On December 5, 2014, the United States Court of Appeals for the D.C. Circuit remanded an order of the Federal Energy Regulatory Commission (FERC) denying refunds to certain Louisiana-based utility companies for rates that FERC had previously ruled “unjust and unreasonable.” 1 The December Order is the third time the D.C. Circuit has remanded an order in the long-running dispute, and the second time the D.C. Circuit has remanded on the issue of refunds.2
The dispute originated in 1995, when the Louisiana Public Service Commission (LPSC) filed a complaint with FERC under Section 206 of the Federal Power Act (FPA). The Complaint objected to the way in which capacity costs were allocated among three Louisiana utilities, all of which were subsidiaries of Entergy Corporation. FERC dismissed the complaint, and the LPSC petitioned the D.C. Circuit for review. In 1999, the D.C. Circuit remanded the order to FERC for further explanation.3 On remand, FERC decided that the allocation of capacity costs was unjust and unreasonable, but ordered relief only on a prospective basis.4 FERC declined to order refunds because it found it could not make the required finding under FPA Section 206(c) that Entergy’s subsidiaries would be able to recover the costs of the refunds from their ratepayers.5
The LPSC again petitioned for review, and in 2007 the D.C. Circuit remanded the case again, this time on the issue of refunds.6 The D.C. Circuit concluded that the Louisiana utilities should be able to pass through the costs of the refunds to their ratepayers. It reasoned that, contrary to FERC’s concerns, such cost recovery would not be barred under the filed rate doctrine in a situation where all parties were on notice that the capacity allocation might be found unjust and unreasonable, and refunds ordered.
On remand, FERC again declined to order refunds. Although acknowledging a long-standing “policy of granting full refunds to correct unjust and unreasonable rates,”7 FERC argued that there was a separate line of precedent concerning situations involving misallocated costs and issues of rate design. In those situations, FERC claimed that it “traditionally” declined to order refunds. The LPSC again petitioned for review.
In this most recent order, the D.C. Circuit takes issue with FERC’s reasons for departing from its “general policy” of ordering refunds for unjust and unreasonable rates. The court found that FERC has no specific policy against refunds in rate design cases, but has instead declined to issue refunds in such cases due to specific considerations that are not pertinent to the refunds in LPSC v. FERC. FERC identified the following reasons for denying refunds in cost allocation cases: “potential under-recovery by the utility; consumers’ and utilities’ inability to revisit past decisions; a ‘detrimental effect upon an organized market’; different generations of consumers paying the surcharges and receiving the past benefits; and the ‘complication and cost of rerunning markets.’”8 FERC itself had ruled out the possibility of under-recovery in this case. As for the other considerations, FERC determined that refunds were not warranted because (1) Entergy had not over-recovered and (2) Entergy could not revisit its past decisions.9
The D.C. Circuit accepted neither explanation. It noted that FERC did not explain why “a lack of over-recovery should automatically negate refunds.” It further observed that FERC had not identified any past decisions that Entergy was unable to revisit, or “why that fact—presumably true in every refund decision—was more significant here than in other decisions in which it orders refunds.”10 The D.C. Circuit concluded that FERC “cannot reasonably apply a policy that is based on factors that it acknowledges are not present in a given case.”11 The court directed FERC on remand to consider the factors present in the case and reach a “reasonable accommodation” among them with regard to refunds.