Louisiana Public Service Commission v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 3, 2017 Decided June 23, 2017

No. 16-1014

LOUISIANA PUBLIC SERVICE COMMISSION,
PETITIONER

V.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

ARKANSAS PUBLIC SERVICE COMMISSION AND ENTERGY
SERVICES, INC.,
INTERVENORS

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
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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 for the Court filed by Chief Judge GARLAND.

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).
 3

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
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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 ¶ 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,
La. Pub. Serv. Comm’n v. FERC, 761 F.3d 540, 555 (5th Cir.
2014), and that reading is unchallenged in this case.

LPSC is an independent regulatory agency tasked with
ensuring the reasonableness of energy rates charged in
Louisiana. See LA. CONST. art. IV, § 21. In 2010, LPSC filed a
complaint with FERC under Federal Power Act § 206,
contending that Entergy’s use of state retail depreciation rates in
the bandwidth formula -- even if permissible under the System
Agreement’s terms -- was “unjust, unreasonable, unduly
discriminatory or preferential” and thereby harmed Louisiana
customers, 16 U.S.C. § 824e(a). Accordingly, LPSC argued,
FERC had a duty to reform those rates. Id. (requiring FERC to
“determine the just and reasonable rate . . . to be thereafter
 5

observed and in force, and [to] fix the same by order” if it finds
an existing rate “unjust, unreasonable, unduly discriminatory or
preferential”).

FERC rejected LPSC’s complaint and follow-on
rehearing petition, finding that LPSC failed to carry its burden
of showing that the retail depreciation rates were unjust,
unreasonable, unduly discriminatory, or preferential. See La.
Pub. Serv. Comm’n v. Entergy Corp., 139 FERC ¶ 61,107,
61,767-68 (2012) (Opinion No. 519); La. Pub. Serv. Comm’n v.
Entergy Corp., 153 FERC ¶ 61,188, 2015 WL 7308093, at *13-
14 (2015) (Opinion No. 519-A). FERC reiterated that
conclusion in two other orders. See Entergy Servs., Inc., 142
FERC ¶ 61,022, 61,122-23 (2013) (Opinion No. 523); Entergy
Servs., Inc., 153 FERC ¶ 61,184, 2015 WL 7308089, at *6-7
(2015) (Opinion No. 523-A). LPSC now petitions for review.1

II

We review FERC’s orders under the arbitrary and
capricious standard, “treating FERC’s factual findings as
conclusive if supported by substantial evidence in the record.”
La. Pub. Serv. Comm’n, 522 F.3d at 391. “FERC’s remedial

1
The System Agreement was terminated on August 31, 2016,
pursuant to a settlement between the Entergy companies and three
state energy regulators (including LPSC). See Entergy Ark., Inc., 153
FERC ¶ 61,347 (2015). Thus, even if we were to remand the
challenged orders, and even if FERC were then to find some aspect of
the Agreement unlawful, it could not change its terms prospectively.
FERC would, however, have discretion to issue refunds for payments
made above the just-and-reasonable rate dating back to the filing of
LPSC’s § 206 complaint. See 16 U.S.C. § 824e(b).
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choice is lawful if the agency has ‘examine[d] the relevant data
and articulate[d] a . . . rational connection between the facts
found and the choice made.’” Id. (quoting Motor Vehicle Mfrs.
Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
Because “we may not substitute our own judgment for that of the
Commission,” we do not ask whether FERC’s “decision is the
best one possible or even whether it is better than the
alternatives.” Elec. Power Supply Ass’n, 136 S. Ct. at 782.

LPSC attacks FERC’s orders on three grounds. All three
are unavailing.

1. LPSC contends, first, that FERC failed to confront
evidence of undue discrimination under the bandwidth formula.
See 16 U.S.C. § 824e(a) (requiring FERC to reform “unduly
discriminatory” rates). Different states use different methods for
setting depreciation rates, LPSC argues, which leads to
inconsistent production-cost calculations. Moreover, it
continues, incorporating state-determined depreciation rates
allows states to manipulate their rates to attain more favorable
outcomes under the bandwidth formula.

Although this argument may make sense in theory, FERC
found that LPSC had failed to support it with sufficient real-
world evidence. Indeed, LPSC relied chiefly on a single
example: the fact that Louisiana based its depreciation rates on
license lives that “exceed the [Nuclear Regulatory Commission
(NRC)] license lives,” while Arkansas based its depreciation
rates on “license lives that are substantially less than the NRC
license lives.” La. Pub. Serv. Comm’n v. Entergy Corp., 134
FERC ¶ 63,016, 66,269 (2011). Although this illustrated that the
two states used different depreciation rates, FERC concluded it
did not prove that depreciation-rate disparities between the states
were so gross as to undermine the rough cost-equalization
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principle underlying the bandwidth remedy. Nor did LPSC’s
example involve rate manipulation: FERC found that Arkansas’
shorter license lives stemmed not from an attempt to exploit the
formula for its own benefit, but rather from a diverse array of
legitimate ratemaking considerations. See Opinion No. 519, 139
FERC at 61,766-67.

