United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 8, 1999 Decided April 13, 1999
No. 98-1088
Louisiana Public Service Commission, et al.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Arkansas Public Service Commission, et al.,
Intervenors
On Petition for Review of Orders of the Federal
Energy Regulatory Commission
Michael R. Fontham argued the cause for petitioners.
With him on the briefs were Noel J. Darce and George M.
Fleming.
David H. Coffman, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and John H. Conway,
Deputy Solicitor.
Douglas G. Green argued the cause for intervenor Entergy
Services, Inc. With him on the brief was J. Wayne
Anderson.
Earle H. O'Donnell and Roger L. St. Vincent were on the
briefs for intervenor Occidental Chemical Corporation.
Mary W. Cochran, Paul R. Hightower, Clinton A. Vince,
and Glen L. Ortman were on the brief for intervenors City of
New Orleans and Arkansas Public Service Commission.
Before: Wald, Silberman, and Ginsburg, Circuit Judges.
Opinion for the Court filed by Circuit Judge Silberman.
Silberman, Circuit Judge: FERC determined that Enter-
gy Corporation had violated the inter-company formula tariff
that it administers to equalize costs among its five parallel
subsidiaries; the Commission declined, however, to order a
refund from the subsidiaries that were undercharged by
virtue of the tariff violation to the customers of the over-
charged subsidiaries. The state regulatory bodies of Louisi-
ana and Mississippi (the service areas of the overcharged
subsidiaries), supported by an energy consumer as interve-
nor, petition for review of the Commission's order, contending
that the Commission abused its discretion in declining to
order a refund. We deny the petition.
I.
Entergy Corporation owns five public utilities--Entergy
Gulf States, Entergy Arkansas, Entergy Louisiana, Entergy
New Orleans, and Entergy Mississippi--that provide electri-
cal power to retail customers in Arkansas, Louisiana, Missis-
sippi, and Texas. (Entergy Arkansas, alone among the sub-
sidiaries, sells wholesale as well as retail power.) Entergy's
subsidiaries are linked by more than common parentage:
each subsidiary makes its capacity available to its sister
companies as a backstop for when demand exceeds self-
generated supply. Maintaining the availability of such capac-
ity, of course, carries costs, even when it is not tapped for
power generation. Since the subsidiaries' retail rates are set
by state regulators based on principles of cost-of-service
ratemaking, it would be inequitable--vis-a-vis a subsidiary's
retail customers--for that subsidiary not to earn compensa-
tion from its sister companies when it keeps capacity on hand
for them.
The Entergy subsidiaries' response to this problem of cost
equalization inter se is the System Agreement, a tariff that
has been filed with and approved by the Commission pursu-
ant to s 205 of the Federal Power Act (FPA), 16 U.S.C.
s 824d (1994). One provision of the Agreement, known as
the MSS-1 schedule, requires monthly payments from subsid-
iaries contributing less than their fair share of the System's
total capacity to subsidiaries contributing more.1 A company
first determines its capability: the power that its "available"
generating units--whether owned, leased or operated for its
benefit--can generate in the month at issue. Next the
company ascertains its responsibility ratio by dividing its use
of power (self-generated and otherwise)--known as load re-
sponsibility--by the sum of all the individual companies' load
responsibilities.2 Then the company determines its propor-
tionate share of total System capability--known as capability
responsibility--by multiplying its responsibility ratio by the
total System capability, and compares this figure to its actual
capability for the month. If the company's actual capability
is less than its capability responsibility, then the company is
"short" and must make a monthly payment; if the company's
actual capability exceeds its capability responsibility, then the
company is "long" and will receive a monthly payment. The
size of the payment is determined by multiplying the long
__________
1 These transactions are sales of electric energy at wholesale in
interstate commerce, and hence are subject to the Commission's
regulatory authority. See 16 U.S.C. s 824 (1994).
2 The company load responsibility, measured monthly, is a
rolling 12-month average of the company's hourly loads, i.e., sales
of power, coincident with the System's monthly peak hour load.
company's MSS-1 rate--its average cost of oil and gas gener-
ating units based on the previous year's operating results--by
the number of megawatts by which the company is long.3
As a formula rate tariff, the MSS-1 tariff's components
may vary and hence the formula may dictate different equali-
zation payments from month to month. Such changes do not,
however, subject the Entergy system to the Federal Power
Act's pre-filing and pre-approval requirements for changes in
a tariff; they are instead countenanced by FPA s 205(f), 16
U.S.C. s 824d(f), which governs automatic adjustment claus-
es. The retail rates charged by the subsidiaries to their
customers are subject to state regulatory authority and oper-
ate quite differently. Apart from a fuel adjustment clause
that allows for automatic changes in retail rates when fuel
costs change, the retail rates are fixed by state regulators and
remain in place until the regulators initiate a new rate case.
