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Entergy Texas, Incorporated v. Nelson

United States Court of Appeals, Fifth Circuit

April 26, 2018

ENTERGY TEXAS, INCORPORATED, Plaintiff - Appellee
v.
DONNA L. NELSON, In her official capacity as Chairman of the Public Utility Commission of Texas; BRANDY MARTY MARQUEZ, In her official capacity as a Commissioner of the Public Utility Commission of Texas; KENNETH W. ANDERSON, JR., In his official capacity as a Commissioner of the Public Utility Commission of Texas, Defendants - Appellants TEXAS INDUSTRIAL ENERGY CONSUMERS, Intervenor Defendant-Appellant Company Total 2007 bandwidth (payments)/receipts including interest 2007 bandwidth amounts previously (paid)/received per the May 27, 2007 initial filing Remaining 2007 bandwidth amounts to be (paid)/received

          Appeals from the United States District Court for the Western District of Texas

          Before REAVLEY, SMITH, and OWEN, Circuit Judges.

          REAVLEY, CIRCUIT JUDGE.

         The Federal Energy Regulatory Commission ("FERC") and the Public Utility Commission of Texas ("PUCT") both play a role in the regulation of energy production and sale. If they issue conflicting orders, FERC's controls. This case is about whether, as the district court found, a certain PUCT order conflicts with a prior FERC order. On one side, we have PUCT and a trade association, the Texas Industrial Energy Consumers ("TIEC"). As appellants, they seek to persuade us that PUCT's order was consistent with the relevant FERC order and should therefore be enforced. On the other side, we have Entergy Texas, Inc. ("ETI"), an operating company of Entergy Corporation. ETI brought this action to enjoin enforcement of the PUCT order and now defends the district court's ruling. We decide that PUCT's order is not in conflict with any FERC order. We reverse the district court and render judgment in favor of PUCT and TIEC.

         I. BACKGROUND

         Entergy Corporation is a public utility holding company dealing in electricity through its subsidiary "Operating Companies, " including ETI. Entergy Operating Companies are split along state lines. Entergy serves customers in Texas, Arkansas, Louisiana, and Mississippi, and its Operating Companies are ETI; Entergy Arkansas, Inc.; Entergy Gulf States Louisiana, L.L.C. ("EGSL"); Entergy New Orleans, Inc.; and Entergy Mississippi, Inc. This strict division did not always exist. Prior to 2008, an entity called Entergy Gulf States, Inc. ("Entergy Gulf States") served markets in both Texas and Louisiana. Its split led to the creation of ETI and EGSL.

         Electricity is highly regulated, and both state and federal authorities play significant roles. FERC "regulates the sale of electricity at wholesale in interstate commerce." Entergy La., Inc. v. La. Pub. Serv. Comm'n ("LPSC"), 539 U.S. 39, 41, 123 S.Ct. 2050, 2053 (2003). But at the intrastate level, state regulatory bodies have sole jurisdiction. F.E.R.C. v. Electric Power Supply Ass'n, 136 S.Ct. 760, 767-68 (2016), as revised (Jan. 28, 2016). In Texas, PUCT is the regulating authority. Because Entergy sells electricity across state lines at both wholesale and retail levels, it must work with FERC, PUCT, and other state authorities.

         Entergy's Operating Companies must maintain roughly equal costs of production, and FERC must make it so. The obligation to equalize costs comes primarily from FERC's Section 206 duty to ensure "reasonable" rates that are not "unduly discriminatory, " 16 U.S.C. § 824e(a), but also from the "System Agreement" entered into between the Operating Companies-a FERC-approved "filed rate" for purposes of the filed rate doctrine. See Entergy Louisiana, Inc., 539 U.S. at 42, 123 S.Ct. at 2053 (explaining that the System Agreement is "a tariff approved by FERC"). In 2005, a variety of factors led FERC to conclude that the Entergy System was "out of rough production cost equalization." LPSC v. F.E.R.C., 522 F.3d 378, 388 (D.C. Cir. 2008) (per curiam) (quoting 113 FERC ¶ 61282, 62134 (Dec. 19, 2005)). It took action.

         FERC's remedy to the problem of unequal costs was that entities with low costs would make payments to entities with high costs as necessary to achieve "rough" equalization. More specifically, rough equalization was re-achieved through a "bandwidth remedy." "Pursuant to this remedial measure, each calendar year the production costs of each operating company are calculated and, if necessary, 'payments [are] made by the low cost Operating Company(ies) to the high cost Operating Company(ies) such that, after reflecting the payments and receipts, no Operating Company [has] production costs more than 11 percent above the Entergy System average or more than 11 percent below the Entergy System average.'" LPSC v. FERC, 771 F.3d 903, 906 (5th Cir. 2014) (quoting LPSC v. Entergy Servs., Inc., 146 FERC ¶ 61, 152 at P 3 (2014) (second bracket added)). These payments are known as rough production cost equalization payments, or "Bandwidth Payments." Once Bandwidth Payments reach an Operating Company, a question arises: what becomes of the money?

