In a decision issued on March 6, 2018, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit” or the court) upheld a series of FERC orders declining to direct Entergy Services Inc. (“Entergy”) to pay refunds for previously misallocated capacity costs. The D.C. Circuit found that FERC adequately explained its reasoning and clarified that—contrary to previous assertions—the Commission has no general policy of ordering refunds in cases involving flawed rate design, and that it had adequately explained that such a refund order would be inequitable in this instance.

The origins of this long-running dispute date back to a multi-state system agreement in which Entergy, and several other Entergy Company-branded public utilities, are members and share certain costs, such as for capacity. In the mid-1990s, the Louisiana Public Service Commission (“LAPSC”) filed a Federal Power Act (“FPA”) Section 206 complaint at FERC arguing against Entergy’s inclusion of interruptible service in its rate design, specifically, in the utility’s cost allocation calculations. As the LAPSC argued, because interruptible service is subject to curtailment to accommodate firm customers, such service does not cause the utility to build out its system (i.e. incur capacity costs), and should therefore bear less of the capacity cost burden as compared to firm service, which is generally uncurtailable except in emergencies. After an earlier D.C. Circuit opinion reversed FERC’s first order rejecting the LAPSC’s complaint, FERC ultimately agreed that interruptible load should not have been included in Entergy’s cost allocation calculations, and FERC directed the utility to revise its rates prospectively. FERC declined, however, to order Entergy to pay refunds for the time period in which the previous rates were in place—a decision on which FERC would reverse itself twice, prompting two more appellate decisions from the D.C. Circuit.

In the third such decision from the D.C. Circuit, issued in 2014, the court rejected FERC’s ultimate refund denial for failure to explain the Commission’s departure from its self-described “general policy” of ordering refunds when consumers have paid unjust and unreasonable rates (see December 15, 2014 edition of the WER). On remand from that decision, FERC reaffirmed its decision to not order refunds, and clarified that it actually has no general policy of ordering refunds in cases involving rate design issues. LAPSC again appealed to the D.C. Circuit, resulting in the March 6, 2018 decision—the fourth appellate decision in this dispute.

In the D.C. Circuit’s March 6, 2018 decision, the court determined that FERC had sufficiently clarified its refund precedent, and upheld the Commission’s ultimate decision to decline to order refunds in this case. Specifically, the court noted, although FERC does generally award refunds when there has been an over-collection of revenue, refunds are generally not ordered when, as in this case, sufficient revenues had been collected but allocated incorrectly.

As the court summarized, in the absence of utility over-recovery, FERC is generally reluctant to order refunds in cases involving flawed rate design for two reasons. First, it may be difficult for the utility to recover its costs fully after granting the refunds—such as if a state commission were to decline to impose surcharges to pay for the refunds. Second, FERC has been hesitant to order refunds in flawed rate design cases because impacted customers made operational decisions based on those rates, which they cannot retroactively “undo.” As the court noted, a refund would be inequitable because it would, “at least in part, pull the economic rug out from under those transactions.” Finally, FERC added an additional factor weighing against refunds in this case: intergenerational equity. In other words, FERC argued that it would be inequitable to order refunds because they would be awarded to, and collected from, completely different customer groups than those initially impacted by Entergy’s flawed rate design.

The D.C. Circuit found the LAPSC’s rejoinders unconvincing in light of FERC’s clarifications. For example, although the LAPSC argued, correctly, that several of the cases FERC cited to were brought under FPA Section 205 instead of Section 206, even still, the court responded, FERC’s refund authority under both sections is discretionary, so it was unclear why the Commission should disregard case law from Section 205 cases. Similarly, despite the LAPSC’s arguments to the contrary, the value of FERC’s refund precedent was not undermined by the fact that those cases did not involve utilities that were part of a large holding company.

The D.C. Circuit’s March 6, 2018 decision can be found here.