LPSC is thus wrong to say that FERC failed to confront
its asserted evidence of undue discrimination. In fact, both the
administrative law judge and the Commission considered and
discussed LPSC’s proffered evidence, but they simply found it
insufficient to satisfy LPSC’s burden. See 16 U.S.C. § 824e(b)
(“[T]he burden of proof to show that any rate . . . is unjust,
unreasonable, unduly discriminatory, or preferential shall be
upon the . . . complainant.”). At bottom, FERC concluded,
LPSC never showed that depreciation-rate inconsistencies or
state manipulations were subverting the bandwidth formula’s
purpose of roughly equalizing costs.2 Nonetheless, the
Commission left open the possibility that it would reform the
rates if a party marshaled more evidence showing discriminatory
results.3 Under our deferential standard of review, FERC only

2
See Opinion No. 519-A, 2015 WL 7308093, at *14 (“[T]he
Louisiana Commission fails to provide evidence demonstrating that
these alleged distortions create cost disparities that prevent rough
production cost equalization.”).
3
See Opinion No. 519-A, 2015 WL 7308093, at *5 (“If it were
shown that there are circumstances under which the methodology in
the formula with respect to depreciation expense would not result in
a just and reasonable allocation of production costs, the Commission
would exercise its statutory authority to determine appropriate
changes to the depreciation component to ensure just and reasonable
rates.”); see also Oral Arg. Recording at 26:08-27.
 8

had to confront the evidence that LPSC presented and reasonably
explain why it did not doom the use of retail rates. See, e.g.,
Wisc. Power & Light Co. v. FERC, 363 F.3d 453, 461 (D.C. Cir.
2004). The Commission fulfilled those obligations.

2. LPSC also asserts that the Commission departed from
its rules and precedent without explanation by refusing to require
that FERC’s own depreciation rates be used in the bandwidth
formula. See, e.g., La. Pub. Serv. Comm’n v. FERC, 184 F.3d
892, 897 (D.C. Cir. 1999) (“For the agency to reverse its
position in the face of a precedent it has not persuasively
distinguished is quintessentially arbitrary and capricious.”). We
disagree.

To be sure, the Commission requires utilities to use
FERC’s own depreciation methodologies for purposes of
wholesale ratemaking. See Order No. 618, 2000 WL 33539341,
at *4. But the bandwidth formula does not directly implicate
FERC’s wholesale ratemaking activities; it is simply a
component of an agreement between Entergy companies, which
FERC has jurisdiction to monitor because of its effect on
wholesale prices. See La. Pub. Serv. Comm’n, 522 F.3d at 390-
91.4 As the Commission explained, given the bandwidth
formula’s unique context, FERC precedent did not require the
use of FERC’s own depreciation standards. See, e.g., Opinion
No. 519-A, 2015 WL 7308093, at *7 (“[T]he circumstances
surrounding the bandwidth formula are quite different from a

4
See also Opinion No. 519-A, 2015 WL 7308093, at *7 (“The
purpose of the bandwidth formula is not to set a cost-of-service rate
for the sale of wholesale power, but to provide a basis to compare
each [company’s] production costs . . . in order to allocate such costs
to achieve a rough equalization.”).
 9

standard calculation of wholesale rates.”).

3. Finally, LPSC maintains that FERC unlawfully
subdelegated its exclusive jurisdiction over wholesale rates by
allowing the use of state-determined retail depreciation rates in
the bandwidth formula. Federal agencies may not subdelegate
their “decision-making authority . . . to outside entities -- private
or sovereign -- absent affirmative evidence of authority to do
so.” U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 566 (D.C. Cir.
2004).

As it conceded at oral argument, LPSC unsuccessfully
advanced this same unlawful-subdelegation argument before the
Fifth Circuit. See Oral Arg. Recording at 46:47; id. at 48:18-20.
The Fifth Circuit found no unlawful subdelegation because
FERC used its own judgment “when it initially reviewed and
accepted the bandwidth formula incorporating the state agencies’
depreciation rates,” and then “clarified that it will continue to
exercise oversight of the state [depreciation] rates in . . . Section
206 complaint proceeding[s].” La. Pub. Serv. Comm’n, 761
F.3d at 552. FERC continues to exercise that review authority,
as evidenced by the proceedings in this case. And we take the
Commission at its word that it would grant a § 206 complaint if
the complainant presented sufficient evidence of unjust,
unreasonable, unduly discriminatory, or preferential rates --
which LPSC failed to do here. See Opinion No. 519-A, 2015
WL 7308093, at *5; Oral Arg. Recording at 26:08-27. Like the
Fifth Circuit, we therefore conclude that there has been no
unlawful subdelegation because FERC has exercised, and
intends to continue to exercise, its § 206 review authority. Cf.
U.S. Telecom Ass’n, 359 F.3d at 567 (finding unlawful
subdelegation where an agency allowed “states [to] make crucial
decisions . . . with [agency] oversight neither timely nor
assured”).
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III

For the foregoing reasons, we reject LPSC’s challenges
and deny its petition for review.5

So ordered.

5
Because LPSC has not shown that it is entitled to any relief, we
need not consider its specific request for retroactive relief dating back
to before its 2010 complaint. See La. Pub. Serv. Comm’n, 761 F.3d
at 556.