         Here we reach a jurisdictional watershed. For FERC's jurisdiction over the Bandwidth Payments ends when the funds reach the recipient Operating Companies. State regulators determine the effect Bandwidth Payments will have on retail rates. Or, in FERC's words, states handle "any issues related to the allocation of an individual utility's payments or receipts to retail customers." 127 FERC ¶ 61126, 61548 (May 8, 2009).

         Bandwidth Payments do not represent profit. Rather, because the purpose of cost equalization is to ensure reasonable rates, the benefit flows to the customer. Accordingly, an entity that receives a Bandwidth Payment passes it through to its customers. And an Operating Company that makes a Bandwidth Payment saddles its customers with that cost. This is a simple dollar-for-dollar pass-through in the ordinary case, where the Operating Company functions solely within one state and is therefore subject to the jurisdiction of only that state.

         While Entergy Gulf States existed, however, both Louisiana and Texas regulators had lawful authority to regulate its Bandwidth Payment receipts. This shared jurisdiction affected only the Bandwidth Payments made in one year-2007, the first year the bandwidth remedy was in place. That was more than a decade ago, but it is where our story really begins.

         The 2007 Bandwidth Payments reflected the "2006 test year." In other words, they were calculated based on 2006 data. Entergy Gulf States received a $120.1 million Bandwidth Payment while still in existence astraddle the Texas and Louisiana state lines. Under the system we have already described, both Texas and Louisiana regulators had authority to determine how that payment would affect retail rates in their respective jurisdictions. Thus, each state had to decide what portion of the $120.1 million Bandwidth Payment should be passed through to customers within that state.

         After receiving the payment, but before state regulators could act, Entergy Gulf States split into two separate entities divided by the state line- ETI (Texas) and EGSL (Louisiana). This separation was immaterial to the division of the original $120.1 million payment because it occurred after Entergy Gulf States received that payment. It solved a problem for future years, but as FERC has since made entirely clear, Texas and Louisiana retained their shared jurisdiction of the $120.1 million payment. See 127 FERC ¶ 61126, 61548 (May 8, 2009).

         Louisiana regulators acted first, splitting the $120.1 million by allocating an $80.948 million share to Louisiana and a $30.399 million share to Texas. Entergy then sought PUCT's adoption of the same division, warning PUCT that FERC would "resolve" the matter if PUCT opted for "a different jurisdictional allocation methodology."[1] Entergy feared that PUCT would decide Texas customers were entitled to more than a $30.399 million share of the $120.1 million, which would mean that Entergy would have to pass a greater benefit to Texas and Louisiana customers than it actually received.

         That is just what happened. PUCT viewed the split as disproportionally favoring Louisiana customers, found Louisiana's method "not equitable, " and instead split the $120.1 million "on the basis of actual production costs, " resulting in a $62.37 million share for Louisiana and a $48.977 million share for Texas.[2] In short, while Bandwidth Payments represent a zero-sum game, Louisiana claimed $80.948 million of Entergy Gulf State's $120.1 million piece of the pie, and Texas claimed $48.977 million-leaving an $18.6 million discrepancy that Entergy had to swallow.

         Entergy found this unfair. As foreshadowed, it took its complaint to FERC in the form of a proposed amendment to the System Agreement-an amendment that would allow FERC to allocate Entergy Gulf State's 2007 bandwidth receipts between Louisiana and Texas retail jurisdictions. See 127 FERC ¶ 61126, 61546. But there it found an unsympathetic ear. FERC recognized a jurisdictional impediment to granting Entergy relief, ruling that "any issues related to the allocation of an individual utility's payments or receipts to retail customers" were beyond its jurisdiction. Id. at 61548. Of course, no jurisdictional problem would exist if PUCT had transgressed any FERC order, but FERC confirmed there was no conflict because PUCT accepted "the Commission's determination of the amount of receipts to be distributed to [Entergy Gulf States] under" the filed rate.[3] Id. Ultimately, the inconsistent-treatment problem was a problem of Entergy's own creation:

The potential for retail regulators to adopt different retail allocations of payments for multi-jurisdictional utilities has always existed, and the Commission has never claimed that a Commission-approved allocation has been violated because two states allocated the receipts differently among their respective retail customers. As has long been recognized, when more than one jurisdiction is involved there is an inherent operating risk that one jurisdiction may allocate on a different basis and the allocations may not mesh perfectly. It is axiomatic that different regulatory bodies are not bound to apply the same ratemaking principles, and therefore, the possibility of such imperfection is inherent in this nation's dual system of retail and wholesale rate regulation. This is a risk that Entergy assumed when it established its operating structure.