In 1985, when the current version of the System Agree-
ment was approved by the Commission, there were four
Entergy subsidiaries. Entergy Louisiana and Entergy New
Orleans were consistently short; Entergy Arkansas and En-
tergy Mississippi consistently long. (A fifth subsidiary, En-
tergy Gulf States, joined the System in a merger approved in
1993.) Despite this imbalance among the subsidiaries in
terms of relative contribution to System capability, circum-
stances were such that each subsidiary, in terms of absolute
need for power given consumer demand, was maintaining a
sizable number of operating units that were rarely (if ever)
tapped for power generation. In 1986, Entergy's operating
committee initiated the Extended Reserve Shutdown (ERS)
program in the hope of reducing the costs of maintaining this
unnecessary capacity. Under the program, some of the
generating units would be identified as unnecessary for ca-
pacity needs, removed from active service, and preserved in a
reserve status. It was hoped that the ERS program would
allow the companies to reduce staffing and other operating
__________
3 If there is more than one short company, the payment
obligation is allocated based on the ratio of each short company's
deficiency to the total deficiency of the short companies.
and maintenance expenses that otherwise would have been
required to maintain the units in a constant state of readi-
ness, enable the companies to defer the cost of repairing
broken units until it was necessary to bring the reserve units
back on line, and obviate the need to construct costly new
generating capacity to meet long-term requirements. Al-
though Entergy contemplated retiring some of the ERS units
rather than bringing them back on line, it intended to return
many of the units to active service notwithstanding the 8-12
month period necessary to restore the ERS units. Forty
percent of the units placed in ERS since the inception of the
program in 1986 had been restored to active service by 1993.
The dispute before us stems not from Entergy's implemen-
tation of the ERS program itself, but rather from Entergy's
decision to allow the individual companies to include ERS
units within the category of "available" capability for pur-
poses of cost equalization under the MSS-1 tariff. Recall
that the higher a company's capability relative to the capabili-
ties of its sister companies, the better off that company will
be in terms of cost equalization under MSS-1. Under the
version of the System Agreement then in place,
A unit is considered available to the extent the capability
can be demonstrated and (1) is under the control of the
System Operator, or (2) is down for maintenance or
nuclear refueling. A unit is considered unavailable if in
the judgement of the Operating Committee it is of insuf-
ficient value in supplying system loads because of (1)
obsolescence, (2) physical condition, (3) reliability, (4)
operating cost, (5) start-up time required, or (6) lack of
due-diligence in effecting repairs or nuclear refueling in
the event of a scheduled or unscheduled outage.
Entergy Servs., 80 F.E.R.C. p 61,197, at 61,787 (1997) (foot-
note omitted) (emphasis in original). Entergy's Operating
Committee interpreted "available" to include ERS units,
which had the effect of improving the lot of those companies
that had relatively more ERS-eligible units. That benefitted
Entergy Arkansas and Entergy New Orleans: in the period
1987-1993, Entergy Arkansas, which was long to begin with,
became more long, and Entergy New Orleans, which was
short to begin with, grew less short. Conversely, Entergy
Mississippi and Entergy Louisiana were, at least in this
respect, disadvantaged by virtue of the inclusion of ERS units
in MSS-1: Entergy Mississippi, which was long to begin
with, became less long, and Entergy Louisiana, which was
short to begin with, became more short. (The inclusion of
ERS units as "available" for MSS-1 purposes also bears on
the MSS-1 rates of the long companies. As noted, that rate
is the average cost per megawatt of the long company's oil
and gas-fired generating units. A long company, by placing
units into ERS, reduces the cost associated with those units
and consequently reduces the average cost of all of its oil-and
gas-fired generating units, and hence its MSS-1 rate.) Hold-
ing constant the number of units that each company actually
put in ERS from 1987-1993, an Entergy officer determined
that Entergy Mississippi received $8.8 million less, and En-
tergy Louisiana paid $10.6 million more, than would have
been the case had ERS units been excluded from MSS-1.
Though inclusion of ERS units in the MSS-1 calculation
began in 1986, neither the Commission nor any other party
challenged the practice until 1993. One issue presented in
FERC's review of the merger of Gulf States into the Entergy
system as a fifth subsidiary was whether to allow Gulf States
to include its then-existing ERS units as available capability
for MSS-1 purposes before those units were returned to
active service; the Commission decided that Gulf States
should not receive credit for those ERS units because "there
has been no historic practice of maintaining rough production
cost equalization between Gulf States and the Operating
Companies." Entergy Servs., Inc., 65 F.E.R.C. p 61,332, at
62,497 (1993). The Commission, sua sponte, raised the
broader question of whether Entergy's System Agreement
permits the four incumbent subsidiaries to count their ERS
units as "available" for MSS-1 purposes, and initiated a
proceeding under FPA s 206, 16 U.S.C. s 824e (1994), to
determine whether the Entergy companies were violating the
Agreement. See Entergy Servs., 65 F.E.R.C. at 62,548.
