Commission stated that "nearly every participant in this

proceeding, including [petitioners], at one time either believed

that the System Agreement permitted the inclusion of ERS

units in Schedule MSS-1 calculations, or at least did not

protest such treatment." Entergy Servs., 80 F.E.R.C. at

61,787-88 (footnote omitted). Petitioners concede that they

did not object until the Commission initiated its s 206 investigation into the possible tariff violation, but argue that the

timing of their protest is irrelevant. They explain that in the

merger review proceeding, their entire focus was on the

treatment of Gulf States' ERS units, and thus they should not

be faulted for missing the possibility that inclusion of ERS

units in MSS-1 by the incumbent subsidiaries was working to

the detriment of Entergy Louisiana and Entergy Mississippi.

Only when they concentrated on the s 206 proceeding, petitioners tell us, did they discover the disparity among the

incumbent subsidiaries in ERS-eligible units and recognize

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 20 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

the impact on Entergy Louisiana and Entergy Mississippi of

including ERS units in MSS-1. Petitioners also urge that

even if they should have complained earlier, that failing

should not be attributed to the retail ratepayers, the ultimate

beneficiaries of the hoped-for refund.

Again, though this factor is less weighty than the others--

particularly the first two--and perhaps would be inadequate

standing alone, we do not regard it as objectionable.

III.

There remains petitioners' challenge to the amendment

approved by the Commission to govern the MSS-1 treatment

of ERS units going forward. The amendment provides:

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, or (3) is in extended reserve shutdown

(ERS) with the intent of returning the unit to service at

a future date in order to meet Entergy System requirements. The Operating Committee's decision to consider

an ERS unit to be available to meet future System

requirements shall be evidenced in the minutes of the

Operating Committee and shall be based on considerations of current and future resource needs, the projected length of time the unit would be in ERS status, the

projected cost of maintaining such unit, and the projected cost of returning the unit to service.

Entergy Servs., 80 F.E.R.C. at 61,788-89 (emphasis in original). Petitioners contend that this amendment grants unfettered discretion to Entergy, and thus is an effective abdication of the Commission's statutory responsibility to ensure

that rates are just and reasonable. See 16 U.S.C. s 824d(a).

They explain that the amendment does not indicate in which

direction the various factors point, and does not say anything

about the relative weights of the factors. Petitioners bolster

their claim by directing us to the testimony of an Entergy

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 21 of 22
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

witness who opined that the factors could cut for or against

MSS-1 inclusion depending on the circumstances.

While the amendment is certainly closer to a standard than

to a rule, we defer to the Commission's judgment that it is

just and reasonable. See Northern States Power Co. v.

FERC, 30 F.3d 177, 180 (D.C. Cir. 1994) ("Because '[i]ssues of

rate design are fairly technical and, insofar as they are not

technical, involve policy judgments that lie at the core of the

regulatory mission,' our review of whether a particular rate

design is 'just and reasonable' is highly deferential." (quoting

Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C. Cir. 1992))

(alteration in original)). FERC understandably concluded

that the amendment set out the parameters of the operating

committee's discretion, and that discriminatory implementation of the amendment could be remedied in a proceeding

under FPA s 206, 16 U.S.C. s 824e, a review facilitated by

the requirement that the operating committee record the

reasons for its decisions in writing. The amendment, moreover, is a far cry from the vacuous tariff provisions that the

Commission has rejected in the past. See, e.g., Southern

Natural Gas Co., 47 F.E.R.C. p 61,205, at 61,708 (1989)

(rejecting portion of proposed tariff that granted oil pipeline

authority to construct facilities to serve shippers "in its sole

discretion"); Tennessee Gas Pipeline Co., 45 F.E.R.C.

p 61,236, at 61,693 (1988) (same); cf. Farmers Union Cent.

Exch., Inc. v. FERC, 734 F.2d 1486 (D.C. Cir. 1984) (vacating

Commission order setting permissible oil pipeline rates so

high that "regulation" would be left to market forces, reasoning that the Commission thereby contravened its statutory

responsibility to ensure that rates are just and reasonable).

* * * *

For the foregoing reasons, the petition for review is denied.

So ordered.

USCA Case #98-1088 Document #429025 Filed: 04/13/1999 Page 22 of 22