Id. (footnotes omitted).

         Entergy's fight was not over yet. It sued PUCT in federal and state courts. Those suits were resolved by settlement in 2010, with ETI agreeing to let the matter go in return for a PUCT-approved rate increase.[4]

         That could have been the end of it, but in Entergy's eyes, the issue was not fully resolved because the bandwidth calculation for the 2006 test year remained in flux as various aspects of the bandwidth formula were litigated and ruled upon, meaning additional payments were necessary to "true-up" the rough equalization of production costs. Accordingly, in 2014, FERC found that its orders since the initial bandwidth calculation "affect the test year 2006 bandwidth calculation." It ordered Entergy "to file a comprehensive bandwidth recalculation report showing the updated payments and receipts" for both that year and 2007 in light of the changes.

         Entergy submitted its recalculations in the form of a "compliance filing." TIEC opposed not the calculations but that portion of the compliance filing allocating the additional payment between ETI and EGSL; TIEC thought that the payments should be treated as being made to Entergy Gulf States. In the order now made the subject of this litigation, FERC accepted Entergy's filing and rejected TIEC's objection, finding "it was reasonable for Entergy to recalculate the 2007 bandwidth filing and allocate refunds and surcharges for" ETI and EGSL because those entities had succeeded the now-defunct Entergy Gulf States. 151 FERC ¶ 61112, 61701 (May 14, 2015).

         This "2015 FERC Order" also contained the following table, which "summarizes the remaining or true-up amounts to be paid/received on September 24, 2014." Id. at 61699.

Company
Total 2007 bandwidth (payments)/receipts including interest
2007 bandwidth amounts previously (paid)/received per the May 27, 2007 initial filing
Remaining 2007 bandwidth amounts to be (paid)/received
Entergy Arkansas
($278.3)
($251.7)
($26.5)
Entergy Gulf States Louisiana
$108.7
$89.7
$19.0
Entergy Louisiana
$93.8
$91.1
$2.7
Entergy Mississippi
$34.5
$40.6
($6.1)
Entergy New Orleans
$0.0
$0.0
$0.0
Entergy Texas
$41.3
$30.4
$10.9

         It is undisputed that the 2015 FERC Order authorized ETI to receive an additional $10.9 million Bandwidth Payment stemming from the 2006 test year. It did that and more, according to ETI. Based upon this table, ETI concluded that FERC had reversed itself with respect to the earlier Texas/Louisiana allocation dispute and retroactively reallocated to ETI a mere $30.4 million share of the original $120.1 million, meaning PUCT had overcharged ETI by more than $18 million.

         ETI informed PUCT of this conclusion in late 2014, asserting that, under FERC's order, "retail customers have received from ETI an overpayment of $8.6 million for the 2007 Bandwidth filing." This statement implied ETI would be keeping the new $10.9 million Bandwidth Payment as partial recompense for the prior overpayment. If PUCT cooperated, ETI would be content to let sleeping dogs lie: ETI assured PUCT that, "[i]n the interest of its customers, " ETI did not "intend to revisit the over-payment of 2007 receipts" but warned that "if other parties decide to revisit issues related to the overpayment, then ETI will respond accordingly." In short, ETI would litigate if PUCT deemed the $10.9 million payment to be a new Bandwidth Payment subject to ordinary pass-through procedures.

         PUCT ordered the $10.9 million payment be passed through to customers. ETI sued, seeking to enjoin enforcement of PUCT's order on the basis that it conflicted with the 2015 FERC Order in light of the table set forth above. TIEC intervened and participated in the litigation. The district court found ETI's contentions persuasive and enjoined enforcement of the PUCT order. PUCT and TIEC appealed.

         II. STANDARD OF REVIEW

         Orders granting or denying a permanent injunction are typically reviewed for abuse of discretion. N. Alamo Water Supply Corp. v. City of San Juan, Tex., 90 F.3d 910, 916 (5th Cir. 1996). But when the dispute turns on the legal question of preemption, review is de novo. VRC LLC v. City of Dallas, 460 F.3d 607, 611 (5th Cir. 2006). The issue facing this court is preemption vel non, and review is de novo.

         III. DISCUSSION

         This is a single-question case: did the 2015 FERC Order merely identify the proper amount of remaining Bandwidth Payments to be made to various Operating Companies including ETI, or did it also retroactively reallocate all previously made 2007 Bandwidth Payments, thus establishing that PUCT had already ordered ETI to pass through more funds than ever it received in Bandwidth Payments?