The Louisiana Public Service Commission and the Missis-
sippi Public Service Commission, petitioners here, argued
that the Entergy system had violated the MSS-1 tariff's clear
definition of "available" units by including ERS units in
MSS-1. They requested that Entergy Arkansas and Enter-
gy New Orleans, the operating companies that benefitted
from the inclusion of ERS units in the MSS-1 calculation,
refund to the customers of Entergy Louisiana and Entergy
Mississippi the amount by which their rates had been escalat-
ed by virtue of the alleged tariff violation. The Commission
agreed that Entergy had violated its tariff, relying on the
ALJ's finding that ERS units are neither under the control of
the System Operator nor down for maintenance or nuclear
refueling, but rather are effectively in storage. See Entergy
Servs., Inc., 80 F.E.R.C. at 61,786-87. But FERC decided
that the equities of the case did not support a refund because
the end result of the tariff violation was not unjust, unreason-
able, or unduly discriminatory. See id. at 61,787-88. (The
Commission expressly disclaimed any reliance on Entergy's
submission that it acted in good faith in interpreting the tariff
to address the novel problem of unnecessary capacity. See
id. at 61,788 & n.45.)4
The Commission then turned to the appropriate treatment
of ERS units going forward. An amendment to the System
Agreement was proposed that would include an ERS unit as
an available unit under MSS-1 if Entergy intends to return
the unit to service at a future date, with Entergy's "intent" to
be ascertained by an examination of several enumerated
factors and recorded in the minutes of the Operating Commit-
tee. See id. at 61,788-89. Over the objections of the Louisi-
ana and Mississippi regulators that it would be unjust to
impose MSS-1 costs for units that provide no present benefit
to the system and that the amendment's ambiguity made it
__________
4 The Commission also noted that because it was declining to
order refunds based on its discretion, it had no need to address
whether or to what extent FPA s 206(c), 16 U.S.C. s 824e(c) (1994),
might preclude ordering refunds in any event. See Entergy Servs.,
80 F.E.R.C. at 61,788 n.46.
susceptible to discriminatory application, the Commission ap-
proved the proposed amendment. See id. at 61,789.
Upon FERC's denial of the Louisiana and Mississippi
regulators' request for rehearing on the refund and amend-
ment issues, see Entergy Services, Inc., 82 F.E.R.C. p 61,098
(1998), the regulators, joined by an energy consumer (Occi-
dental Chemical Corporation) as intervenor, brought the in-
stant petition for review. They contend that the Commission
abused its discretion by relying on superficial, even irrational,
equitable factors to deny the requested refund, especially
when the Commission's self-described general policy is to
provide refunds to remedy overcharges.5 And, while aban-
doning their complaint to the Commission that the concept of
the amendment is unlawful insofar as it countenances the
inclusion of some ERS units in the MSS-1 schedule, petition-
ers argue that the wording of the amendment is so ambiguous
and prone to discriminatory implementation that the Commis-
sion has effectively abdicated its statutory responsibilities in
approving it.
II.
We take up the refund issue first. Before addressing
petitioners' various attacks on the Commission's reasoning,
we think we should clarify a point on which the briefs were
somewhat obscure: just what sort of injury has been caused
by Entergy's violation of its tariff. No one disputes that
holding everything else constant, the decision to include ERS
units in MSS-1 worked to the detriment of the two compa-
__________
5 Intervenor Occidental makes a similar argument for a full
refund but, unlike petitioners, alternatively seeks a refund under
Western Resources, Inc., 65 F.E.R.C. p 61,271, at 62,252 (1993), in
which the Commission held that in certain circumstances involving a
tariff violation that benefits ratepayers, it would deny a full refund
but award a refund of the time value of the overcharged amount.
But since only intervenor Occidental raises the Western Resources
refund issue before us, we decline to address it. See Illinois Bell
Tel. Co. v. FCC, 911 F.2d 776, 786 (D.C. Cir. 1990) ("An intervening
party may join issue only on a matter that has been brought before
the court by another party.").
nies, Entergy Louisiana and Entergy Mississippi, that had
fewer ERS-eligible units than the other companies in the
system. Entergy Louisiana, a short company, became more
short, i.e., faced higher MSS-1 payment obligations; Entergy
Mississippi, consistently a long company, became less long,
i.e., received less in MSS-1 payments. But since the retail
rates of both companies were fixed before Entergy began to
include ERS units in MSS-1 and did not change until peti-
tioners initiated rate cases in 1994, the harm cannot be found
in an increase in retail rates charged to customers--as retail
rates were fixed, no such increase occurred. Nor can it be
asserted that the injured parties are Entergy Louisiana and
Entergy Mississippi--after all, these companies, along with
the other Entergy subsidiaries and the holding company,
support the Commission's order. We gather the harm arises
from petitioners' expectation that but for the distortions in
MSS-1 payments flowing from the tariff violation, they would
have brought rate cases earlier that would have lowered retail
rates.
This injury might well warrant a refund to the retail
customers of Entergy Louisiana and Entergy Mississippi.
But the Commission claimed it took a broader perspective
and concluded that the equities cut against ordering a refund.
