United States Court of Appeals, District of Columbia Circuit
April 3, 2017
Petition for Review of Orders of the Federal Energy
Michael R. Fontham argued the cause for petitioner. With him
on the briefs were Paul L. Zimmering, Noel J. Darce, and Dana
J. Banta, Senior Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
briefs were David L. Morenoff, General Counsel, and Robert H.
Strain argued the cause for intervenors. With him on the
briefs were David C. Duggins, Marnie A. McCormick, Gregory W.
Camet, P. Randolph Hightower, Glen L. Ortman, and Dennis
Lane. Adrienne E. Clair entered an appearance.
Before: Garland, Chief Judge, Griffith, Circuit Judge, and
Edwards, Senior Circuit Judge.
Garland, Chief Judge
Louisiana Public Service Commission (LPSC) asked the Federal
Energy Regulatory Commission (FERC) to reform certain
depreciation rates on the ground that those rates were
unjust, unreasonable, unduly discriminatory, or preferential.
FERC rejected the request, finding that LPSC failed to meet
its burden of proof. LPSC now petitions for review. For the
reasons stated below, we deny its petition.
Corporation is a public utility holding company that sells
electricity, both at wholesale and retail, in Arkansas,
Louisiana, Mississippi, and Texas. It does business through
five operating companies named after their respective
jurisdictions: Entergy Arkansas, Inc.; Entergy Louisiana,
LLC; Entergy Mississippi, Inc.; Entergy Texas, Inc.; and
Entergy New Orleans, Inc. For decades, these companies worked
together as an integrated system, and transactions between
them were governed by a System Agreement. As we have
described it before, "[t]he System Agreement act[ed] as
an interconnection and pooling agreement for the energy
generated in the System and provide[d] for the joint
planning, construction and operation of new generating
capacity in the System." La. Pub. Serv. Comm'n
v. FERC, 522 F.3d 378, 383 (D.C. Cir. 2008).
2000, a spike in natural-gas prices caused large
production-cost disparities between the five operating
companies. Id. at 385. For example, Entergy
Louisiana, which was hit particularly hard by the natural-gas
price hike, incurred production costs that were 12 percent
above System average; Entergy Arkansas' production costs,
conversely, were 17 percent below average. Id. To
mitigate the unfairness of these production-cost disparities,
which in turn affect the cost-of-service rate for the sale of
wholesale power to other operating companies in the System,
id. at 390, FERC fashioned the "bandwidth
remedy, " La. Pub. Serv. Comm'n v. Entergy
Servs., 111 FERC ¶ 61, 311 (2005) (Opinion No.
480). That remedy provided for a maximum annual bandwidth of
11 percent, thereby permitting at most a 22-percent
spread between the companies' production costs.
Id. at 62, 371. If production-cost disparities
exceeded the bandwidth in a given year, the companies were
required to make payments to one another to bring costs
within the permissible range. In choosing a 11 percent
bandwidth, FERC sought only to produce rough cost
equalization among the companies in order to prevent undue
discrimination; it did not intend to eliminate all
cost disparities because doing so might disrupt the
System's historical operation. See La. Pub. Serv.
Comm'n, 522 F.3d at 393-94.
Entergy implements the bandwidth remedy each year, its first
step is to calculate each company's annual production
costs. The System Agreement provides a formula for doing
that. See J.A. 504-10. One input into that formula
is depreciation -- that is, the cost of an asset (e.g., a
power plant) distributed over its estimated useful life.
See Ala. Power Co. v. FERC, 160 F.3d 7, 8 (D.C. Cir.
case is about the depreciation rates used in the bandwidth
formula. Because states have exclusive jurisdiction over
retail energy regulation, see FERC v. Elec. Power Supply
Ass'n, 136 S.Ct. 760, 766 (2016), state regulatory
agencies may use their own methodologies for determining
retail depreciation rates. An Arkansas agency using its
preferred accounting practices might set a power plant's
remaining useful life at 10 years, while a Louisiana agency
using its own practices might set that plant's remaining
useful life at 20 years. This divergence would, in turn, lead
those agencies to calculate the costs of their plants
differently. FERC, meanwhile, has established accounting
practices of its own, which it uses to set wholesale
depreciation rates. See Depreciation Accounting, 92
FERC ¶ 61, 078, 2000 WL 33539341 (2000) (Order No. 618).
depreciation rates does the bandwidth formula incorporate?
Under FERC's reading, the formula calls for the use of
retail depreciation rates set by state regulators in
Arkansas, Louisiana, Mississippi, and Texas. See Entergy
Servs., Inc., 137 FERC ¶ 61, 029, 2011 WL 4703181,
at *13 (2011) (Opinion No. 514). The Fifth Circuit has upheld
FERC's reading as a reasonable interpretation of the
System Agreement, ...