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Louisiana Public Service Commission v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

June 23, 2017

Louisiana Public Service Commission, Petitioner
v.
Federal Energy Regulatory Commission, Respondent Arkansas Public Service Commission and Entergy Services, Inc., Intervenors

          Argued April 3, 2017

         On Petition for Review of Orders of the Federal Energy Regulatory Commission

          Michael R. Fontham argued the cause for petitioner. With him on the briefs were Paul L. Zimmering, Noel J. Darce, and Dana M. Shelton.

          Carol 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. Solomon, Solicitor.

          Mark 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.

          OPINION

          Garland, Chief Judge

         The 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.

         I

         Entergy 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).

         In 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.

         When 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. 1998).

         This 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).

         Which 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 ΒΆ 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, ...


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