Petitioners, while emphasizing the Commission's self-
described "general policy ... to order refunds to remedy
overcharges," Entergy Servs., 82 F.E.R.C. at 61,369 (footnote
omitted), do not--and, indeed, could not--contend that the
policy is without exception. See Koch Gateway Pipeline Co.
v. FERC, 136 F.3d 810, 816 (D.C. Cir. 1998) (vacating refund
order as an abuse of discretion); Towns of Concord v. FERC,
955 F.2d 67, 72 (D.C. Cir. 1992) ("[O]ur examination of the
Federal Power Act reveals no statutory command mandating
refunds when the rate charged exceeds that filed.").6 In-
stead, petitioners submit that the Commission's four grounds
__________
6 The Commission's authority to order refunds of amounts
improperly collected in violation of the filed rate derives from FPA
s 309, 16 U.S.C. s 825h (1994). See Towns of Concord, 955 F.2d at
73.
for departing from its general policy are irrational. As the
Commission did not set forth these equitable factors in the
alternative or otherwise suggest that its decision would be the
same in the absence of one or more of the four factors, we
consider each one. See Sundor Brands, Inc. v. NLRB, 1999
WL 94803, *3 (D.C. Cir. Feb. 26, 1999) (citing SEC v.
Chenery Corp., 318 U.S. 80, 87 (1943)).
We bear in mind, however, that "[w]hen a federal court of
appeals reviews an administrative agency's choice of remedies
to correct a violation of a law the agency is charged with
enforcing, the scope of judicial review is particularly narrow."
National Treasury Employees Union v. FLRA, 910 F.2d 964,
966-67 (D.C. Cir. 1990) (en banc); see also ICC v. Transcon
Lines, 513 U.S. 138, 145 (1995); Towns of Concord, 955 F.2d
at 76 (explaining that the words "necessary or appropriate" in
FPA s 309, 16 U.S.C. s 825h, evince Congress' intent to
leave refund determinations to the Commission's "expert
judgment"). Indeed, "the breadth of agency discretion is, if
anything, at [its] zenith when the action assailed relates
primarily not to the issue of ascertaining whether conduct
violates the statute, or regulations, but rather to the fashion-
ing of policies, remedies and sanctions ... in order to arrive
at maximum effectuation of Congressional objectives." Niag-
ara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 (D.C.
Cir. 1967). Thus, we will set aside FERC's remedial decision
only if it constitutes an abuse of discretion. See, e.g., Public
Utils. Comm'n of Calif. v. FERC, 143 F.3d 610, 617 (D.C. Cir.
1998); Koch Gateway, 136 F.3d at 816. To the extent the
Commission made factual determinations in the course of
exercising its discretion, we of course ask whether those
conclusions are supported by substantial evidence. See 16
U.S.C. s 8251(b) (1994).
A.
We begin with the Commission's "disincentive" rationale
for denying a refund:
[G]iven that there would have been a disincentive to
participate in the ERS program without Schedule MSS-1
treatment for the units, Entergy's actions, both in creat-
ing the ERS program and in continuing to include these
units in Schedule MSS-1 calculations, resulted in consid-
erable system-wide benefits, in the form of enhanced
system efficiencies and cost reductions, that ultimately
benefitted ratepayers.
Entergy Servs., 80 F.E.R.C. at 61,787 (footnotes omitted). In
other words, the Commission thought it inequitable to order a
refund when the predicate tariff violation had conferred bene-
fits on the system, including the allegedly injured parties,
that would not have come to pass absent the tariff violation.
Petitioners' primary argument is that FERC is simply
wrong in asserting that the operating companies needed any
added incentive to place units in ERS.7 They submit that the
enormous benefits expected to flow from the ERS program in
terms of reduced operating, maintenance, and fuel costs, far
outweigh any disincentive created by adverse MSS-1 treat-
ment. One view of Entergy's own data supports this claim:
company by company, over a roughly concurrent six-year
period, the benefit of the ERS program in terms of operating
and other cost savings outweighs the "cost" of adverse MSS-1
treatment for all but Entergy New Orleans. In the case of
Entergy Louisiana and Entergy Mississippi, adverse MSS-1
treatment, i.e., inclusion of ERS units in MSS-1, is what
__________
7 Petitioners also argue--half-heartedly--that treating ERS
units as available capability for MSS-1 purposes would neither
avoid a disincentive, nor create an incentive, for the operating
companies to place units in ERS. But, in a world where ERS units
are excluded from treatment as available capability, an operating
company will not be indifferent between receiving MSS-1 credit
now (by keeping the unit in active service) and receiving MSS-1
credit later (by putting the unit in ERS and later restoring it to
active service)--money now is always more valuable than money
later. And petitioners overlook that treating ERS units as "avail-
able" for MSS-1 also creates an "extra" incentive in that the life of
the unit is extended and the unit continues to receive MSS-1 credit
(albeit at lower rates in the case of a long company) while in ERS.
actually occurred. Yet Entergy Louisiana's ERS savings of
$13.8 million outweigh its MSS-1 detriment of $10.6 million;
Entergy Mississippi's ERS savings of $11.2 million similarly
surpass its MSS-1 detriment of $8.8 million. In the case of
Entergy Arkansas and Entergy New Orleans, adverse
MSS-1 treatment, i.e., exclusion of ERS units from MSS-1
treatment, did not occur in fact. Supposing that ERS units
had been excluded from MSS-1 treatment, Entergy Arkansas
would have lost $6.3 million in MSS-1 receipts but would still
have enjoyed $33.9 million in ERS savings; on the other
hand, Entergy New Orleans would have faced $13.1 million
more in MSS-1 payments and would have enjoyed only $6.8
million in ERS savings. (This assumes that Entergy Arkan-
sas and Entergy New Orleans would have placed the same
number of units into ERS had those units been excluded from
MSS-1 treatment.) All this suggests that each company
except Entergy New Orleans would have made roughly the
same ERS "investment" even if it had received adverse
MSS-1 treatment as a result.
