La. Pub. Serv. Comm'n v. Fed. Energy Regulatory Comm'n

10 F.4th 839

LOUISIANA PUBLIC SERVICE COMMISSION, Petitioner

v.FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Entergy Services, LLC and Arkansas Public Service Commission, Intervenors

No. 20-1024

United States Court of Appeals, District of Columbia Circuit.

Argued December 10, 2020

Decided August 20, 2021

Michael R. Fontham argued the cause for petitioner. With him on the briefs were Dana M. Shelton and Justin A. Swaim.

Lona T. Perry, Deputy Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were David L. Morenoff, Acting General Counsel, and Robert H. Solomon, Solicitor.

Glen Ortman, Dennis Lane, Gregory W. Camet, Mark Strain, and Marnie A. McCormick were on the brief for intervenors Entergy Services, LLC and Arkansas Public Service Commission in support of respondent. Jennifer S. Amerkhail and Marie Denyse Zosa entered appearances.

Before: Henderson, Pillard, and Katsas, Circuit Judges.

Katsas, Circuit Judge:

The Federal Energy Regulatory Commission required Entergy Corporation's five operating companies to roughly equalize their electricity production costs. In determining which costs must be equalized, FERC excluded purchased-power costs that a Louisiana affiliate incurred in 2005 and amortized in 2008 and 2009. The agency reasoned that the governing tariff excluded the disputed amortization expenses. The Louisiana Public Service Commission (LPSC) challenges this exclusion.

I

Entergy, a public-utility holding company, owns five operating companies that sell electricity in four states, including Louisiana. The companies have been governed by a system agreement requiring them to act as a "single economic unit." LPSC v. FERC , 184 F.3d 892, 894 (D.C. Cir. 1999) ( LPSC I ). The agreement provided for the companies to operate power facilities jointly, and it required a "rough equalization" of their production costs. LPSC v. FERC , 522 F.3d 378, 383–84 (D.C. Cir. 2008) ( LPSC II ) (cleaned up).¹

FERC has long reviewed the operating companies’ allocation of production costs, which affect electricity rates. See LPSC II , 522 F.3d at 389–90. In 2005, FERC determined that the production costs were not roughly equal and imposed a "bandwidth remedy" to achieve rough equalization after the fact: Whenever the yearly production costs of an individual operating company deviated from the average by more than 11%, companies with lower costs were required to pay companies with higher costs as necessary to bring all five companies within that range. LPSC , 111 FERC ¶ 61,311, PP 28, 145 (2005). Although FERC initially made the bandwidth remedy effective in 2006, we set aside that effective date in 2008. See LPSC II , 522 F.3d at 400. In 2011, on remand from this Court, FERC extended the bandwidth remedy to production costs incurred on or after June 1, 2005. See LPSC , 137 FERC ¶ 61,047, P 34 (2011).

In the meantime, Entergy filed a tariff establishing a formula to calculate production costs subject to the bandwidth remedy, which FERC largely accepted. LPSC , 117 FERC ¶ 61,203, P 75 (2006). The formula incorporated cost data from the operating companies’ annual Form 1 reports, which classify assets and expenses according to FERC's Uniform System of Accounts. See 18 C.F.R. pt. 101. The bandwidth formula was keyed mostly to these FERC accounts. The formula included a variable for purchased-power expenses (PURP), which utilities incur when buying power on wholesale markets. PURP incorporated expenses recorded in FERC Account 555, which covers purchased-power expenses. See id. pt. 101, acct. 555.

The bandwidth remedy led to annual compliance proceedings. In April of each year, the operating companies would report production-cost data for the preceding year on Form 1. Using that data, Entergy would determine whether any of its operating companies fell outside the 11% bandwidth and report the results to FERC.

This petition concerns how the bandwidth formula accounts for deferred production costs. Utilities often must spread over many years their recovery of large, non-recurring costs. To do this, a company offsets those costs by creating a regulatory asset—a type of credit . The company then amortizes the asset in later years, creating debits chargeable to customers. Over time, FERC and Entergy have taken different positions on whether the bandwidth formula should recognize these production costs when an operating company incurs them or in later years as it amortizes the associated regulatory asset.

