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Louisiana Public Service Commission v. Federal Energy Regulatory Commission

December 30, 2008


The opinion of the court was delivered by: Tatel, Circuit Judge

Argued November 7, 2008

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

Before: ROGERS, TATEL, and KAVANAUGH, Circuit Judges.

Over the Louisiana Public Service Commission's objection, the Federal Energy Regulatory Commission approved a new long-term allocation of power-generating capacity among the affiliates of the Entergy system. In so doing, FERC interpreted the provision of the Entergy System Agreement that governs off-system sales as inapplicable to short-term opportunity sales. Aggrieved by FERC's decision approving the long-term, intra-system allocations and upset at FERC's interpretation regarding the short-term, off-system sales, the Louisiana Commission petitions for review on both issues. Yet the only issue before us on which FERC actually took action was the approval of Entergy's long-term allocations, making that the only issue we have jurisdiction to decide. Finding it easily resolved by our standard of review, we deny the petition.


Because we have dealt many times with the Entergy system and its predecessors, most recently in Louisiana Public Service Commission v. FERC ("Louisiana 2008"), 522 F.3d 378 (D.C. Cir. 2008), we describe it here only briefly. Entergy is a multi-state affiliation of power companies that share the costs and benefits of power generation. At all times relevant to this appeal, it consisted of five affiliates: Entergy Louisiana, Entergy Gulf States, Entergy New Orleans, Entergy Mississippi, and Entergy Arkansas. The affiliation is governed by the Entergy System Agreement, and although that agreement creates an integrated system, it allots to each affiliate the primary responsibility for and benefit from the generation facilities in the affiliate's jurisdiction. Because these facilities run on different fuels, shifts in the relative price of coal, gas, and nuclear energy can create striking cost disparities among the affiliates. To balance such disparities, we have long viewed the System Agreement as requiring that affiliates share the costs of power generation in roughly equal proportion. See, e.g., Miss. Indus. v. FERC, 808 F.2d 1525, 1554--55 (D.C. Cir. 1987). The Entergy System has accomplished this rough equalization primarily through careful allocation of new generation capacity. As an "insurance policy" should long-term allocation plans fail to achieve proper cost-spreading, however, FERC recently adopted a "bandwidth remedy" that limits any relative cost discrepancies plus or minus 11 percent. Entergy Servs., Inc., 111 F.E.R.C. ¶ 61,311, at 62,356 (2005). We approved that remedy in Louisiana 2008, 522 F.3d at 391.

Facing a complaint from New Orleans, which was bearing unusually high production costs, Entergy submitted to FERC a proposed reallocation of generating capacity. See Entergy Servs., Inc. ("Opinion No. 485"), 116 F.E.R.C. ¶ 61,296, at 62,485 (2006). Under the proposed allocations, Entergy Arkansas and Entergy Gulf States would "sell" their cheaper generation capacity to Entergy New Orleans and Entergy Louisiana, id. at 62,486 & nn.14--15, thereby allowing New Orleans to pass costs from its more expensive generators on to the now-undersupplied Entergy Gulf States. These paper transfers of power would lower costs for New Orleans and Louisiana but raise costs for Gulf States. Representing Gulf States's customers, the Louisiana Commission thus opposed the allocations as discriminatory. The same administrative law judge who presided over the extensive bandwidth proceedings approved the allocations, Entergy Servs., Inc. ("Initial Decision"), 111 F.E.R.C. ¶ 63,077 (2005), and FERC affirmed that decision in relevant part, both on exceptions from the initial decision, Opinion No. 485, 116 F.E.R.C. ¶ 61,296, and on petition for rehearing, Entergy Servs. Inc. ("Opinion No. 485-A"), 119 F.E.R.C. ¶ 61,019 (2007).

In the course of these proceedings, the Louisiana Commission discovered that Entergy Arkansas had been selling cheap energy off system through a series of month-long opportunity transactions without offering the other Entergy affiliates first bite at those electrons. The Louisiana Commission believed this a violation of section 3.05 of the System Agreement, which provides:

It is the long term goal of the Companies that each Company have its proportionate share of Base Generating Units available to serve its customers either by ownership or purchase. Any Company which has generating capacity above its requirements, which desires to sell all or any portion of such excess generating capacity and associated energy, shall offer the right of first refusal for this capacity and associated energy to the other Companies under Service Schedule MSS-4 Unit Power Purchase.

Entergy System Agreement § 3.05 (2000). Although for several reasons the ALJ thought that the short-term, off-system sales were irrelevant to the long-term, intra-system allocation issue before him, he also doubted whether it would be sensible to apply this section of the System Agreement to short-term opportunity sales at all. Initial Decision, 111 F.E.R.C. at 65,429--30. On exceptions, FERC agreed that any possible section 3.05 violation had nothing to do with the long-term allocation issue. But echoing the ALJ's doubts, FERC also said that "section 3.05 was not triggered by the one-month capacity sales." Opinion No. 485, 116 F.E.R.C. at 62,505. Believing that FERC had authorized the repeated sale of cheap energy off system, the Louisiana Commission pressed this issue on rehearing. There, FERC reaffirmed its view that any short-term sale violation had no import for the long-term allocation question actually before it, Opinion No. 485-A, 119 F.E.R.C. at 61,062--63, but this time it went on to explain in detail why section 3.05 of the System Agreement just shouldn't apply to short-term sales, id.

Before us the Louisiana Commission gives this apparently ancillary short-term sale dispute pride of place, arguing it first and resisting any attempt to connect it to the long-term allocation issue on which Entergy initiated these FERC proceedings. As the Louisiana Commission sees it, "[t]he short term sale issue has substance independent of the resource allocation" because "FERC's unnecessary holding on the point authorizes Entergy to sell cheap System resources" in a way that causes the Louisiana Commission's constituents independent harm. Appellant's Reply Br. 2. Because we have no doubt that FERC resolved the long-term allocation issue, we consider it first, turning second to the question of whether we should consider the short-term sale issue at all.


Conceding that "minimizing differences in production costs is a valid goal of resource allocations among operating companies," Appellant's Reply Br. 12, the Louisiana Commission challenges the long-term allocations approved by FERC as ill-designed to serve that end. It argues that these allocations merely inverted the positions of Entergy New Orleans and Entergy Gulf States, driving the former's costs down by transferring them to the latter. It argues that FERC never studied the likely long-term effects of the allocation and that it unduly relied on the backstop provided by the bandwidth remedy. Ultimately, it says, the proof is in the production costs: following the allocations Entergy New Orleans went from about 12 percent above system average to about 1 percent below, whereas Entergy Gulf States went from about the average cost to about 8 percent above the system average.

We review FERC's treatment of this issue with great deference. We affirm its orders unless arbitrary or capricious, Louisiana 2008, 522 F.3d at 391, and treat its factual findings as conclusive if supported by substantial evidence, 16 U.S.C. ยง 825l(b). Where the subject of our review is, as here, a predictive judgment by FERC about the effects of a proposed remedy for undue discrepancies among operating companies, our deference is at its zenith. See Louisiana 2008, 522 F.3d at 393 ("We owe FERC great deference in reviewing its selection of a remedy . . . ."); Envtl. Action, Inc. v. FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991)("[I]t is within the scope of the agency's expertise ...

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