This analysis is inadequate, however, because it assumes
that the companies make their ERS decisions with hindsight
on a net basis, rather than at the margin looking forward.
For each of the four pre-merger companies, if ERS units
were excluded from MSS-1 treatment, there would be a cost
to placing an extra unit into ERS; the company will suffer in
its MSS-1 standing vis-a-vis the other companies (and they
could not be sure how the other companies would behave).
To be sure, there is also a benefit, in terms of ERS savings,
upon placing that marginal unit into ERS. But, as the
Commission and intervenor Entergy point out, the magnitude
of the costs was certain whereas the scope of the benefits was
not. Accordingly, we cannot say the Commission abused its
discretion in rejecting an analysis that itself ignored the
distinction between ex ante and ex post reasoning.
Be that as it may, petitioners argue that it makes little
sense to talk of "providing incentives" or "avoiding disincen-
tives" to the operating companies' putting units into ERS.
That analytical framework is, according to petitioners, a post
hoc construct that ignores the reality that the operating
companies are wholly owned subsidiaries of Entergy Corpora-
tion and therefore have neither the ability nor the inclination
to flout the System's goals. The only incentives that matter,
petitioners submit, are those faced by the System as a whole.
Petitioners acknowledge, as they must, however, the record
testimony of several witnesses that the operating companies
do in fact possess the authority to identify and recommend
for final approval by the System's operating committee
which--and how many--units to place in ERS. One of
FERC's trial staff testified, for example, that "each operating
company ... made the decision as to which unit if any to
place in ERS and when to place a unit in ERS." There was
further testimony that the visibility of the adverse MSS-1
treatment felt by each of the companies on a unit-by-unit
basis might raise the ire of state regulators ignorant of the
less visible (and more uncertain) benefits of ERS. To these
witnesses, the aggravation of justifying the ERS program to
state regulators might deter even the most System-loyal
operating company officers from putting units into ERS. As
one witness summarized, "as long as there are individual
Operating Companies with responsibilities to their regulators
and ratepayers, such individual Operating Company interests
cannot be ignored." Surely this constitutes substantial evi-
dence in support of the Commission's finding.8
__________
8 Petitioners submit that other record evidence casts doubt on
the Commission's finding that the operating companies approached
the ERS program in a self-interested way. They point to the
testimony of the operating committee's delegate that the System's
final approval of units for ERS was not always documented careful-
ly, and suggest that if the operating companies really were looking
out for themselves, they would have insisted on more fastidious
record-keeping. This testimony stands in contrast to the numerous
other witnesses testifying that the operating companies did have
some autonomy in ERS decisions, and surely cannot be said to tip
the scales such that no "reasonable jury [could] reach the [Commis-
sion's] conclusion," Allentown Mack Sales & Serv., Inc. v. N.L.R.B.,
522 U.S. 359, 367 (1998).
Still, petitioners claim that the Commission's, and our own,
prior interpretations of the nature of the Entergy system
support their conception of the operating companies as indis-
tinguishable (and unthinking) parts of a whole. However, we
think that precedent is not inconsistent with the Commis-
sion's findings here. In Middle South Energy, Inc., 31
F.E.R.C. p 61,305 (1985), the Commission, in the course of
approving the 1985 (and still current) version of the System
Agreement, rejected an ALJ's finding that the operating
companies exhibited a "pattern of autonomy." Id. at 61,645
(quoting Middle South Energy, Inc., 30 F.E.R.C. p 63,030, at
65,168 (1985)). The Commission found that "major critical
decisions, including decisions to build new generating units,
are made by the Operating Committee for the benefit of the
system as a whole." Id. But the Commission also acknowl-
edged that "it is clear that there is input from the individual
companies and consideration of their needs in making coordi-
nated decisions." Id. And, in denying petitions for review of
the Commission's decision in Middle South, we described the
Commission as finding, inter alia, that the "individual operat-
ing companies were intimately involved in the planning stages
of new generation units and sought to promote their own
interests." Mississippi Indus. v. FERC, 808 F.2d 1525,
1555-56 (D.C. Cir. 1987), rev'd on other grounds, 822 F.2d
1104 (D.C. Cir. 1987). That the operating companies are
involved in the "planning stages" of the ERS program--not
that their decisions are final--is all the Commission found in
this case.
