Opinion ID: 6936498
Heading Depth: 2
Heading Rank: 2

Heading: The Merits of Petitioners’ Claims

Text: Replacement Capacity Costs The most significant dispute in this case concerns the question whether or not FERC must consider projected replacement capacity costs when making a determination of the “prudence” of the spin-off with respect to rates. Section 205(a) of the FPA provides that all rates and charges made by a public utility must be “just and reasonable.” To determine reasonableness, FERC applies a “prudence” test, which permits utilities to recover in their rates the cost of “prudent” investments. This test is laid out most clearly in New England Power Co., 31 F.E.R.C. ¶ 61,-047 (1985), aff'd sub nom. Violet v. FERC, 800 F.2d 280 (1st Cir.1986) (“Violet”): [Mjanagers of a utility have broad discretion in conducting their business affairs and in incurring costs necessary to provide services to their customers. In performing our duty to determine the prudence of specific costs, the appropriate test to be used is whether they are costs which a reasonable utility management (or that of another jurisdictional entity) would have made, in good faith, under the same circumstances, and at the relevant point in time. Id. at 61,084. The petitioners correctly point out that a prudence analysis must evaluate a utility’s decision on the basis of information available to the utility at the time the decision is made. Neither FERC nor this court can properly use hindsight in evaluating the reasonableness of a decision’s effect on rates. See id. (“We note that while in hindsight it may be clear that a management decision is wrong, our task is to review the prudence of the utility’s actions and the costs resulting therefrom based on the particular circumstances existing at the time the challenged costs were actually incurred, or the time the utility became committed to incur those expenses.”). Nevertheless, we reject petitioners’ contention that the ban on the use of hindsight necessarily requires FERC to make a final decision at this juncture as to the prudence of the spin-off with respect to replacement capacity costs in the distant future. We also reject petitioners’ claim that our decision in City of New Orleans v. SEC requires that we remand for FERC to consider replacement costs in its prudence analysis. In that case, we objected to the agency’s reliance on an unsatisfactory report submitted by Entergy, which claimed that the benefits of the spin-off outweighed the costs. We pointed out that the Entergy study had considered the total capacity of the System in drawing its conclusions regarding replacement costs, but had stated its conclusions regarding savings in terms of the advantage to AP & L ratepayers only. We also noted that “the Commission made no further effort to explain how replacement costs would affect other System utilities’ ratepayers.” 969 F.2d at 1167. It was primarily this analytical imbalance, which the SEC failed to address, that led to our remand. CNO mistakenly interprets our opinion, however, to hold that we remanded because the SEC had failed to consider replacement costs. In fact, we explained that we were remanding because the SEC had “faded to address directly the effect of plant replacement costs on the petitioners [CNO et al ].” Id. at 1169 (emphasis added). We believe the opinion is clear that a critical issue in City of New Orleans v. SEC was the nonrecognition of “the costs borne by non-Arkansas ratepayers,” id. at 1167, rather than the consideration of replacement costs, per se. Accordingly, we do not find this case controlling as to the FERC’s duty to consider its replacement costs in any determination of the effect of the transfer upon ratepayers in the short- and long-term haul. Without passing on the wisdom of FERC’s decision to delay consideration of the replacement costs, we hold that for purposes of this case, nothing in the FPA or in the caselaw compels the Commission to include those costs in the current prudence inquiry. Nor is FERC’s decision to defer this issue clearly contrary to its own precedent. Thus, the question rested securely within the agency’s discretion and therefore deserves deference. The Commission determined that it would not review the replacement costs issue until such time as the System actually adds capacity. Not until that time can the replacement costs have any effect, let alone an unreasonable one, on the utility’s rates. This decision comports with FERC precedent suggesting that a prudence inquiry is proper only after a decision affects jurisdictional rates. See Duke Power Co., 46 F.E.R.C. ¶ 61,315, at 61,962 (1989); Minnesota Power & Light, 48 F.E.R.C. ¶ 61,104, at 61,343 (1988). FERC has determined that in this case the effect of replacement costs on ratepayers will depend on several highly speculative variables: (1) the configuration of future capacity additions, (2) the relationship between long and short companies at the time, and (3) the then-existing version of the System Agreement. 54 F.E.R.C. at 61,865-66. Given these variables, FERC suggests the possibility that capacity additions might not affect billings at all. See id. at 61,866 n. 15. Entergy complains that FERC’s opinion leaves open the possibility that ratepayers can ultimately challenge the prudence of today’s spin-off with the advantage of hindsight. Until the final prudence determination is made, Entergy must operate under a cloud that may deter investors. If so, that risk must be accepted as a tolerable incident of utility regulation. FERC has already explained in prior cases that postponing a prudence analysis until the rate-altering event occurs does not conflict with the duty to utilize the knowledge available at the time the decision was made. In Minnesota Power & Light, FERC denied a request to make a prudence finding regarding speculative future costs, but nevertheless promised that, when the issue eventually became ripe, the Commission would ask what a prudent utility would have done at the time of the action: A utility whose actions were prudent when made runs no risk as a result of the Commission’s declining to make an advance determination as to the prudence of its actions. On the other hand, advance prudence determinations pose the risk that the Commission will become involved in day-to-day utility management decisions .... In accordance with Commission precedent, any inquiry as to the prudence of the utilities’ decisions should occur at such time as the companies actually seek to reflect the effect of the proposed transactions in rates. 43 F.E.R.C. at 61,343. We note, additionally, that the FERC Order in this case explicitly states that “Enter-gy stockholders are not absolved from any potential disallowance in a future proceeding involving the assignment of replacement capacity costs.” 65 F.E.R.C. at 62,566. Therefore, FERC remains obligated to address the prudence of replacement capacity costs when and if they are actually incurred. In sum, FERC’s decision to defer the issue of replacement costs is a reasonable one, and we affirm the Commission’s Order. Accordingly, we need not address the dispute between CNO and Entergy about whether FERC should find those costs prudently incurred if it did consider them. As to the question of whether Entergy engaged in faulty decisionmaking, we agree with the AL J and the Commission that since the overall effect of the spin-off on ratepayers was reasonable, any flaws in Entergy’s decision-making process were irrelevant. 6 So ordered.