Historically, the Entergy companies recorded regulatory assets and their related amortization expenses in two FERC accounts not referenced in the bandwidth formula—Account 407.3 (Regulatory Debits) and Account 407.4 (Regulatory Credits). Entergy continued this practice in its first bandwidth filing, the 2007 filing concerning 2006 production data. In excluding regulatory assets and their amortization from the bandwidth calculation, Entergy effectively accounted for deferred production costs when they were incurred, rather than when the related amortization expenses were recorded. But FERC rejected this approach. It prohibited the companies from recording regulatory assets and amortization expenses in Accounts 407.3 and 407.4 when the assets and expenses could be traced to another account. See Entergy Servs., Inc. , 130 FERC ¶ 61,023, PP 261–65 (2010). And when the assets and expenses could be traced to accounts incorporated into the bandwidth formula, it ordered Entergy to treat amortization expenses as production costs for purposes of the formula. See LPSC , 132 FERC ¶ 61,253, P 34 (2010).

Perhaps anticipating these rulings, Entergy revised its accounting for deferred purchased-power costs during the 2008 bandwidth proceedings for 2007 cost data. Because the regulatory assets and related amortization expenses could be traced to Account 555, Entergy began recording them there, rather than in Accounts 407.3 and 407.4. And because the bandwidth formula defined purchased-power expenses by reference to Account 555, this approach included amortization expenses in the bandwidth calculation. Entergy thus counted deferred purchased-power costs when the associated regulatory assets were amortized, rather than when the underlying costs actually were incurred.

LPSC challenged this approach, and the parties reached a settlement. See Entergy Servs., Inc. , 128 FERC ¶ 61,181 (2009). It required Entergy to amend the bandwidth formula "starting with the 2009 Bandwidth Calculation (i.e., effective May 31, 2009) to provide that all purchased power costs will be included in the Bandwidth Calculation in the year the costs are incurred, regardless of whether they are deferred on the individual Operating Company's books." J.A. 1298.

Pursuant to the settlement, Entergy proposed amending the definition of PURP. Under the amendment, PURP still would include most purchased-power expenses recorded in Account 555, but it would "exclud[e] the effects, debits and credits, resulting from a regulatory decision that causes the deferral of the recovery of current year costs or the amortization of previously deferred costs." J.A. 1327. FERC accepted the proposal and made the amendment effective May 31, 2009, before the 2009 bandwidth proceedings. See Entergy Servs., Inc. , 128 FERC ¶ 61,069, P 11 (2009). Under the amendment, the bandwidth formula again considered deferred purchased-power costs when the operating companies incurred them, not when the companies amortized the relevant regulatory assets.

This petition concerns application of the amendment to the 2009 and 2010 bandwidth proceedings, which involve production costs for 2008 and 2009. FERC reopened these proceedings after it discovered accounting errors in the delayed bandwidth proceeding for 2005 production costs. There, an administrative law judge ruled that the operating companies had erroneously recorded certain regulatory assets and their associated amortization expenses in Accounts 407.3 and 407.4. LPSC , 157 FERC ¶ 63,018, P 101 (2016). One of these deferrals is at issue—a $56.3 million purchased-power cost that Entergy Louisiana, one of the operating companies, incurred in 2005. To blunt its impact on ratepayers, LPSC had ordered the company to establish a regulatory asset and amortize it over four years. Id. The ALJ ruled that Entergy Louisiana should have recorded the asset and its amortization in Account 555, and that Entergy had to revise the bandwidth calculation accordingly. Id. PP 113–14. FERC agreed, but stressed that any corrections "should be limited to accounting adjustments that have been shown to have a bandwidth implication." LPSC , 163 FERC ¶ 61,116, PP 119–20 (2018) (Recalculation Order). Recognizing that the error implicated the bandwidth calculations for later years, FERC ordered Entergy Louisiana to refile its Form 1 report and ordered Entergy to adjust bandwidth payments for subsequent years "to ensure that legitimate production costs are properly accounted for on the FERC Form 1 reports and reflected in rates under the filed formula." Id. P 121.

Entergy corrected the accounting and bandwidth calculations for the $56.3 million regulatory credit that Entergy Louisiana received in 2005 and the associated amortization expenses that it recorded in 2006 and 2007. But Entergy did not change its calculations for the amortization expenses recorded in 2008 and 2009. It reasoned that those expenses would not affect the bandwidth remedy under the 2009 amendment, which expressly excluded amortization expenses from the calculation of purchased-power costs.

Entergy's calculation locked a portion of Entergy Louisiana's $56.3 million production cost out of the bandwidth remedy. When Entergy Louisiana incurred that cost in 2005, the bandwidth formula recognized deferred purchased-power costs only upon amortization, so the bandwidth calculation for 2005 did not account for the costs. But for amortization expenses realized in 2008 and 2009, Entergy read the...