Taking the broadest tack, petitioners also seek to under-
mine the Commission's very premise that the ERS program
"ultimately benefitted ratepayers." Petitioners do not dis-
pute that the ERS program provided benefits; but it is
asserted that those benefits, rather than being passed on to
ratepayers, stayed within the Entergy system, and thus
within the pockets of Entergy's shareholders. How could it
be, petitioners ask, that ratepayers enjoyed the benefits of
the ERS program--which predominantly take the form of
reduced operating costs that are reflected in retail rates only
when a new rate case is initiated--when no such rate case
occurred during the first seven years of the program?
FERC responds by pointing to several ERS-related benefits
that flowed to ratepayers in Louisiana and Mississippi, the
service areas regulated by petitioners. For one, a 1994 rate
case involving Entergy Mississippi resulted in a $28.1 million
reduction in retail rates; Entergy Louisiana was in the
course of a similar rate proceeding not yet completed (based
on the current record) but expected to have a similar out-
come. For another, even before the 1994 rate cases, the
Commission identifies certain benefits that flowed to Louisi-
ana and Mississippi ratepayers. The ERS program produced
some $2.6 million in energy cost savings, $2.1 million of which
was passed on to Entergy Louisiana's and Entergy Mississip-
pi's ratepayers through the automatic fuel adjustment clauses
in those companies' retail rate tariffs. And perhaps more
important, as the Commission explained in its order denying
rehearing, the ERS savings support an inference that, ceteris
paribus, the companies would have less need to seek rate
increases. See Entergy Servs., 82 F.E.R.C. at 61,370.
There is ample evidence, therefore, supporting the Com-
mission's general finding that some ERS-related benefits
accrued to Louisiana and Mississippi ratepayers. Nor can we
quarrel with the Commission's "expert judgment" that these
benefits supported denying the requested refund, a proposi-
tion that we have endorsed in the past. See Gulf Power Co.
v. FERC, 983 F.2d 1095, 1100 (D.C. Cir. 1993). Petitioners
do not even respond to the Commission's point about the
pass-through of fuel cost savings to retail ratepayers, or to
the Commission's observation that the 1994 rate cases un-
doubtedly have captured some of the ERS-related benefits
for ratepayers. And the Commission's finding that the ERS
program obviated the need for Entergy Louisiana and Enter-
gy Mississippi to seek rate increases is not, as petitioners
suggest, suspect because based on an inference from the
record. Those sorts of "sound inference[s] from all the
circumstances," Allentown Mack Sales & Serv., Inc. v.
N.L.R.B., 522 U.S. 359, 379 (1998), are the stuff of which
substantial evidence is made.
B.
Now to the Commission's second reason: "[T]he non-Gulf
States ERS units were planned and constructed for the
benefit of all of the pre-merger Operating Companies." En-
tergy Servs., 80 F.E.R.C. at 61,787 (footnote omitted). In
other words, the ERS units are really just another sort of
excess capacity--albeit an "extended reserve"--that is avail-
able, once restored, to serve the System's needs, and there-
fore should receive the same cost equalization treatment
under MSS-1 as does "ordinary" excess capacity. See id.
(Placing a unit in ERS, while significantly reducing the costs
associated with that unit, does not eliminate those costs
entirely. See Entergy Servs., 82 F.E.R.C. at 61,370 n.9.)
The Commission also pointed out that even during the units'
ERS tenure, they provide System-wide benefits. See Enter-
gy Servs., 80 F.E.R.C. at 61,788. Most notably for present
purposes, the companies' ability to return ERS units to active
status allows the companies to defer the construction of costly
new generation units. Moreover, the Commission's approval
of an amendment to the System Agreement specifically to
address this situation would have been forthcoming if re-
quested (as it was in this proceeding). See id. Though
petitioners attack this rationale--that extended reserves
should be treated like ordinary reserves--insofar as it sup-
ported the Commission's decision on refunds, paradoxically
they do not take issue with the identical concept underlying
the amendment approved by the Commission, which express-
ly countenances the inclusion of ERS units in MSS-1 going
forward. In challenging the amendment solely on the ground
that it is too vague, petitioners have de facto conceded the
basic equitable argument.
Even aside from petitioners' implied concession, they do
not persuade us that the Commission has abused its "consid-
erable discretion in fashioning remedies." Public Utils.
Comm'n, 143 F.3d at 617. Petitioners contend that ERS
units provide no benefits to the System during their ERS
tenure, and hence are properly excluded from MSS-1 cost
equalization because they are not presently "used and useful"
to the System. But the Commission explained that ERS
units are useful to the System in providing a backup reserve
to the System and in allowing the companies to defer repairs
of the ERS units and construction of new generating units,
and we see no reason not to defer to the Commission's
conception of usefulness. Nor are we impressed with peti-
tioners' alternative point that, even though ERS units may be
useful if restored to active service, Entergy officials have
testified that some of the ERS units would be retired perma-
nently rather than restored. The Commission reasonably
concluded that all of the ERS units could be brought back to
active service, and that this benefit was sufficient, especially
when the decision to retire certain ERS units would be made
in the future. (Indeed, as we noted earlier, 40% of the units
placed in ERS since the inception of the program in 1986 had
already been restored to active service by 1993.) FERC's
judgments on these questions of benefits readily support its
application of the well-settled principle that the costs associat-
ed with ERS units (whether construction expenses incurred
in the past or maintenance costs incurred today) should be
borne by those who benefit from them. See, e.g., Gulf Power
Co., 983 F.2d at 1100; City of New Orleans v. FERC, 875
F.2d 903, 905 (D.C. Cir. 1989).
