United States: FERC Clarifies Its Refund Policy In Cost Allocation Disputes

In an April 29, 2016 order regarding cost allocation among the Entergy operating companies, FERC clarified and distinguished its approach to refunds in cost allocation and rate design cases, from its approach to refunds in cases of utility over-recovery ("April 29 Order"). Specifically, FERC clarified that it will generally decline to order refunds under disputes over cost allocation, whereas refunds will generally be awarded in cases involving allegations of a utility earning more than a just and reasonable rate during the refund period.

The proceedings at issue originated in 1995, when the Louisiana Public Service Commission ("LPSC") filed a complaint at FERC alleging that certain cost allocation calculations used by Entergy Services, Inc. under the Entergy System Agreement—an agreement between and among the Entergy operating companies—were unjust and unreasonable because they did not exclude interruptible load from the calculation of peak load responsibility. On March 21, 2013, FERC upheld a prior determination it had made that the Entergy system as a whole collected the proper level of revenue, but that Entergy Services, Inc. (the subject of the original complaint) incorrectly allocated peak load responsibility among the various Entergy operating companies. FERC determined that Entergy Services, Inc., therefore, did not engage in an over-collection of revenue, but rather in a misallocation of revenue. FERC concluded that it would invoke its "equitable discretion" and follow its "general practice" of not ordering refunds in rate design and cost allocation cases.

After the LPSC petitioned the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") for review, the D.C. Circuit remanded the case back to FERC, finding, among other things, that FERC had failed to explain its departure from its "general policy" of ordering refunds when consumers have paid unjust and unreasonable rates, and that FERC had failed to explain why the absence of over-recovery "should automatically negate refunds." The D.C. Circuit also stated that invoking FERC policy on refunds did not eliminate the need to consider the fact that an unjust and unreasonable cost allocation had caused consumers in Louisiana to pay their utility companies too much and consumers in other states to pay too little, and that refunds, if ordered, would transfer a subset of the total overpayment to Entergy's Louisiana operating companies from its other operating companies.

In its April 29 Order, FERC stated that the D.C. Circuit's reference to FERC's "general policy" of ordering refunds when consumers have paid unjust and unreasonable rates was "based on statements made by the Commission in this proceeding that do not accurately represent that policy as both the Commission and the courts have described it in the past." FERC clarified that while it had previously described its approach of ordering refunds in cases of utility over-recovery as a "general policy," FERC "has never treated it as a policy that encompasses all cases involving unjust and unreasonable rates."

FERC distinguished cases involving unjust and unreasonable cost allocation or rate design, from cases where a utility was over-recovering. FERC noted that while it had traditionally elected to order refunds with respect to the latter, it had traditionally declined to order refunds in cases involving rate design and cost allocation issues. In explaining why the distinction exists, FERC stated that its refund authority is discretionary, and guided by equitable principles. More specifically, FERC described the basic consideration in ruling on refunds as being "one of fairness," and reasoned that refunds were appropriate in instances of utility-over recovery because "fairness dictates that the excess revenues should be refunded to customers."

Conversely, FERC explained that if a utility collected no more than it was entitled to, but the issue was one of cost allocation or rate design, refunds would potentially result in under-recovery, which would be unfair because: (i) it would result in a loss of revenue from the reallocation when the utility would not have the opportunity to file a new rate case to recover such revenues; and (ii) retroactive implementation of the new rate may be unfair to utilities or customers who cannot alter their past purchase or sale decisions in light of that new rate. FERC also relied on the fact that, in cost allocation cases, it lacks the authority to order retroactive surcharges to pay for the retroactive refunds. Specifically, FERC stated that "[FPA section] 206(b) authorizes only retroactive refunds (rate decreases), not retroactive rate increases such as those that Entergy would have to assess on any wholesale customers subject to surcharges needed to cover the refunds."

FERC also noted that it was mindful of the D.C. Circuit's statement that invoking a FERC policy on refunds does not eliminate the need to consider the fact that an unjust and unreasonable cost allocation caused consumers in Louisiana to pay too much and consumers in other states to pay too little and that refunds, if ordered, would transfer monies to Entergy's Louisiana operating companies from its other operating companies. However, while FERC conceded that "it may be inequitable that some customers paid too much under the filed rate," it stated that it also considers the equities involved in assessing additional charges on other customers who were not responsible for the misallocation, but who would be required to make additional payments for past purchases they reasonably concluded were final and cannot revise. FERC stated that "in balancing these equities, the Commission has traditionally denied refunds and made the new, corrected rate applicable prospectively."

A copy of the April 29 Order may be found here.

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