         A. The Arguments

         PUCT and TIEC argue that the purpose of the 2015 FERC Order was to allocate remaining Bandwidth Payments attributable to the 2006 test year, payments that were now due in light of changes and clarifications to the bandwidth formula. Under this view, ETI was entitled to an additional $10.9 million Bandwidth Payment, which it duly received and which PUCT duly ordered passed through to customers. Any gripes relating to the alleged initial overcharge are water under the bridge because PUCT already won that battle, and Entergy's attempt to read the 2015 FERC Order in a way that effectively abrogates past PUCT and FERC rulings amounts to a collateral challenge of those long-final orders.

         According to ETI, the 2007 Bandwidth Payments were only "conditionally" approved. In subsequent years, the bandwidth formula changed, and FERC ultimately ordered a backward-looking recalculation and reallocation, which Entergy performed and FERC approved. Thus, with the 2015 FERC Order, FERC conclusively determined that ETI's "total" 2007 Bandwidth Payment was $41.3 million. The new payment of $10.9 million approved in that same order is off limits to PUCT because PUCT has already claimed more than $41.3 million in 2007 Bandwidth Payments. Put another way: PUCT must abide by the determination that ETI received a mere $41.3 million in 2007 Bandwidth Payments, and because it has already passed through 2007 Bandwidth Payments in excess of that figure, it cannot touch the $10.9 million payment.

         B. Relevant Principles

         FERC has "exclusive jurisdiction to regulate the transmission and wholesale sale of electric energy in interstate commerce." AEP Tex. N. Co. v. TIEC, 473 F.3d 581, 584 (5th Cir. 2006). The Federal Power Act both supplies FERC with this jurisdiction and limits it, establishing "a zone of exclusive state jurisdiction." Electric Power Supply, 136 S.Ct. at 767. It is for states to regulate both "within-state wholesale sales" and, "more pertinent here, retail sales of electricity." Id. at 768.

         There is no overlap of jurisdiction. See New Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 911 F.2d 993, 1001 (5th Cir. 1990). But there is a risk that one regulator acting in its proper capacity can disrupt the regulatory efforts of the other. See Electric Power Supply, 136 S.Ct. at 776. In cases of conflict, the Constitution's Supremacy Clause controls. See Entergy Louisiana Inc., 539 U.S. at 47, 123 S.Ct. at 2056. "The filed rate doctrine requires 'that interstate power rates filed with FERC or fixed by FERC must be given binding effect by state utility commissions determining intrastate rates.'" Id. (quoting Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 962, 106 S.Ct. 2349, 2354 (1986)). Thus, as applied to state regulators, the filed rate doctrine polices the jurisdictional line and protects FERC's authority. Id.

         C. Interpreting the 2015 FERC Order

         When interpreting an order, we start with the order. What does it say? What, on its face, does it do? ETI seeks to convince us that FERC's order retroactively reallocates 2007 Bandwidth Payments, but the order simply says nothing about that. The word "reallocation" is not used; nor is any synonym or functionally equivalent phrasing. There are no broad statements from which an objective reader can infer any intent to retroactively reallocate the 2007 Bandwidth Payments. And there are no statements shedding light on a supposed need or motivation to do so. ETI's position looks suspect already.

         FERC was specific about what its order does. Most basically, the order approves ETI's compliance filing. 151 FERC ¶ 61112, 61698 ("Entergy's compliance filing is accepted."). Indeed, assessing the acceptability of the compliance filing was the order's raison d'être. This observation raises two question. First, with its filing, what did FERC order with respect to Entergy's compliance filing? (If FERC had previously ordered a retroactive reallocation, then we have our answer.) Second, did Entergy's compliance filing itself purport to effect a retroactive reallocation? (If so, FERC's acceptance of the filing would likely establish a retroactive reallocation, even if FERC had not previously contemplated such a measure.) If the answers to these questions do not point to a retroactive reallocation, then ETI is left with the difficult task of persuading us that the 2015 FERC Order somehow effectuated a retroactive reallocation by the way.

         1. FERC's orders requiring the Entergy compliance filing did not call for a retroactive reallocation of 2007 Bandwidth Payments.

         As noted already, the bandwidth formula remained in flux for years after the 2007 Bandwidth Payment had been made, meaning the initial payment had necessarily been calculated incorrectly. Once FERC got the formula ironed out, it became clear that two Entergy Operating Companies needed to make further payments to achieve rough cost equalization. FERC ordered Entergy to submit a single filing that would "comply with" its "final orders regarding the annual bandwidth calculations pending in numerous dockets." 148 FERC ¶ 61085, 61514 (July 31, 2014). The formal directive was:

to file, within 45 days of this order, a comprehensive bandwidth recalculation report showing the updated payments and receipts based on the 2006 and 2007 calendar year data in compliance with all bandwidth formula and bandwidth calculation adjustments that the Commission accepted or ordered, effective as of June 1, 2007 and June 1, 2008, ...

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