Petitioners, moreover, oversimplify in claiming that the
appropriateness of MSS-1 cost equalization treatment at a
given point in time hinges on whether the unit in question is
"used and useful" to the System at that time. We explored
this issue in Town of Norwood v. FERC, 80 F.3d 526 (D.C.
Cir. 1996), which involved the analogous context of a dispute
over which assets a single utility could appropriately include
in its rate base--analogous because an individual Entergy
company's catalogue of MSS-1 eligible units is akin to a
"cost-equalization rate base." The utility in Norwood had
shut down its nuclear power plant temporarily in response to
a regulator's safety concerns, and four months later decided
to retire the plant permanently because the costs of restart-
ing it and operating it through the remainder of its license
exceeded the value of the energy it could produce. See id. at
528. The Commission granted the utility's request to include
in its rate base 100% of its $48.4 million investment in the
plant that it would have recovered if it had operated the plant
through the remainder of its license, and its post-shutdown
operating and maintenance expenses of $68.9 million. See id.
at 528, 530. A petition for review asserted, inter alia, that
forcing ratepayers to pay for a plant no longer producing
electricity conflicts with the principle that ratepayers should
only pay for items "used and useful" in providing service.
We rejected the argument:
Although a utility's rate base normally consists only of
items presently "used and useful," see New England
Power Co. Mun. Rate Comm. v. FERC, 668 F.2d 1327,
1333 (D.C. Cir. 1981), cert. denied, 457 U.S. 1117 (1982), a
utility may include "prudent but canceled investments" in
its rate base as long as the Commission reasonably
balances consumers' interest in fair rates against inves-
tors' interest in "maintaining financial integrity and ac-
cess to capital markets." Jersey Cent. Power & Light
Co. v. FERC, 810 F.2d 1168, 1178 (D.C. Cir. 1987) [(en
banc)].
Town of Norwood, 80 F.3d at 531 (emphasis and bracketed
material added). We held that the Commission had reason-
ably approved the requested cost recovery, in light of the
nuclear plant's record of serving ratepayers for decades and
the promise of savings going forward. Here, no one disputes
that the ERS units have a record of service as available
capacity, or that placement of units into ERS yields savings
going forward.9 And, unlike the nuclear plant in Norwood,
many of the ERS units will be returned to active service in
__________
9 As noted earlier, there are ongoing costs associated with the
ERS units, which are akin to the post-shutdown maintenance
expenses approved for recovery in Norwood. And petitioners
themselves indicate that the ERS units still have some initial
investment costs that have not yet been recovered, see Brief for
Petitioners at 25, the recoupment of which we also sanctioned in
Norwood.
the future. So even were we to assume the ERS units are
not presently "used and useful," our broader explication of
the "used and useful" principle in Norwood provides ample
support for the Commission's reasoning.
C.
The final two factors relied on by the Commission are not
all that weighty. FERC concluded that "there was no unjust
enrichment as a result of the violation [of the tariff's defini-
tion of "available"], given that Entergy as a whole received no
net gain from the inclusion of ERS units in Schedule MSS-1."
Entergy Servs., 80 F.E.R.C. at 61,787. The Commission
explained that the only consequence of the decision to include
or exclude ERS units for MSS-1 purposes is a different
MSS-1 payment pattern among the operating companies; but
MSS-1 payments and receipts always cancel out from the
perspective of the System as a whole, and so Entergy Corpo-
ration (the holding company) had nothing to gain by violating
its tariff. See id. at 61,787 n.37. Petitioners appreciate this
algebraic truth, but suggest that it is too superficial a charac-
terization of the holding company's motives. Pointing to an
Entergy official's testimony that one of the reasons for includ-
ing ERS units in MSS-1 was to maintain stability in MSS-1
payments and receipts so as to avoid the initiation of rate
cases by state regulators, petitioners contend that this strate-
gy--which proved successful until 1994--unjustly enriched
the holding company by enabling it to keep the benefits of
ERS for the shareholders for longer than if ERS units had
been excluded from MSS-1. The Commission responds by
claiming that the benefits identified by petitioners flow from
the ERS program, not from the tariff violation.
We admit that petitioners cast doubt on the strength of this
factor, especially given the Commission's failure squarely to
address in its brief petitioners' notion that the tariff violation
provided a benefit insofar as it made rate cases less likely by
not "rocking the boat" of MSS-1 payments and receipts. But
under the deferential review we accord to the Commission's
remedial decisions, we think the Commission's reasoning just
passes muster. A reasonable response to petitioners' point,
although missing in the Commission's brief, can be found in
the Commission's explanation in its orders of the separate
disincentive rationale we discussed at the outset of our analy-
sis. The Commission explained that the System (and its
shareholders) did not retain all of the benefits of the tariff
violation that facilitated the ERS program. Even though no
rate case was initiated before 1994, ratepayers were made
better off insofar as the operating companies were less likely
to seek rate increases. See Entergy Servs., 82 F.E.R.C. at
61,370. And the 1994 rate cases appear to have captured
benefits for ratepayers in the form of reduced retail rates.
