On June 1, 2018, the U.S. Court of Appeals for the D.C. Circuit declined to review an order issued by the Federal Energy Regulatory Commission (“FERC”) holding that an operating company that withdrew from a “multi-state energy system” had to continue sharing benefits from a settlement with the other system members, even after it withdrew from the system.
In 1951, six companies from Arkansas, Louisiana, Texas, and Mississippi formed the Entergy Corporation, a publicly held utility company intended to share the costs and benefits of generating and transmitting power. The system agreement provided members the option to withdraw so long as the member gave an eight-year notice. Entergy Arkansas announced on December 19, 2005 that it intended to withdraw on December 18, 2013. In 2008, Entergy Arkansas settled state litigation against Union Pacific, which included a below-market rate for coal delivery as part of the settlement. Under the system agreement, all members realized some of the increased costs as a result of Union Pacific’s breach of contract, and they also realized the benefits of the reduced rate following the settlement.
In 2009, FERC approved both withdrawal notices, and held that neither Entergy Arkansas nor Entergy Mississippi should have to pay an exit fee to the other members. FERC held in subsequent proceedings that the settlement benefits should be allocated among the members and adopted a methodology for doing so.
The Arkansas Public Service Commission filed a petition for review with the D.C. Circuit Court of Appeals, arguing that FERC’s order was effectively an unlawful exit fee, that the order would increase costs to Arkansas consumers with no notice in violation of the filed rate doctrine, and that FERC arbitrarily and capriciously required Entergy Arkansas to share the settlement benefits with other members. The D.C. Circuit Court of Appeals held that the order to share the benefits did not constitute an exit fee because “[b]y any logic, an exit fee must have been generated because of the exit,” and if Entergy had not withdrawn from the system, the settlement would have still been shared with the other members. Furthermore, the Court held that FERC has broad authority to implement equitable relief, including implementing a remedial rate. Finally, FERC did not act arbitrarily or capriciously because had FERC not ordered the sharing of the settlement, it would have been “unjust and unreasonable to the other [members] who were injured by Union Pacific’s breach.” The Court also affirmed the FERC’s chosen method of allocating the settlement benefits.
Jeremy Fetty is a partner in the law firm of Parr Richey with offices in Indianapolis and Lebanon. Mr. Fetty is current Chair of the Firm Utility and Business Section and often advises businesses and utilities (for profit, non-profit and cooperative) on regulatory, compliance, and transactional matters.
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.