Electricity, Energy Policy, FERC

FERC Underestimates its Authority: Recoupment vs. Refund of Unjust & Unreasonable Rates

The Federal Energy Regulatory Commission (FERC) has the authority to order a public utility to refund to its customers rates that FERC determines to be unjust and unreasonable. But what if FERC later determines that the public utility should not have paid the refund? Does FERC have the authority to order the customer to return the funds to the public utility? According to FERC, not if the customer is a governmental “non-jurisdictional” entity that is exempt from the agency’s jurisdiction under § 201(f) of the Federal Power Act (FPA). However, according to the D.C. Circuit Court of Appeals in TNA Merchant Projects, Inc., et al. v. FERC, No. 13-1008, et al. (D.C. May 19, 2017), FERC underestimated its authority to order the recoupment of such funds from a non-jurisdictional entity in a “perplexing” and “tortured” interpretation of the agency’s power. Ordering the recoupment of a refund paid to the non-jurisdictional entity is not ordering the non-jurisdictional entity itself to pay a refund. Recouping funds vs. refunding is not a distinction without a difference with respect to the scope of FERC’s power under the FPA.

Underlying Rate Refund Determination – Reactive Power Service Charges

The FERC rate determination underlying the recoupment issue presented in TNA Merchant is noteworthy, as it reflects an explicit clarification of FERC’s policy regarding the requirement to file a rate schedule for reactive power services provided to customers for no charge. What is reactive power – a clear and simple explanation:

Not all power used by electrical equipment is ‘useful’, i.e. it is not used by the equipment to create outputs. Reactive Power is a measure of this ‘unproductive power’.

….

Imagine a horse pulling a barge along a canal. The horse is pulling the barge from the towpath, as he cannot stand directly in front of the barge. Some of the force on the towrope is ‘useful’, i.e. it is pulling the barge forwards along the canal. However, some of the force is pulling the barge in towards the canal bank and not in the direction the barge is travelling. This sideways force is unproductive. Reactive Power can also be thought of as ‘unproductive’ or ‘useless’ power.

For years, Chehalis, an electric generator, had been providing reactive power services to Bonneville Power Administration, a nonprofit federal power marketing administration, for no compensation. In 2005, Chehalis filed with FERC what it considered to be proposed initial rates to begin charging Bonneville for reactive power services. However, FERC determined that the proposed rate schedule was a changed rate since Chehalis had been providing the reactive power service to Bonneville previously – there was no new customer and no new service. Under the FPA, FERC has the authority to order refunds of unjust and unreasonable rates only if the rate is a changed rate, not for initial rates. Pursuant to FPA § 205, FERC suspended Chehalis’ proposed rates for 5 months to hold a hearing, but they became effective thereafter subject to a refund if the agency ultimately determined the rates to be unjust or unreasonable. In April 2008, the agency did just that and held that Chehalis’s proposed rates were excessive, ordering it to refund Bonneville approximately $2 million of the charges collected for reactive power service from August 1, 2005 through September 30, 2006.

Through a series of challenges by Chehalis and remands from the court, FERC ultimately determined in 2013 that, while Chehalis should have filed an initial rate schedule for the reactive power services it provided to Bonneville for free, its precedent on that issue had not been clear and therefore, as a “prospective policy,” was not applicable to Chehalis. FERC concluded that “it would be appropriate for Chehalis to recover the amounts previously refunded to [Bonneville], with interest.”

FERC’s Broad Authority to Remedy its Errors – Recoupment vs. Refund

FERC also concluded that, while it would be appropriate for Chehalis to recover the refund from Bonneville, the agency did not have the power to order Bonneville to return the funds to Chehalis. FERC reasoned that it lacked authority to order the return of the funds since it could not order Bonneville, an exempt non-jurisdictional entity, to “refund” rates under FPA § 205. The FPA’s § 309 gives FERC authority to “perform any and all acts . . . [as may be] necessary or appropriate to carry out [the Act’s] provisions.” FERC determined that it lacked authority to order the recoupment of funds from Bonneville under FPA § 309 as well, because “the Commission’s refund authority under section 205 does not extend to exempt public utilities such as [Intervenor]…[and § 309] does not grant the Commission any broader authority than that provided by section 205.”

The DC Circuit flatly rejected FERC’s position on the limits of its authority. The court noted that “[i]t would be the height of irony if [Bonneville] was permitted to urge FERC to order Chehalis to provide them with a refund in the proceeding below and then deny Chehalis the right to recoup these monies after FERC determined they should never have been disbursed in the first place. There is nothing in the statute to indicate that Congress intended such a result.” The DC Circuit held that FERC clearly has broad authority under FPA § 309 to remedy its errors, including ordering recoupment of a refund from an exempt non-jurisdictional entity like Bonneville.

Relying on the statute’s language and two recent DC Circuit cases, the court concluded that even though FERC lacks authority to order exempt governmental entities to refund unjust rates under FPA § 201(f) and § 205, recoupment of a refund from such an entity that FERC previously ordered is a different remedy that “is beyond the strictures of § 201(f) and § 205.” The court called FERC’s position “a tortured interpretation of the statute that finds no support in the words of the Act or in the case law.” FERC has broad authority to fix its past errors and the agency retains the authority to amend its decisions to require a refund, including ordering recoupment of the refund. The court remanded the case to FERC to consider whether, under the circumstances, “something less than full recoupment might be warranted.”

Brian Heslin

About Brian Heslin

Brian Heslin represents energy companies in regulatory proceedings at the state and federal level. In addition, he provides advice on busines and strategic planning, upstream natural gas supply and capacity negotiation, compliance and other related services.

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The landscape of the energy industry is rapidly changing, with a focus on the development of clean, domestic energy sources and a secure, reliable energy infrastructure driving significant changes in the interdependency of energy industry segments and an increase in government regulation. Continued growth in the domestic production of oil and natural gas has positioned the U.S. to be an energy exporter in the global market and will have a marked impact on the course of the industry’s development.

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