The Commission's view that this division of benefits between
the Entergy System and the retail ratepayers was not "un-
just" deserves deference. Indeed, it is hardly unusual for a
utility whose rates are set by cost-of-service ratemaking
principles to seek to reduce its costs, thereby increasing
profits, during the interim between rate-setting proceedings.
See National Rural Telecom Ass'n v. FCC, 988 F.2d 174, 178
(D.C. Cir. 1993); Stephen Breyer, Regulation and its Reform
48 (1982).
The Commission's final factor sounds in estoppel; the
Commission stated that "nearly every participant in this
proceeding, including [petitioners], at one time either believed
that the System Agreement permitted the inclusion of ERS
units in Schedule MSS-1 calculations, or at least did not
protest such treatment." Entergy Servs., 80 F.E.R.C. at
61,787-88 (footnote omitted). Petitioners concede that they
did not object until the Commission initiated its s 206 investi-
gation into the possible tariff violation, but argue that the
timing of their protest is irrelevant. They explain that in the
merger review proceeding, their entire focus was on the
treatment of Gulf States' ERS units, and thus they should not
be faulted for missing the possibility that inclusion of ERS
units in MSS-1 by the incumbent subsidiaries was working to
the detriment of Entergy Louisiana and Entergy Mississippi.
Only when they concentrated on the s 206 proceeding, peti-
tioners tell us, did they discover the disparity among the
incumbent subsidiaries in ERS-eligible units and recognize
the impact on Entergy Louisiana and Entergy Mississippi of
including ERS units in MSS-1. Petitioners also urge that
even if they should have complained earlier, that failing
should not be attributed to the retail ratepayers, the ultimate
beneficiaries of the hoped-for refund.
Again, though this factor is less weighty than the others--
particularly the first two--and perhaps would be inadequate
standing alone, we do not regard it as objectionable.
III.
There remains petitioners' challenge to the amendment
approved by the Commission to govern the MSS-1 treatment
of ERS units going forward. The amendment provides:
A unit is considered available to the extent the capability
can be demonstrated and (1) is under the control of the
System Operator, or (2) is down for maintenance or
nuclear refueling, or (3) is in extended reserve shutdown
(ERS) with the intent of returning the unit to service at
a future date in order to meet Entergy System require-
ments. The Operating Committee's decision to consider
an ERS unit to be available to meet future System
requirements shall be evidenced in the minutes of the
Operating Committee and shall be based on consider-
ations of current and future resource needs, the project-
ed length of time the unit would be in ERS status, the
projected cost of maintaining such unit, and the project-
ed cost of returning the unit to service.
Entergy Servs., 80 F.E.R.C. at 61,788-89 (emphasis in origi-
nal). Petitioners contend that this amendment grants unfet-
tered discretion to Entergy, and thus is an effective abdica-
tion of the Commission's statutory responsibility to ensure
that rates are just and reasonable. See 16 U.S.C. s 824d(a).
They explain that the amendment does not indicate in which
direction the various factors point, and does not say anything
about the relative weights of the factors. Petitioners bolster
their claim by directing us to the testimony of an Entergy
witness who opined that the factors could cut for or against
MSS-1 inclusion depending on the circumstances.
While the amendment is certainly closer to a standard than
to a rule, we defer to the Commission's judgment that it is
just and reasonable. See Northern States Power Co. v.
FERC, 30 F.3d 177, 180 (D.C. Cir. 1994) ("Because '[i]ssues of
rate design are fairly technical and, insofar as they are not
technical, involve policy judgments that lie at the core of the
regulatory mission,' our review of whether a particular rate
design is 'just and reasonable' is highly deferential." (quoting
Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C. Cir. 1992))
(alteration in original)). FERC understandably concluded
that the amendment set out the parameters of the operating
committee's discretion, and that discriminatory implementa-
tion of the amendment could be remedied in a proceeding
under FPA s 206, 16 U.S.C. s 824e, a review facilitated by
the requirement that the operating committee record the
reasons for its decisions in writing. The amendment, more-
over, is a far cry from the vacuous tariff provisions that the
Commission has rejected in the past. See, e.g., Southern
Natural Gas Co., 47 F.E.R.C. p 61,205, at 61,708 (1989)
(rejecting portion of proposed tariff that granted oil pipeline
authority to construct facilities to serve shippers "in its sole
discretion"); Tennessee Gas Pipeline Co., 45 F.E.R.C.
p 61,236, at 61,693 (1988) (same); cf. Farmers Union Cent.
Exch., Inc. v. FERC, 734 F.2d 1486 (D.C. Cir. 1984) (vacating
Commission order setting permissible oil pipeline rates so
high that "regulation" would be left to market forces, reason-
ing that the Commission thereby contravened its statutory
responsibility to ensure that rates are just and reasonable).
* * * *
For the foregoing reasons, the petition for review is denied.
So ordered.